Argo Group International Holdings Ltd (ARGO) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Argo Group International Holdings Earnings Conference Call. My name is Tuanda, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Mike Russell, Director of Investor Relations. Please proceed, sir.

Thank you, Tuanda, 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 in to 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?

Thank you, Mike, and good morning, everyone. We're 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'm pleased many of you on the call have had 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'd like to say that I'm 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 the 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 core to the strategic expansion of our operating platform, giving us increased opportunities for intelligent growth and better access to what has become a single [Bronly] distributed specialty insurance marketplace.

With established underwriting operations now in the U.S., 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's 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 U.S. operations, namely Excess and Surplus Lines and Commercial Specialty.

Regarding our U.S. operations -- our underwriting operations in the first six months of 2008 have performed relatively well to increased 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 in more generic classes of business continue 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 the United States, a region where we have a concentration of insureds. As we announced in July, we sustained over $16 million in pretax storm losses which impacted our results for the quarter, largely in our Commercial Specialty segment, and in our Excess and 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 [correlation] 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 U.S. 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'm also happy to report that AM Best affirmed the financial strength rating of A for our U.S. operations, with an outlook of stable.

Over the last several quarters, I've outlined the steps we've taken to increase the geographic breadth and product offerings of Argo Group. A component of this expansion that deserves specific mention is our increased exposure to property catastrophes. Historically and today, our U.S. operations have been dominated by casualty business, with only moderate property catastrophe exposure. Looking at our experience in 2005 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 than would be the case if our preexisting catastrophe exposure had been larger. As a result, we've 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-centric 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 seeded property exposures, such that the types of catastrophes that would cause an expected loss of capital for a year are historically unprecedented. In other words, we're 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're encouraged by the discussions we've 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've had with potential underwriters, I think we're close to getting a good replacement onboard soon.

So in summary -- we continue to find and write profitable business in a very competitive market -- conditions we've been adjusting to for several quarters, if not years. Additionally, over the past 12 to 18 months, we've 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've moved from being an aspiring national specialty underwriter to becoming a market leader in the international specialty marketplace.

Now I'd like to ask Jay to review our financial results in more detail. Jay?

Thanks, Mark.

First, let me say how excited I am to be part of the Argo management team. And I truly can say I've really enjoyed this first quarter; it's been exciting. We've had a lot to get done with the Heritage acquisition. But we've got a strong team, and it's 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.

Pretax 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 U.S. 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% from 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've made good progress, having written just shy of $95 million of gross premiums during 2008. Roughly 55% of this business is U.S. 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 for the quarter 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 entry into the Lloyd's market. While their worldwide property book represents the majority of its business, Heritage also focuses on non-U.S. liability, which is a nice complement to our U.S. 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 seeded written premium and the related balance sheet items. During the quarter, Heritage added $5.7 million to Argo Group's operating income.

Now let's turn to the loss ratio for the quarter. As mentioned earlier, our results were impacted by the storms that occurred primarily through the midsection of the U.S. 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 a 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. Net development for the quarter was a favorable $9.2 million, comprised of $5 million from our E&S segment, approximately $6.5 million from our runoff 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 have developed favorably, and the $5 million form the runoff 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 runoff segments.

Expenses -- our expense ratio continues to show improvement during 2008 as we continue to grow our premium volume and expand our international operations.

On the balance sheet side -- 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 $2 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 its portfolio is primarily comprised of very high-quality fixed income securities. As is typical with a Lloyd's operation, it has a fairly short duration of 2.3 years. Their portfolio had no subprime or [CDO] exposure.

In terms of the aggregate portfolio -- we recognized 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 pretax 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 credit quality of the fixed income portfolio is AA plus. Relatively speaking, we've benefited in the quarter from a very conservatively managed portfolio.

We have approximately $31 million of subprime securities remaining in our portfolio -- that's less than 1% of the portfolio -- and $482 million of investments that are wrapped by the mono-line bond insurers, consisting almost entirely of municipal securities. We and our investment advisors examined 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%. This includes the additional $72.5 million of debt assumed with Heritage. We're comfortable in this range and believe we have additional debt capacity.

With that, I'll turn it back over to the operator and open it up for questions.

(OPERATOR INSTRUCTIONS) David Lewis, Raymond James.

Thank you, and good morning.

Good morning.

Morning.

Congratulations on a solid quarter.

Couple 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?

Well, David, you have to keep in mind that for most Lloyd's operations -- particularly those that have a property focus -- the majority of the premium written during the year happens in the first six months. So probably 70% to -- sorry, if you include July 1, we've probably written 85% of the premium at Heritage that we'll 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?

Just two things -- I think that the operating run rate, plus or minus 90% out of Heritage, is in line with our expectations.

There was a -- David, there was a pro forma filed last week, where you would've 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.

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

I'm sorry, it's a traditional quarter for Heritage. And that's to Mark's 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.

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?

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 -- sorry, having said that, David, most of the losses that we 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 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 consistently runs in the high 90s, for example. And our grocers and grade-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's still more rate decline to come. But it's -- and again, I'm talking about our book of business as it relates to the marketplace. I don't see that changing, meaning I don't think it's going to get significantly worse than it is, nor do I think it would improve significantly, either.

And any -- what are you seeing out there on your reinsurance operations? You're somewhat of a new player there. Is that pricing coming in pretty much as anticipated, or are you starting to see some significant pressures there?

No. The marketplace that we see today is about the same as it was at the end of last quarter. And so, 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 -- I think I suggested we may end up writing somewhere between $80 million and $100 million. Now we're probably going to end up closer to $80 million, not because the environment's changed, but we decided to pull back and write, or create less aggregate exposure, so that we could use that aggregate exposure for Heritage.

That's very helpful, thank you.

Bijan Moazami, FBR.

Good afternoon, everyone. Good morning. I have a number of questions.

First of all, I was wondering if you could expand a little bit on where you're growing -- in the Specialty segment, the premium volume expanded very, very nicely -- and if you could talk a little bit about this Surety operation that you've put together.

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 on the spigot 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 startup stage. I don't think you'll see much premium or income contribution until this time next year.

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

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

Thank you.

(OPERATOR INSTRUCTIONS) Amit Kumar, Foxx-Pitt Kelton.

Thanks. Congrats on the strong quarter.

Just a few questions -- I guess going back to the discussion on 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 1 numbers, too? Or are you guys like -- is that going to be a meaningful number now, or are you suggesting that this is it?

No, that doesn't include July 1. July 1, we did just fine.

Remember that -- sorry, the guidance that I'd given before -- and I forgot to say that; I forgot to say it again this time -- that's just for the book that we're 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.

Okay. That's helpful.

And just moving on to the reserve discussion -- I think you had $6.2 million of reserve releases. 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 the risk management, and PXRE legacy book, as to how those individual components are developing?

Yes. So the net number was $9.2 million. That came from three different areas. Approximately $5 million came out of property reserves from the Excess and Surplus Lines division, [as] 2007 property reserves were obviously far enough along that we could look back and see that those weren't going to be needed. So that was approximately $5 million.

Then, in our runoff segment, there was two pieces. One was a non-catastrophe-related -- which basically means non-KRW -- PXRE property reserve that had been out for some attrition of lost business that they had written -- that had been up for a fair amount of time. And we realized that we weren't -- 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 along with the risk management book -- this is in runoff. That came down about $5 million. And then we had about $2.5 million that went to increase the comp reserves. And then finally, in Commercial Specialty there was a small amount of development.

The net of all of those leads you to a $9.2 million net release for the quarter.

Okay, that's very helpful.

My third question, in terms of capital management -- going forward, what are your plans on buying back your stock?

Well, right now, we're sorting through where we're 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 U.S. operations up to the parent company in the U.S. And once we do that, then I think we'll be in a better position to assess what to do with that capital towards the end of the year.

Okay, end of the year, that's helpful.

And finally, a quick numbers question -- what was the impact of Massamont on the premiums?

Well, I don't think it had that much of an impact this year. A lot of the -- remember that we entered into a 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 1 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's probably a $5 million to $10 million benefit in the third quarter, but probably closer to the low end of the range.

Okay, that's all for now. Thanks so much.

Okay.

[Joe Salerno], Goodnow.

Thank you.

Two questions -- one, on Heritage -- it contributed one month of results, correct?

Yes.

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

Yes. Actually -- yes, 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 of the year, plus July 1, that there won't be as much written premium in the second half of the year. But there's less lumpiness in the earned premium number.

And so I think Jay's suggestion was that 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.

$80 million for the quarter.

Sorry, $80 million for the quarter. And so that's probably a pretty good annualized number, keeping in mind that we're writing a bit less this year than -- sorry -- yes, that's about right. It's about $80 million per quarter this year.

Okay. So if we look at --

Joe --

Go ahead, I'm sorry.

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 assume some debt for them, but that's not in that number.

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 have the contribution have been. Because again, if the operating income after tax -- $5.7 million operating income; after tax was $4.3 million, divided by the number of shares -- that's $0.14 for one month. It sounds to me it would be too bullish to say $0.28 -- if it was there for two months more, the quarter would have been $0.28 higher. You follow me? That sounds too hot.

Yes.

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 interest expense or so that came onboard as well to make that contribution less. You follow?

Yes. I'd have to put it all back together on a per-share basis; we don't look at it that way.

Okay, well, then --

In other words, we picked up the interest expense at the holding company. The interest expense that was added is 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, on a steady state out of this business.

Let me give you the underwriting contribution. The other expenses onboarded for the Heritage transaction would only be the debt cost. And I think you might have also -- you also saw in the pro forma, you've got, as currently gauged -- although we're still doing some additional work on this -- about a $30 million intangible that's going to be amortized on a straight-line basis over 10 years.

So I'm doing this a little bit -- because I haven't reduced it to a per-share basis -- but I'm doing this -- and I won't do that, but I think that those are all of the puts and takes that you would put in.

Okay, so the amortization ran $30 million annualized --

No.

-- did you say? No?

There's a $30 million intangible --

Okay.

-- amortized over 10 years, so $3 million a year.

Okay.

So just real quickly -- and I'm sorry for the length of this -- but it sounds to me -- Heritage contributed $5.7 million in one month. If interest -- sounds like $6 million for the year, per month -- okay, well, we could take it off-line. But this is one month of contribution, and those are the puts and takes going forward.

Yes. And I'll reiterate what I said earlier -- it's one month of contribution; it was a strong month of contribution.

Okay.

Relatively strong.

Okay.

And then, second question, on the runoff businesses -- can you guys give a sense of how much capital that's tying up? And do you expect that to wind down over one, three, five years -- just a range?

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

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

Well, again, the large part of property reserves has already paid down. On the reinsurance book, we've 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're 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've said in the past. So for the remainder of this year -- and those reserves -- what's left of them is the end of the tail that was already long-tail. And so they will still be paying down, but they're going to pay down at -- gosh, $10 million to $30 million a year for the next few years. I don't see them paying down any faster than that.

Okay. Thank you.

Okay.

(OPERATOR INSTRUCTIONS) David Lewis, Raymond James.

Thank you.

Mark, did you repurchase any stock at all in the second quarter?

We did not.

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

Yes.

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?

Well, the agreement terminated on March 31. And if you -- so we're already seeing the impact of the difference between gross and net 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're already starting to see the impact of the elimination of the quota share, and we'll 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'll 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.

And what was the premium levels under that quota share for the full year of '07?

That was about $80 million.

Okay.

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

There were -- 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 of as catastrophes -- hurricanes and so forth.

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.

Sure, I understand. Thank you.

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.

Thank you very much.

I appreciate everyone's time today on our call. I think we've made a lot of progress over the last year. I'm happy that some of the things that we've been doing strategically -- it's now a little easier to see them financially, but still a little bit of a challenge on the Heritage front. I think that we'll 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.

Thank you for joining today's Conference. That concludes the presentation. You may now disconnect. Have a wonderful weekend.