Kestrel Group Ltd (KG) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Maiden Holdings Limited fourth-quarter 2010 earnings conference call. Today's call is being recorded.

At this time, I would like to turn the conference over to Ellen Taylor with Maiden Holdings Investor Relations. Please go ahead.

Thanks, Trenesa. Good morning, everyone. Thanks so much for joining us today. Just a few housekeeping items before we get started. Of course, today with us we have Art Raschbaum, our President and CEO. He is going to kick things off for us today. He is going to be followed by John Marshaleck, our CFO. And then also, we are pleased to have with us this morning, Barry Zyskind, our Chairman, as well as Pat Haveron, who is the President of Maiden Global Servicing.

Before we begin, any forward-looking statements on this call are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. And these forward-looking statements are going to be based on the Company's current expectations and beliefs concerning future developments, and their potential effects on the Company; so there can be no assurance that the actual developments will be those anticipated by the Company. Our actual results may differ materially from those projected as a result of significant risks and uncertainties, including non-receipt of expected payments; changes in interest rates; the effect of the performance of the financial markets on investment income and fair value of investments; the impact of competition and pricing; changes in demand for the Company's products; the effect of general economic conditions; adverse state and federal legislation and regulations, and the regulatory investigations into industry practices; developments relating to existing agreements; heightened competition; changing in pricing environments; and changes in asset valuation. Of course, the Company undertakes no obligation to publicly update any forward-looking statements except as may be required by law.

And then also, some of our discussions about the Company's performance today will include reference to non-GAAP financial measures, and information that reconciles those measures to GAAP may be found in our filings with the SEC and in our news release located on the investor relations website.

With that, I am going to go ahead and hand things over to Art.

Thank you, Ellen. Good morning, and welcome to the call. This morning, John and I would like to review Maiden Holdings' fourth-quarter and full-year results. As a highly differentiated reinsurer, focused primarily on the noncatastrophe reinsurance needs of regional and specialty insurers, we're focused on driving stable underwriting and operating performance. I am pleased to report that our fourth-quarter and our full-year results are consistent with that objective. Importantly, we continue the methodical and disciplined expansion of our underwriting platform and our portfolio.

With much of the attention in the reinsurance sector focused lately on catastrophes, it's important to note that Maiden does not anticipate any significant losses stemming from the Christ Church earthquake, nor from the Australian flooding. In fact, through the quarter and throughout the year, we continue to carefully expand and diversify our underwriting portfolio, both organically and through disciplined acquisition, while building a more stable performing, less volatile underwriting portfolio.

I will focus my remarks on the year-to-year comparisons, while John will provide a more detailed information on a quarter-to-quarter basis. For the full year, we increased net income by over 14% to $70 million, and operating earnings by nearly 10% to $73 million; and that translates to earnings per share of $0.98 and operating earnings per share of $1.02. That compares very favorably with 2009 earnings per share of $0.87 and operating earnings per share of $0.95. This earnings growth was generated through a continued expansion of our underwriting and invested-asset portfolios. Importantly, we remain well positioned to continue to strengthen our earnings in 2011 and beyond. It's important to note that through much of 2010, we held a large cash balance reflecting a growing asset base, as well as strong cash flow and loan prepayment activity related to our agency mortgage-backed securities. Despite the large amount of cash, Maiden still delivered strong year-on-year growth in net income and operating earnings.

From an underwriting perspective, on a full-year basis our combined ratio is 96.9%. This performance includes the effects of a slightly higher full loss ratio assumption for AmTrust reflecting a changing business mix, as well as certain one-time charges relating to the GMAC International Insurance Services acquisition, which was completed in the fourth quarter. From a reserving perspective, while we see reserve movement among various accident years, our underwriting performance does not reflect a significant level of reserve reductions. Importantly, we are maintaining our pricing discipline in a very challenging environment.

Our results this year were driven by net written premium growth of 19%, up $197 million to $1.2 billion from full-year 2009. By any measure, this was a highly successful year, and sets the stage for strength in earnings in future quarters, as we continue to steadily increase our asset base, and a growing and increasing diversified underwriting portfolio. These results also reflect strong contributions from our strategic quota shares with AmTrust and ACAC, as well as a more modest effect from our recent acquisition of the GMAC IAS International underwriting portfolio and infrastructure. While this 2010 impact is relatively small from this segment, prospectively we expect revenues from this developing segment to exceed $100 million in 2011.

For 2010, on a comparative year-to-year basis, Maiden net premium growth benefited from the ACAC quota share treaty of the former GMAC Insurance personal and commercial auto underwriting platform. This contract incepted in the first quarter of 2010, and delivered more than $200 million in premium this year. We also continue to see continued attractive growth related to our AmTrust quota share. This growth was somewhat offset by a reduction in diversified volume, which reflects our continued disciplined approach to underwriting in a very competitive market, particularly in North America. As we've mentioned throughout the year, early in 2010, two large client relationships elected to retain more risk, and we also chose to de-emphasize our accident and health business in order to maintain acceptable returns on capital.

Going forward, with the addition of the international acquisition, and anticipated growth for Maiden Re, our US underwriting platform, we believe we are well positioned to continue to build this diversified segment. On a full-year basis, earned premium totaled $1.2 billion; that was up nearly 27% from 2009, and that growth really helped to drive improvement in our underwriting income for the year.

Looking back at the recently completed January 1 renewal season, it's fair to say that the market remains competitive. For our US platform, Maiden Re, which as I've mentioned represents the vast majority of our diversified reinsurance segment, the current January 1 renewal season represents about 50% of the current in force annual premium. Notwithstanding the market dynamics, our year-end submission activity remains strong, and at year end, our US team was able to identify and bind a number of new accounts, while maintaining underwriting discipline.

We are also currently already evaluating a number of transactions in the US for the first and second quarter of 2011, and overall we expect to benefit from incremental growth in the US portfolio. Our confidence is centered around our ability to continue to leverage our competitive advantages, specifically our differentiated client-focused approach, our strong operating efficiency, and our unique collateral trust.

Beyond the team's strong, new business development efforts, Maiden focused a great deal of attention and effort on providing value-added services and maintaining long-term relationships with our clients throughout the year. As you may recall, we target an 85% renewal retention rate on our treaty business, and for 2010, our retention rates stood just below that target level at 83%. That was no small feat in the current competitive environment, and it reflects the demonstrated value that our team focuses on delivering to our clients each and every day.

On balance, we do not anticipate a change in the competitive landscape over the next 12 months, and despite higher catastrophe losses, the industry remains extremely well capitalized. We believe that some combination of a more severe reduction of capital or significant increase in demand will be the primary catalyst to any market turn. Notwithstanding that view, we believe that Maiden remains well positioned to continue to expand the platform and generate growth in a disciplined manner. We continue to benefit from our multi-year strategic relationships with AmTrust and ACAC. These clients have demonstrated market discipline and strategic effectiveness in continuing to build their respective, highly profitable businesses.

In addition, in the fourth quarter, as I've mentioned, we closed on our acquisition of the GMAC International Insurance Services platform and infrastructure. This is a unique business development team that expands our international reach and enhances our diversification with a continued focus on stable and predictable business. It is comprised significantly of customized personal auto reinsurance relationships with both auto manufacturers at the distribution point and insurance companies that provide the policies. This business unit will focus on continuing to grow, and expanding as well, Maiden's regional and specialty insurer focus strategy in Europe. While the impact of this acquisition on the quarter is negligible, we expect a growing contribution to Maiden profitability in 2011 and beyond. From a balance sheet perspective, we continue to increase Maiden's investment portfolio, ending the year with $1.9 billion. When you factor in our loan to AmTrust, it actually serves as collateral for part of our reinsurance obligations to them; total invested assets topped $2 billion.

The challenging yield environment, higher prepayment speeds on our agency mortgage-backed securities, and strong underlying cash flows all impacted our invested-asset portfolio throughout 2010. Nevertheless, we remain focused on managing the balance sheet in the most efficient and effective manner possible. John will spend a bit more time on the topic, however, at year end, we are fairly close to a more appropriate cash position. Importantly, this increased level of invested assets, particularly when you couple it with the addition of new assets that we expect to come with the GIIS transaction, those should provide us with a great foundation to further strengthen investment income in 2011.

We also increased shareholders' equity by nearly 11% from year-end 2009 to $750 million, while book value per share rose 8% from $9.62 to $10.40. The book value per share performance reflects the effect of the warrant exchange, which took place at the end of November. The growth in our balance sheet reflects the impact of solid earnings and a net increase in unrealized gains throughout the year. From an ROE perspective, we produced a return on equity of 9.8% and an operating ROE of 10.2%, largely reflecting the current lower yield environment, and our conscious decision to maintain a shorter-duration bond portfolio. It also reflects the effect of, again, holding significantly higher levels of cash on hand through much of the second half of the year, but we are confident that we can continue to strengthen these returns in the coming year.

I'd like to turn things over now to John who will provide a bit more detail on the quarter and the full year.

Thanks, Art, and good morning. I'd like to take a few minutes and review some of the details for the quarter. My comments today will generally revolve around results compared to the same period last year, unless I note otherwise. As Art mentioned, even in the face of the continued challenging investment environment and strong pricing competition, we once again delivered solid results for the quarter, and we are extremely proud of all we have accomplished over the course of the year.

We generated net income in the quarter of $19.1 million, which represents a 14% increase over the fourth quarter of last year, driven by growth in underwriting income from the diversified segment and our ACAC quota share agreement, as well as improved results from the investment portfolio. Operating earnings came in at $17.2 million for the quarter, compared with $18.1 million in the third quarter and $19 million in the fourth quarter of last year. We reported EPS of $0.27 per share, with operating EPS of $0.24. Our average share count increased by approximately 1.6 million shares this quarter as result of the warrant exchange, which was completed in September.

We produced total revenue of $334.3 million in the fourth quarter, which increased by more than 25% from the fourth quarter of last year, and rose approximately 2% from the third quarter of 2010. Excluding the effect of the securities gains, revenue for the quarter was up 24% over the same period last year. Full-year 2010 revenue of $1.2 billion increased by nearly 27%.

Our net written premium for the quarter of $330 million was up over $95 million or 41%, including a $58 million increase tied to the ACAC reinsurance contract, which commenced in March of this year. Additionally, we saw continued growth from the AmTrust segment, which produced written premium of $127 million, up 21% from the same period last year. Our results also reflect the $16 million increase in our diversified reinsurance segment despite the competitive landscape.

During the quarter, we recognized approximately $30 million in net written premium tied to the international transaction, which closed in November. The results from this platform are included in diversified segment; as we mentioned in the past, this relatively unique platform generates consulting and an origination fee income, in addition to reinsurance premium from quota share agreements. We have initially elected to record the fee income associated with this platform as a [counter] expense item. Net earned premium totalled $312 million, up $63.8 million driven by growth in the AmTrust and the ACAC segments.

Our combined ratio for the quarter came in at 97.3% compared to 95.5% in the fourth quarter of the last year. Full-year combined ratio results were 96.9%, as compared to 95.9% in 2009. While these results are higher than we have seen in previous quarters, as we have mentioned in the past, it's not unusual for us to experience some modest variability in the combined ratio based on shifts in the underlying business mix of the portfolio. The diversified reinsurance segment generated a combined ratio of 94.5% for the quarter and 95.4% for the full year, compared to 96.4% for the fourth quarter of 2009 and 94.9% for the full year of 2009 (sic - see 8-K).

The AmTrust segment combined ratio came in at 96.7% in the quarter, up from 89.7% for the same period last year. The full-year combined ratio totaled 95.9% compared to 94.5%. This increase generally reflected a shift in the underlying business mix. The combined ratio for the new ACAC segment for the fourth quarter was 96.4%, and 96.6% for the full year. As Art mentioned, are investable assets, which include our investment portfolio, the loan to AmTrust, and total cash, increased to $2.36 billion at year end. This is up from $2.09 billion at the end of 2009, and $2.08 billion at the end of September.

As a result of the international acquisition at November 30, and the resulting reinsurance transaction that was part of this acquisition, our funds-held balance increased by $150 million at year end. As the reinsurance contracts that created this balance are novated to Maiden, substantially all of this balance will be converted to invested assets. We received the investment income on the funds-held balance until they become our invested assets. Our bond portfolio increased to $1.88 billion compared to $1.59 billion at the end of September, and $1.67 billion at the end of 2009. This largely reflects our strong focus on investing the excess cash we discussed on our third-quarter call, as well as the benefit of improved valuations and slower prepayments in the mortgage-backed portfolio. The vast majority of the excess cash was invested toward the end of the quarter, which positions us well as we enter 2011.

During the quarter, we continued our strong focus on maintaining the conservative portfolio profile of our investment portfolio, while putting our excess cash balances into investments that would still provide acceptable risk return criteria. These investments were primarily highly-rated corporate and government securities. At year end, 85% of the fixed maturity portfolio was single A minus rated or better. The duration of the portfolio increased to 3.8 years from 3.3 years at the end of September, while the yield on the fixed maturity portfolio came in at just over 4% compared with 4.25% at the end of September.

Our total cash and cash equivalents decreased to $186 million from $448 million at the end of September. We continued to target cash of approximately $100 million to $150 million, so this is relatively in line with a more normalized level of cash. As a result of the changes to the investable asset mix, our investment income for the quarter of $17.7 million remained relatively stable compared with $17.5 million for the third quarter of 2009, but up over 5% from $16.8 million in the fourth quarter of 2009. Our statutory capital at year end totaled approximately $968 million; this represents a premium to surplus ratio of approximately 1.3 to 1, and we believe this level is appropriate for our lower volatility reinsurance portfolio. Book value per share stood at $10.40 at year end, compared with $9.62 a year ago. For the year, we produced a return on equity of 9.8%, and an operating return on equity of 10.2%. This included a fourth-quarter return on equity of 10.1%, and operating return on equity of 9.1%.

I'd like to spend a little time speaking about our continued commitment to maintaining a strong and efficient balance sheet. Many of you are aware, recently we filed a $300 million public shelf that was subsequently rated a triple B minus by S&P. We felt that this was an important component of maintaining good corporate governance, and ensuring that Maiden is well positioned to be able to have the appropriate long-term financial flexibility as a publicly traded company that has experienced strong healthy growth over the past.

Additionally, as we have discussed in the past, we continue to survey the market for opportunities to further enhance the efficiency of our capital structure, including opportunities to potentially refinance the $260 million trust preferred securities, which were issued in the first quarter of 2009 in connection with the GMAC Re acquisition. We felt that it was important to ensure that the Company would be in a most nimble position, possibly to access the public markets and capture an opportunity should one become available. Of course, we remain extremely committed to maintaining and enhancing shareholder value through all of our activities.

I'd like to turn it back over to Art for a few closing comments.

Thanks, John.Before closing, I'd like to provide you with some perspective on our outlook for 2011. We are clearly in a challenging operating environment that is competitive, but we believe that Maiden is well positioned to continue to expand the underwriting portfolio, and enhance earnings and shareholder return. Despite the revenue decline in Diversified segment for the year, overall we are confident that we can continue our successful efforts at the end of 2010 to expand this important segment.

Our new European business development team is well positioned to deliver superior service to existing relationships by delivering customized auto and auto-related branded insurance products through important point of sale distribution networks, and also because they are now out from under some of the challenges of the GMAC umbrella. We believe they will be able to extend this important relationship-oriented model to new automotive manufacturers, and further enhance and diversity their quota share insurance partnerships.

Further, we will continue to work with the team to expand our capabilities with the objective of implementing a regional and specialty insurer focused strategy in Europe, particularly in view of impending risk-based capital rules of solvency to [unspecific]. We expect our strong strategic relationships with AmTrust and ACAC to continue to provide a growing source of stable and profitable business, and we're also intently focused and committed to continuing to grow and enhance our investable asset base in our investment portfolio, which should provide increasing levels of investment income.

And then finally, as John mentioned just moments ago, we've taken several significant steps to position Maiden to improve our balance sheet efficiency by filing universal shelf and securing an investment-grade credit rating from S&P on that shelf; both of these actions will give us the flexibility to respond quickly to opportunities to secure potentially more cost-effective financing. We are committed to continuing our efforts to maintain focus on delivering stable results, strengthening our balance sheet, delivering value to our customers, and rewarding our shareholders with growing earnings and returns. We are very pleased with the continued development of the Company, and the prospects to strengthen value to our shareholders.Thank you very much.

Okay, Trenesa, I think that concludes our prepared remarks. You want to open it up for Q&A now?

(Operator Instructions)

The first question is from Ken Billingsley with BGB Securities. Your question please.

Good morning.

I just have a few questions on the line of business break-out. On the diversified reinsurance, the acquisition expense ratio was down pretty dramatically, but the G&A portion of that was up. Can you just comment-- I know you said some of that Maiden was business mix, but it seemed a pretty large movement and at the end of fourth quarter of 2009 there was a large increase. Could you fill in the blanks a little there?

Sure. This is John Marshaleck.

There was -- the fourth quarter included the acquisition of the international operations, so that did have an impact on the ratios. It was acquired at the end of November, so it had one month impact, so we did see some changes in the expenses as a result of that, but on a full-year run rate, I think if you look at the full year segment, we are pretty comfortable with the way that's running. So, the expense ratio will fall better in line with a full-year run rate.

Will fall in line closer to around 31% combined?

Well, yes. There are two components there, the general and administrative expense ratio, we will see a change -- a more annualized expected return -- percentage there. The mix of the business in the quarter will change each quarter, and it really depends on the earned premium flowing through that quarter. As the international operation becomes a bigger component of that segment, you will see a shift in the acquisition cost and that could be a loss ratio as well, but overall we are still targeting that 96% combined.

The ACAC quota share business, the loss ratio was up for the fourth quarter compared to the first few quarters. Obviously, it looks like you did a review of the business. Could you talk about expectations on there?

And then again, also comment regarding the expense ratio specifically with the ACAC quota share business that was quite a bit lower in the fourth quarter versus what we saw in the first three, so was there an adjustment made? What can we anticipate going forward, there?

With respect to the loss ratio, it is largely business mix. There has been some growth in the international component, which has a bit higher loss ratio and that affects --I'm sorry, you're talking about ACAC. With respect to ACAC, it really is a seasonality in the quarter. We have an adjusted -- an experienced and adjusted formula, not account, and we are well within our expectations for that business.

As far as the expense it is really the allocation of corporate overhead across the various components and the effect of a sliding commission as well on the higher loss ratio in the quarter.

So, in the ACAC business, we should expect that the fourth quarter will tend to run at a little bit higher loss ratio because of seasonality.

That was true for this quarter. I wouldn't say it's necessarily a certainty, but we certainly saw a little bit of movement in that quarter.We think it will settle down. Nothing unusual that caused us to change our expectations on the business. There was some winter weather that had an impact on the property side of that business, but not an unmanageable affect.

Okay.

On the balance sheet, the restricted cash and investments was down fairly large and I thought there was this collateral from the Maiden's collateral protective trust and prepayments would make this grow. What is causing that to decline?

The total you are referring to or just the restricted cash balance?

It was restricted cash and equivalent balance -- $219 million in third quarter, dropped to $90 million in the fourth quarter.

Yes. The restricted cash balances are balances that are in trust for our clients. Really, the maturities that take place during the quarter impact that balance somewhat. We intend to invest that cash as quickly as possible, but if it matures -- as you know, if it matures right at quarter end it's going to show up as restricted cash. We would expect that balance to go down and be relatively small over time, so I think what you are seeing there is the impact of investing the available cash on a timely basis.

And, on the AOCI, can you talk about the, obviously, decline -- what is it, mark-to-market issues, can you talk about the portfolio that you are investing in and where you saw the declines on that line item?

Yes, sure. The investment portfolio has not changed. The philosophy there has not changed. We're continuing to put -- invest in highly-rated corporates and governments; there's no change there.

During the quarter, as you know, there was an increase in the over all interest rate and that drop that we experienced in the quarter was pretty much in line with what we expected based on that increase in rate. That's just built into the portfolio. Really, nothing unexpected came from that and certainly no change in any of our investment strategies.

If you can recall, September was where the bond market hit the highest peak, if you will, and we've seen some movement the opposite direction in the last month or so.

Last question, and I'll turn it over to someone else. You talked about reserve and I believe you said there was no significant reserve releases. Can you give a dollar amount on that?

We always have -- quarter to quarter we have movements among different actions here. I think the point that we are trying to illustrate is that we did not have a measured reserve take down. I think in the industry there've been a number of companies that have been reporting large reserve reductions. We've not taken similar actions ourselves. They are just the normal kind of adjustments that occur accident year to accident year.

Could you comment on the accident year movement? Nothing significant in any particular -- so you are not moving a lot from couple years into one particular year? Is it pretty small in every single year, whether it's positive or negative?

Nothing that really sticks out as particularly significant. We always see relative movement.

Great. Well, congratulations and thanks for taking my questions.

Thank you very much, Ken.

Our next question is from Bijan Moazami with FBR Capital Markets. Your question please.

Yes. I'd like to first stay on some of Ken's questions, was there a reallocation of G&A into different subsidiaries, number on?

And also there is a $5.2 million G&A that is not allocated to those 3 segments and could you comment on that?

This is John Marshaleck.

There was not a reallocation. It's the same procedures we used in the past. There was some increase in the G&A in the quarter due to the acquisition of the international operations and that's why you're seeing an increase in that percentage. And, there is a portion --there always has been a portion of the G&A that we do not allocate to the segments. That has not changed the procedures we use to allocate; that had not changed as well, so what you are seeing in the quarter is a small change due to the acquisition, but if you look at the year-to-date G&A it's in line with where we expect that to run.

Okay. I understand that.

Secondly, I want to go back on your shelf offering filing for a second, you have $260 million trust preferred security, only $250 million reflected on your balance sheet and I think that you still have 1 year of interest payment penalty to make on that until you can refinance, could you walk me through your thought process on that number one; and number two, what kind of quality debt you have to issue to get the same kind of benefits from it, from AM Best that you have on your present trust?

Let me start broadly. The trust preferred, actually, we have 3 more years to go with respect to taking out the debt in advance of the 5 year call provision that was built into the trust preferred, so that remains in place. It's not the shorter term that you referenced.

When we talk about filing the shelf and we talk about looking at options, we've made the comment, I think, repeatedly for probably the last quarter, the last 4 or 5 quarters that we are constantly looking at options and approaches. I think what we mean to focus on is that we want to have the ability to react if we see opportunities in the market. Having a shelf, having the rating, gives us that flexibility that frankly, we haven't had before, so it does give us the ability to move quickly. And, obviously, any decision we would make with respect to any replacement capital would have to factor in the effect of that $40 million of amortization of the equity that was issued with the debt. So, we are not suggesting that we have a solution in hand, but what we are saying is having that shelf gives us the ability to look at options much more actively and I think with an objective of finding a solution that will effectively work for us.

As far as the AM Best issue, I think, obviously, all rating agencies will have to recognize what the impact of any solution that we would come up with would be and we would be sensitive to the rating. We are not going to do anything that is going to undermine our rating as a Company. That is a critical part of our competitive business model and that would have to be part of any solution, Bijan.

Okay.

I want to also ask a question I asked probably last quarter. The top line growth rates of 41%, which is probably one of the best I've seen in the industry, but obviously any kind of growth requires capital also. The question is that where are you in terms of premium to surplus ratio? Where are the indications by AM Best that the level of capital you need to support that level of growth rate? Obviously there is a growth penalty. If you could get us a little comfortable in terms of the adequacy of capital as you are growing at this rapid pace?

Yes. First of all, I think our -- both S&P and AM Best have opined on our capital position. I think our A minus rating reflects comfort with our capital position; recognize that our business model is heavily built around minimizing volatility, and so the more stability that we build in the portfolio, we think the more efficiently we can use the capital base. There's not an infinite level to that, but we think we are at a comfortable level where we sit today.

We did see growth in the balance sheet this year, and I think that continued earnings will feed our continued growth in the business, so I don't view that we are running into a barrier at this point with respect to capital and opportunities. I think they are fairly well matched.

John?

Yes. I mentioned in my comments, Bijan, that we had over 1.3% -- or 1.3 to 1 writing surplus ratio. We feel comfortable with that ratio. I think going into 2011 we feel that we could support the expected growth with where we stand today and where that ratio is.

Thank you.

Our next question is from Bob Farnam with CBW.

Thanks. That's KBW.

One more question on the ratings. Are you looking to get a higher rating? And, if so, what do you need to get there? I'm talking credit ratings.

We are always looking to get a higher rating. Given it our first effort with the rating agency, we are pleased with the outcome, but we are still a fairly young company and I think that's reflected in the rating. But, I think we will continue to focus on delivering solid results and growing the balance sheet. That's the most important thing we can do to strengthen our rating position, but our answer is always, yes, we definitely want to increase our ratings from both rating agencies, but we have to prove that with our effectiveness and implementing the business plan, growing the balance sheet. It's a pretty sequential process. We feel like we are on a good track in that case, but like a lot of things, it takes a little bit of time and seasoning.

I would imagine with the growth you are putting on that might even extend it further. You're going to see how the growth pans out over time as well? Is that -- ?

The interesting thing about that, Bob, the growth is tactually -- if you look at 2011 -- or 2010, ACAC was a big component of that. That's a very stable personal auto book. It's a book we've known for many years before it became a reinsurance customer of ours. If we were adding a book of excess property business or something more infinitely more volatile, I think in reality that portfolio actually improves our risk profile. It stabilizes our portfolio even further.

I think you'll find that as well the international acquisition will have similar effect. It diversifies us geographically and it also provides us a fairly more stable portfolio of auto business as well. So, we are being very strategic in the way we build these components into the portfolio and ensuring that they are complementary to our overall strategy of creating a stable diversified portfolio business.

Moving over to the European platform, it sounds -- it sounds like you expect $100 million or so of premium to come from that business, but it also sounds like that's not the full run rate. Can you get into what you envisioned for that piece over the next few years? It sounds like there's quite a potential opportunity there.

I agree with you. I think there is a significant opportunity. The most immediate objective of the group is to continue to strengthen existing relationships they have, and we're already seeing progress in terms of their ability to extend value to a lot of those customer relationships. And, then, we will be doing some things this year to strengthen their ability to take that model to other OEMs, which I think will be very important.

I think a slower component will be adding the regional and specialty piece to it because we will have to add some resources into that infrastructure, but I would say that I feel reasonably comfortable saying that this team should certainly be able to meet our 10% combined annual growth rate strategic target for the business without, obviously, undermining discipline and underwriting integrity. We're pretty bullish on the opportunity there, and we've been very pleased with the reaction of the clients as well over this period of time.

Great. That's it. Thank you.

The next question is from Beth Malone with Wunderlich Securities.

Hi. Good morning. A couple of questions, acquisitions certainly have been an important part of the growth strategy of the Company. Predominately it's been guys you know and guys you like from the former GM structure, but are you looking beyond that? Is that going to continue to be a part of the strategy to acquire books of business, either domestically or internationally?

Those were obviously very opportune situations where were able to continue on relationships and platforms and add them to our business. I think that was a very unique opportunity. We are always looking for ways to complement our business. I think in the reinsurance sector it's a little harder to do than it is in the primary sector, but that doesn't stop us from evaluating opportunities.

I think pure balance sheet acquisitions are much tougher to do, in the reinsurance sector, but to the extent that we can look at potential renewal rights opportunities or opportunities to provide strategic capital to other companies, we see that as an opportunity to continue to build our business.

The other area where I think we've had success historically is really developing teams of resources; people that come in with additional competencies can extend our capabilities and competencies a bit further. And, I think that's probably one of the more immediate opportunities -- is really looking at some of the elements of our infrastructure and capabilities that we'd like to add components to.

Okay.

And then on the ACAC relationship, should we now assume -- the run rate that you've seen in net written premiums in the third and fourth quarter of 2010 were relatively stable, so going forward in 2011 in the first half, we should see a fairly positive comparison to 2010 because the first half of 2010 you didn't have or you were just starting to roll that business on, is that an accurate assumption?

That is absolutely correct, Beth. If I look at ACAC and some of the things they have been doing in their business - one of the things that was a priority for them was fixing some elements of their operating platform, particularly on the technology side and I think they've done a great job of responding to that. With some of the issues behind them I think their business will be well positioned to continue to build, but, yes, you're right, the ACAC acquisition didn't begin to flow on our P&L until the end of the first quarter of last year, so it will compare favorably in the first quarter.

I know you address this -- the higher loss ratio at ACAC in the fourth quarter was due to a number of factors. Should I assume some of that was weather related?

Yes. You definitely should. The winter storms' effect, it provided some -- there is some seasonality that occurs in that portfolio, but we don't see it -- it certainly doesn't undermine our expected performance of the business given the law sensitive feature of the contracts, so we feel pretty good about that contract meeting its expectations -- certainly did in 2010. We feel pretty good about 2011 as well at this point.

So, 2011, given the fact that we've had a pretty difficult first quarter in terms of weather throughout the United States, is there an area where -- is ACAC nationally positioned or are they concentrated in a certain geographic that might have more exposure to weather than others?

They are reasonably diversified. There is a bit of concentration in the North Carolina area because that was the founding location for that business, but actually, the indications we've heard at this point is that January settled down quite a bit, so we'll look actually across our reinsurance portfolio for the effects of the winter, and while we are not a dominant cat writer, we could see some noise in our portfolio, but as it stands right now, we are seeing nothing at this point that is overly consequential.

And, then, a point of clarification on the cash position, your significant cash, is there a structural reason why you maintained such a significant cash position or is it just you haven't had a chance to invest the capital that you've recently acquired through these acquisitions?

You may recall that really at the end of the second quarter, third quarter, as well, we were sitting on a pretty big chunk of cash, so what was happening -- it was a combination of things, an embarrassment of riches, I would say. We had very good cash flow from the business that was generating a lot of cash. We had prepayments on our agency-backed securities, and we also had some debt securities that actually were called early on; and all of that conspired to create almost $0.5 billion of cash sitting on the balance sheet, so really it was through the third quarter and as John said, probably 'till about November that we really started to get traction on moving that down. So, we're really down at $150 million at this point, and I think we can continue to make some progress on that.

The other important point is that we will see some additional buildup of assets and we want to get them working as quickly as possible and that relates to the international transaction, so -- we are working as fast as we can, but the other important point, particularly in at third and fourth quarter there, was a lot of noise in the bond markets and we wanted to make certain that we weren't deploying that capital in a manner that would undermine our performance. So, I think actually, at the end of the day our decisions and our ultimate deployment will serve the Company well.

All right. All right. Thank you.

Our next question is from Caroline Cameron with Macquarie.

Hi. Actually, most of my questions have been asked already, but this one thing I was thinking about is to see if you could talk about demand for reinsurance. I know you mentioned that there is one situation where your client actually increased retention and was just what you're seeing there?

Yes. I think through year end, we saw fairly similar flow in terms of 1 -1 opportunities. One of the things that I've heard from the teams particularly in the US has been the amount of deal flow that we still have in front of us is surprisingly high and I think a lot of these are more specialized needs. I don't think the demand is peaking in a big way, but in our target segment, we do find many of our perspective clients have specialized needs that particularly result after year-end results, maybe the need for some capital support to assist them in the next 12 to 24 months, so I think those are some of the transactions we are looking at, but in terms of just basic demand by traditional reinsurance, we are not seeing a spike in that at all at this point.

Okay.

And then just when you were talking about adding teams, is there any particular segment or division where you think there's more opportunity to add right now where that might be more beneficial?

Well, in the international business, clearly adding some business development resources in that regional market segment is something we're very keenly focused on. In the US, in our market focus it's a very relationship oriented business. To the extent we can develop resources that have strong positions in the regional market that is something that appeals to us as well. It's not as much line of business specific as it is customer segment specific.

Okay. That's great. Thank you.

Thank you very much.

Thank you and that concludes our questions for this time and I will turn the call back over to the Company for additional or closing remarks.

Thanks again for joining us on the call this morning. Certainly, if you have any additional questions, please don't hesitate to give us a shout. Thanks.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may now disconnect.