Darwin Professional Underwriters Q4 2007 Earnings Call Transcript

Darwin Professional Underwriters, Inc. (DR)

Q4 2007 Earnings Call

February 27, 2008 5:00 pm ET

Executives

Stephen J. Sills - Chairman of the Board, President & Chief Executive Officer

John L. (Jack) Sennott, Jr. - Chief Financial Officer, Senior Vice President & Director

Mark I. Rosen - Senior Vice President & General Counsel

Analysts

Charles Gates - Credit Suisse

John Gwynn - Morgan Keegan

Jeffrey Whitehorn - Gilman-Hill Asset Management

Alison Jacobowitz – Merrill Lynch

[Jack Haller] – Strategic Risk

Presentation

Operator

To the extent any non-GAAP financial measure is discussed during this conference call you may find a reconciliation of such matters to most directly comparable financial measures calculating according to GAAP in the financial supplement made available today on the company’s website. This conference call may contain projections, comments and other forward-looking statements as defined in the Private Securities Legislation Reform Act of 1995. Each forward-looking statement is based on Darwin’s plans and expectations as well as on current events and industry trends. Such statements are subject to risks and uncertainties as described in the company's most recent 10-K and actual outcome or results may differ materially from these expressed or implied by any of these statements.

I would now like to turn the call over to Mr. Stephen Sills, President and Chief Executive of Darwin Professional Underwriters. Please begin, Mr. Sills.

Stephen J. Sills

Good afternoon everybody. Welcome to Darwin’s fourth quarter and year end 2007 earnings conference call. I’m here today with Jack Sennott, our Chief Financial Officer as well as several members of our senior management team who are available for specific questions on individual disciplines should they arise. We released our fourth quarter and full year 2007 financial results in our press release today and as in our custom I will start by providing some overview comments and then I’ll let Jack provide some detail on our financial results.

We had another excellent quarter and were pleased with our company performance. This quarter’s net income of $10.9 million represents the best operating results in our history. For the full year 2007 we have generated net income of $32.2 million also record results for us. This calculates to a return on equity of 13.7% and growth in book value of 16.7% for 2007. Our loss emergence remains favorable and we were able to continue growing our company by finding and writing new business opportunities as well as retaining our best accounts in the face of tough competition. During the fourth quarter renewal pricing decreased an average of 14% across all our lines. For the full year 2007 renewal pricing decreased approximately 11% across all our lines. While not excited with the direction that pricing is moving we continue to be very pleased with the development of each of our accident year loss ratios and have reduced pricing where we feel it is warranted. Unfortunately as has been the case for the last few years we are operating in a competitive marketplace and we think it will remain so for the foreseeable future. Of course pricing is only one component in our toolkit along with policy language and retention or what you’ve heard us refer to as the architecture of a placement. It is our job as we underwrite business to see that we utilize all components to generate profitable underwriting results.

I think you’ll agree that so far we’ve been doing a good job. We do believe that some business has reached the level where it only makes sense to walk away and in those cases we’re doing just that. However the confidence we have in the profitability of our business is best demonstrated by our favorable adjustment to prior accident year loss reserves this quarter. We have made favorable adjustments to our 2003 through 2006 accident years as they continue to develop at much better experience levels than originally established, the industry based loss ratios that we recorded when we first went into business.

Turning to premiums our fourth quarter 2007 gross premiums written were $70.8 million an increase of 12.6% over our fourth quarter 2006 writings. Additionally our net premiums written for the fourth quarter were $51.2 million an increase of 22.2% over the fourth quarter last year. So again we’ve been successful in unearthing opportunities to grow the business particularly in the smaller account area. As I’ve said many times as the market softens our strategy remains unchanged, we continue to distinguish ourselves with our service model and product innovation and by remaining focused on getting bigger by getting smaller from the average account risk exposure perspective. Over the long term this will better insulate our profitability. The percentage of business that we classify as small approximates 47% of our in force business as of December 31, 2007. So we’re pleased with our success in building a small business franchise. Additionally for 2007 if you look at our price changes by size of business our pricing is down by only 7% in our small business compared to 14.6% and 16.1% for our medium and large size accounts respectively. Once again this long term strategy should better insulate our profitability in a softening market.

Our 77.2% combined ratio for the quarter compares favorably to our fourth quarter of 2006 combined ratio of 89.2% Our current quarter combined ratio has been impacted by reductions in our prior accident year loss results and related ceded premiums. These amounts favorably impacted the fourth quarter of 2007 by $4.4 million net of incentive compensation accruals, profit sharing and income taxes. Comparatively the fourth quarter of 2006 was favorably impacted by $2 million for favorable development of prior accident year results net of comparable offsetting incentive compensation accruals, profit sharing and income taxes. With each successive quarter our loan loss experience which we believe has been excellent to date is being weighted heavier in the determination of our reported operating results.

Before I turn the call over to Jack I did want to spend another minute and provide some color on the evolving sub-prime credit exposure facing the industry and how it might impact Darwin. As we’ve mentioned in the last few earnings calls our investment exposure remains very small and well contained and we continue to see that as the case. I’ll let Jack provide you with some more details on that aspect of the business. From an insurance coverage perspective we continue to watch the evolving development of events and emergence of significant losses and the resulting claims primarily in the financial institutions and real estate areas. We believe that the underwriting decisions that we’ve made regarding these classes of business have positioned us well. We have overwhelmingly avoided real estate classes since the inception of the company and have written only a small amount of financial institutions business. Consequently we don’t see significant exposure in our business at this time due to sub-prime exposures. To date we have a total of three claim notices, two are from the same financial institution client, a sub-prime lender where we have a $10 million DNO limit and a $10 million fiduciary limit. The third claim is a $20 million A side only policy on a bank. All three of these cases are excess to us. We remain comfortable with our reserve position on each of these claims.

With that as a background let me turn the call over to Jack to provide you with some more details on our results. When Jack is finished, I’ll make some concluding remarks and we’ll take some questions.

John L. Sennott, Jr.

As Stephen mentioned our fourth quarter net income was $10.9 million which represents an 88.3% increase over the $5.8 million we earned in the fourth quarter of last year. This net income generated earnings per diluted share of $0.64 for the quarter compared to $0.34 per share for the fourth quarter of 2006. Our combined ratio was 77.2% for the quarter compared to an 89.2% combined ratio for Q4 2006. Additionally investment income was up 26.5% to $6.1 million for the quarter compared to $4.8 million for the same period last year. Stephen mentioned that our gross premiums written were $70.8 million for the current quarter which compares to $62.9 million for the comparable quarter last year an increase of $7.9 million or 12.6%. The $70.8 million of gross premiums written in the quarter breaks down as follows: approximately $33.4 million was attributable to our E&O business; $25.9 million was attributable to our medical business; $11.2 million was attributable to D&O business; and $300,000 was attributable to our general liability business which we began writing last quarter through our short line railroad program.

Our growth was driven by our medical business which was up 20.9% for the quarter. Comparatively our errors and omissions line were up 11.2% and our D&O business was down 1.7%. Our growth in the medical business came primarily from the writing of new med mal liability policies primarily those in our hospital professional liability and miscellaneous medical facility classes of business as well as the addition of business written in the senior living classes of business.

Turning to losses we have made a favorable adjustment to prior year loss reserves and the corresponding reinsurance balances totaling $8.6 million. This adjustment required that we record offsetting additional incentive compensation and profit sharing commission expenses of approximately $1.8 million based upon contractual agreements with certain key employees and program administrators. Taken together these adjustments positively impacted the income statement by $6.8 million or $4.4 million net of tax which equates to $0.26 a share. These favorable adjustments affect the 2003 through 2006 accident years and we’ve included our current carry gross and net loss ratios for each of our accident years in our financial supplement which is posted on our company website. We continue to hold our 2007 accident year at a direct loss ratio of 62.5%.

Darwin’s total expense ratio was 27.1% for the quarter ended December 31^st, 2007 and 27.9% for the same quarter last year. Overall our expense ratio decreased during the current quarter ended in 2006 due to improvements in both the general and administrative expense and commissions expense ratios. Our G&A expenses decreased to 15.9% for the fourth quarter of 2007 compared to 16.2% for the quarter of last year and this improvement was driven by our ability to spread our administrative costs including the additional compensation related expenses which were recorded in connection with the favorable reserve releases over a bigger premium base.

Our commissions incurred as a percentage of net premiums earned decreased to 11.2% for the fourth quarter of 2007 compared to 11.7% for the fourth quarter last year. This improvement in the commission expense ratio is due to an increase in the ceding commissions received from re-insurers in connection with the restructuring of our re-insurance agreements this past April, 2007. These improvements were partially offset by higher commissions paid to brokers. As mentioned in previous calls we increased our commission rates on new business in the first quarter of this year.

At December 31^st, 2007 we continued to maintain an extremely strong balance sheet. We had $827.1 million in total assets, $572.9 million in cash and invested assets and $254.2 million in stockholders’ equity. Our book value per share as of December 31^st, 2007 is $14.93 an increase of 16.8% for the 12 months of 2007. If you exclude mark-to-market adjustments on our investment portfolio our book value per share is $14.72. Our cash flow from operations for the year was $127.4 million compared to $108.3 million for 2006. Our cash flow continues to be strong as paid losses remain low with payments of $3.8 million for the quarter and $16.7 million for all of 2007.

Turning to investments our portfolio duration is 3.9 years at December 31^st, 2007 which is down slightly from the year end 06 average duration of 3.99. We have increased the percentage of our portfolio invested in municipal securities which represents approximately 39.4% of the total portfolio as of December 31^st, 2007 versus 33% at year end last year. These securities which generally have five to 10 year durations were attractively priced at points during the year and provided us with opportunity for a better tax equivalent yield. Accordingly our taxable equivalent yield on investments held is 5.32% as of December 31^st, 2007. We’ve also been focusing on the dependency these municipal securities may have to insurance guarantees by the monoline insurers. We’ve expanded our financial supplement this quarter to include a table which breaks out our municipal securities with these insurance wrappers cut by guarantor. Our strategy in purchasing these securities has always been to view these securities assuming that no guarantee exists and that the creditworthiness of the security is dependent on the strength of the underlying issuer.

As you’ll see in the table that we provided this quarter the average credit quality of the underlying issuer is AA- and these securities are currently trading at a net unrealized gain. We believe that these securities remain attractive investments and we see no issues with their ability to pay. Overall we continue to have a strong investment grade average rating in our portfolio and currently have 21.3% of our portfolio in cash, short term investments and fixed maturity securities with maturities of less than one year.

As for an update on our sub-prime mortgage exposure our total investments in sub-prime mortgage or asset backed securities at December 31^st, 2007 is $1.3 million or less than 1% of our portfolio. This amount is down from the $3.2 million we held at the end of last quarter. We currently hold four securities that would be classified as sub-prime and all are currently rated AAA with none under credit watch by Moody’s, S&P or Fitch. In addition these holdings are expected to pay down within six months and all are currently paying down their balances. These securities are commonly in a slight unrealized loss position due to interest rate adjustments as opposed to creditworthiness. We believe that our collateral position on each of these securities is strong and consequently we have very little exposure to sub-prime defaults in our portfolio.

In addition to the sub-prime mortgages we also hold $8.5 million of Alt-A or low documentation loan securities. These are all also AAA rated and have an average life of approximately 1.5 years with strong collateral and little exposure to defaults in this portion of our portfolio. The remainder of our $126 million asset backed portfolio is rated a very high quality AAA with the exception of one small corporate mortgage backed security which is rated BBB and has a market value of about $437,000 at year end. This mortgage backed portfolio is secured by a minimum of 20% or greater collateral and in many cases is backed by government agencies.

In addition all of these securities are priced nightly so we believe that we have current information on all of them. We see no permanent impairment issues in our portfolio at this time. And in summary we believe we have strong stable fixed income portfolio that protects our capital base and strengthens our balance sheet.

With that let me turn it back to Stephen.

Stephen J. Sills

As I mentioned before we’re pleased with our results for the quarter and for 2007 and remain confident about our prospects. We still like the business and believe we’ll continue to be able to grow it profitably. Darwin’s capital base remains very strong and grows stronger as we continue to grow our book value. Notwithstanding the fact that our results continue to reflect the need to grow into our capital base our annualized return on average equity of 13.7% is up significantly from our 7.7% return in 2006. The last point I would like to make is to acknowledge the team here at Darwin and to thank them for all that they’ve accomplished. Next week marks our five year anniversary as a company and it’s been my pleasure working with this group to build a great franchise. We have much more to do as a group and as we continue to build the business I also feel that their accomplishment warrants some formal recognition at this time.

And with that we’re happy to take any questions you may have.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Charlie Gates from Credit Suisse. Please proceed.

Charles Gates - Credit Suisse

One question I have is could you elaborate on the competitive environment in your three major lines?

Stephen J. Sills

They’re competitive. There are people out there that are trying to grow and I don’t think there are too many areas out there that people are not aggressively looking at other people’s lines of business. But I think as we’ve seen and as people see in our business the business has been profitable.

Charles Gates - Credit Suisse

Which of these coverages do you think is the most competitive?

Stephen J. Sills

I think D&O has been the most competitive.

Charles Gates - Credit Suisse

And so that really hasn’t changed significantly?

John L. Sennott, Jr.

That’s been a pretty rapid descent almost since we’ve been in business and that’s why as you’ve seen it’s been de-accented from originally feeling it was going to be a third of our business to being significantly less at this time. The one spot where you’re not seeing large decreases and perhaps seeing some increase are in the financial sector of the D&O business. But D&O is probably one of the most competitive out there.

Charles Gates - Credit Suisse

If you were to go back in history what period of time is most similar in your career to the current pricing and underwriting environment? And that’s my last question.

Stephen J. Sills

If I had to guess I might say, well it could be a couple of different times. It could the 88-89 time period, it could be the 94 time period.

Operator

Your next question comes from John Gwynn from Morgan Keegan. Please proceed.

John Gwynn - Morgan Keegan

Jack, can you give us the renewing rate changes by segment for the quarter and year?

John L. Sennott, Jr.

Yep. In the quarter medical was down 14.9%; E&O 14.3%; D&O 13.5%; and average was 14.4%. So a fairly tight band around 14%. You want it for year to date as well, John?

John Gwynn - Morgan Keegan

Please.

John L. Sennott, Jr.

Okay. Medical 10.2%; E&O 12.5%; D&O 11.9%; and 11.6% is the total. Just so we’re clear those are our renewals.

John Gwynn - Morgan Keegan

Right, I understand. And I think I ask this every time, I’m sorry if I’m not allowed to forget some stuff but in calculating your accident year experience do you have a calculation that you do on what your accident year experience was?

John L. Sennott, Jr.

In our financial supplement on the page that says Selected Supplemental Operating Results Data you have the combined ratios at the top and at the bottom half of that supplement you have an accident year result gross and net losses. So what you can see there is what the gross earned premium is, what the gross paid in case outstanding is through December 31^st, 07 and what our current booked loss ratio is. And then we have the same thing right below that for our net loss ratios, so it’s net of re-insurance and net of re-insurance recovery. So you can get our current carried experience broken out between paid case and IB&R.

John Gwynn - Morgan Keegan

Okay, great. I think I remember that explanation from last time. Stephen, at what point do you think D&O is loose bricks instead of a falling knife?

Stephen J. Sills

I think financial institutions are shaping up to possibly be a loose brick. I think for those that aren’t familiar with the term the way we’ve always talked about opportunities in the business because of what the competition might be lacking in terms of policy form coverage or perhaps mis-pricing items. So financial institutions in D&O could be a loose brick before very long.

John Gwynn - Morgan Keegan

What about in your med mal business, the community hospital business in particular, who are the three or four most active competitors you have in that line or if you don’t want to name competitors what types of companies they are?

Stephen J. Sills

They’re large multi-line companies but I don’t know if it’s productive for us to point fingers. I’d rather not.

Operator

Your next question comes from Jeffrey Whitehorn from Gilman-Hills Asset Management. Please proceed.

Jeffrey Whitehorn - Gilman-Hill Asset Management

I’m sorry if these questions are disjointed but it’s part of a reflection of how my mind works. What has to happen in your three most important businesses for you to start experiencing price increases?

Stephen J. Sills

I guess people have to be bleeding and I think the claim environment has been good, not universally good, but I think about five years ago people started to raise rates, fill some of the holes that they had from the previous losing years and I think some of them are probably living off of that or running that well dry now and it could be happening at any time. I don’t know how big some of the things of what’s happening with sub-prime, how pervasive that will be, what are the different areas it’s going to it, but I don’t see it as around the corner on the one hand and on the other hand we’re not planning on it, we’re not building for it and if it doesn’t happen it wouldn’t be the end of the world. It would certainly make it easier for us but our strategy as we’ve been outlining for the last few years has been driving through in the smaller business whereby the ability to write the business and to retain the business functions as much on how you handle it, how the process becomes the product versus the price becoming the issue and the more that we can continue to drive that, the more we’ll be able to continue to grow our business. Obviously there could be difficulty, you talk about major rate decreases for years and years to come, everybody will start to feel some pain then but just looking over the horizon now we think we’re okay.

Jeffrey Whitehorn - Gilman-Hill Asset Management

So I’m not that bright, I was only thinking maybe two years from now you might start getting price increases. Is that not a reasonable timeframe?

Stephen J. Sills

I couldn’t say with that specificity.

Jeffrey Whitehorn - Gilman-Hill Asset Management

Second thing, observation, your stock is moving all day, there was no earnings. Maybe next time announce the earnings in the morning, not in the afternoon.

John L. Sennott, Jr.

That’s generally our work – to work it out a little differently this time before netting with our 55% owner and based on where are board and committee meetings felt.

Jeffrey Whitehorn - Gilman-Hill Asset Management

Well, that gets to my third observation, on the 21^st of February the stock dropped a point, $1.40 on 18,006, it’s about the same amount on 50,000. I’m going to make the assumption that your markup majors don’t have a daytime job at Disney World. Perhaps – again it’s a big perhaps given your big owner and assuming you don’t have a terribly dysfunctional relationship with that owner – how about issuing more stock because (a) you have a good story to tell so you’ll meet some old friends, reacquaint yourselves with some old friends, make some new friends, help that large owner in an orderly transition remove some of the shares. The dilution factor would be there, it wouldn’t be that great because those shares are already in the share count anyway. And in a marketplace like this where every other day the cartoon network, as I call it which is really is CNN or CNBC, wants to talk about sid, schmid piv and all the other things, having a little extra cash on the balance sheet may not be a bad idea.

Stephen J. Sills

We will definitely pass your comments on to our parent company, very colorful.

Jeffrey Whitehorn - Gilman-Hill Asset Management

Well Sam [Zell] thought it might be worthwhile having a bulletproof balance sheet so it’s not just my comments, just words are going into the wind here, but it seems to me in questionable times, having that extra cash but know there will be a dilutive effect to it, is just not a bad idea especially since the rating agencies who have lost total credibility are going to get reviewed by the SEC, having that cash is better than having a rating for the rating agencies.

Stephen J. Sills

Jeff, I appreciate your kind of focus and diligence on our balance sheet. For us we’re trying to manage capital efficiently. I understand what you’re saying regarding more capital is always nice to have, you have to balance that and certainly the rating agencies would live by that mantra as well, but we’re trying to balance that against required returns on equity for investors and we’re glad you’d be patient in that regard. But those are the things we kind of try to weigh through and balance.

Jeffrey Whitehorn - Gilman-Hill Asset Management

One last question and I’m sorry for the rant and rave, but it’s just my observation that maybe your relationship with Allegheny is sort of dysfunctional, not anything to do with you, but maybe they’ve got another agenda and there’s a whole other set of things and then you’re sort of, maybe not the basket child, but not treated the way one would think you’d be treated. You said that the financial area is more of a, not a falling knife, but we want to call loose bricks. How convinced are you or what kind of due diligence would you have to do before you start writing D&O insurance for any of those financial firms given that on an almost weekly basis they find another hole that they’re just about to fall into?

Stephen J. Sills

Frequently where the opportunities come, not to use a banality, but people throw the baby out with the bathwater and so you get senior management at a company all of a sudden saying we’re out of this class of business, where everything we write in this class of business gets a 50% rate increase. Those are the opportunities where you can look in there and you could say, let’s say you look at a hedge fund and you understand what they’re doing and you see the way they’re structured and you say, you know what for that price, for the price you’re able to get today, this I a good write. It’s almost the converse of what you see today where people say, well if it’s this type of business I’m prepared to give it a 20% decrease. So I think you generally need kind of a tectonic shift which that makes it relatively easy to jump in.

Jeffrey Whitehorn - Gilman-Hill Asset Management

But you wouldn’t have to hire additional layers of people or people specialized in some of this?

Stephen J. Sills

Yes, we might. I don’t know if I’d buy into layers of people.

Jeffrey Whitehorn - Gilman-Hill Asset Management

I didn’t mean layers, I just meant like a half a dozen lawyers or forensic accountants or something like that?

Stephen J. Sills

No, it could be an underwriter who’s a specialist in underwriting that type of business.

Operator

Your next question comes from Jay Cohen from Merrill Lynch. Please proceed.

Alison Jacobowitz – Merrill Lynch

Hey, it’s Alison actually, Jacobowitz. Two questions, first thanks for the details on the sub-prime exposure but I was just wondering if you put up any reserves for those three claims and then the second question is just on the premium growth rates by segment, they all seem to change notably like the med mal up 21% is a notable change from the recent trend and the E&O has fallen off a bit. I’m just wondering if there’s anything special there or one time or how, just trying to do the forecast thing.

John L. Sennott, Jr.

Let me take the premium part first, I think our D&O business has been flat and down a little bit for the last couple of quarters and I think we’re been fairly consistent in suggesting that the market there got softer faster and that the opportunities that we had to write would be fewer and that where we build the business there would be in smaller accounts and you can’t move the needle very quickly with a four figure account if you’re going to lose some six figure accounts at the same time. So that we’ve been fairly consistent on and we see that as an issue going forward. Regarding E&O and medical business those are lines that we have said that we see more opportunity than we’re expanding classes in both of them, both in E&O and in the medical classes so you heard us talk about senior living in the medical classes. We’re growing in the technology business on the E&O side. Those are areas where we think that we’re going to continue to grow the business, whether or not one’s a little higher than the other one, quarter-over-quarter I wouldn’t be able to tell you. But we see those as both areas where we could grow.

Stephen J. Sills

Let’s have Mark Rosen come in from the claims.

Mark I. Rosen

I’m the General Counsel and also the head of claims. Specific question on reserves on individual claims I don’t think we should get into that particularly with a small number of claims like we have here. I think we should leave it with the general comment that we’re comfortable with the case reserves that have been posted with regard to the sub-prime claims that we’ve received.

Operator

(Operator Instructions) And you have a follow up question from Mr. Charlie Gates from Credit Suisse. Please proceed.

Charles Gates - Credit Suisse

I look at the expense ratio year-over-year and in fall from 27.9 to 27.1, could you tell me basically what would have been the ingredient or the cause of that?

John L. Sennott, Jr.

Well, a couple things, keep in mind, Charlie, that when we have favorable loss reserve adjustments, as we had in this quarter given our swing rated re-insurance, our variable rated re-insurance, part of our adjustment becomes an adjustment to ceded premium which increases net premium and has a benefit of spreading general and administrative costs and commissions over a bigger base. If you follow that aspect of it. And the other components, there’s not a lot of magic in it, in that we grew the business quicker than we grew the headcount in the fourth quarter

Charles Gates - Credit Suisse

Now, one of you said in your introductory remarks, I think that you were raising commissions?

John L. Sennott, Jr.

We did raise commissions in the first quarter of 07, we have talked about that the last couple of quarters on new business and it was an average of about, call it 1.5 to 2 points on new business that impacted to the company, but at the same time we had renewed our major re-insurance program and with that we increased the use of a ceding commission in the general use of re-insurance we had restructured the program to more of a flat rated excess of loss in some of our programs with the ceding commission and that ceding commission comes through as an offset to commission expense and that had an offsetting effect to our commission expense ratio. I guess the other aspect on commissions some larger accounts are accounts that have relationships with their intermediaries that are direct pay from the client to the intermediary so on our books that shows up as a zero commission account. When you write less business that is larger like we have done and moved in that direction you have less zero commission accounts in total and that will also drive your overall commission rate up slightly. So that’s one other point. Operator, next question I guess.

Operator

The next question comes from Donna Gallagher from Strategic Risk. Please proceed.

Jack Haller – Strategic Risk

The $5 million under debt on the balance sheet and in cash flow from finance, what was the use of funds there please?

John L. Sennott, Jr.

We drew it down right in advance of the acquisition of the AMS.

Jack Haller – Strategic Risk

Next question, in light of the statement that you’d be interested in walking away from business if premiums continue to decline, does management have a dividend philosophy?

Stephen J. Sills

First of all the issue of walking away if it continues to decline, there’s some point where it will become unprofitable. Some business we think that if the prices decrease some we could withstand that. So it’s not that – we haven’t drawn the line on all our business.

Jack Haller – Strategic Risk

I understand, but have you thought about returning to money to shareholders if the opportunities that becomes diminished?

John L. Sennott, Jr.

If we felt that there were no opportunities to continue to best put the capital to work in growing the business and finding profitable opportunities then we would absolutely revisit our current capital strategy, but I think what you heard Stephen say is at this time, and I think the most recent results bear this out, we still see opportunities to grow the business and feel that the best use of our capital is to put it work to expand the franchise.

Operator

And you have a follow up question from Jeffrey Whitehorn from Gilman-Hill Asset Management. Please proceed.

Jeffrey Whitehorn - Gilman-Hill Asset Management

Paying in the first six months or the last six months of the year, that actually dramatically increased the profitability and/or the volume over any of your lines of business?

John L. Sennott, Jr.

Jeff, I’m sorry I missed – your question wasn’t clear through right when you started it. Would you mind just asking it again?

Jeffrey Whitehorn - Gilman-Hill Asset Management

No problem. It’s my mouth. I was wondering if there’s anything the first six months or the last six months in the environment which would actually cause you to increase your internal projections in terms of volume or profitability on any one line of business whether it be a piece of legislation, someone dropping out of the business or just, wow this happened and we didn’t take that into account, it’s really happy times now for us.

Stephen J. Sills

I guess any or all of the things that you’ve talked about, I don’t know what the likelihood of them are, of people dropping out of the business, it certainly wouldn’t upset us. But yeah, those are the sort of the things that do affect the marketplace. A lot has been talked about tort reform and in most jurisdictions tort reform hasn’t really, I’m not sure how serious it should be taken. It seems so far to date the only one of the recent wave of tort reform is Texas where they seem to have done it substantively by amending the constitution and people believe that it’s real. But there are so many other states that tort reform gets passed, people have jumped in and cut rates because they believe it’s a better environment only to have the courts throw it out and you’re back where you started from. So we haven’t relied on any of that and I don’t know if there’s any of that stuff out there on horizon that’s worth paying attention to at this time.

John L. Sennott, Jr.

There have been a couple of Supreme Court cases recently that have been favorable to business generally and favorable to aspects of our business with regards to the securities class action, raising the bar for pleading standards most recently, the Stoneridge case which is beneficial to the people called secondary actors, not the issuer but accountants or investment bankers that previously had been sued with more regularity. So if your question was external environmental factors that might bear positively or negatively I think that’s probably one.

Jeffrey Whitehorn - Gilman-Hill Asset Management

The acquisitions you have made, how have they improved your overall operations?

Stephen J. Sills

We closed on it January 3^rd so we need probably a little more time to put a statistically valid sample together but we’re very positive about the AMS acquisition and having kind of brought that on board and we like the team of people and we think it will be a good addition.

Jeffrey Whitehorn - Gilman-Hill Asset Management

Is it a niche that you can dominate? Is it a niche that is more profitable than others?

Stephen J. Sills

A company our size rarely uses the word dominate. We’re looking at more niches, places where we can find opportunities. We think they can help us with some of the small business that we’re looking to write that goes beneath the radar of other people within the business.

Operator

There are no further questions at this time. I would like to turn the call over back to Mr. Stephen Sills for closing remarks.

Stephen J. Sills

Thank you everyone for listening and appreciate your support. Speak to you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect and have a wonderful day.

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