Argo Group International Holdings, Ltd.
Q1 2008 Earnings Call Transcript

Published: 20 May 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Argo Group International Holdings earnings conference call. My name is [Erica], and I'll be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Michael Russell, Investor Relations. You may proceed, sir.

[Michael Russell:]

Thank you, Erica, and good day everyone. Welcome to Argo Group's conference call for the first quarter of 2008. With me today is Mark Watson, President and Chief Executive Officer, Mark Haushill, Interim Chief Financial Officer, Jay Bullock, our soon-to-be new Argo Group CFO, and Nick Denniston, CFO of Heritage. We are pleased to have the opportunity to review the company's results for the quarter as well as management's perspective on the business. No earnings guidance will be provided in this call. I would like to remind you that this conference call is being recorded, and all participants are in listen-only mode. Following management's opening remarks the operator will provide instructions on how you may queue in and ask questions. Let me remind everyone that as a result of this conference call, Argo Group management may make comments that reflect their intentions, beliefs and expectations for the future. Such forward-looking statements are qualified by the inherent risks and uncertainties surrounding future expectations generally and may materially differ from actual future results involving any one or more of such statements. Argo Group undertakes no obligation to publicly update forward-looking statements as a result of events or developments subsequent to this conference call. For a more detailed discussion of such risks and uncertainties, please see Argo Group's filings with the SEC. With that, I'd like to turn the call over to Argo Group's President and CEO, Mark Watson. Mark?

[Mark Watson:]

Thank you, Mike, and good day to everyone. We appreciate that you've taken time to join us today. After my opening remarks, Mark Haushill will discuss the first quarter financial results in more detail, and then we'll open the call to your questions. If you've been following our activity since the beginning of January I'm sure you'll agree it's been a busy and productive four months, right up until today. On that note, I want to welcome Jay Bullock, who's agreed to become our new Chief Financial Officer. Jay's no stranger to the insurance industry or to Argo Group having been an adviser to us on a number of transactions over the last few years. I'm sure most of you on the call have read our press release recapping Jay's background so I'll leave it at that. Needless to say, we're pleased to have recruited someone for this critical role who has the depth of financial and industry expertise that Jay brings with him, and I'm looking forward to working with Jay to further build our international specialty insurance business. I also want to take this opportunity to thank Mark Haushill who, while our search was being conducted, shouldered quite a heavy load of responsibilities as Interim Group CFO and of course helping us work on the Heritage transaction as well. Given our lengthy track record together and his tenure with Argo Group, we're pleased to be retaining Mark as CFO of our U.S. operations while he will help Jay and me restructure our finance team group wide. Before I review and put into context each of our other major initiatives and announcements, let me make some general comments about our first quarter results and balance sheet, for which Mark Haushill will provide more detailed information in a moment. So just a few first quarter comments. I'm pleased with how our results came out for the first quarter on several fronts. First, we were able to grow the top-line in a meaningful way due to the expansion of both our international business and the organic growth that came from our Commercial Specialty segment. This is the piece that we used to refer to as Select Markets. The growth also demonstrates the importance of our diversification in that, with our E&S segment declining year-over-year because of increased market competition we were still able to grow the group as a whole. Next, we've begun to see the benefits of our merger with PXRE and our corporate restructuring, which we did at the end of the fourth quarter last year. Our larger capital base has allowed us to compete in the reinsurance market, and we're pleased with the business written by Argo Re in the first quarter as it launched its business plan. In addition, the quarterly results were benefited by a lower tax expense than we've had in the past. Mark Haushill will give more detail about this in his remarks in a minute. The net effect of some of these things in the first quarter was record operating profits which increased net income by 47% over last year's first quarter and book value per share rose 2.7% in the first three months of 2008. We also set new first quarter highs in gross written, net written and earned premiums as well as total revenues. Let me talk about each segment just for a minute. Our Business segment performance remained strong given the competitive pressures present in the general market environment. Our largest segment, our Excess & Surplus Lines segment, continued to generate good premium volume and produce profitable margins in a marketplace that remains highly competitive in price and from an increased appetite by the standard markets. Nevertheless, we continue to focus on writing profitable business through our specialty E&A platform rather than chase the market. Our Commercial Specialty segment experienced excellent top-line performance generated from a mix of both organic growth produced by offering new niche programs and products and through an acquisition by our Public Entity business. That would be the acquisition of Massamont. Finally, our International Specialty operation - that's mainly our Bermuda reinsurance operation completed its first full quarter operationally, and I'm pleased to say that the results, both in terms of premium production and financial results were in line with our expectations for how the business is doing notwithstanding both increased competition in the marketplace as well as increased retentions for many of the insurance companies buying reinsurance. I would also say in general that retention rates for all of our lines of business remained strong depending upon class of business, and we continue to have the ability to expand our products in areas where we can deliver good value to our clients. Let me just make a couple of comments about the balance sheet. Our balance sheet remains strong, as demonstrated by our high quality investment portfolio, our conservative reserving philosophy, and what we believe to be strong capital position. As I mentioned earlier, I think, we finished the sale of PXRE Reinsurance Company  that was the U.S. subsidiary of PXRE - and the nice thing about that is that that transaction eliminates once and for all the company's exposure to casualty business written prior to 2002, which has fairly long tail reserves which were held by PXRE Group. The transaction further strengthened our balance sheet and freed up capital, giving us the flexibility to take advantage of marketplace opportunities which I'd like to actually review now. There have been a number of things that we've done over the last quarter, so let me just spend a couple of minutes talking about them. Again, some of these M&A transactions have really supplemented some of our organic growth initiatives. But I think that now is a really good time to reflect back over the last year and think about what the PXRE transaction really means. And so if I can just speak generally for a minute, as of March 31 we completed the sale of PXRE's U.S. subsidiary. And if you look at the PXRE transaction in hindsight now what you'll see is that with the sale proceeds from the PXRE sale in the first quarter we effectively paid $270 million for about $600 million of invested assets plus approximately $200 million in remaining property reserves on the PXRE balance sheet, and that's almost entirely from the hurricanes of 2005. In addition to that, we leveraged that acquisition to establish our Bermuda corporate platform, and we've now launched our International Specialty operations, which contributed approximately $50 million of gross written premium in the first quarter and about $5 million of net income. Now, I think that there's still some more opportunity to be had from this transaction, but I think that this really puts in perspective a year later what we were trying to communicate a year ago. With the sale of PXRE, which was of the PXRE U.S. subsidiary, we picked up about $130 million in cash from Tawa as well as an extraordinary dividend immediately before closing the sale up to our U.S. holding company. So we took that $130 million and, along with some other available cash, were able to use those combined proceeds on hand to pay for the all-cash offer of Heritage, which was approximately $270 million, keeping in mind that Heritage wrote about $700 million worth of business in 2007 at a combined ratio of about 90%. Upon the completion of the Heritage transaction, which we expect to close in the second quarter after shareholder and regulatory approvals, Heritage will bring with it an impressive core team of underwriters who have a track record of profitable underwriting results across an underwriting cycle. Its mix of property and liability business and access to the London market make it a complementary addition to both our U.S. and our Bermuda operations. The strategic combination of Argo and Heritage will create a much broader underwriting platform, with increased market presence as well as an extended geographic capability and distribution network in some of the most important markets in the world. From a strategic perspective, adding Heritage to the Argo Group family of companies will round out our International Specialty platform, effectively becoming the third leg of the stool by having a major underwriting presence in the world's three major property and casualty insurance and reinsurance markets. We believe this operational breadth and new opportunity to engage new business relationships in the leading global insurance centers will help fuel Argo Group's next stage of growth and development. And then lastly just a couple more words about Massamont. As regards our U.S. operations, in March Trident, our Public Entity operation, acquired Massamont Insurance Agency, also a specialist in the public entity insurance industry. This strategic combination immediately expanded our public entity footprint into all of New England, a market previously underserved by Trident. Massamont's successful 20year track record bolsters Trident's already robust market presence and adds to our Commercial Specialty segment's product portfolio with additional automobile specialty programs on top of what we are already doing on the public entity front. We're also pleased to appoint Massamont's visionary leader, Van Schenck, as President of Trident, which after the acquisition is the second-largest writer of small to medium-sized public entities in the United States. Just a couple of other items I'd like to touch upon before I turn the call over to Mark. Many of you will be pleased to see that since the close of the first quarter we have purchased over $5 million of Argo Group common shares on the open market. We will continue to evaluate our capital position to determine whether additional share purchases are warranted. I'd also like to talk about our rebranding effort. I'm pleased to report that we finished this strategy - or I should say we finally launched this strategy - which on the surface looks like a refreshment of our logo, but it's much more than that. We've not streamlined how we market ourselves and our global insurance in financial markets. You'll notice our Bermuda reinsurance company's name has been changed from Peleus Re to Argo Re, and we have packaged our U.S. operations under the name Argo Group U.S. rather than Argonaut Group, among other changes. I'd also like to say that early last month we hosted the Premier of Bermuda, the Honorable Dr. Ewart Brown, at Argo House in Hamilton for a ribbon cutting ceremony marking the official launch of the new Argo Group. The rebranding campaign was a major undertaking for which dozens of people were involved, and I want to thank our Communications Director, Wendy Davis Johnson, and her marketing team for a job well done. Finally I'd just like to say that the initiatives that we have undertaken or completed since the PXRE acquisition have dramatically strengthened our business platform, increased our range geographically, given us maximum flexibility for capital deployment, and ideally positioned Argo Group as a specialty insurer in the major global insurance markets where we operate. I'm very pleased with the financial results for the first quarter, and I'm even more excited about the platform that we're developing. And with that, I'd like to turn the call over to Mark Haushill.

[Mark Haushill:]

Thank you, Mark. I'd like to add to Mark's comments with some brief detail about the quarterly results, and then we'll take your questions. Before I get into the numbers I think it's worth commenting on the quarter overall. We've been challenged in the last several quarters on the clarity of the financial information and this quarter is fairly straightforward as we were through the anomalies associated with the merger in August of 2007. Having said that, this quarter we realized certain tax benefits, and I'll talk about that more in a few minutes. As Mark said, pre-tax operating income for the first quarter was $40 million, an 8.7% increase from the first quarter of 2007 of $36.8 million. Earnings per share was $1.20 as compared to $1.13 in the same quarter of 2007. Earned premium was up 6.3% for the quarter relative to 2007, mainly reflecting the growth in International Specialty and the Commercial Specialty business. As for our loss ratio selections in 2008, they're slightly higher than 2007 - about 1 to 2 points - reflecting the rate decreases which were in line with our overall expectations. Obviously, it's a little early in the year to definitively conclude on 2008 loss selections, but the first quarter did not result in us changing those selections. Prior year loss reserves continue to develop favorably. Development for the quarter was a favorable $6.7 million, comprised of $5.1 million from the E&S segment and about $0.5 million from Commercial Specialty with the remainder being in the runoff book, primarily workers’ compensation. The E&S development was primarily the 2004 accident year for casualty lines of business. Of note for E&S is we have adjusted our casualty loss ratio selections for 2005 and subsequent during the current year. For the first quarter of 2007, favorable prior year development was $9.1 million, again primarily coming from our E&S segment. This development also related to 2004 and to a lesser extent 2005 accident years for casualty lines of business. Property reserves for KRW are in line with our expectations, and for the quarter we did not recognize any development. The expense ratio was 35.8% for the quarter versus 36.3% in the first quarter of 2007, the slight decrease in 2008 primarily the result of growth in earned premium. And we expect the expense ratio to improve slightly during the year as we expand our international operations. Investment income was up 35% to $38.1 million for the quarter primarily due to the increase in invested assets that Mark referenced early as respects to the PXRE transaction. Interest expense also increased as we assumed some debt in the transaction as well. Now to income taxes. The income tax provision for the first quarter was $4.4 million or a calculated rate of about 10.6%. The primary items affecting the provision included adjustments related to the sale of PXRE Reinsurance Company. There will be more detail on this in the Q that we file later on this week or early next week, but the big driver being the reduction of the valuation allowance and some other benefits associated with the sale. It's expected that the effective tax rate for the remainder of the year will be in the mid 20s. I think toward the end of last year we had referenced we expected the effective tax rate to be in the upper 20s. It's now going to be in about the mid 20s. As for the portfolio, it stood at about $3.5 billion as of March 31, 2008 and had a pre-tax unrealized gain of about $116 million. The current fixed income portfolio duration is 3.2 years, and the credit quality of the fixed income portfolio is double A plus. We've managed our portfolio conservatively and have not been adversely affected by many of the recent market conditions. An update on subprime - we have about $35 million in subprime securities and about $493 million of investments that are wrapped by the monoline bond insurers consisting almost entirely of municipal securities. We hired investment advisors to examine the underlying credit of the wrapped bonds, and we're comfortable with the quality of these investments despite the challenges facing the monoline insurers. The muni market continues to offer good returns, and our strategy looks at the credit quality of the underlying municipality not the bond insurer. As Mark talked about, we did complete the sale of the PXRE Reinsurance Company at the end of the first quarter which eliminated approximately or reduced assets by about $257 million and reduced loss reserved by about $200 million from our balance sheet. Leverage remains at about 21%. We're certainly comfortable in that range and believe we have some additional debt capacity. And with that, Operator, that concludes our prepared remarks and we're ready for questions.

[Operator:]

Yes, sir. (Operator Instructions) Your first question comes from Amit Kumar - Fox-Pitt Kelton.

[Amit Kumar:]

I was just going back to the income tax discussion and the adjustments coming out of the PXRE acquisition. Does this sort of spell the end of any adjustments or there could still be any remaining for the subsequent quarters?

[Mark Haushill:]

As respect to tax?

[Amit Kumar:]

No, any other adjustments regarding the PXRE acquisition, lingering adjustments.

[Mark Haushill:]

Well, okay. Well, this is what I'd say as respects to the tax benefits. The valuation allowance will be continued to reduce in subsequent quarters. In the accounting literature, you have to look forward three years so each quarter will add another quarter of incremental benefit, but it's small. It'll be a couple hundred thousand dollars. So I don't think you'll actually see it.

[Amit Kumar:]

And regarding the guidance of the mid 20s tax rate, I guess that's also a function of maybe increased sessions from Heritage to Bermuda or not?

[Mark Haushill:]

No. No, the mid 20s that I gave or that I provided does not include any combination with Heritage or any benefit on the tax side.

[Amit Kumar:]

Just moving on, I guess, to the Commercial Specialty premiums. I know you talked about Massamont. Could you just sort of break down the incremental number from Massamont and if there were any other one-timers?

[Mark Watson:]

There were a couple of things. Massamont was about an additional $7 million in premium year-over-year. Remember that we started writing business with Massamont in the third quarter of 2007, so this acquisition will bring in some additional premium but the relationship with Massamont started prior to the acquisition.

[Mark Haushill:]

There was also one account that was an 18month account and therefore had no premium associated with it in 2007. We've now re-written it as a 12-month account as of the first quarter, and the premium associated with that account for the 12 months is approximately $18 million.

[Amit Kumar:]

And could there be any similar accounts in maybe Q2?

[Mark Haushill:]

No.

[Amit Kumar:]

Accounts with timing issues?

[Mark Haushill:]

It's possible. I mean, it's possible that we'll have other larger accounts that move the needle, but that's a program that we've had in place for a few years now and it just happened to have renewed in the first quarter. So I would consider that more of an anomaly.

[Amit Kumar:]

And then I guess just moving on to the International Specialty, in terms of the premiums coming in I think the prior guidance was, I guess, $100 million, and now you have done $50.3 million. How much of this came from, I guess, the former - from Peleus Re?

[Mark Haushill:]

Yes, that's a good question, Amit. I think that about $25 to $30 million of that is from the new part of the International Specialty operations that Andrew Carrier and his team is writing, and the remainder is from business that was already part of the Peleus Re operation.

[Amit Kumar:]

And then I guess - I'm sorry?

[Mark Haushill:]

I was just going to say I think that $100 million for the new business is still a reasonable goal. But when I reflect upon my remarks earlier today given increased retentions by a number of cedents that are prospective clients of our International Specialty operation, that number may look more like $90 than $100 for the year.

[Amit Kumar:]

And I guess the flip side is, I know we've talked about the cat fund changes which are not going through, but on the other side we have Citizens. I think Flagstone earlier today mentioned I think close to $450 million of new premiums coming into the marketplace. Do you have any thoughts on that sliver?

[Mark Watson:]

No, other than you're right. Citizens is in the marketplace right now. That's not a company that our international guys are focused on, so I don't really have too much to say.

[Operator:]

Your next question comes from Scott Heleniak - Ferris, Baker Watts.

[Scott Heleniak:]

Could you talk about the - I saw yesterday you launched the surety unit. I'm wondering if you could talk about what kind of opportunities you're seeing there. Is any of this launching due to the fact that people are pulling back in this area? Did that have any [decision] in that or wondering if you could just give more color on that.

[Mark Watson:]

Well, it's a combination of things. Mark and I have been in and out of the surety business for over a decade. Like a number of other programs that we've either started or stopped, it has to do with having the right - well, it's two things, one, it's the right people, and then the other is the market opportunity. We had a chance to pick up a team of folks, the leader of which I've known for several years, and yes, there has been some pullback in some of the surety markets and so I do believe there is a market opportunity to start something today. I don't think it will be a significant part of our operation for several years. We will be focused on smaller account business. While we'll write some construction, I don't know that we're going to look at that many large construction projects. So it's something that we launched and we wanted to talk about that with our distribution partners, but it's probably not going to be a meaningful part of our discussion financially for a couple of years.

[Scott Heleniak:]

So you may get into larger accounts in a couple of years but now kind of small-account focus?

[Mark Watson:]

No, no, no. I just meant it will take awhile to get it going, period. We'll write larger accounts if they make sense today or two years from today, but the emphasis of the business model is on smaller accounts.

[Scott Heleniak:]

And then could you give an update on the ROE target now that you've made the purchase of Heritage, which you should be free to [set]. It's still in the same ballpark of 13% - 15%?

[Mark Watson:]

Well, when we announced the Heritage deal we said we thought it would be about 15% accretive this year, and we thought it would improve ROE by about 1.2 to 1.5 points. And having now spent some more time - and we have Nick Denniston with us today - I think that's still pretty good give guidance. There's still some opportunities to leverage the Heritage platform, but until we see how the rest of the year plays out in the London market, I don't think I want to be any more optimistic than that. But I think that's a pretty good start.

[Scott Heleniak:]

And then finally, what's the buyback authorization that you have outstanding right now?

[Mark Watson:]

It's $150 million.

[Operator:]

(Operator Instructions) Your next question comes from [inaudible] - Raymond James.

[Unidentified Analyst:]

Can you just give a little bit more color on the pricing and rate trends in the quarter for the various lines? Do you expect to see a lot more contraction in Excess & Surplus going forward?

[Mark Watson:]

Well, [Pashan], I think that whether or not we see more contraction depends upon the marketplace. When I look at, a quick look at April's production numbers would suggest that we didn't have as much fall off in E&S that we did in the first quarter, but I'm not sure that one month is a trend one way or the other. If you look at where the fall off is coming from, remember we're reporting premiums year-over-year. And so while premium was down about - written premium was down about 11% or 12% year-over-year for the first quarter, you have to kind of break that down and look at it in terms of both rate and policy count. The rate reduction remains in the mid single digits. Because of the increased appetite in the admitted marketplace, we're looking at less business and therefore we're writing less business. Our production partners are getting less business coming to them, and so it's just a contraction in the marketplace that makes up the difference. So in other words, policy count is down about 6% or 7% as well. So you add both of those up and that gets you to 11% or 12%. As respects the marketplace in general, I don't think that my commentary would be any different than any of - I don't see it any differently than any of our other competitors who have already kind of given their marketplace reviews.

[Unidentified Analyst:]

And just to double check, so Massamont, you had about $7 million in premiums from them in the quarter.

[Mark Watson:]

That's correct.

[Unidentified Analyst:]

Could you provide any color on where you expect them to contribute for the rest of the year?

[Mark Watson:]

I think that that remains to be seen on what we do on a couple of other programs. The Public Entity business is much lumpier than most of the programs that we have, and what I mean by that is the majority of Public Entity business tends to renew on July 1. We had this relationship with Massamont on July 1, 2007 and so there won't be a full year's worth of new premium going forward. But I don't have the number in front of me. I don't have that level of detail in front of me.

[Operator:]

Your next question comes from [Nicholas Verduga] - Signal Hill Group LLC.

[Nicholas Verduga:]

First of all, with regard to a couple of expenses, I guess there were a couple positive surprises in the quarter, which is great - of course the tax rate, which you've already discussed, but the other one being the expense ratio. I would say it was significantly below what we were expecting. I'm just curious. Do you guys see this as a sustainable number or were there any anomalies in the quarter?

[Mark Haushill:]

No. I think I mentioned on our last call and probably the last couple of quarters that we were becoming more focused on expense management. And I think that we're now starting to see the benefit of that. In fact, I'm actually very complimentary of what our operating guys have been able to do. Nonacquisition expense on the E&S side came down year-over-year for the first quarter, and actually there is more expense savings that will be coming through for the remainder of the year. And I believe that will allow us to keep our expense ratio in check where it is right now, which frankly we still think is too high. So as the top line starts to move a little bit more we're becoming even more vigilant about expense management. Fortunately, because we were able to get our hands around it sooner rather than later, the changes that we need to make at this point are incremental as opposed to severe.

[Nicholas Verduga:]

And my other question regards your top line. Once again, it was a positive surprise. Net premiums written outpaced us by a significant margin. I'm just curious, has the bar been raised or is this simply an acceleration of the premiums that we normally would have expected through 2008, it's just front-end loaded? Do you believe that that, similar to the expense ratio, do you believe that the top line is sustainable as well at this pace?

[Mark Haushill:]

Well, you know, we've had lumpy growth for the last couple of years now on a quarter-by-quarter basis, and I think that this year will be no different. So I don't believe that the growth rates for the first quarter of 2008 will be necessarily reflective of the remaining three quarters on a gross basis. On a net basis, perhaps that is indeed more true because the quota share that we had in place on our E&S book with HCC terminated on March 31. So you'll see a pickup this year of about $50 million more in written premium for E&S than we would have had a year ago from the removal of that quota share. We have a number of initiatives that are starting to play through on the Commercial Specialty program. Massamont is one of them. So there's still premium to be had there. So I think that probably what you see is a fairly flat written premium line on a net basis for E&S for the remainder of the year. We may still be down slightly, but we'll have the benefit of the quota share pickup which Argo Re will be picking up on behalf of HCC or replacing HCC. And then you've got some of these initiatives still coming through on Commercial Specialty which may not drive the same level of increase but I think a double-digit increase for the remainder of the year is still reasonable.

[Nicholas Verduga:]

You're saying a double-digit on a percentage basis, I'm assuming?

[Mark Haushill:]

Yes.

[Operator:]

(Operator Instructions) Your last question comes from Amit Kumar - Fox-Pitt Kelton.

[Amit Kumar:]

I guess just quickly going back to the Peleus Re numbers, could you just give some more color in terms of the zones or where exactly did those premiums come from? Because you mentioned that you're not that interested, I guess, in Citizens.

[Mark Watson:]

Well, the reason for that is not about geography. The reason for that is we're mainly focused on smaller accounts, and we write smaller accounts all over the world. It's really tough to kind of break it down by geography for any one quarter. Having said that, April 1 is a big month for Japan, which we just got through writing. January 1 is a big month for Eastern Europe, so there was more concentration in the Eastern Europe portfolio - excuse me, all of Europe - in the first quarter. And in the second quarter and including July 1, which is actually the third quarter, we'll be more focused for our U.S. account. And perhaps because we're more focused on writing wind-exposed property as opposed to quake-exposed property, there will be an emphasis in the Gulf Coast region and the Eastern United States.

[Amit Kumar:]

And I guess just going back to the restructuring, I think in your opening you made a comment that you expect to continue to structure the finance function or something of that sort. Could you just expand on that in terms of is the streamlining done or are there still several things.

[Mark Watson:]

Yeah, that was an operational reference. The restructuring of the group was completed in the fourth quarter. While we may be moving capital around from one business unit to another, the structure of our company I don't think will change very much. And the reason why I hedge is we have an idea of how we want Heritage to fit in, but we may decide to change that a year from now. Initially, Heritage will be a wholly owned subsidiary of Argo Re. As far as what the finance team looks like, with Jay coming on as CFO, with Nick Denniston joining the team as both financial director of Heritage and helping out on the corporate finance side, we have an opportunity to finally put in place some of the things we've been focused on on the corporate finance side but just haven't gotten to because of lack of resource.

[Amit Kumar:]

And would you be breaking out Heritage and Peleus separately in the disclosure going forward or is it going to be all plugged into one?

[Mark Haushill:]

No, Heritage will be a separate operating segment from the International Specialty operation. So assuming we close Heritage in the second quarter, which we're on track to do so, we will have four ongoing business segments that we will report next quarter. Plus, of course, we still have the run off segment.

[Operator:]

This concludes the question-and-answer portion of the call. I would now like to turn it over to Mark Watson for closing remarks.

[Mark Watson:]

Thank you, Operator, and I'd like to thank everyone for participating on our call today. I think having net income increase year-over-year by 50% is significant. I also think seeing earnings per share increase year-over-year is a good indication that we're now able to use our capital more effectively, particularly the capital that we picked up from our transaction with PXRE. We're now starting to put some of the management pieces of the puzzle in place, particularly by having Jay Bullock join us as Chief Financial Officer. We'll have more to say about the Heritage acquisition on our next call as we incorporate it into our financial results, but when I look at where we are today versus a year ago, I believe that we have gone a long way down the path of building out our International Specialty operations. Again, we continue to focus on being an insurance underwriter as opposed to a reinsurance underwriter, and I think that the addition of Heritage makes that clearer about our intent strategically in the future. And I want to thank everyone for some pretty hard work in the first quarter. There's been a lot of work done by a lot of people, and we're now starting to see the benefit of that financially and I look forward to talking with everyone at the end of the second quarter. Again, thank you for your time today. That concludes our call.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.