CastlePoint Holdings, Ltd. Q1 2008 Earnings Call Transcript

May.21.08 | About: Castlepoint Holdings (CPHL)

CastlePoint Holdings, Ltd. (CPHL) Q1 2008 Earnings Call Transcript May 6, 2008 2:00 PM ET

Executives

Joel Weiner – SVP and CFO

Michael Lee – Chairman and CEO

Greg Doyle – President

Analysts

Mike Grasher – Piper Jaffray

Bruce Wilcox – Cumberland Associates

Jon Lubert – IL Hedge Investments

Operator

Good day everyone and welcome to today's CastlePoint Holdings first quarter 2008 earnings conference call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. At this time, for opening remarks and introductions I would like to turn the call over to Mr. Joel Weiner, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Joel Weiner

Thank you, operator. Good afternoon and welcome everyone. During this call, CastlePoint Holdings Chairman and CEO, Michael Lee will discuss highlights of the quarter; Gregory Doyle, President of CastlePoint Holdings will review the progress in our profit centers; and I'll provide details on our financial performance during the quarter.

We'll end the earnings call with a Q&A session. Before I turn the call over to Michael, I want to remind you that some of the statements that will be made during this call will be forward-looking statements as defined in the Securities and Exchange Commission Act of 1934. In particular, statements about projected levels of growth, net premiums written and earned, the percentage of net premiums written that will be earned, the volume of premiums produced, operating and net income, combined ratios and expense ratios, loss ratios, insurance services income, investment income, amount of invested assets, operating leverage, investment leverage and any other statements containing information that is not strictly historical in nature constitute forward-looking statements.

Actual results could differ materially from those projected in these forward-looking statements. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time. I also want to remind everyone that this call is being broadcast over the Internet in the Investor Relations' section of CastlePoint's Web site. A replay will be available on that website.

Now I would like to turn the call over to Michael.

Michael Lee

Thank you, Joel and good afternoon everyone. I would like to thank all of you for joining us this afternoon to discuss our first quarter 2008 results. I'm pleased to report that CastlePoint once again produced excellent operating results this past quarter, excluding realized investment gains and losses, our net income increased by 56% for the first quarter to $11 million from $7.1 million during the same period last year. And our EPS increased by 26% to $0.29 per share, compared with $0.23 per share for the same period last year.

Including investment gains and losses, our net income was $9.6 million and $0.25 per share for the first quarter. The first quarter results are typically lower than other quarters during the year due to the general seasonality of our business and the fact that we commenced operations in the second quarter of 2006. Therefore, premium volume ramps up throughout the remaining quarters from the first quarter. Gregg and Joel will provide further details regarding how premiums and earnings are expected to grow throughout the year during their portions of the presentation.

During the quarter, we had an investment loss of $3 million or $0.08 per share from an investment in a limited partnership that invests in municipal bonds. This limited partnership is in the process of being liquidated. While this loss is a distraction to our strong operating results for the quarter, I would like to put it in proper context. The losses from this partnership and impairment charges last quarter and this quarter were isolated to a small portion of our investment portfolio that contains several funds and partnerships with a current carry value of approximately $23 million.

Due to the limited carrying value of these investments and the corrective actions that we have already taken with regard to these few investments, we are confident that, despite the $3 million investment loss from the one limited partnership that we experienced this quarter, our overall results in 2008 will not be adversely affected in a meaningful way due to our investment portfolio.

The remaining portfolio totaling $687 million or approximately 97% of our total cash and invested assets is comprised of highly rated investments with an average credit rating of AA plus. On this portion of the portfolio, our unrealized losses are approximately $5 million.

Turning our attention back to our first quarter operating results, I would like to provide further details on the market conditions and the progress that we are making in delivering our solutions to our clients. Despite the competitive market environment, we continue to experience strong demand for our solutions from Tower as well as other clients. This is reflected in our net premiums written during the quarter, which increased by 64.3% to $118 million from approximately $72 million during the same period last year. Our production from Tower grew by 52% to $80 million from about $53 million during the same period last year.

Our growth from clients other than Tower grew by 99% to $38 million from last year, representing 32% of the total production in the quarter. We are seeing strong demand for risk-sharing solutions due to our unique ability to provide capital as well as access to A minus rated insurance companies.

As a result, the client that we signed up last year are having a meaningful affect on our production in the first quarter and our pipeline for new clients remains strong. We are seeing strong growth from program underwriting agents due to our ability to offer broad product line platform as well as flexibility in addressing their needs.

Finally, despite the general softening in the reinsurance market, we are getting growth from our risk-sharing clients that see business from their own company to CastlePoint Re. Gregg will describe this in further detail later, but in summary we continue to achieve strong growth without being adversely affected by softening market conditions.

Despite our strong premium growth, we continue to maintain our underwriting discipline as reflected in the 90.6% combined ratio during the first quarter for the total of our reinsurance and insurance segments comprised of 54.3% loss ratio, and 36.3% expense ratio. We are confident about our underwriting profitability due to our focus on accumulating profitable, low hazard, established books of business with credible actuarial loss data from small insurance companies and managing general agents.

Before I turn the call over to Gregg, I would like to point out that April 2008 marked our two year anniversary since we commenced business. Since that time, we have substantially met all of our financial objectives that we communicated to our investors when we commenced business in April 2006.

We wrote approximately $237 million net premiums written during our first 12 months of operations and about $307 million in the second 12 months while net income grew to $17.2 million during the first 12 months and $35.2 million during the second 12 months.

Our book value grew by 59% from $263 million and $8.92 per share when we commenced business to approximately $420 million and about $11 per share at the end of the first quarter. We have also successfully established our infrastructure that is capable of delivering program risk sharing and reinsurance business and we have achieved a significant flow of business from clients other than Tower, exceeding our target of 30% during the first quarter of this year.

More importantly, during our third year of operations commencing in April 2008, we believe we will continue to make progress to come close to our target of 15% ROE by successfully deploying the $385 million of capital that we have raised by increasing net premiums written to approximately $500 million to $550 million by the end of this year.

As the first quarter operating results demonstrated, we believe we are on track to continue to build our business franchise and create value for our shareholders.

With that overview, I would like to turn the call over to Greg for further details regarding our business solutions. Greg?

Greg Doyle

Thank you, Michael. During my portion of the presentation, I will provide further detail on the sources of production and how we are able to grow profitably, given the overall soft market conditions in our industry. We had strong production during the quarter from clients other than Tower, particularly in the primary risk-sharing and program areas due to clients moving their business to us.

Most of these clients began transferring their business to us last year, and so over the course of 2008 we will record a full year of their business adding to our growth. In the first quarter, we also added a new client relationship for quota share reinsurance and we finalized our due diligence in order to commence program business with a couple of additional clients that will begin in the second quarter.

Our primary risk-sharing business solution is a key differentiator for CastlePoint and we have established a regular flow of risk-sharing opportunities in our pipeline. We have two risk-sharing clients that we signed up last year, writing business on Tower policies and also utilizing CastlePoint Insurance Company.

The first client writes small workers' compensation policies, very similar to the type of business that Tower writes with average premium per policy of less than $10,000. This client generates this business in the Midwestern and Western states. The second client writes similar workers' compensation policies, as well as commercial automobile business, primarily in Florida. In the both cases, these risk-sharing clients participate in the business through reinsurance, which creates an alignment of our collective interests.

As I mentioned earlier, during 2008, we will have the benefit of a full year's worth of their business, and as a result we will see strong growth from these existing clients year over year. We expect to retain approximately $50 million to $75 million this year in net written premiums from these clients. We are also currently assessing risk-sharing opportunities in other lines of business and other geographic territories that will complement our existing business mix.

With respect to our program business solutions, we also are now realizing a steady flow of business from the clients that we developed in 2007. These clients are program underwriting agents who each control very profitable, established books of business and they are interested in our broad product platform and responsiveness in customizing solutions for them, including our ability to provide insurance company services. We now have five program business clients with an average annualized premium production per program of approximately $12 million.

Our net written premiums participation from these programs for 2008 is expected to be approximately $25 million. In addition, we have a strong pipeline of program opportunities that we are assessing for 2008. Most of the business that we are writing with our program clients is from small underlying policies that present low to medium hazard risks. Our underwriting guidelines were developed from those at Tower and our due diligence for all programs and risk sharing opportunities before we accept them is comprehensive.

We also are growing our reinsurance business through CastlePoint Re by focusing on providing quota share reinsurance solutions to small insurance companies. We currently have approximately 12 quota share reinsurance clients that compares to eight in the prior year period.

Our quota share business includes commercial property, commercial package, workers' compensation and personal automobile, similar to the types of business that we write in the primary risk sharing and programs area.

Despite softening in the reinsurance market, CastlePoint Re sees continuing demand for its quota share reinsurance products, especially from clients who are already accessing or are interested in accessing our primary risk sharing capabilities. We believe we are less vulnerable to the soft market conditions because our clients position themselves in profitable niche markets with a reduced level of competition.

We also carefully monitor the underwriting results of all of our business by continually reviewing our clients' results to ensure that it meets our expected profitability standards as well as underwriting and pricing guidelines. Finally, on many of our contracts, we've a sliding scale of commission that within a small range of loss ratios is projected to deliver our target combined ratio.

In summary, we are seeing strong production, particularly from existing clients, that we believe will enable us to meet our production targets for the year. We also believe we will achieve the level of underwriting profitability that we are seeking due to our business approach that focuses on accumulating profitable, established, low hazard books of business rather than competing for individual policies in the open market.

I'll now turn the call back to Joel, who will provide further details on our financial results.

Joel Weiner

Thank you, Greg. I'll begin with a discussion of our consolidated results for the first quarter, including a review of the financial results of our reinsurance and insurance segments. Then I will go over in some detail our investment portfolio and also go over the earnings guidance for the second quarter and for the full year 2008.

As Michael mentioned earlier, first quarter operating results again were excellent. For the quarter, our operating earnings which excludes realized and unrealized gains and losses, increased by 56% to $11 million, which was $0.29 per share and an increase of 26% from the prior year period.

Net income in the quarter was impacted by $3 million loss on a limited partnership that is included in that investment income. This limited partnership invests primarily in AAA municipal bonds and it was significantly impacted by market illiquidity. Even though none of the underlying municipal bonds in this partnership suffered defaults, the manager is in the process of liquidating the partnership.

We expect to receive our current market value for the fund, which is $5.5 million as the partnership expects to be liquidated by the end of June. Our book value per share as of March 2008 was $10.96. In CastlePoint Re we had $94.2 million in net written premiums. This is up 31% from the prior year.

In the quarter, 36% of the business in CP Re came from clients other than Tower. The combined ratio in our reinsurance segment was 89.1%, comprised of 54.1% loss ratio and 35% expense ratio. These results are similar to last year. Based upon the excellent combined ratio and the increase in premiums, underwriting profit in CP Re was $8.4 million for the quarter, representing 58.8% increase over the prior year period. CP Re continues to operate well with premiums and underwriting results meeting our plans.

In our insurance segment through CastlePoint Insurance Company or CPIC, we had net written premiums in the first quarter of $23.9 million, compared to zero last year. This business was comprised of $20.2 million of risk sharing business with Tower and $3.7 million of programs and risk sharing business from other clients.

CPIC had a gross combined ratio, meaning before reinsurance is seeded of 82.9% for the quarter, including 52.2% loss ratio and 30.7% expense ratio. The net combined ratio, which is after seeded reinsurance, was 95.5%. Since the net combined ratio reflects costs that are seeded to purchase property catastrophe protection. As earned premiums in CPIC grow, the ratio of seeded property catastrophe reinsurance costs relative to earned premiums will decline and therefore spread between the gross and net combined ratios will narrow significantly, improving CPIC's overall results.

Now let's turn to our investment portfolio. Our invested assets increased 2.4% since year end to $710.1 million. Invested assets, net of amounts payable for recent securities purchased, includes $107 million in cash and cash equivalents, which is in the process of being invested. We expect to deploy the majority of our cash balances by the end of June. As of March 31, 2008, we had $13 million in unrealized losses, representing less than 2% of the cash in invested assets.

Unrealized losses usually do not pose problems for us, and that our investments are comprised of conservative, highly rated fixed income investments that we can hold to maturity. Since we are able to hold these investments to maturity, we are not significantly affected by the fluctuation in the price of these bonds. However, there can be temporary impacts on our book value but as the bonds approach maturity the unrealized losses will diminish, restoring the lost book value.

During the first quarter, we sold all of the subprime assets and we no longer have any subprime or Alt-A exposure in our portfolio. The average credit quality of our investment portfolio was AA, 73% of our investments are rated in AAA. All of our investments are investment grade with the exception of two bonds, which are rated BB for a total of $1.2 million. Our book yield as of quarter end was 5.65%, excluding cash and cash equivalents.

Before I summarize the earnings guidance, there are several factors that you should understand that affect how our earnings by quarter will ramp up during this year. First, there is a natural progression of earnings increases by quarter that should be expected, based upon our growth in invested assets and written premiums as compared to last year. The written premiums growth is followed by a ramp-up in our earned premiums since premiums are earned generally over a 12- month period. Since the business from clients other than Tower for the most part is still ramping up, particularly from programs and risk sharing, the growth in earned premiums from these sources will accelerate through the year. For the same reason our invested assets are growing throughout the year, based especially upon the cash flow from these additional clients.

With that in mind, you will note that in our press release for the second quarter of 2008, we project our net income to be in a range between $13.5 million and $15.8 million, and diluted earnings per share to be in a range between $0.35 and $0.41 per share.

For the full year, we are maintaining our guidance for net income to be in a range of $67.5 million to $71.5 million with diluted earnings per share between $1.75 and $1.85. The quarterly and full year earnings guidance assumes no further realized investment losses.

Operator, we would now like to turn the call open for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We'll go first to Mike Grasher with Piper Jaffray.

Mike Grasher – Piper Jaffray

Good morning, gentlemen.

Michael Lee

Good morning.

Mike Grasher – Piper Jaffray

I wanted to go back to just the overall growth that you have experienced here and Michael, if you could maybe speak to the current capital position at the Company and how you feel about it relative to your growth and I guess more importantly, what you might be hearing from the rating agencies in terms of your capacity as we move forward?

Michael Lee

When we started the Company in April of 2006, we planned on taking about three years to fully ramp up all the capital that we planned on raising and certainly that's where we are at. As I mentioned before, we are looking at fully leveraging the capital that we have raised. So, I think given that's the case, we are looking at growing around 15% or so, given that we are targeting about 15% ROE. So, absent any additional capital raise, I think we will pretty much keep to that plan. But as far as the rating agency is concerned, I think we have, during the first couple of years we were underleveraged. Certainly, there are no concerns from rating agency standpoint, and this year we have submitted our plan and we are pretty much keeping to that plan. So we don't anticipate any issues with the rating agencies.

Mike Grasher – Piper Jaffray

Does that encompass or consider 2009 because I hear Greg speaking and he sounds pretty bullish, not that that's a bad thing, just in terms of the pipeline of opportunities that are out there, and just wondering what your expectations might be beyond 2008?

Michael Lee

I think we were pleasantly surprised, and I think during past earnings calls, we have said we are seeing strong reception for our business solutions and we are certainly seeing that. But our business model requires us to have the capital to support that type of growth. So, I would imagine our growth has to moderate somewhat, commensurate with the capital that we have. So, I think, we don't have any problem with continuing to grow at about 15%. I think there is an opportunity for some ret-recession [ph] to other reinsurers, especially in our program division. So, you may see us gaining more underwriting capacity by utilizing other reinsurers, should we want to. But at this point in time, we are pretty happy where we are and we plan to continue to keep to our business plan and grow our business around 15% in 2009.

Mike Grasher – Piper Jaffray

Okay. And that was where I was (inaudible) next was utilizing other reinsurers on the primary business, is that something you have been in discussions with currently or this is just something down the road that you might explore?

Michael Lee

I think given our past history or affiliation with Tower, we certainly know how to use the reinsurance market and we look at raising capital as well as using reinsurance, and to the extent the capital market is not receptive at this point in time, anyway, to raising additional capital and given where our stock prices is relative to book value, I think we'll probably look at the reinsurance market, should we decide to grow beyond 15%. But I think absent some kind of an acquisition or some other non-organic type of growth, we're not looking to grow beyond 15%. So, that is what our current plan calls for, beyond 2008.

Mike Grasher – Piper Jaffray

Okay. Thank you.

Michael Lee

Thank you, Mike.

Operator

We'll take our next question from Bruce Wilcox with Cumberland Associates.

Bruce Wilcox – Cumberland Associates

Hi, good afternoon, everybody. So, operationally things seem very healthy and I just want to make sure I understand where the partnership interests were captioned. You have the balance sheet item investment and partnership's equity method, so that was 5.5, which is about 8.5 at the end of the year. Is that where we took the write down?

Joel Weiner

Yes, Bruce. This is Joel. It's included in net investment income, even though the partnership has not been sold and it's a GAAP requirement that partnership income be included in net investment income.

Bruce Wilcox – Cumberland Associates

Right, understood. And then – so is 5.5 with the partnership current NAV, your limited partnership interest NAV is?

Joel Weiner

Yes.

Bruce Wilcox – Cumberland Associates

Okay. So, that's not discounted in any way from the NAV at the reporting date?

Joel Weiner

That's correct.

Bruce Wilcox – Cumberland Associates

Joel, why do you say you think that will be realized – how can you make a statement that you don't think you'll take any further losses on it?

Joel Weiner

We certainly don't plan to take any further losses on it and the manager is in the process of liquidating the fund.

Bruce Wilcox – Cumberland Associates

Okay.

Joel Weiner

We are comfortable that the assets in the fund were accurately priced as of March.

Bruce Wilcox – Cumberland Associates

Okay.

Joel Weiner

Barring some, again, major disruption in the marketplace, we expect to get our money back.

Bruce Wilcox – Cumberland Associates

Do you know whether the underlying securities have improved since March 31?

Joel Weiner

I don't really have that information.

Bruce Wilcox – Cumberland Associates

Okay. Other than that, the equity securities in the available for sale 37 million, those individual stocks that are managed by a third party manager?

Joel Weiner

Yes. They include preferred stocks, which are managed by BlackRock.

Bruce Wilcox – Cumberland Associates

Okay. So, everything in the available for sale, the $593 million, that's all managed by

BlackRock?

Joel Weiner

Yes. There is one fund that is managed by KBW.

Bruce Wilcox – Cumberland Associates

Okay.

Joel Weiner

It's a small amount; it's actually slightly less than $10 million.

Bruce Wilcox – Cumberland Associates

Okay. In the Common trust securities, there was no change in carrying value on that from December to March?

Joel Weiner

No.

Bruce Wilcox – Cumberland Associates

Okay. So, it sounds like it's reasonable to think that, you're sort of the non-bond portfolio or the non-fixed income portfolio is probably – it's, A, small, and B, the one partnership is in liquidation?

Michael Lee

Yes, this is Michael. As I mentioned –

Bruce Wilcox – Cumberland Associates

Hi, Michael.

Michael Lee

Hi, Bruce, 97% of the total assets are in bonds that we feel very comfortable with. As I mentioned, there's only $5 million of unrealized, even through this turbulent market. As far as the other 3%, that's where we had the issues, but because of the corrective actions that we took in the fourth quarter and this quarter, at this point in time we don't see any issues with that portfolio, especially given that the value – we're carrying at a value of approximately $22 million. So, we have isolated our problem to that particular segment or the portion of the investment portfolio and that amount is a very small amount, obviously, and also we took the corrective action that we think were prudent to make sure that it doesn't impact us in a meaningful way in 2008.

Bruce Wilcox – Cumberland Associates

Okay, then just my last question, and I'll hop out. You had $86 million payable for securities. Is that just a payable for settlement in the ordinary course because it was a caption that was a zero value, wasn't there in December?

Joel Weiner

Exactly right, because we had a lot of cash and BlackRock is working to deploy it into our purchases made at the end of the month.

Bruce Wilcox – Cumberland Associates

Okay. So, those are just payables in an ordinary settlement.

Joel Weiner

Yes.

Bruce Wilcox – Cumberland Associates

Okay. Thank you.

Operator

(Operator instructions) We'll go next to Jon Lubert with IL Hedge.

Jon Lubert – IL Hedge Investments

Hi, guys, how you doing?

Michael Lee

Hi, hello.

Jon Lubert – IL Hedge Investments

I had a question about, you are talking about deploying this $86 million and then also a significant amount of your cash by June. What type of assets are BlackRock recommending with this type of money that you've already used and the money that you are going to be using?

Joel Weiner

This is Joel. In general, we have a set of guidelines. The process works like this and I'll explain the process. BlackRock is making the individual trade decisions. What management does is we have developed our guidelines with BlackRock's help that we would consider to be fairly conservative and it talks about the things they can invest in, the concentrations that they can have and these are the guidelines that we monitor them to and it's also what we report to our Board of Directors on. So, at any given time, BlackRock will like one part of the market better than other parts. They look at spreads relative to treasuries. We give them credit quality constraints. We give them a constraint for how much we want in mortgages. And over the last several quarters, we have been keeping a lid on the percentage of the portfolio that goes into mortgages and so forth. Does that answer your question, John?

Jon Lubert – IL Hedge Investments

Yes. During February, you guys when there is a lot of dislocation in the levered loan and municipal bond market, you guys are staying on the sidelines with cash and waiting for things to get a little more stable. It seems like you didn't make any investments until the end of March?

Joel Weiner

That was partly – a large part with BlackRock's advice as they expected the rates to go up and the spreads to go up, as they did.

Jon Lubert – IL Hedge Investments

I do think that the municipal bond loss should actually, from – a lot of the municipal bond funds that I work with have had a really good April. So, I think some of that might be recouped to the gentleman's previous question. Then I had a question on the premium numbers. It seems like in the industry there's been weakness in premium pricing. I wanted to see if you had any more clarity on how that was affecting your margins and your pricing?

Michael Lee

Jon, this is Michael Lee. CastlePoint has a very unique business model, and that we accumulate books of business. And because of that, I would say that we are in a much better position than other companies, and I think Greg alluded to the fact that we are not competing in the open market, chasing down individual policies. What we're looking to do is evaluate established books of business that mirror the type of book of business that we feel could make an underwriting profit. We look at low hazard, very predictable books of business with at least about five-year actuarial loss history. We also put a sliding scale commission that adjusts within a narrow band based on the movement in the loss ratio. Because of our approach, I think we are looking at underwriting managers that have a demonstrated track record, and certainly what we do look for is the pricing environment that these underwriting managers operate in. So, we do look at the pricing trends and obviously if we see an underwriting manager that is discounting their business, we are not going to reinsure or we are not going to do business with them, unless we can set the commission lower to reflect the fact that the profitability of the business will decline as a result, we would provide lower commissions. So, we put a package together, based on the operating environment that the underwriting manager is operating in and we structure a transaction to enable us to achieve our target combined ratio. So, under various circumstances, we do end up being able to achieve our target combined ratio. So, our business model is quite different than the business model that you may see from other companies.

Jon Lubert – IL Hedge Investments

Okay. So it's not that you're just getting a certain percentage of the premiums that they decide to cut them, you have to take it. You know ahead of time what that premium is, how much you're going to get and you can adjust the commission to get to where you need to be?

Michael Lee

Yes. Do you want to elaborate?

Greg Doyle

Hi, Jon, this is Greg. Just add an answer to that question and then just add another comment. It really goes back to the upfront diligence that we do whereby we essentially overlay our underwriting and pricing guidelines in upfront with our clients, so it's an environment where we are operating within the pricing guidelines that we've set with that client right up front. So we have got pretty clear visibility as to what's going on as far as that goes. The other thing I wanted to mention is that we write a very small percentage of the number of opportunities that are presented to us in any of our business operating areas and as was discussed earlier because we don't have excess capital that we are trying to put to work. We have what we think is an appropriate amount of capital relative to our business plan; we are not in a position where we need to be any less selective than we have been historically. So, we write a very small number of the opportunities that we see. We control, manage the underwriting and pricing guidelines right from the outset and we are not in a position where we need to be any less selective than we have been previously.

Michael Lee

One more thing, Jon. These contracts are usually annual contracts so at renewal, if we see a problem, we can adjust. During the year we have the sliding scale commission that protects us from the movement in the loss ratio and at the end of the year, when we review our client's account, we could reprice and adjust our structure in such a way to deliver our targeted combined ratio.

Jon Lubert – IL Hedge Investments

Great. Do you guys see – have you guys thought anything about as your income increases and you are starting to see greater earnings and cash flow, further increasing the dividend if your stock price stays around where it is?

Michael Lee

I think we are in the midst of reviewing all strategic options, including paying higher dividends and various other potential strategic options, which may include buybacks and some of the things that I think last time you brought up. So, we're carefully reviewing our strategic options. Certainly, we are not happy with where the stock price is currently, but we are being patient and we're trying to deliver on our business plan and we are just trying to monitor the situation and make decisions that would create value for our shareholders.

Jon Lubert – IL Hedge Investments

Okay. Thank you for your time and congratulations on a strong quarter.

Michael Lee

Thank you.

Greg Doyle

Thank you.

Joel Weiner

Thanks, Jon.

Operator

We'll take a follow-up from Mike Grasher with Piper Jaffray.

Mike Grasher – Piper Jaffray

Thanks, just a quick follow up for Greg, just on topic of the general market conditions out there. Do you see or do you have a sense for how it's changing? Do you see it changing slowly or more rapidly now in terms of maybe the desperation that of some of the smaller capitalized companies that you've run across in terms of wanting to come on board or from an M&A perspective or even carving out pieces of their business?

Greg Doyle

I would say, Mike, for more perspective because we have got a very focused marketing approach. There's probably more – and we don't really deviate from that, which I think is one of the reasons that we are able to produce the kind of results that we have. There has been some more activity outside of our normal focused marketing approach and the types of companies and the specific company that we are looking to do business with. So, I think there's a growing need and interest out in the marketplace. I'm not sure how much of that ultimately will fit within the types of clients or the return hurdles that we are looking for. But I guess the easy answer is yes, we're seeing a little bit more of that out there right now.

Mike Grasher – Piper Jaffray

Okay.

Michael Lee

Just add to what Greg said. A lot of your clients are also because of our relationship do come to us for various solutions whether it's strategic investment or they may want to sell. So, we are seeing opportunities to potentially acquire these distribution sources or to refer to our strategic partners that may want to acquire a particular MGA or insurance company. So, we are actively involved in this space, trying to find any type of solution that would provide strategic answers for our client. And in that way, I think we are adding a lot of value and not just reinsurance or risk-sharing solutions. So, I think because of that, they know that – our clients know that by affiliating with us, they get a strong partner that can help them through many different types of situations.

Mike Grasher – Piper Jaffray

Okay. And thank you for the comments.

Operator

And it appears we have no further questions at this time. I would like to turn the conference back to Mr. Michael Lee for any closing remarks.

Michael Lee

Thank you, operator. As we mentioned during this call, our operating earnings for the first quarter were excellent and in line with our plans. We believe our unique approach of providing comprehensive solutions, capital, paper and insurance services, continue to receive very strong reception from our clients. As a result, we believe we are well-positioned to continue to grow our business and achieve our profit targets in 2008. I would like to thank all of you for joining our earnings call today and look forward to speaking with you again next quarter.

Operator

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.

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