Argo Group International Holdings, Ltd.
Q2 2008 Earnings Call Transcript

Published: 8 Aug 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Argo Group International Holdings earnings conference call. My name is Towanda, and I'll be your coordinator for today. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Michael Russell, Director of Investor Relations. Please proceed, sir.

[Michael Russell:]

Thank you, Towanda, and good morning. Welcome to Argo Group's conference call for the second quarter of 2008. With me today is Mark Watson, President and Chief Executive Officer and Jay Bullock, Chief Financial Officer. We are pleased to have the opportunity to review the company's results for the quarter and the first half of 2008 as well as provide 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 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 would like to introduce Mark Watson, President and Chief Executive Officer of Argo Group. Mark?

[Mark Watson:]

Thank you, Mike, and good morning everyone. We are appreciative that you've taken time to join us today. I’d like to welcome our Chief Financial Officer, Jay Bullock to his first Argo Group earnings call. In his first three months with the company, Jay has proved to be a valuable addition to the executive team and I am pleased many of you in the call will have a chance to meet him at investor meetings and conferences. After my opening remarks, Jay will review our second quarter and first half results in more detail before we open the call to questions. Overall, I would like to say that I am pleased with the progress Argo Group has made during the first half of 2008. Despite the softening market, our company and insurance operations remain strong, and we’ve recently taken another major step to strengthen our position as a leader in the international specialty insurance marketplace. And that transaction of course was the acquisition of Heritage Underwriting Agency, which gives us a much broader underwriting platform with increased market presence in international distribution. In Heritage we gain an established Lloyd's franchise with approximately $800 million of controlled premium in this syndicate, 54% of which is backed by Heritage capital, the other 46% backed by trade and other capital providers. And Heritage has a track record of generating a 20% to 25% return on capital in recent years. The Heritage acquisition was part of the strategic expansion of our operating platform giving us increased opportunities for intelligent growth and better access to what has become a single broadly distributed specialty insurance marketplace. With established underwriting operations now in the US, Bermuda, London, and Continental Europe, Argo Group is uniquely positioned in that regard among most of our industry peers in the property/casualty business. The broader geographic platform allows us to take advantage of business opportunities now emerging from these three markets, and also by leveraging our company’s entire specialty product portfolio wherever it is needed. Having completed the acquisition in May, our second quarter report includes results for only a portion of Heritage this quarter, contributing gross written premiums of $74 million and operating profits of $5.7 million for the month of June. At current levels Heritage will be a major contributor to our financial results going forward. With the addition of Heritage to the Argo Group family of companies, it was necessary for us to review and consequently change our segment naming nomenclature to better describe the business each segment writes. Therefore Argo Re’s operations in Bermuda are now reported as the Reinsurance Segment, while Heritage will be reported under the segment name of International Specialty. Segment names remain unchanged for our US operations, namely Excess & Surplus Lines and Commercial Specialty. Regarding our US operations, our underwriting operations in the first six months of 2008 have performed relatively well to increase pricing pressure in our E&S and Commercial Specialty segments. We believe that we have maintained sensible premium volumes as we exercise the necessary level of underwriting discipline. As I’ve mentioned in previous calls, our E&S businesses are competing with the standard market as well as new entrants into the E&S marketplace, whereas Commercial Specialty continues to see increased activity by both regional and national admitted carriers. The larger accounts and more generic classes of business continued to be under more pricing pressure than the smaller niche accounts we tend to write. Single digit rate declines continue to be the norm in our markets with some minor loosening of terms and conditions, but only minor. The second quarter also brought a series of severe storms across the midsection of United States, a region where we have a concentration of insureds. As we announced in July, we sustained over $16 million in pretax storm loses, which impacted our results for the quarter largely in our Commercial Specialty segment and in our Excess & Surplus Lines segment to a lesser extent. Both segments during the second quarter and first half of 2008 generated responsible volume production, and including the storm losses, produced positive operating income for the second quarter. Our Reinsurance segment in its second full quarter of operation performed in line with our expectations by writing what we believe to be attractive risks in the catastrophic reinsurance market. Argo Re is currently enjoying rates per unit of exposure that are better than the primary market and can use capital more effectively due to an uncorrelation of risks and mainly just rate relative to risk as respects the other part of our portfolio. Since January, Argo Re has generated about $15.5 million in operating income through a fairly balanced book of US and European risks and some Japanese risks to a lesser extent. On a consolidated basis, we reported historic highs in the second quarter for gross net and earned premiums and total revenue, aided by our Reinsurance and International Specialty operations. Including storm losses, net income in the second quarter increased by 9.5% over the same period last year, while earnings in the first half of 2008 were up by 30%. Investment income in the quarter increased 29% and was up approximately 32% during the first half of the year. The quarter’s results include favorable development on prior year loss reserves of $9.2 million pretax and $16.3 million pretax for the first half of 2008, stats that reflect our conservative reserving practices over the last several years. Let me talk about our balance sheet for a minute and our risk management philosophy. Our balance sheet remains strong as demonstrated by our high quality portfolio, conservative reserves and strong capital position. Invested assets increased to $3.9 billion and total assets topped $6.2 billion. Book value per share at the end of the quarter was $45.85 versus $45.15 at December 31, 2007. I am also happy to report that A.M. Best affirmed the financial strength rating of A for our US operations with an outlook of stable. Over the last several quarters, I’ve outlined the steps we’ve taken to increase the geographic breath and product offering of Argo Group. The component of this expansion that deserves specific mention is our increased exposure to property catastrophes. Historically and today, our US operations have been dominated by casualty business with only moderate property catastrophe exposure. Looking at our experience in 2005, we will bear this out. Conceptually, this low level of catastrophe exposure has been an advantage allowing us to add businesses like Argo Re and Heritage with a lower capital allocation then would be the case if our pre-existing catastrophe exposure had been larger. As a result, we have been able to significantly and prudently expand our business. Investors should be aware that the Argo Group today has larger, and we would argue, a more appropriate amount of worldwide catastrophe exposure. We are not a cat-centered company nor do we wish to become one. We do plan to continue to use the expertise in our group to write property exposures as long as the pricing is attractive and additive to the overall portfolio of Argo’s business. As we will discuss in a minute, in the first year of Heritage ownership, we felt it was prudent to purchase additional reinsurance protection for the Group for 2008. In 2009, we will have an opportunity to tailor the business written and reinsurances purchased by the Group companies to best achieve the Group goals of maximizing expected return within the constraints of acceptable risk parameters. As you know, risk restraints are not monolithic. The right level depends on other risks facing a company and the correlation between those risks. However, in an attempt to provide investors some insight into how we think about property risk constraints, I would offer that we seek to manage our gross and ceded property exposure such that the types of catastrophes that would cause an expected loss of capital per year are historically unprecedented. In other words, we are still managing our exposure to losses relative to income, not surplus. Before I conclude my remarks, let me address an issue that received more attention than it deserved during the recent quarter, that of the unexpected departure of a small group of underwriters from Heritage. Certainly, I was disappointed in their decision to leave the company, but I also understand the highly-competitive nature of the Lloyd’s market. More importantly, what has been missing from the dialogue is any mention of the tremendous strength of the Heritage organization and infrastructure that was the primary attraction in our acquiring the company in the first place. We are encouraged by the discussions we have had with the management and staff, and quite frankly, have a high degree of confidence we can take advantage of the attractive opportunities presented through the Lloyd’s Syndicate. Given the interest level that we have had with potential underwriters, I think we are close to getting a good replacement on board soon. So in summary, we continue to find and write profitable business in a very competitive market, conditions we have been adjusting to for several quarters, if not years. Additionally, over the past 12 months to 18 months, we have held steadfast to our model of engaging in those business activities we perform well and supplementing our growth with sensible, accretive acquisitions. The result has been a consistent increase in our book value and base of invested assets. Along the way, we have uniquely positioned our business platform to take advantage of a converging specialty insurance marketplace. We have differentiated Argo Group among its peers by building or acquiring operations in Bermuda and London, which we believe will be a catalyst for future incremental growth in the international insurance and reinsurance arenas. We have diversified our company by offering multiple lines of business and expanding our channels of distribution internationally. We have strengthened the Group by supplementing existing operations with small M&A opportunities that energize organic growth or add talent and experience that we didn’t already have. We have the ability and flexibility to be proactive and flexible in our deployment of capital. Finally, we have moved from being an aspiring national specialty underwriter to becoming a market leader in the international specialty marketplace. Now I would like to ask Jay to review our financial results in more detail. Jay?

[Jay Bullock:]

Thanks, Mark. First let me say how excited I am to be part of the Argo management team and I truly can say I really enjoyed this first quarter. It has been exciting, we have had a lot to get done with the Heritage acquisition, but we have got a strong team and it has been a real interesting time. I’ll add to Mark’s comments with some additional detail about the quarter’s results, and then we’ll take your questions. Pre-tax operating income for the second quarter was $30.8 million, an increase of 14% from the second quarter of 2007. We were pleased with these results given the competitive marketplace and the storm activity that affected our US operations this quarter. This result demonstrates the value of our diversification strategy, as our Reinsurance Segment and our new Lloyd’s operation contributed meaningfully to these results. Gross written premium increased over 40% in the second quarter of 2007, driven largely by our new International Specialty and Reinsurance businesses, as well as by both organic and acquisition-driven growth in our Commercial Specialty segment. The growth in these segments was offset by a modest decline in our E&S segment, which continues to face competitive market conditions. Let me take a few minutes to discuss the new business coming from our Reinsurance and International Specialty segments. Argo Re is the company we established in late 2007 to participate in the reinsurance market and we have made good progress, having written just shy of $95 million of gross premiums during 2008. Roughly 55% of this business is US business, with the remaining diversified throughout Europe, Japan, and other parts of the world. As Mark said, this segment has contributed nicely to our results this year with operating income of $9.7 million and $15.5 million year-to-date. Although we have a short history with this business, the combined ratio in this book of approximately 64% is running in line with our expectations. Complementing the Reinsurance business are the operations of Heritage, our newest acquisition and entering into the Lloyd’s market. While our worldwide property book represents the majority of its business, Heritage also focuses on non-US liability, which is a nice complement to our US liability book. As Mark mentioned, our Lloyd’s syndicate managed by Heritage is 54% supported by our capital, with the balance of the support coming from trade and other capital providers. The way we will account for Heritage will include the activity associated with this trade capital, which results in an increase in gross and ceded written premium and the related balance sheet items. During the quarter, Heritage added $5.7 million to Argo Group’s operating income. Now let us turn to the loss ratio for the quarter. As mentioned earlier, our results were impacted by the storms that occurred primarily through the mid-section of the US during the quarter. The $16.4 million of storm losses added 6.3 points to our loss ratio, affecting the results of both our E&S and Commercial Specialty segments. Our Reinsurance segment reported a lower loss ratio than a year ago due to the lack of reported catastrophe losses during the quarter. Our International Specialty segment or Lloyd’s operations reported a 53.4% loss ratio for the quarter. This is consistent with past experience and our current expectations. Prior-year loss reserves continued to develop favorably, and that development for the quarter was a favorable $9.2 million, comprising of $5 million from our E&S segment, approximately $6.5 million from our Run-off book, offset by a small amount of adverse development in Commercial Specialty and the expected small unwinding of discount on some of our comp reserves. The 2007 property reserves for E&S had developed favorably and the $5 million from the Run-off segment was primarily due to favorable development from PXRE legacy property business. For the second quarter of 2007, favorable prior-year development was $7.1 million, primarily coming from our E&S and Run-off segments. Expenses – our expense ratio continues to show improvement during 2008 as we continue to grow our premium volume and expand our international operations. Investment income increased significantly during the quarter. This was primarily due to the increase in invested assets associated with both the PXRE merger and the acquisition of Heritage. Interest expense also increased with the addition of $166 million of trust-preferred debt associated with the PXRE transaction and the $72.5 million assumed with Heritage, and borrowings under our revolving credit facility. In addition we are now including the expenses associated with our fee-producing business in the interest and other expense line item, as well as foreign exchange gains and losses. For the second quarter, interest expense was $7.1 million, other expenses were 42 million and the foreign exchange loss was roughly $400,000. Let me turn to the balance sheet briefly before we open it up for questions. With the acquisition of Heritage our portfolio grew to $3.9 billion at the end of June. Heritage represented approximately $735 million of this balance, and this portfolio is primarily comprised of very high-quality fixed income securities. As is typical of a Lloyd’s operation, it has a fairly short duration of 2.3 years. Their portfolio had no sub-prime or CDO exposure. In terms of the aggregate portfolio, we recognize net realized losses of $1.2 million for the quarter. This amount is comprised of write-downs of $2.3 million and a net gain on sale of $1.1 million. The pre-tax unrealized gain on the portfolio decreased from $115 million at March 31 to $58.2 million at the end of June, coming almost entirely from our fixed income portfolio, and primarily due to higher interest rates and wider credit spreads. The current fixed income portfolio duration is 3.2 years and the credit quality of the fixed income portfolio is AA+. Relatively speaking, we have benefited in the quarter from a very conservatively-managed portfolio. We have approximately $31 million of subprime securities remaining in our portfolio; that is less than 1% of the portfolio, and $482 million of investments that are wrapped by the monoline bond insurers, consisting almost entirely of municipal securities. We and our investment advisors examine the underlying credit of the wrapped bonds and are comfortable with the quality of these investments. From a capital perspective, our leverage ratio in the quarter was 22%, which includes the additional $72.5 million of debt assumed with Heritage. We are comfortable in this range and believe we have additional debt capacity. With that I’ll turn it back over the operator and open it up for questions.

[Operator:]

(Operator instructions) Your first question comes from the line of David Lewis with Raymond James. Please proceed, sir.

[David Lewis:]

Thank you and good morning. Congratulations on a solid quarter. Couple of questions, first, Heritage appeared to have a very strong June period in terms of both gross premiums written and the combined ratio. One, I think you only incorporated one month in there in your financials, is that correct? And second, can you give us any kind of guidance of what we might anticipate in the second half? Is that higher one-month type period, et cetera?

[Mark Watson:]

David, you have to keep in mind that most Lloyd's operations, particularly those that have a property focus, the majority of the premium written during the year haven’t in the first six months. So, probably 70% to – sorry, if you include July 01, we’ve probably written 85% of the premium at Heritage that we will write for the year. For the first six months, that was probably 65% to 70%. Earned premium will be a little bit less lumpy than that. But I don’t think you should multiply the P&L for one month by 12 and get an annualized number. Jay, you want to add anything for the second half of the year?

[Jay Bullock:]

Just two things. I think that operating run rate plus or minus 90% on Heritage is in line with our expectations. David, there was a pro forma filed last week where you would have seen the first quarter earned premium out of Heritage. So that gives you a quarter to look at. And I think it’s reasonable to assume that that’s a representative quarter for Heritage.

[David Lewis:]

The first quarter going to the second half or you’re just saying a traditional first quarter?

[Jay Bullock:]

I am sorry. A traditional quarter for Heritage, and that’s at the March point that the earned premium is slightly less lumpy than the written premium is. So, that first quarter number was $80 million. That’s a pretty representative earned premium quarter for Heritage.

[David Lewis:]

Okay. And second can you talk a little bit about retention in your different operations and any pricing trends you can speak to in each of the individual segments?

[Mark Watson:]

Well, our retentions really haven’t changed too much with the exception of our Commercial Specialty segment. We increased our property retention from 500, 000 to 1 million, and of course every time you do that you then have a frequency of losses that you haven’t seen in the past. Murphy's Law always seems to come in. As far as pricing go – sorry, having said that David, most of the losses that we’ve had in Commercial Specialty from the spring storms were hundreds of thousands of dollars and so that hasn’t changed much. Jay was suggesting by note here you might have been – were talking about business retention, our renewal rates haven’t changed much. They tend to still run in the 50s and 60s on our E&S business and the high 70s to high 90s on our Commercial Specialty business. Rockwood (inaudible) runs in the high 90s, for example, and our Grocers and Great Central programs tend to run in the high 70s to low 80s. Rate decreases are about the same this quarter as they were last quarter, which is single digits, but like the last quarter they were more in the 6% to 8% range instead of the 1% to 5% range that we saw this time a year ago. Having said that, the last couple of months, we’ve actually seen rate declines normalize and flatten out back down to very low single digits, and it will be interesting to see in the next coming months if that’s a change in the trend or if the last couple of months have just been anomalous. I’m probably a bit cynical and think that there is still more rate decline to come. But it is for our – and again, I am talking about our book of business as it relates to the marketplace. I don’t see that changing, meaning I don’t think it is going to get significantly worse than it is nor do I think it would improve significantly either.

[David Lewis:]

And any – what do you think out there on your Reinsurance operations? You are somewhat a new player there, is that pricing coming in pretty much as anticipated or are you starting to see some significant pressure there?

[Mark Watson:]

No. The marketplace that we see today is about the same as it was at the end of last quarter. And so that means, it’s a little more competitive than we thought it would be this time a year ago. And we have seen in the marketplace low double-digit rate declines year over year. But again, as I think I said in my opening remarks the Reinsurance pricing particularly for property cat remains very good and so while we took that into consideration during the year you may recall at the end of the first quarter I suggested that we would write slightly less than we thought as a result of that. And we will probably – and I think I suggested we may end up writing somewhere between 80 million and 100 million. Now we are probably going to end up closer to 80 million not because the environment has changed, but we decided to pull back and write – or create less aggregate exposure so that we could use that aggregate exposure for Heritage.

[David Lewis:]

That’s very helpful. Thank you.

[Operator:]

Your next question comes from the line Bijan Moazami with FBR. Please proceed.

[Bijan Moazami:]

Good afternoon everyone or good morning. I have a number of questions. First of all, I was wondering if you could spend a little bit on where you are growing in the Specialty segment the premium volume expanded very, very nicely, and if you could talk a little bit about the surety operation that you have put together?

[Mark Watson:]

Sure. The growth in the Commercial Specialty segment isn’t coming from any one place Bijan. It’s coming from just a range of small business opportunities that we’ve been working on for the last several quarters. So, it’s a couple of new programs that are adding a few million dollars here and there. It’s no one big thing nor is it turning up, turning on the spiked [ph] and writing more of the same business. It’s just from across the board. It is not coming from surety which we just launched. Frankly it’s unlikely that surety is going to make much of an impact on our business for 2008. It’s really still in the start-up stage. I don’t think you will see much premium or income contribution until this time next year.

[Bijan Moazami:]

Do you also have a high property component in that segment than before?

[Mark Watson:]

No, I don’t think it’s changed too much at all. What happened to generate the losses that came in the quarter was just an increased frequency in storms, not more property exposure.

[Bijan Moazami:]

Thank you.

[Operator:]

Your next question comes from the line of Amit Kumar with Fox-Pitt Kelton. Please proceed.

[Amit Kumar:]

Thanks. Congrats on the strong quarter. Just a few questions, I guess going back to the discussion on the reinsurance premiums and the guidance which you have given us previously. If I look at the gross premiums they were $94.3 million for the first six months. Does that include the July 01 numbers too or are you guys like – is that going to be a meaningful number now or are you suggesting that this is it?

[Mark Watson:]

No, that doesn’t include July 01. July 01 we did just fine. Remember that – sorry the guidance that I had given before and I forgot to say it again this time, that’s just for the book that we are writing directly. There are other reinsurances assumed in the Reinsurance segment mainly pro rata participations on the books of some of our business partners, which add I think another $15 million to $20 million of premium in it.

[Amit Kumar:]

Okay. That’s helpful. And just moving on to the reserve discussion I think you had 6.2 million of reserve releases. Can you – I might have missed this, but could you just go through those lines one more time in terms of maybe hitting on A&E and Risk Management and PXRE legacy book as to how those individual components are developing?

[Jay Bullock:]

Yes. So, the net number was 9.2. That came from three different areas. Approximately 5 million came out of property reserves from the Excess & Surplus Lines division as were 2007 property reserves were obviously (inaudible) along. We can look back and see that those weren’t going to be needed. So, that was approximately 5 million. Then in our Run-off segment there was two pieces. One was a non-catastrophe related which basically means non- KRW. PXRE property reserve has been up for some attrition loss business that they had written. They have been up for a fair amount of time and we realize that we didn’t see anything coming through on that. So, that was approximately 4 million. And then the final piece was an auto liability book that was written long length [ph] in the risk management book. This isn’t Run-off. That came down about 5 million. And then we had about 2.5 million that went to increase the comp reserves. So – and then finally, in Commercial Specialty, there was a small amount of development. The net of all of those leads it to a 9.2 million net release for the quarter.

[Amit Kumar:]

Okay. That’s very helpful. My third question in terms of capital management, going forward what are you plans on buying back your stock?

[Mark Watson:]

Right now, we are sorting through where we are going to finish allocating capital to our operations. And I think as I’ve said in the past, we may have a lot of excess underwriting capacity, but that doesn’t necessarily translate into excess capital until it’s sitting in a holding company. We do have plans to dividend capital from the US operations up to the parent company in the US and once we do that then I think we will be in a better position to assess what to do with that capital towards the end of the year.

[Amit Kumar:]

Okay, end of the year. And that’s helpful. And finally a quick numbers question. What was the impact of Massamont on the premiums?

[Jay Bullock:]

Well, I don’t think it had that much of an impact this year. A lot of the – remember that we entered into the partnership with Massamont a year ago, and so a lot of the premium that resulted from that relationship was already put on the books. I think there will be an impact on July 01 business, Amit, but that comes into the third quarter and I don’t have the number off the top of my head, but my recollection is there is probably a $5 million to $10 million benefit in the third quarter, but probably closer to the low end of the range.

[Amit Kumar:]

Okay, that is all for now. Thanks so much.

[Operator:]

Your next question comes from the line of Joe Salerno [ph] with Goodnow [ph]. Please proceed.

[Joe Salerno:]

Thank you. Two questions. One on Heritage, it contributed one month of results, correct?

[Mark Watson:]

Yes.

[Joe Salerno:]

Can you guys just walk through roughly the puts and takes of – I mean, obviously we have the operating income for the month and I think you guys were saying that you can’t kind of you can’t go times three if it was there for the full quarter. So if it cut that a little bit, are there other expenses associated, like interest expense or anything else, so just kind of want to look at the puts and takes of—

[Mark Watson:]

Yes. Actually Joe, you probably could go times three for the quarter. The point I was trying to make earlier is because Heritage writes most of their premium in the first half and plus July 01, that there won’t be as much written premium in the second half of the year, but there is less lumpiness in the earned premium number and so I think Jay’s suggestion was – but if you go back and look at the pro forma we filed that earned premium for the quarter that we filed was about $40 million.

[Jay Bullock:]

$80 million.

[Mark Watson:]

Sorry, $80 million for the quarter. And so that is probably a pretty good annualized number, keeping in mind that we are writing a bit less this year – but yes, that is about right. It is about $80 million per quarter this year.

[Joe Salerno:]

Okay, so if we look at –

[Jay Bullock:]

I'm sorry. I was just going to say any financing cost is now being picked up and carried as a holding company cost, if you will. We did descend some debt from them, but that is not in that number.

[Joe Salerno:]

Right. So if we – what would the expense be roughly associated? I'm just trying to figure out if Heritage was there for the full quarter, which it obviously will be going forward. What would the contribution be then, because again if the operating income after tax, $5.7 million operating income, after tax is $4.3 million, divided by the number of shares, that is $0.14 for one month. How about – it sounds to me it would be too bullish to say $0.28, if it was there two months more, the quarter would have been $0.28 higher. You follow me? That sounds too high. So I'm trying to figure out if Heritage contributed roughly again $0.14 for one month, just on that operating income number, there must be some, say interest expense or so that came onboard as well to make that contribution less. Do you follow?

[Jay Bullock:]

Yes. I have had to put it all back together on a per-share basis. We don’t look at it that way. And otherwise we picked up the interest expense of the holding company, the interest expense that was added was probably $6 million, $7 million for the year. But I think what Mark is trying to say on an operating basis, $80 million is a pretty good quarter. We expect about a 90% combined ratio plus or minus (inaudible) stay out of this business, that will give you the underwriting contribution. The other expenses onboard for the Heritage transaction would only be the debt cost and I think you might have also – what you also saw in the pro forma, you have got as currently gauged, although we are still doing some additional work on this, about a $30 million intangible that is going to be amortized on a straight-line basis over 10 years. So I'm doing this a little bit, I haven’t reduced it to a per-share basis, I'm doing this and I won’t do that but I think that those are all the puts and takes that we would put in.

[Joe Salerno:]

Okay, so the amortization ran $30 million annualized?

[Jay Bullock:]

There is $30 million intangible amortized over 10 years, so $3 million a year.

[Joe Salerno:]

So, just real quickly then, I'm sorry for the length of this, but it sounds to me Heritage contributed $5.7 million in one month. It’s interest sounds like $6 million for per month. Okay, we could take it offline but this was one month of contribution and those are the puts and takes going forward.

[Jay Bullock:]

Yes, and I’ll reiterate what I said earlier. It is one month of contribution, it was a strong month of contribution, relatively strong.

[Joe Salerno:]

Okay. And then the second question on the Run-off businesses, can you guys give a sense of how much capital that is tying up and do you expect that to wind down over 1 year, 3 years, 5 years, you know, just a range?

[Mark Watson:]

I don’t think much has changed since the last quarter about the wind-down. I think, I guess we have wound down another $20 million in loss reserves since then. So we still have approximately $200 million in capital supporting those reserves.

[Joe Salerno:]

Okay. And do you suspect that will be over the next year or two, how rapidly that will wind down?

[Mark Watson:]

Again, the large part of property reserves has already paid down on the Reinsurance book, we have gone from $1 billion to $200 million at the end of 2007 and that number now is closer to $150 million after the first half of the year. If we are lucky we get down to $100 million by the end of the year. The comp reserves are still north of $300 million but getting lower, and A&E is still running around $150 million. I don’t see the comp reserves and the A&E paying down that much as I have said in the past, so for the remainder of this year and those reserves, what is left of them is the end of the tail that was already long tailed. And so they will still be paying down but they are going to pay down at $10 million to $30 million a year for the next few years. I don’t see them paying down any faster than that.

[Joe Salerno:]

Okay, thank you.

[Mark Watson:]

Okay.

[Operator:]

(Operator instructions) Your next question is a follow-up from the line of David Lewis with Raymond James. Please proceed.

[David Lewis:]

Thank you. Mark, did you revert selling stock at all in the second quarter?

[Mark Watson:]

We did not.

[David Lewis:]

Okay. And so we will probably look at that maybe occurring at the end of the year based on the ability to dividend up to the holding companies is what I heard you basically say here earlier. Is that correct?

[Mark Watson:]

Yes.

[David Lewis:]

Okay. And can you refresh my memory on the HCC quota share agreement that was terminated, what was the date of that and where are we going to see the impact there on the gross written side?

[Mark Watson:]

The agreement terminated on March 31, and so you were already seeing the impact of the difference between gross and net on the – in terms of written premium, if you look at the difference between the three months ended last year versus this year, gross written premium went from $185 million last year to $180 million in the second quarter this year, and net went from $138 million to $153 million. So you are already starting to see the impact of the elimination of the quota share, and we will begin to see the benefit of that in terms of earned premium next quarter and even more so in the fourth quarter this year. So the impact is already happening on the written side and now we will get the benefit of that a bit in the third quarter in terms of earned premium and even more so in the fourth quarter of this year.

[David Lewis:]

And what was the premium levels under that quota share for the full year of 2007?

[Mark Watson:]

That was about $80 million.

[David Lewis:]

Okay. And lastly, Jay, were there any catastrophe losses in the year-ago period or was it zero?

[Jay Bullock:]

We disclosed storm losses in the year-ago period in the press release and I don’t have the number at my fingertips, I think it was $3 million or $4 million. That would have been the only catastrophe activity. Remember when we say catastrophes, these are identified storms that meet a certain threshold, which quite frankly, is not very large. So just to be clear, these are named storms, not what we might normally think as (inaudible) hurricanes or so worth. So there was a little bit of activity but relative to this quarter, we had a dramatically higher number of storms this quarter than we had last year.

[David Lewis:]

Sure, I understand. Thank you.

[Mark Watson:]

Thank you.

[Operator:]

And at this time, there are no additional questions. I would now like to turn the call back over to Mr. Mark Watson for the closing remarks.

[Mark Watson:]

Thank you very much. I appreciate everyone’s time today on our call. I think we have made a lot of progress over the last year. I'm happy that some of the things that we have been doing strategically, it is now a little easier to see them financially, but still a little bit of a challenge on the Heritage front, I think that we will have a much clearer picture for everyone in the third quarter of how Heritage fits in with the Group from a financial perspective and hopefully we can have a thorough discussion about Heritage again and the Group as a whole at the end of the third quarter. I look forward to talking to everyone at that time and thank you very much for being with us today.