Arch Capital Group Ltd (ACGL) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2009 Arch Capital Group earnings conference call. My name is Lacy and I'll be your coordinator for today.

At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

Before the Company gets started with this update, Management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws, These statements are based upon Management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks or other factors that may affect the future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time.

Additionally, certain statements contained in the call that are not based on historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking-statements in this call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and the definition of operating income can be found in the Company's current report on form 8-K furnished by the SEC yesterday, which contains the Company's earnings press release and is available on the Company's website.

I would now like to turn the presentation over to your hosts for today's call, Mr. Dinos Iordanu and Mr. John Hele. Please proceed.

Thank you, Lacy. Good morning, everyone, and thank you for joining us today.

We've finished the 2009 year with a very good calendar year underwriting and investment results. The results were aided by light cat activity and favorable reserve development as well as significant improvement during the year in the bond market. We strongly believe that the most important measure in creating value for our shareholders is our ability to increase book value per share. At $73.01, our book value per share increased an impressive 42.2% from year end '08, 5.1% from the prior quarter, and 32% from year end '07 through the '09 period. Our annualized returned on equity for the year was 18.3%, and for the quarter, 15.7%; and our underwriting performance, as measured by the combined ratio was excellent, an 88% for the year, and 89% for the quarter. Cash flow from operations remained strong at $184 million for the quarter and $993 million for the year, despite the continuing shift in our mix of business to shorter-tail lines and the maturation of our casualty business written from 2003 to 2006.

At first glance, these calendar-year numbers look impressive. However, in our view, they mask the headwinds that we are facing in this phase of the cycle. Headwinds, by the way, that in our view got a bit stronger by year end. At Arch, we have always run our business on an underwriting or policy basis. We look at the economics of the business. We underwrite on that basis. We allocate capital and underwriting resources on that basis and, most importantly, we compensate our underwriters on that basis.

I'm not going to make a habit of this, to do part of your homework; but, if you put our 2009 results on an underwriting-year basis, the expected return on equity would be closer to 10%, not 18%, as the calendar year numbers indicate. Approximately 5 points for our reported returns on equity came from prior-year reserve releases, and 3 points from a level of cat activity that was lower than long-term expectancy. Even though current market conditions do not allow us to achieve a 15% return on equity for the business we underwrite, our stated goal of achieving that 15% return on average over the cycle has not changed, and we believe that by focusing on underwriting margins, maintaining discipline during the soft phase of the cycle, we will be able to deliver on that goal.

From a production point of view, for the year our growth rates in premiums were down 2%, and our net written premiums declined by 1.5%. For the year, the insurance group was up 1% on gross written premium, and 2.8% on net written premium, while the reinsurance group was down 9% on gross, and 7.8% on net. For the quarter, insurance was basically flat, both on gross and net written premiums while reinsurance was down 40% on gross and 40% on net for the quarter. About 50% of the significant reduction in our reinsurance volume was driven by actions we have taken as we non-renew or reduce shares on treaties that did not meet our return goals. The other half was due to actions taken by our clients, where they either decided to retain more net on quota share contracts or where they restructure their purchases to access the excess of loss contracts.

Reinsurance terms and conditions have remained fairly stable with the only exception, as we reported in prior quarters, being continuing pressure and request for improved ceding commissions. Property cat rates, while down in the mid-single digits, are still attractive on an absolute basis. In the fourth quarter and January 1 renewals, we intentionally utilized a bit less PML than a year ago. Assuming market conditions remain stable, we expect to redirect this unused PML capacity during the balance of the year.

For our insurance group, rates for the fourth quarter, as measured on our book of business for both new and renewal business were essentially flat, ranging from a negative 5% to a positive 6%. When you factor in trend or claims inflation, which in our estimation ranges from plus 2% to plus 8% depending on the line of business, we're losing some ground from a margin point of view. We continue to focus our underwriting activities and efforts on small to medium size accounts in all of our units, as we believe that competition is somewhat less aggressive for these types of accounts.

Now, let me turn a bit on capital management. Our capital management philosophy, which we believe is an integral part of managing through the cycles, has not changed. We intend to continue to retain excess capital to our shareholders as long as we do not see attractive opportunities to deploy in our business. In the fourth quarter, we'll repurchase 5.1 million shares at an average price of $69.67 and since the inception of our program and through February 12, 2010, we have repurchased approximately 24 million shares or 31% of our outstanding common stock and have returned approximately $1.6 billion through the share repurchases to our shareholders. As of February 12, 2010, we had $870 million remaining authorized for future share repurchases.

Before I turn it over to John Hele for more commentary on our financials and more color on our financials, let me update you on our PML aggregates. As of January 1, 2010, our one in 250 PML from a single event was $750 million or 19% of common equity, down from $826 million at October 1, 2009. $46 million of the reduction was attributable to less exposure, and $30 million was attributed to us utilizing and adopting RMS 9.0. Tri-County Florida remains a larger zone with northeast US Win coming in at slightly less.

With that, let me turn it over to John for his comments before we take your questions. John?

Thank you, Dinos.

I would like to add some commentary to expand upon the information that has already been released. For 2009, premiums written by the insurance segment represented about 70% of our gross volume and 62% of our net volume, slightly higher than in 2008, with the balance written by the reinsurance segment. Property and other short-tail lines represented approximately 47% of our net premium volume in 2009, consistent with 2008.

For the 2009 fourth quarter, premiums written by the insurance segment included an $18 million assumed premium block of contractual liability excess wear and tear business, shown in the other line of business. The amount of premium from this business going forward should be about $4 million to $5 million per quarter. The quarter-to-quarter comparability of premiums, written by the reinsurance segment in the 2009 fourth quarter reflected portfolios in and out on a large property-oriented quota share that we discussed last year. The total impact on comparability was $53 million. On a consolidated basis, the ratio of net to gross written premiums in the 2009 fourth quarter decreased to roughly 72% from 75% in the 2008 fourth quarter, primarily driven by the mix between insurance and reinsurance, while the yearly comparisons were relatively flat.

Turning to our operating results, the consolidated combined ratio was 88.8% in the 2009 fourth quarter, compared to 101.2% in the 2008 period. The 2009 fourth quarter loss ratio of 57.9% reflected the benefits of a light cat quarter, while 2008 fourth quarter loss ratio at 70.3%, including 22 points mainly from Hurricane Ike. The 2009 fourth quarter consolidated accident-year loss ratio primarily benefited from a lower level of large specific risk loss activity and a reduction in property IBNR related to current-year events due to the lack of activity. In looking at the quarter-over-quarter, as well as sequential accident year loss ratios, please keep in mind that as the book shifts more to shorter-tail business, there will be more fluctuations quarter-to-quarter. Therefore, we believe that the full year accident-loss ratios are more indicative than quarterly numbers.

2009 fourth quarter loss ratio had a lower level of favorable reserve development net of related adjustments which totaled $16 million or 2.3 points compared to the 2008 fourth quarter of $116 million or 16.6 points. Prior-year development in the 2009 fourth quarter primarily resulted from reductions in property reserves, partially offset by an increase in the insurance segment for European professional liability and executive assurance reserves on a small number of large specific risk losses.

The consolidated expense ratio was flat quarter-over-quarter with a 60 basis point decrease in the acquisition expense ratio, primarily due from a lower level of costs related to prior-year reserve development. The other operating expense ratio was 60 basis point higher and reflected costs related to the expansion of the insurance segment's presence in executive assurance and professional liability lines as well as Canada, as noted in prior calls, while the reinsurance segment's growth was primarily due to the lower level of net premiums earned.

With regard to the investment portfolio of $11.4 billion at the end of the year, it is down slightly from $11.5 billion at the third quarter, mainly due to the impact of the share repurchases of $359 million in the quarter. On a per share basis, the net investment income was $1.56 in the fourth quarter 2009 versus $1.60 in the third quarter of 2009. The investment portfolio book yield was 3.64% at December 31, 2009, down from 3.93% at September 30, which reflects the impact of lower interest rates for new money as well as the maturing of older, higher yielding assets.

Given our conservative investment outlook and low yields, we've seen new money three-year duration investments at approximately 3%. Although we were able to participate in TALF in the third quarter, there were no opportunities to do so in the fourth quarter. The investment income was also impacted by a drop in demand for securities lending, which reduced invested income by $3 million in the quarter compared to the same quarter last year as well as share buy-backs that reduced investment income by approximately $1.5 million. Our duration shortened to 2.87 from 3.09 at September 30, primarily due to aging and limited new money purchases due to share buybacks. Given the risks to an insurance company of potentially increasing interest rates, we prefer a shorter duration at this time versus a longer one.

The investment funds accounted for using the equity method of $392 million at December 31, which includes the bank loan fund investments of $277 million had a return of $32 million for the quarter and a full-year return of $168 million that has now recovered most of the loss in 2008. The total return of the investment portfolio was 1.15% in the fourth quarter and 11.28% for the year. This has been accomplished with a portfolio with an average credit quality of AA+. Credit related impairments were $4.8 million in the quarter. The non-agency CMBS portfolio of $713 million at December 31, has a market to book price of $102, an average loan to value of 65%, delinquencies of 4.6% and current credit support of 27%. Our cash flow from operations was $184 million for the quarter and $993 million for the year.

Our balance sheet remains in excellent shape, and our financial flexibility remains strong with total capital amounting to approximately $4.7 billion at December 31. Debt represented approximately 8% and hybrids represented less than 7% of our total capital. Our $100 million of revolving credit borrowings mature in August of 2011, and our $300 million of senior notes mature in 2034. The hybrids are all perpetual, preferred shares. As of December 31, 2009, we continue to hold approximately $600 million to $700 million over our targeted capital level based on current rating agency models with an appropriate buffer. Our liquid cash short-term investments and treasury securities represent about 22% of our invested assets.

As mentioned earlier, we bought back $359 million of shares in the fourth quarter at 98% of the average book value for the period. This added $0.29 to book value in the quarter. With the December 31, book value per share of $73.01, this was an easy investment decision to make. Through year-end 2009, since inception, we have repurchased 22 million shares, which had an estimated positive impact on our book value of $1.24, and added 3.7 points to the 2009 full-year ROE. Given the current insurance and reinsurance market outlook, we continue to view buying back our shares when they trade at this current range as the best way to use excess capital. Reflecting the additional $119 million of shares repurchased through Friday, February 12, our main authorization through December 2011 is approximately $872 million.

With these introductory comments, we are pleased to take your questions.

Thank you. (Operator Instructions) Our first question comes from the line of Jay Gelb with Barclays Capital. Please proceed.

Thank you. I was hoping you could give us insight in terms of how fast you anticipate they could complete the $807 million share buy-back program.

Hi, Jay. This is Dinos. Well, it will depend on the share price as how we trade in the marketplace; and also it will depend as to what part of the year we are. Traditionally, we don't do a lot during the hurricane season which is in the third quarter.

In the second quarter, we'll go steady, and our attitude is to continue to pretty much repurchase approximately what we add to earnings on a quarterly basis, even though we still have significant excess capital. But we don't want to do it all in one quarter.

Having said that, if markets -- for whatever reason, the Greek tragedy or -- cause the share price to become a lot more attractive, of course, we're going to respond to that. So, John, do you want to say anything?

No. I think the world outlook is still not easily certain. So we remain cautious, and would like to maintain a buffer in our capital. At the same time, we're looking for good opportunities. If the share price comes down, we'll continue to buy back.

Okay. And could you give us a sense of how your January 1 reinsurance renewals went?

Yes. January 1 -- and don't forget. It's only January. Year-over-year was approximately flatish, both for our insurance and reinsurance point of view. And basically you're asking predominantly on volume, right?

Right.

Because I can give you a flavor on rates, too.

That would be great.

Rates, they were a bit down only reinsurance, as I mentioned in my prepared remarks, and don't forget, what we do in the reinsurance sector is approximately 70% short tail, and I think we've seen rates come down mid-single digits. It was a little better on the insurance group, with some exceptions. I think casualty lines -- and this is not professional liability or D&O -- stabilized and slightly positive.

We were disappointed with the D&O world. I think the D&O world in January 1 lost ground a bit. It was in the minus, 5 % range. Professional liability was stable, and property -- even though we like the absolute rates, was a little bit under pressure, down about the same as cat rates at about 5% or so.

So that gives you a little flavor from what we saw on January 1. But volume wise, I think we were pleased with what we achieved. One month doesn't make a year, but it was a good beginning.

Okay. And then, for the year, should we be thinking about volume trend at roughly the same pace as this early stage, flat for the year?

I don't know. We don't give guidance, so I don't spend a lot of time worrying about the future. I try to respond to the market; you tell me where the market will go, I'll tell you how much I'm going to write. If conditions don't deteriorate further, probably looking at a flatish, maybe slightly down year. If conditions improve, we're going to reverse that; but if conditions become extremely more competitive, we won't mind giving up volume, and we're going to react to whatever the market does. I -- as my old boss says, Mr. Market had his own mind, and you can't control it.

Good point. Thanks, Dinos.

And our next question will come from the line of Josh Shanker with Deutsche Bank. Please proceed.

Thank you. Good morning.

Good morning.

I realize that the fourth quarter is not a big reinsurance quarter. You talked about reasons why rates were down dramatically, and I'm just trying to think about how you think about the insurance business versus the reinsurance business where volumes were flat. Combined ratios seemed to be edging to about break-even. I'm trying to understand -- seeing why the profitability of the two businesses at this point in the cycle. Maybe you can do a compare and contrast?

I'll do that but, before that, I didn't say rates that was significantly down. I said our volume in reinsurance was significantly down.

You can talk about why that is, I suppose?

Reinsurance -- let's start with that. Reinsurance is a lumpy business. Basically 75% of that reduction came out of three contracts. One contract was -- the client decided that they want to keep more of that business. We agreed with them, I think giving -- if it was our choice, we probably would have stayed on the same level as a year ago. We thought the business was still attractive, but we had a half a loaf instead of a full loaf.

The other two situations they were a contracts that we could have stayed on, and decided not to because we believe we could have utilized the PML capacity in the forthcoming quarters at better terms.

So, don't -- I wouldn't read a 40% reduction in reinsurance as the norm quarter to quarter. It was the outcome of our underwriting activities for what we saw coming up for renewal in that quarter. As I said January was a much better picture from both a rating and volume point of view. And what's your second question?

Then compared to the insurance business, it seems we're right near in the high 90s maybe 100% combined? You talked about the 10% ROEs were the as it-year return on equity would be, so to speak. Is that business -- I'm trying to figure out how long is --

Well let me give you a flavor of that. When you dissect it into -- different sectors -- let's say short tail, medium tail, long tail. A lot of the long tail business, when you factor the risk free rate of return on new money invested, and close to a hundred combines it's not going to give you very attractive ROEs. As a matter of fact, those ROEs, they might be well below 10%; and as you can see, we're trying to minimize our writings.

You can't totally exit the business. This is not a light switch where you turn it off and on. At the end of the day, you have to maintain your book of business with -- you have long-standing clients. They've been good client, and not every client is looking for the big reduction. So you underwrite. You wade through. You're giving up some volume, and you remain positive, because when things turn, you can double and triple your volume and make a lot of money in the business. So in essence, you keep the factory going.

Our short tail business we still view as attractive, but it's not very easy to obtain. Everybody else looks at it through the same prism, with the same set of eyes, so you're starting to see a little more competition; but it's not unreasonable competition. There is cat exposures, there are models that everybody prices off to, et cetera. It's the blend of all that that gives us the ability to achieve high single digits, low double digits, ROE on a policy basis as we see it today.

But I'm not telling you that every segment of the business is behaving equally. There are some that are in the mid-teens. There are some that are the very low single digits. If you have a good blend, you might get to 8%, 9%, 10%, 12%, and it depends company to company, their blend, et cetera.

What I can tell you, though, is that we find better opportunities for better margins on smaller accounts than we do on larger accounts, and that our effort to switch the book, it's not something we started yesterday, something we started actually going back to '06 -- '06, '07, '08, '09. We were drifting towards that and losing some of the multimillion-dollar accounts, because that's where the competition was stiffest.

Very good. Appreciated, and one unrelated comment, I suppose, but maybe it's related. Are you seeing any talented people looking for work these days?

There are talented people looking for work; and usually we are a good employer for those, so if they call you and they are talented, give them my number. I would love to talk to them.

But is there any slowdown to some extent?

No, there isn't any slowdown. We're still getting a good flow of resumes, but there is only so much you can do. This is not the greatest environment to really expand your books.

When you find extraordinary opportunities, you act on it, and I think history has shown that we were -- we were the beneficiary of those extraordinary opportunities.

Great. Thank you for all the detail.

You're welcome.

And the next question will come from the line of have Vinay Misquith with Credit Suisse. Please proceed.

Hey, good morning. Could you give us a sense of how much of reduction in property IBNR already took in this quarter?

Well, -- let me explain to you the process -- how we -- short tail lines don't have significant amount of IBNR. Some segments, it might be 10 or 12 weeks of earned premium. Some other segments might be six month of the premium, et cetera. Now we don't -- we looked at -- this is short tail, so we look quarter after quarter to see how the activity from -- a large loss of activity what the expectancy is, and when we looked at it in the fourth quarter we were a bit conservative in the first, second and third, so we made the adjustments.

But we have not changed our reserving patterns for short tail. The loss ratio went down. I think it went done by 4 or 5 points. It was predominantly because the activity was pretty light, and you -- you've got to factor that in. You get an amplified effect, in essence, because you look at the entire year and then you're making the adjustment in your fourth quarter.

Okay. Fair enough.

As John said in his prepared remarks, if you're looking for long-term trends, I think look at the entire year, the calendar year. That will be a better indicator.

What is the normalized cat load that we should assume for 2010?

Well, if you tell me how much business I'm going to write, I can tell you. If we write the same amount of business we wrote a year ago, it's close to $200 million.

It's about $50 million a quarter.

That's great. One last question. Do you have a duration gap between your assets and your liabilities?

Before I -- in that number, we include both the cats -- and you know how we measure cats -- we measure cats on anything that is over $5 million of industry loss. There is a cat event, and it goes into that bucket, but also we do factor in attritional cats into our numbers, because there might be tornadoes.

Tornadoes.

Tornado, hail, et cetera and all that. Now, let me get back to your question. What was your question again?

The duration gap between your assets and your liabilities, because I find that the duration of your assets is really low this quarter. Just curious whether you're keeping a shorter duration on your assets?

I'll let John answer that and then give you some color afterwards.

What we do, Vinay, is we analyze our liability duration which is about 3.5 and then we match asset flow of against that, so we're matched on the assets backing the liabilities. It's the capital where we can change our duration longer or shorter depending upon our view, and that's now under a year, the assets backing our capital. That's about a year, slightly less than from an effective duration point of view, whereas we're 3.5 -- 3.5 roughly on the assets backing the liabilities.

So when do you think you're willing to put that more to work in longer duration assets?

Well, listen. We'll be more conservative on that view. We'll discuss that with our investment committee every quarter. We're more worried about when the stimulus is removed and the easing of that and the flooding of the market. We're going to have pressure on interest rates. We'd rather be cautious in that approach.

You're going to see us being cautious on duration and you are going to see us cautious on credit. Our shareholders are going to make money because we're great underwriters, not because we're brilliantly investors. They can go to Buffet. He's a brilliant investor for that. Wit us, we try to be better than average underwriters.

We view that what we give off by being a little shorter, if rates stay low or go down more, that's a strategy and that's what you have. If rates spike up, especially if the (indiscernible) flattens, or there's a rapid spike or parallel shift up, that's a big hit to your reported capital, and you lose the opportunity to reinvest in higher rates, and we think being shorted at this moment of time given it's uncertain, really we would rather be in this position than reinvesting that money long at this time.

Oh, sure. Thank you very much.

And your next question will come from the line of Jay Cohen with Bank of America Merrill Lynch. Please proceed.

Thank you. A couple questions. You suggested that you wanted to essentially redirect some of your PML to later quarters. Should we read into that maybe some of the US business, southeast US business you find more attractive, those renewals tend to come up?

No. What you ought to read into that, Jay, to be totally honest with you -- a couple of contracts we had that were retro type of contracts. So in essence you are still further removed from looking at the underlying data set, and we prefer to use our PML when we have more knowledge about the underlying exposure and that was my comment.

We felt that losing another 5 point on the cat business, even though I think the rates are still adequate being retrospective year - some believe may not be the most attractive way to deploy PML. We took that off the table and then we have it available and I have a lot of confidence in our cat team. Their performance over the last eight years has been fabulous, so I spent a lot of time with them. They're good. They even have some Greek blood in them.

Thank you. Next question is, on the favorable development, which were strapped quite a bit, and you talked about on the insurance side some issues in Europe. Can you get into that in a bit more detail; and then in addition, the bigger-picture question on the reserve development is, are you seeing any escalation in claims from a frequency or severity standpoint that might cut across your books?

Let me answer. We had some specific risk loss activity on a few number of claims; they were from the '07 underwriting year, and we decided to add to those versus using IBNR for that, just to be conservative from the point of view from the '07, '08 time period. We remain cautious on that and want to be conservative on those points of view.

It's a call you make. We allow them to flow through, and we chose not to make an IBNR adjustment, even though you can justify making up an IBNR adjustment. So that is the essence of that.

This is professional liability in Europe.

Yes.

Yes.

Okay. There's nothing systemic there.

No. Just a normal book of business.

Right.

But again, wanted to be cautious from the '07, '08 time period.

And from a claims standpoint in general, forgetting the European issue, what are you seeing?

We see both to be benign. As a matter of fact, very good trends on frequency. A slight little uptake on severity, but nothing -- still a lot better than historical averages. So -- but like I said, we don't -- we always reserve on very long historical averages.

We don't try to measure the uptake in one year or in one quarter or -- and change part of that, because that can change. You'll see that in the D&O lines, for example, frequency of reported claims is way down for the '09 year. But, of course, everybody is recognizing that is why you're getting more competition on the business, and you see rates starting to come down.

Right. And I guess one more question. Given the capital level you have, one option would be to reinsure less of your insurance business, and I'm wondering what you think about that?

Well, if you're willing to change, your risk profile, of course, you can do that. The reason we buy reinsurance is twofold. One is to have a reasonable bet on verticality, so basically we don't want the insurance group to take more than $15 million net any one risk. So, sometimes you need to issue policies at $50 million or $100 million, depending especially on short tail business in the energy sector, et cetera. So for that reasonable, you're going to buy reinsurance.

Also you want to protect yourself from horizontal accumulations, and horizontal accumulations require you to buy reinsurance on that basis. And we do it in the insurance group by limiting our cat exposure. We're doing it by -- so even though we like the business, otherwise we wouldn't write our own account, there is reinsurance protection that has to come in in order to take out the volatility that is associated with either vertical penetrations or horizontal accumulations.

Got it. Thanks for the answers.

(Operator Instructions). And our next question will come from the line of Ian Gutterman with Adage Capital. Please proceed.

Ian, it's not only my name that gets mutilated.

It's not even a Greek name.

[ Laughter ]

One numbers question, then a couple of financial ones. First, do you have what the fully diluted book value would be for the quarter?

Yes. We have -- depending on -- if you use the treasury stock method, $70.05.

Got it. First, on the underwriting, your ROE, a couple thoughts on it. One is I assume that's using the portfolio yield you earned last year. On a new money basis, wouldn't it actually be lower than 10% since --

You're absolutely correct. It may be a couple points down.

And then, given that property returns are so strong, still mid- even high teens, that implies casualties may be mid-single digits, low single digits.

Yes. Depends on the line, yes, you're correct.

Just wanted to make sure I was thinking about that right.

Well, you do, and you're a geek -- so you do the calculations.

No. I agree with you. It's just when I broach numbers like that with some of your competitors, they look at me like I have three eyes.

On buy back capacity, I guess I understand how you could buy back your earnings based on top line isn't growing out, surplus doesn't change, the PML isn't changing. I guess the one I look at that does become a constraint is reserves to surplus? It looks like unless your pays are really going to spike up here, that your reserve balance continues to grow, and if you keep capital flat, that grows maybe a tenth of a point a year in that ratio. Is that correct?

Well, your reserves -- your reserves they might even start coming down again depending on your mix of business. Don't forget, for the last few years we have been replacing the mix with more short tail. Short tail business doesn't have a big reserve component, because the losses come in, you pay them, and you're out; and so, when the long tail lines, which are becoming a lot less as part of our book of business -- they're maturing in claims -- you will see a shift in your reserves. But if you reserve position continues to grow, yes, you are going to require more capital. You allocate capital to reserves, as you're allocating capital to the premium exposure you have, depending on where you are.

Ian, our reserves at the end of '08 were $7.6 billion and they are $7.87 at the end of this year.

Right. They're growing a bit. We're going to maintain very strong reserves; but, if our volume continues to be flattish or coming down and the book is shifting at some point in time as you mature you're going to have less reserves.

Doesn't that imply, though, that paid incurred gets close to 100 then?

Yes. At some point in time you can get to that, absolutely.

Okay. I guess I was assuming that we wouldn't necessarily see a large paid growth -- maybe that's just my model, but --

Well, if you get a company who matures, meaning that the volume is not growing, they're flattish, and they're mature, meaning they're -- they're 7, 8 years into it. It's not unusual to have -- paid getting current to be the same.

Okay. That's fair. Traditionally you've been about 1.5 times reserve to surplus. Is there an upper boundary I should think about on that?

No. We don't spend a lot of time thinking about that. The way we reserve the Company is we have what we call the IBNR families is books of business. We look at it from that perspective, and we set the proper reserves, and in our judgment based on what the data shows us.

I didn't mean from the adequate reserves, just from a leverage standpoint.

Then from the capital requirement point of view, predominantly AM Best an S&P models, we run those. We run them at the A plus level. We add a cushion, as John said, on top of it, and only beyond that cushion we think of excess capital.

Got it. Okay. An then my last question, do you have any words of wisdom on the Greek debt crisis?

Buy Greek bonds.

All right.

Help us out. My mother still lives there.

All right. Thanks, Dinos.

At this time we have no further questions in queue. I would like to turn the call back over to Mr. Iordanu for any closing remarks.

Thank you, Lacy, and thanks, everybody for giving us your time. We're looking forward to talking to you next quarter. Have a good afternoon.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.