American Financial Group Inc (AFG) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 American Financial Group earnings conference call. My name is Channel, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Keith Jensen, Senior Vice President. Please proceed, sir.

Thank you. Good morning. I'm here with Carl Lindner, III and Craig Lindner, the Co-CEOs of American Financial Group and we're happy to welcome you to the second quarter conference call. If you are viewing this webcast from our website, you can follow along with the slide presentation if you'd like. Certain statements made during the call are not historical facts and may be considered forward-looking statements and are based on estimates, assumptions and projections, which management believes are reasonable, but by their nature, subject to risks and uncertainties. The factors which could cause actual results to differ materially from those suggested by such forward-looking statements include, but are not limited to, those discussed or identified from time to time in AFG's filings with the Securities and Exchange Commission, including the annual report on Form 10-K and the quarterly reports on Form 10-Q. We do not promise to update such forward-looking statements to reflect actual results or changes in assumptions or other factors that could affect these statements. Core net operating earnings is a non-GAAP financial measure, which sets aside items that are not considered to be part of ongoing operations, such as net realized gains or losses on investments, effects of accounting changes, discontinued operations, significant asbestos and environmental charges, and certain other non-recurring items. AFG believes it to be a useful tool for analysts and investors in analyzing ongoing operating trends and will be discussed for various periods during this call. A reconciliation of net earnings to coordinated operating earnings is included in our earnings release. Now, I'm pleased to turn the call over to Carl Lindner, III, Co-Chief Executive Officer of American Financial Group.

Good morning, and thank you for joining us. We released our 2008 second quarter results yesterday afternoon. I'd like to start by covering some highlights on slide three of the webcast. Core net operating earnings per share for the quarter, were $0.96 compared to $0.93 in the 2007 second quarter, reflecting the beneficial effect of our 2007 and 2008 share repurchases. Improved results in our annuity and supplemental insurance operations and higher investment income were more than offset by lower underwriting results in our property and casualty operations, largely driven by catastrophe losses. Record operating earnings for the first half of 2008 were $2.05 per share compared with $1.84 per share for the comparable period in '07. Net earnings were $0.52 per share compared to $0.54 per share in the 2007 second quarter. Our 2008 second quarter earnings were impacted by net realized losses on investments of approximately $41 million, or $0.35 per share. These charges were primarily related to declines in the market value of our equity positions and financial institutions, including National City. We also completed our previously announced asbestos and environmental internal review. The 2008 net earnings included a $0.09 per share charge for strengthening the A&E reserves, whereas the 2007 second quarter results were impacted by $0.46 per share of A&E charges. We are pleased that there were no new merging trends or issues that surfaced in connection with their review. Our insurance results for the quarter and through the first half of the year continued at an excellent pace. Each of our four property and casualty business segments produced solid underwriting profit and we continue to make progress towards meeting the company's 2008 objectives. Our annuity and supplemental insurance businesses benefited from increased spreads in the annuity lines during the quarter and to a lesser extent, improved loss ratios in the supplemental insurance lines. Through the first half of 2008, our record core earnings are 6% above the 2007 period and our annualized core operating return on equity was 16%. Our financial condition and liquidity remain very strong. Our book value per share of $27.59 excluding unrealized gains and losses on fixed maturities was up 6% compared to $26.03 per share at the end of the 2007 second quarter. Increase in our unrealized losses on fixed maturities was primarily a result of the increase in market interest rates during the quarter.

If you turn to Slide four, I'd like to review the results of our specialty property and casualty operations. Overall underwriting profit in the 2008 second quarter of $75.5 million was 34% lower than the same period a year ago. The combined ratio increased 6 points to 87.8, excluding the impact of the A&E reserve strengthening on the insurance run-off operations in both periods. The 2008 second quarter results were impacted by higher catastrophe losses of $25 million, principally from tornadoes in the Midwestern part of the United States and lower underwriting profits in several of our specialty insurance operations. We recognized nearly $70 million in favorable reserve development compared to approximately $46 million in the comparable period in 2007. Our underwriting profit and combined ratio through the first half of 2008 reflect the effects of a more competitive market conditions, but our results and returns are in line with our expectations. I'm encouraged by the stability of our overall rate levels, excluding the effect of California workers' comp, average rates in the other specialty operations through the 2008 second quarter were down about 3% from the same prior year period. Gross and net written premiums were down slightly for the quarter. Decreases in net written premium resulted from competitive pressures in the commercial general liability and excess and surplus lines markets. The acquisition of market form in January of this year has helped us to offset some of those declines.

Now, I'd like to -- if you go to slides five and six, I'd like to review the second quarter and six-month results for each of our specialty business groups. The property and transportation group continued to generate solid underwriting profit through the first half of the year. The second quarter results were primarily impacted by catastrophe losses, primarily within Great American's property in inland Marine division. These losses were partly offset by higher favorable development in our crop business. 2008 gross written premiums for the quarter and year to date were effected by delays in reporting farmers acreage in our crop operations due to the flood conditions in the Midwest. Net written premiums were also reduced by a required statutory premium adjustment in the second quarter related to our crop business. Additionally, Great American's property and inland Marine and Trucking operations, experienced volume reductions caused by softer market conditions. These decreases were somewhat offset by higher premiums in our national interstate subsidiary. We expect to see stronger growth in this group in the second half of the year, when the majority of our crop premiums are recorded, aided by the impact of higher crop prices. We continue to monitor the impact of our crop business of the flooding that occurred in the Midwest during the second quarter. While it's premature to conclude as to the effects of the flooding, we are encouraged by initial reports regarding growing conditions and anticipated yields of corn and soybeans. As we reported earlier, ultimate losses will be effected by specific locations, yields, commodity pricing, and our reinsurance sessions. This group's average renewal rate levels for the first half of the year were about 3% below the same period a year earlier. The specialty casualty group produced strong underwriting profits this year. The increase in its combined ratio for the second quarter and first half of 2008 was largely driven by lower levels of favorable reserve development in the general liability operations. The declines in gross written premiums were driven primarily by volume reductions in our excess and surplus lines reflecting continuing competitive pressure in those commercial casualty markets and lower general liability premiums resulting from the softening in the home builders market. These declines were partly offset by additional premium from the market forum group, which was acquired in 2008 first quarter. Net written premiums for the 2008 second quarter and year to date were comparable to the 2007 periods. As additional premium from market forum and higher premium retention helped offset the declines in the general liability and excess and surplus lines. This group's overall average renewal rate through the first half of 2008 was about 4% lower than in the 2007 period. Specialty financial groups' second quarter underwriting profits were $5.6 million lower than those reported in the prior year. Underwriting profit for the first half of 2008 was up 52% over the comparable 2007 period. The group's combined ratio for the second quarter was up 5.5 points due primarily to recent unanticipated underwriting losses in our run-off RVI business. Partly offset by higher underwriting profits in our fidelity and crime and security operations. The combined ratio for the first half of 2008 improved 2.6 points, primarily driven by improved surety and fidelity and crime results. Rising fuel prices have led to very recent declines in used car prices for larger vehicles, even those that have historically held strong residual values. Until the recent weeks, the remaining contracts are running off profitably, but recent developments required adjustments to our reserves. The specialty financial groups' 2008 results benefited from favorable reserve development, largely within the fidelity and [prime] and surety operations. Increases in net written premiums for the 2008 three and six months periods were primarily driven by the financial institutions operations, which more than offset higher premium sessions in our lease and loan operations this. Group's renewal rates through the first half of this year were about 2% lower than in the year earlier. Moving on to our California workers' comp business, that business has continued to generate excellent profitability through the first six months of '08. The group's combined ratio for the second quarter and first half of 2008 was down from the comparable 2007 periods, primarily as a result of increased favorable prior year reserve development. The improved claims environment resulting from the California workers' comp reform legislations continued to benefit our results as well as those of the industry. Due to the long tail nature of this business, we continue -- we'll continue to be conservative in our reserving until higher percentage of claims has been paid and the full impact of California reform can be determined. The decline in net written premiums reflects the effect of lower rates, partially offset by this group's expansion of its excess workers' comp products. Renewal rate decreases in California averaged about 16% through the first half of this year.

Now, I'd like to move on to a review of our annuity and supplemental insurance group on slide seven. The annuity and supplemental insurance group generated core operating earnings before income taxes for the 2008 second quarter that were 30% higher than the same period a year earlier. The increase was primarily due to higher earnings in the fixed annuity and supplemental insurance businesses, partially offset by lower earnings in our variable annuity operations. Core operating earnings before income taxes for the first half of 2008 were relatively unchanged from the same 2007 period, as higher earnings attributable to the fixed annuity and supplemental insurance operations were offset by earnings declines in our variable annuity and runoff life operations, as well as costs associated with new initiatives. We continue to work toward improving the annuity and supplemental insurance group's return on equity and are pleased to see the favorable impact of wider spreads in the fixed maturity market. Statutory premiums for the second quarter of 2008 were 18% higher than the second quarter of 2007, primarily resulting from annuity sales through our new bank annuity distribution channel launched in the second quarter of this year, as well as increased sales of traditional fixed annuities. These increases were partly offset by lower sales of indexed annuities in the single premium market. Premiums through the first six months of this year were relatively unchanged over the prior period. Higher annuity sales through the bank, new bank annuity channel were offset by lower indexed annuity sales. We're enthusiastic about our new initiative of selling fixed annuities through banks that began this year and believe it will help to expand our penetration in the fixed annuity market.

Moving to slide eight, we recently completed the previously announced comprehensive internal review of AFG's asbestos and environmental exposures relating to the runoff operations of our property and casualty group and exposures related to former railroad and manufacturing operations and sites. The review was done by our internal A&E claims specialist in consultation in-house actuaries and outside specialty council. The most recent external study was completed about this same time last year. As you can see on slide eight, property and casualty groups asbestos reserves were increased by $6.5 million and its environmental reserves were increased by $5.5 million. At June 30, the P&C group's A&E reserves were $413 million, net of reinsurance recoverables. During the course of the study, there were no newly identified emerging trends or issues that management believes significantly impact the overall adequacy of AFG's A&E reserves. The modest increases were primarily due to re-assessments of the potential loss on certain outstanding cases. Our survival ratio for asbestos reserves is 9.5 times paid losses and for A&E reserves, it's 9 times paid losses. As you can see, these ratios compare favorably with (inaudible) most recent report on A&E survival rates ratios of 8.6 times for asbestos reserves and about 8 times for A&E reserves at the end of 2006. In addition, our A&E study and [compos] reserves for asbestos in environmental exposures of our former railroad and manufacturing operations.

Turning to slide nine, you'll see that asbestos and environmental reserves were increased modestly by $3 million as a result of this review. We plan to perform an external comprehensive study next year and another internal review in 2010. The market's continuing pressure on the price of common equities and financial institutions has depressed the pricing levels of many of our equities and some of our fixed maturity securities. As a result, we recorded pre-tax impairment charges of $61 million in the 2008 second quarter. Equities accounted for approximately 80% of the charges, primarily financial institutions including National City. At the end of the second quarter, AFG's carrying value and the remaining common equivalent shares of National City were approximately $18 million. Approximately 98% of our portfolio of fixed maturity and equity securities is valued using prices from exchanges or prices provided by independent pricing services or quotes from brokers. Our investment philosophy with respect to the securities that make up our mortgage-backed securities portfolio has been consistent over a lot of years and has been focused on the senior tranches of these securities, which has cushioned us against significant market value declines. Our mortgage-backed securities represent approximately 31% of our investment portfolio. 97% of these securities have AAA ratings and substantially all are senior classes of securitizations. We recognize the market's interest in issues related to mortgage backed securities with subprime and all (inaudible) collateral. Accordingly, we've provided detailed information about our position in these securities in our supplemental financial package on our website. Suffice it to say, we haven't experienced significant losses in this market and given current circumstances, we don't believe that our risk of loss will have a material adverse impact on our financial position. Now, we continue to monitor our insurance operating exposures related to subprime issues. Based on our review of claims notices and the facts and circumstances of which we are aware, we have no significant individual losses and don't believe our aggregate operating exposures related to subprime issues would be material to our financial condition.

Now, I would like to summarize some key aspects of our strategic focus outlined on slide 11. We are focused on specialty niche markets within the property and casualty insurance and annuity and supplemental insurance industries, where we have significant expertise. We will pursue appropriate uses of our excess capital, including internal growth opportunities within our existing portfolio of businesses, acquisition and startup opportunities that meet our specialty strategy and financial objectives, and opportunistic share repurchase and change in dividend levels. Now, we believe we're well positioned to take advantage of the capital market disruptions. As a plan -- as a result, we do want to keep some capital in reserve for opportunities that may arise. We remain committed to our strong underwriting culture, pricing discipline, risk management philosophy and continually monitor the adequacy of our rates in all markets. We have and will continue to reduce business volume in lines as needed to achieve appropriate underwriting results. Our investment group will focus on achieving returns over the long-term that outperform various market indices, while effectively managing our portfolio risk and we'll evaluate opportunities within our real estate portfolio. Our long-term objective is to achieve operating returns on equity between 12% and 15%, along with consistent growth in book value.

We remain very enthusiastic about this year and our expectations for 2008 are outlined on slide 12. We now expect net written premiums to be slightly above the prior year in our specialty, property and casualty operations, with a combined ratio range of 85% to 86%. Because of our strong underwriting culture, we expect to maintain adequate rates. That said, we do anticipate a modest decline in our overall average renewal rates in 2008 due to competitive conditions in certain markets. We expect net written premiums in our property and transportation group to increase 5% to 8%, primarily fueled by higher crop premiums, as well as some new initiatives in our transportation businesses. This group should also maintain its excellent underwriting track record with a combined ratio in the range of 86% to 90%. Our 2008 guidance is based on assumptions that our accident year underwriting results in our crop operations will be about 50% or $60 million lower than our record [2000 end] results, though it is very early to really conjecture. We remain optimistic about growth opportunities in the specialty casualty group, resulting from our recent investment in market forum and the international expansion opportunities. We also expect the strategic comp acquisition to further expand our penetration and increase our geographic coverage in the workers' comp market. Therefore, we project flat to 3% growth in net written premiums for specialty and casualty. We also expect this group to generate strong underwriting profit with a combined ratio in the range of 78% to 81%. We are pleased with the performance of our specialty financial group through the first half of this year, but are disappointed with the recent results in our runoff RVI business. Overall, we expect underwriting margins for the year to improve over 2007. We look for this group's combined ratio to be in a range of 91% to 94% this year. And we project net written premiums to be flat to down percent -- or down 2% for 2008. This modest decrease as a result of the impact of recently announced reductions or eliminations of automobile leasing programs by automobile manufacturers. We expect to see rate decreases in the California workers' comp market moderate somewhat in the second half of this year. With that and the expansion of our excess workers' comp program, we anticipate that net premium, net written premiums would be down about 6% to 9% this year. The combined ratio should be between 77% and 80% providing excellent returns on this business. Based on recent market conditions and trends, we expect full-year core pretax operating earnings of our annuity and supplemental insurance group to be 8% to 12% higher than in 2007. Anticipated earnings growth in the fixed annuity and supplemental insurance lines is expected to be partially offset by lower earnings and the variable annuity and runoff [life] operations as well as costs associated with new initiatives, primarily our new variable initiative. Fixed annuity earnings in 2008 are expected to be 15% to 20% higher than in 2007 due primarily to higher spreads. New annuity initiatives were launched in the first half of 2008 in our variable operations and in the bank market. Overall annuity sales are expected to be up this year. Growth from new initiatives is expected to more than offset anticipated declines in the sales of indexed annuities. Increased competition from the government subsidized medicare advantage product will likely continue to impact our supplemental insurance operations and we expect these premiums to be flat to slightly down in 2008 from our -- earnings from our supplemental insurance operations in 2008 are expected to be 10% to 15% higher than last year. Our 2008 core net operating earnings guidance remains at between $3.90 and $4.10 per share. These expected earnings do exclude the potential for significant catastrophe and crop losses, unforeseen adjustments to asbestos and environmental reserves and large gains or losses from asset sales. Now, we'd like to open the lines for any questions. Thank you.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Jay Cohen of Merrill Lynch.

Thank you. And still -- kind of good morning/good afternoon, right on the cusp here. I've got a bunch of questions. Let me start with just several. The first is in the property transportation segment, in the second quarter, did you record any, you know, losses on the crop business? I know you really don't get those untill the second half, but did you book some reserves for that?

We did not, Jay. As we've indicated, it's really premature to look forward and know what the answer is, this is something to where we'll analyze in the third quarter and then finalize it in the fourth quarter.

But, Jay, as I mentioned, you know, we're -- in our guidance, we're figuring an accident year that's $60 million less, or about 50% less than last year's record accident year, so we're -- until we know what the results really are, you know, we're trying to be, you know, conservative.

Yes, no, there were other companies that actually put some stuff in the second quarter. I didn't know if you guys had done that, but it's obviously incorporated in your view for the year. The share count seemed to go up in the quarter, the kind of quarter end share count. I'm just was wondering what was happening there and were there any repurchases in the quarter?

There were about 800,000 of repurchases in the month of April. The reason you saw the share count go up in the quarter is because when we retired the convertible issue, we issued shares for the premium, and my recollection is that was about 2.2 million shares or something in that range.

Right, right. That's helpful. Okay. And then on the annuity life business, can you give us the core earnings for that business from the third and fourth quarter of last year, excluding the minority interest?

I think we need to get back to you on that. I don't know that we have that specifically right in front of us. We'd be working off memory only.

Okay, no big deal. That's great. Thanks a lot.

And your next question comes from the line of John Gwynn of Morgan Keegan.

Thanks. Carl, a company that most analysts and investors use as a peer comparison for AFG, [feels awfully] consolidated. Recently cut a deal with the Japanese company that -- what seemed to be a pretty favorable price. Do you have any comment on that transaction?

Well, Philadelphia's has been a very good company. Tokyo had a very specific strategic objective in mind. Philadelphia, you know, shareholders got a great price for the company. I suppose if somebody, you know, approached us, you know, with a three times book, you know, type of proposal and those kind of multiples, you know, we, along with anybody else, would have to, you know, think seriously about something like that.

Right. I know Maguire probably learned part of his property casualty lessons at Great American early in his career, I guess he also learned how to cut a deal, too.

Yes, I'd say so. Yes, he -- I think he used to work in our D&O operations when he was first entering the industry and that, but no, clearly Jamie is very bright. I guess he obviously got a good education from us, too.

Right. Keith, would you care to comment on the change in your credit arrangements during the quarter?

Sure. We -- during this quarter, we have entered into an additional credit agreement. We have an outstanding $500 million line of credit as of the end of the quarter, we had drawn about $395 of that. We decided that it was prudent for us to add to the credit facility and so we have entered into a $120 million supplemental line of credit, which just gives us additional liquidity and cushion against any unforeseen outcomes.

Okay, and, Keith, in the first half of the year, is there any crop -- I mean in the second quarter, is there any crop premium actually booked?

Very, very modest.

Okay. And most of this occurs in the third quarter and some falls into the fourth quarter, right?

Yes, that's correct.

Okay. Craig, of the $49 million of equity impairment in the quarter, what portion of that -- pretax, what portion of that was National City?

Let me get you the number there, John.

Craig, I've got it. It was about $19 million.

$19 million from National City.

Yes.

That's pretax?

Pretax.

Okay. And, Craig, at the GAFRI level, you mentioned improvement in spreads. Is that both action on credited rates and market yields, or is it weighed more one way than the other?

It is both, John. I would say that it's more driven by the opportunity to buy investments at a much wider spread.

Okay. And, Craig, at GAFRI, I assume you've reviewed that quarterly. Are there any concerns we should have about (inaudible) say, during the third quarter?

You know, we take a look at that on a quarterly basis. The -- you know, the really thorough analysis actually is a fourth quarter analysis, John but the spreads that we're enjoying right now were actually wider than what we have assumed in our back amortization.

Okay. And also, Craig, on the 403 B market, there've been a number of changes here recently. Is there anything that's materially affected your operations?

You know, we'll find out here in a couple of months. The whole industry is going through a process right now where -- with the implementation of the 403 B rigs, which will be effective January 1, 2009, the -- each of the school systems is bing given different responsibilities than they have had -- historically they're being given a responsibility to basically administer the 403 B plans for all the teachers and what that means is most of the school systems are putting a TPA in place to handle that and they're going through a process right now to identify the companies that they are going to allow to sell in the school district. And hard to predict with a lot of accuracy where everybody's going to end up. I think at the end of the day, we will be in fewer school districts, but the number of companies selling in each of the individual school systems will go from 13, 14, 15 to 5 or so. So, we'll do a lot more business in fewer school systems and I would say we're about 0.3 of the way through the process right now and for the early read would be we're doing okay in the RFP process, RFI process that we're going through.

Okay, and the recent SEC moves on variable products, is that something that you think you're at a relative advantage or disadvantage on if it is indeed finalized that way?

Do you mean the equity index, annuity products?

Right, right. I'm sorry.

Yes, first of all, the feedback that we get from the industry is that the industry is pretty much unanimous in their opposition to the proposal as outlined, so we would expect to see some changes, but I certainly think that we're going to be in a decent position to, you know, to continue to get our share of the market kind of no matter what changes are put in place.

Okay, great. That's all have, thank you.

And your next question comes from Gary Linhof of Ironwork.

Thank you. I was hoping your could repeat your outlook for the property and transportation business for the full year. I missed what you said you expected written premiums to be.

Yes, I would be happy to. Net written premiums in the property and transportation group will increase 5% to 8%, really fueled by higher crop premiums, as well as some new initiatives in our transportation businesses. The group will also have a combined ratio guidance of -- our guidance is 86% to 90% combined ratios and, again, what I mentioned to Jay is our '08 guidance for a combined ratio is based on the assumption that our accident year underwriting results and our crop operations will be about 50% or $60 million lower than the record 2007 results that we had.

Okay. That's helpful. In the release, you mentioned that your net written premiums in the quarter in property and transportation business were effected by, you mentioned required statutory premium adjustments, as well as I guess a delay in premium reporting due to the flooding. Can you just elaborate on what are those premiums, the required adjustments and can you help us with the magnitude of the impact because of the flooding?

Sure. Sure, Keith?

The premium adjustments are actually a strange accounting rule, SSAP 78, where the premium has to be reduced by the amount of federal comp insurance corporation to underwriting gain after non-proportional insurance. It's a long way of saying that the premium is actually reduced for accounting purposes by the underwriting gain that goes off to the federal government, so that's what we're referring to. And you'll see that there was a similar adjustment in the previous year and that's in part reflective of the fact that in the 2007 period, the profits that we had were actually in excess, as Carl said earlier, they were record profits and so that affected that adjustment. I think you had a second question. What was that?

The second question was I recognized that most of the premium is reported -- crop premiums reported in the third quarter, but you made mention of the fact that your written premiums for the second quarter were impacted by the delays related to the flood.

That's correct. What happened is the federal government actually gave farmers a one-month reprieve on their acres planted reporting and so we'll be on a one-month lag, so we'll be receiving what we normally would have had in June in July, and then likewise, July and August.

Can you share the magnitude of what that might be?

I don't really have a sense of that. All I could say to you is that in -- if you look at prior years, the amount of premium that's recorded in the first part of the year, first half of the year is very modest. The vast majority of the premium is recorded in the third and fourth quarters.

Okay.

Between crop prices -- I mean for the whole year, between what's happened with crop prices and the continued expansion in the brand that, you know, we'd -- our crop business is going to be up double-digit plus this year is what we think.

Okay, great. Gentlemen, thank you very much.

And your next question comes from the line of Amit Kumar of Fox-Pitt Kelton.

Thanks so much. Just going back to the discussion on the crop book, can you just refresh us as to what are the terms of the Munich recover?

Sure. In the Munich recover what we do is take -- if you take $100 of crop premium, about 25% of that is seeded to the federal government under their various pools and the remainder is a 50/50 quota share with Munich [Re], and in that quota share, they pick up half of the residuals, so we retain roughly 35% to 40% of the gross written premium.

Okay. That's very helpful. And has there been any change in terms of -- I know you talked about your crop book being up double digits, but going forward, is there any change in terms of the bi-state distribution, you know, based on what has happened recently?

I don't think there have been any meaningful changes, you know, here over the past year.

Okay, and then finally, I think you have touched upon this previously, but you have added to alt-A. Now, I think it's at $930 million . In Q1, it was close to $700 million. Do you think this is the appropriate level where you want to be, or could there be, you know -- like what's the talk process going

Yes, I -- I think we're probably close to the maximum amount that we're comfortable with in alt-A securities. We have just viewed some of the opportunities as being very, very attractive here the last three, four months. But I think we're up, you know, about at the limit of our comfort level, even though we're -- we feel very good about what we've purchased and, you know, the market values reflect that, you know, we've been in the right spot buying those securities.

Okay. That's helpful. And one -- finally, one quick numbers question. Do you have the unrealized real estate gains number?

With caveat that we don't go through and do a full appraisal, when we look at the cash flow and reasonable multiples on that cash flow, we're looking at roughly $100 to $150 million of unrealized pretax.

So, that's nearly doubled, right? Previously I thought it was 65, end of Q1.

No, it's similar to what we've had for the last little while.

Okay. That's very helpful. Thanks so much.

And your next question comes from the line of David [Focoubsla] of Amber Capital.

Hi, good afternoon. I was wondering if you can share with us if you are worried about some potential taxes change (inaudible) for example, state taxes or capital gain taxes that could incline a company like yours, which is family controlled, to contemplate consolidation?

I think we, like other, you know, business executives or business families, sure. You know, a change in Cap gain tax rates or in personal income, sure. That's something that we're concerned about and, you know, we're -- through our involvement in the political process and that we hope to, you know, have some impact on that.

Okay. Also maybe if you can discuss about the consolidation play and a bit more on your strategic view, you know, if there were any new business lines you would like to enter where it would make more sense for you to enter through acquisition versus growing organically or trying to develop the business.

Yes, we're -- you know, we've grown our business both, you know, internally as well as, you know, making acquisitions. We're pretty active in the first half of this year through the purchase of around two-thirds of market form, which helped us enter the new niche of non-US Med Mal. It also -- we're excited about that acquisition in that we've had a pin up demand by our US executives to write business in Europe, businesses like fidelity and crime, D&O, ocean, marine, large property, and we think market form will give us an excellent opportunity to do that. We've made -- or are in the process of making a number of hires in those key specialty areas and we expect there to be some positive impact from those hires in 2009. So, we're always looking for ways to increase our market position into some 25 or 26 specialty property and casualty businesses that we already have. We're looking for new opportunities and we're always out there.

Thank you very much.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Jay Cohen from Merrill Lynch.

Yes, just a couple of other questions. First, is the California comp business once again, great results there. We did see at least one of your, I think, better competitors in California begin to have some issues on the margins and I'm wondering if you can sort of describe what you do differently than others, why your margins have held up better?

Well, I mean we and [Zenith] and a few others have been specializing in that market forever and, you know, we have republic or work comp subsidiary there has an outstanding claims operation and our underwriting folks really, you know, they probably looked at every risk or, you know, a lot of -- most of the risks in California of any size over a long period of time. So, I think that makes a difference. As we've mentioned, you know, we've been probably more conservative with our loss reserves than maybe quite a few of our competitors wanting to see how California reform plays out in that. So, I think maybe that's one reason why we've been able to maybe report stronger calendar year results, maybe longer than some others in that. I think, you know, our (inaudible) the small to medium size right now side and I think that maybe has also helped us maybe versus some others in that. Those would be the things that would probably come to mind.

N, that's helpful. Thanks, Carl. The other question, the RVI business, I know that's been in runoff. For some reason I had thought your exposure was at this point quite minimal. So, I was a little surprised to see the losses flowing through. If used car prices continued to decline, what kind of exposure do you have in the second half of this year and into next year for further underwriting losses, or did you try to take that into account when you did reserves in the 2Q?

Let me take the first part of your question first, Jay. I think what we have said is in the past reporting periods, that the programs that we had been in for RVI were essentially gone except for one with one major manufacturer that where we'd never had any losses. All of these businesses have been put into runoff and that manufacturer has about another year of leases and the manufacturer id Honda. And I think we've said that in a variety of forums. What we're seeing is with the gas prices, Honda, some of their large vehicles are having unusual drops in their used car values as well. And so we've put up the additional amount this quarter to try and be conservative and to take that into account. Clearly if there was a dramatic additional drop, there would be some additional losses on our part, but we think that we're in pretty good shape on it at this point in time, and the amount that we put up in this quarter was about $10 million.

That's helpful. So, if used car prices kind of stay where they are, depressed, but don't decline more, you're saying we should be okay in the second half of the year?

That's right. And remember we're talking about Honda.

Right, right. Yes, I guess it could have been --

It's not across the broad market. The broad market we are out of.

Yes, Jay, in the past, you know, I've probably made some comments feeling that we might even have some favorable runoff there in Honda, and I think, you know, with fuel prices where they were, you know, that perspective's changed, just as Keith mentioned because of the drop in the SUV part of their stuff and that. So, yes, there won't be any favorable development with the -- you know, if the used car values stay the same, you know, we'll be fine probably with the charge we took in the second quarter. But, you know, it's something we'll watch.

I guess you made two good decisions, one to exit the business and two, to not do any huge deals with GM. Otherwise you might be in more difficult position at this point.

That might be true.

Thanks.

Jay, let me just -- Jay, you had asked a question earlier that I've got an answer for you now. You had asked about third and fourth quarter of '07.

Yes.

GAAP-free operating earnings, that was $57 million for that six month period and that's before consideration of debt expense and before consideration of minority interest.

Yes, Jay, and another part of our business, our premier lease and loan business, the three auto manufacturers in their decisions on leasing programs probably will hurt us from a -- by the tune on revenue -- by about $30 million through, you know, some other products in that. But, you know, more on the revenue side, I think, than the profitability side. Probably not much on that side.

Okay, that's helpful. Thanks, guys.

And there are no further questions. I would now like to turn the call back over to Mr. Keith Jensen.

Alright, thank you. We appreciate your taking the time to join us and we'll look forward to reporting to you at the end of the third quarter. Thank you, and have a good day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent weekend.