Kestrel Group Ltd (KG) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Maiden Holdings Second Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the call over to Noah Fields. You may begin.

Good morning and thank you for joining us today for Maiden's second quarter 2013 earnings conference call. Presenting on the call today we have Art Raschbaum, Maiden's Chief Executive Officer, along with John Marshaleck, our Chief Financial Officer. Also in attendance is Pat Haveron, Executive Vice President.

Before we begin I would like to note that the information presented here today contains projections or other forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on current expectations and future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from these expectations.

We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's annual report on Form 10-K and our quarterly reports on Form 10-Q.

Some of our discussions about the Company's performance today will include reference to those non-GAAP financial measures and information that reconciles these measures to GAAP, as well as certain operating metrics, and may be found in our filings with the SEC and in our news release located on the Investor Relations' website.

Please also note then unless otherwise stated all references to common share data in today's discussion are on a diluted share basis.

I will now turn the call over to Art.

Thank you, Noah. Good morning and thanks for joining us.

The second quarter of 2013 reflects continued solid performance at Maiden. As an underwriter focused on serving the unique non-catastrophe needs of regional and specialty insurers, our focus is on developing stable underwriting performance while driving strong operating returns.

I'm pleased to say that we achieved both objectives in the quarter despite a relatively active quarter for catastrophe activity industry wide. For Maiden catastrophe-related losses were contained within our quarterly provision for expended losses with no adverse earnings impact.

Overall our reported strong operating results in the second quarter are driven by improving underwriting margins, strong growth in revenue, stable investment returns and improved G&A expense relativities as compared to the same period in 2012.

Annualized operating return on equity was 9.7% for the second quarter and 10% for the first half of the year, while operating earnings per share were $0.28 per share in the quarter and $0.56 for the first six months of 2013.

And while the story varies within each of our core business segments across Maiden, the continued benefits of the favorable pricing environment, primary pricing environment, in the US and select international markets combined with disciplined underwriting are driving improved underwriting performance.

In the aggregate, Maiden's net written premiums through the first six months are up $274 million, or 27.3%, while the combined ratio over the same time period is improved to 97.6% from 97.9%. That's coincidently the same level of improvement in the second quarter.

Looking first at the diversified segment, which includes both our US based subsidiary, Maiden Re, and the non-AmTrust non-NGAC of our Bermuda based Reinsure Maiden Insurance, which includes the business developed by our UK-based international insurance services business, we remain focused on maintaining underwriting discipline while building our business by serving the needs of our target clients and prospects.

We're very pleased with the continued improvement in underwriting performance and strong business development in this segment in the first six months of 2013 even though net volume is down 6.9% in this segment compared to the same the same period last year.

Much of that comparative difference, as you may recall, was driven by underwriting decisions to terminate poor performing accounts, as well as decisions by select treaty clients to retain more premium in 2012.

Despite the comparatively lower writings in the quarter, it's important to note that our active client count in the US is up year-on-year. As you may recall, active client relationships are a very key driver to current and future growth. As with all of our clients in the US, we're focused on expanding our relationships with these new clients.

Another important metric for us in the US is in force revenue. This reflects the expected ultimate premium associated with all business that's currently active and can be a leading indicator of revenue trends.

For the first six months of the year, year-on-year core enforced premium is up 1.5%. And finally, our facultative casualty operations in the US continue to experience strong growth. This is our highest margin business segment, which is benefitting from the expansion of our web-based automated underwriting platform and increased revenue from our core client relationships.

In our auto-related international insurance services business unit, revenue is up slightly through the first six months, despite a lower overall trend in car sales in Europe. Importantly, the international insurance services team is currently actively developing new programs and fee opportunities, which should further strengthen future writings and enhance this unit's profitability.

On a comparative basis through the first six months of 2013 in the diversified segment, underwriting income is nearly doubled, as underwriting actions to improve profitability in this segment are driving improved performance.

The combined ratio for the Diversified Reinsurance segment improved to 97.4% in the second quarter of 2013 compared to 98.6% in the same quarter last year and 97.5% in the first quarter of 2013.

In the US component of the diversified segment, our six-month combined ratio has improved in 2013. Importantly, our exposure adjusted price monitoring for the 2013 underwriting year continues to reflect solid year-on-year improvement in pricing. This should have a favorable impact on future performances premium for the current underwriting year is earned.

In the IIS business segment, which you may recall experienced poor performance in 2012 largely related to our German auto segment, our combined ratio through the first six months of 2012 versus 2013 improved significantly and has moved from an underwriting loss in 2012 to a solid underwriting profit in 2013.

Turning to the AmTrust Quota Share this segment continues its strong growth during the second quarter with net premiums written up 48.6% compared to the same period last year and up 50.7% in the first six months of 2013 compared to the first half of 2012.

We're very pleased with the performance of this segment, particularly with the high percentage of new premium coming from lines of business, such as worker's compensation in the US, which is experiencing some of the more significant increases in that market.

We believe that AmTrust will continue to benefit, both from the favorable primary pricing environment in the US and its continuing strong acquisition activity in 2012 and '13. The combined ratio for the AmTrust Quota Share segment in the second quarter of 2013 improved to 95.5% compared to the 96.5% combined ratio in the second quarter last year.

Finally, in the NGAC segment, formally known as ACAC, revenue for the quarter of $72.4 million was flat versus the prior year, as is six-month net written premiums of $149.1 million.

Yesterday we announced an agreement with National General Holdings Corporation to terminate on a runoff basis our quota share reinsurance contract as of August first. One of the conditions of our contract with NGAC was that if they sold shares in a private placement or a public offering, NGAC would have the option to cancel our 25% quota share of their business.

In June NGAC completed a private placement, which was very successful, and it fulfilled their capital requirements. As a result, the quota share is no longer required.

Looking at the favorable underwriting trends and strong growth from the balance of Maiden's business NGAC's decision to terminate the quota share and retain the premium really could not have come at a better time. While we've appreciated the opportunity to service the needs of this important client, the termination affords us the opportunity to focus our capital on our most profitable business segments while continuing to efficiently utilize our capital.

So while the NGAC contract has generated profitable results, underwriting margins in this segment, particularly in the several quarters, have been lower than in diversified in AmTrust segments. As this contract runs off, Maiden's overall combined ratios should improve importantly with robust growth in our AmTrust business segment and favorable prospects for continued development of our diversified business.

We're confident that our growth prospects for 2013 remains strong and beyond 2013 remain comfortable with our ability to achieve our compound annual growth rate target of 10% in 2014 and beyond.

NGAC's performance for the quarter, while profitable, reflected a combined ratio of 98.9%. That compares to 96.4% in 2012. This is also a similar combined ratio to our first quarter and it reflects the continued impact of the less profitable 2011, '12 underwriting periods.

While we anticipate that 2012 pricing actions will benefit the portfolio runoff, it's premature to reflect any benefit in our results from this segment.

As we move forward and we believe that Maiden remains comfortably on track to continue its successful growth in 2013 and beyond. Current business development activity across this segment is robust and should drive future profitable growth.

That said, as we've indicated in the past, growth for the sake of growth is an unsustainable strategy and maybe we'll continue to pursue its growth in diversified segment by leveraging its formidable competitive advantages and maintaining disciplined underwriting.

Complementing our diversified segment, we continue to benefit significantly from our strategic relationship with AmTrust. We believe that market trends favor the continued profitable expansion of this unique, highly differentiated business.

Although growth in this segment is significantly out pacing growth in the balance of our underwriting portfolio, the underlying pricing trends in this segment are the major catalyst for that growth. We expect that growth to drive continued strength in underwriting and while the diversified segment revenue is down slightly, the underlying pricing dynamics and loss cost performance similarly should drive strength in underwriting performance.

We expect revenue growth to return in this segment as the impact of 2012 underwriting actions is steadily offset by profitable growth and, while we're fortunate to enjoy the strong performance of the AmTrust segment, our objective over time and our expectation is that the relationship between the diversified and AmTrust segment should shift as we father develop the diversified segment.

In total, we're very pleased with our performance in the quarter in the first six months and we're optimistic this favorable underwriting and revenue trends will continue.

I'd like to now turn the call over to John Marshaleck, our Chief Financial Officer, to review the second quarter financial results in a bit more detail.

Thanks, Art, and good morning. Unless otherwise stated, my comments this morning will compare Maiden's results in the second quarter of 2013 to the second quarter of 2012.

Net operating earnings for the second quarter of 2013 were $20.4 million, or $0.28 per share, compared with $19.7 million, or $0.27 per share.

Net income was $20.2 million, or $0.27 per share, in the second quarter of 2013 compared with net income of $14.5 million or $0.20 per share.

In the second quarter of 2013 net premiums written totaled $497 million, an increase of 21%. The Diversified Reinsurance segment net premiums were down 6% to $135 million, as our focus on profitability resulted in a non-renewal of certain contracts in 2012.

In the AmTrust Quota Share Reinsurance segment, net premiums written grew by 49% in the second quarter of 2013 to $291 million. The growth of the AmTrust Quota Share segment was driven by the combination of organic premium increases and continuing acquisition activity, which includes worker's compensation business in states that have experienced significant rate increases.

Net premiums written from the NGAC Quota Share were unchanged at $72 million. Net premiums earned of $513 million increased 17% or $76 million.

Earned premiums decreased 10% in the Diversified Reinsurance segment to $178 million. The AmTrust Quota Share Reinsurance segment was up 56% and the NGAC Quota Share segment was up 5%.

Net investment income of $20.7 million in the second quarter of 2013 increased 3%. Total investments increased $98 million, or 4%, to $2.7 billion versus December 31st, 2012.

The average yield on a -- as of June 30th, 2013 on the fixed income portfolio excluding cash is 3.54% with an average duration of 4.37 years. This compares to an average yield of 3.32% and a duration of 3.55 years at the end of the first quarter of 2013.

The increase in duration resulted from the acquisition of longer-duration assets, largely prior to the higher interest rate trends of the latter half of the second quarter. As a result, combined with a lower allocation to investment-grade corporate bond purchases during the second quarter, the new money yield on fixed maturities only increased slightly to 2.59% from 2.53% in 2013 first quarter.

The combined ratio for the second quarter of 2013 improved to 97.6% compared with 97.9%. The components of the combined ratio are as follows; loss of loss expense ratio for the quarter was 66.5% as compared to 68.4%, a decrease of 1.9 percentage points. There was a 1.7 percentage point increase in the commission and acquisition expense ratio in the second quarter of 2013.

The general and administrative expense ratio improved to 3.3% compared to 3.4%. The changes in the ratios mostly reflect business spec changes from 2012 to '13.

Total assets increased 7% to $4.4 billion as of June 30th, 2013 compared to $4.1 billion at the end of 2012.

Shareholder's equity was $956 million, a decrease of 6% compared to December 31st, 2012. A decrease in shareholder's equity is attributable to the impact of increased interest rates on our investment portfolio. Despite this impact, with continued strong operating cash flow and a gradual rise in interest rates, we anticipate improving investment income.

Over the next several quarters we should begin to benefit from a series of developments that are likely to improve the earnings run rate of our business. For example, in January 2012 the call premium expires on our 14% trust preferred securities and we plan to replace that instrument with significantly less expensive capital.

Additionally, as Art mentioned earlier, many of our business lines are enjoying improving primary insurance rates and we expect to benefit from that as the higher rated business earns through.

Finally, as interest rates increase over time, net investment income should improve as we reinvest our portfolio in higher yielding fixed income securities.

I will now turn the call back to Art for some additional comments.

Thank you, John. I'd like to add to our prepared remarks with some commentary on the market. In the second quarter most of our primary insured clients in the US continued to enjoy improved pricing.

And while not all lines and geographies in the US are enjoying the same level of rate strengthening, the trend remains favorable. We're benefitting most significantly in lines of business, such as worker's comp. in particular through our AmTrust relationship and, as we've commented as a reinsurer, the active efforts of our clients to strengthen rate will typically have a favorable impact on our results over time since our pricing assumptions do not typically contemplate the full impact of continued rate strengthening within a given contract or treaty year.

Within the Reinsurance sector in the US we are observing an increased level of competition in our target market of working layer Reinsurance opportunities, particularly from large quota share opportunities. Notwithstanding that competition, we believe that our core competitive advantages, including our highly efficient offering platforms, our client centric business focus, our value-added capabilities and Maiden's dedicated financial trust, which helps to strengthen long-term client relationships continue to serve us well.

In Europe UK auto insurance rates continue to fall, while rates in Germany are mixed as some larger players seek to hold market share. But within our unique auto OEM business model we've been able to somewhat insulate ourselves too from the broader market environment. We're actively pursuing opportunities to expand our manufacture partnerships and diversify our geographic footprint.

We remain confident about Maiden's prospects and we believe the Company is well positioned to benefit from improving pricing in key lines of business, increasing interest rates and the opportunity to reduce our cost of capital when the 14% coupon trust for securities call period expires in January of 2014.

We're committed to strengthen our underwriting performance, continuing to build the business, enhancing earnings and increasing operating returns. The second quarter reflects solid progress in achieving these core objectives and, as always, we appreciate the exceptional efforts of the Maiden team and appreciate the opportunity to serve the needs of our clients.

Thank you very much. Operator, if you could please open the lines for Q&A?

(Operator Instructions). And the first question is from Randy Binner of FBR.

Just to pick up on the pricing commentary at the end there, I guess could you quantify the price increases that you're kind of seeing across your book, kind of coming through from the primary companies and then for worker's comp in particular?

Well, I -- I mean I think AmTrust, his comment is that's probably a big portion of our worker's comp movement but I think after his comment before that increases our ranging between five and 10% to 15%, so obviously some markets where they're seeing particular strength, we've seen recent commentary about strengthening of New York State worker's comp pricing, which is obviously a big market for AmTrust as well and we think that will benefit.

I think in terms of our client business I think in general probably the 5% to 10% range is reasonable.

Okay so 5% to 10% across the book and then there's been the kind of the second derivative, the focus by investors this earning season, meaning that the rate of increases is kind of slowing down a little bit. Is that something you're observing kind of broadly across your book or does the worker's comp component kind of keep your rates moving higher even year-over-year?

Well, year-over-year I mean the worker's comp is definitely strong and, as I said a moment ago, I mean there are some markets that are still seeing continuing strengthening. I don't believe that the pricing strength will last forever and it's certainly -- it appears to be plateauing in some lines in some geographies but, as it stands today, we still think that it's a favorable environment.

Okay and then just to a quick one on capital, so to the extent there's a -- you know, there's this quota share change and then you're still refinancing the TRUPS. I mean how should we think about kind of looking a year out? I mean would your premiums and surplus be -- I know that AmTrust is growing but is the idea here that you let enough capacity go through personal lines that you would be able to basically have better operating leverage going forward, meaning lower premium to surplus ratio?

I mean I think net, net it's a positive from a leverage perspective. Obviously we loved having the relationship but at this point in time it's probably a net positive in terms of leverage and kind of the requirement for incremental capital. So I guess that's probably the extent of the comment. We'll see what the balance of the year and 2014 look like but, as I commented in our discussion, we feel reasonably comfortable about achieving our kind of historical targeted compound annual growth rate.

Okay that's fine, I'll leave it there. Thank you.

Matthew Carletti, JMP Securities.

A couple quick questions, one on the diversified segment; if you could -- when we take away the sale of the MS business and then some of the re-underwriting done in Europe later last year, can you give us an idea of what the kind of underlying growth rate is there? Is it kind of a mid single-digits number or am I off on that?

No I think you're about right there. I mean the comment we've made is that -- I mean we've largely, significantly replaced a lot of that lost business or I say lost, a lot of that terminated. Some of that was also kind of retention decisions. You tend to find that as markets harden, clients do want to retain more premium so that's not an unusual phenomenon but yes I think we have, if you exclude those items, I think it's a reasonably strong sort of 5% to 10% rate.

Okay and then longer term thinking about kind of the net sort of growth rate, obviously without any change AmTrust continues to become a little bigger piece of the pie and based on your comments you'd like for it to kind of diversify to take some of that share back. How do you see getting there? Is it through kind of, as you mentioned, adding new contracts, new clients and just growing kind of organically in that manner or do you see the opportunity out there for of M&A at some point that could in kind of a one-time manner shift the pie?

Well, you know, as you know, M&A is kind of challenging in the reinsurance space, especially given our very focused business strategy. That said, we're always actively looking for renewal rights opportunities, opportunities to bring in teams that might be able to expand our capabilities beyond our current focus so the underlying objective is to ensure that everything we do is oriented around stability, lower volatility, but we've talked before that today we think we're probably right about 100 out of 500 of the US target market that we have so we think we have a lot of headroom to continue to grow and build our business.

And in a typical year, and it's kind of masked this year because of the non-renewal activity, we get a significant amount of organic growth from existing client relationships and we've had a number of client relationships that have actually grown over the last year. So I think through a combination of new client acquisition the expansion of clients as well and the ability to bring on additional kind of resources and technical expertise that can help us build our business, we should see a steady growth in our business.

Okay and one last question shifting to a National General, I mean am I thinking about this right that if you think about it through kind of we know what the margins are. You report it, think through kind of the what you can run it at from an operating leverage, what you can run it at each different business from a kind of investment leverage and then kind of incremental cost of capital that kind of not having that in the mix going forward is probably slightly ROE accretive, given that the rest of the business is probably been running at a higher ROE than that segment?

This is John. Yes that's a fair assessment of that when you look at the margins on that business. There is not a tremendous amount of investment income coming from that line as well, so yes that's a fair assessment.

I mean certainly profitable margins don't mean to discredit the business but relative to the kind of pricing strength and return we're seeing from the other segments, obviously we think, as I said earlier, it's a great time sort of to move on and I think from their perspective it gives them the ability to strengthen their earnings run rate for their shareholders, so I think it's a nice win, win frankly.

Great. Thanks for all the answers.

Ken Billingsley, Compass Point.

Just a couple of quick questions here on the business mix shift in general, can you just talk specifically on a line basis? Obviously a loss ratio looks like it's improving quarter-over-quarter but expense ratios are running up. Can you just talk about maybe what you're writing a little bit more of that has a little bit more of an expense load?

Yes I think we covered it in the first quarter and I think we're really still seeing the effect of that. I mean we've seen a little bit of a shift to excess and excess typically has a higher loss ratio, lower expense ratio and that influences the book. And so I think as we look forward I mentioned earlier that in hardening markets clients tend to want to retain more business so we may see more demand in sort of the working excess environment. That's perfectly fine and we're comfortable with it and we -- we're comfortable with the pricing there. John, you might want to add?

Yes just the earned premium component of that is very important, Ken, because as the premium earns you get a shift in the two ratios and I think in the quarter we saw actually an improvement in the one ratio and the other ratio changes almost that same amount, so really you have to look at it is overall a change in the business mix and that's very focused too on a quarter. We could get more in premium, for example, on a quota share contract in that quarter and it's going to impact that, the ratios, not the overall combined as much, just the components.

The other question I had was relating to kind of rates and you're talking about a hardening market, customers retaining more business. I believe you do have a primary focus or an extensive focus on smaller insurers and I'm guessing some mutual companies as well for business. With Reinsurance sector having excess capital and competition increasing there, what do you see from a competitive standpoint from your -- for you, where they're looking to get more opportunities to maybe they expand relationships and maybe start passing on rev if the competition then heats up?

I think -- I mean that may be a phenomena that's driving some of the increased competition we're seeing in the quota share space. I think it's less likely that kind of the traditional cat players will want to move into our market space, just given the difference in margin and kind of capital and return requirements but I think where we might see a bit more competition is from sort of the global multinationals.

But, as I've said in my comments, I think we have a number of competitive advantages that position us well but clearly I think you correctly point out that if rates are weakening in the cat market do you deploy capital elsewhere? We're watching it carefully and while we have seen some increased competition, we still feel good about our position.

And so from your customers what would you sat the retention rate of your customer is versus maybe what it was a year or two ago?

Our retention rates been holding pretty comfortably in sort of the 85% to 90% range. We really haven't seen a significant dip. I mean it's part -- our customer base is growing so that's net a significant positive. I think year-on-year we're probably up in our US business close to 10 new customers so that's half the battle is developing the relationships and then our teams work to effectively expand those relationships so we think that's a good directional move.

Last question I have is you reported that for this quarter you did not have any real marginal cat loss exposure from an activity -- the activity in the US was pretty active. Could you just talk maybe what's different about this year versus maybe last year? And then I think you also said that you were looking to exit really any headline risk that's associated with it and when that tail would expire.

Yes well, I mean, as you know, we sold our renewal rights to our excess property business, which brought with it a -- probably a significant portion of our historical exposure to catastrophe. As that runs off, our exposure drops as well. I think beyond that the teams in the US have been very focused on ensuring that we have a reasonable sort of relationship between any embedded cat exposure in our working layer business and our overall risk appetite.

And I think that that the quarter reflects very effective work on their part in mitigating that exposure so our one and 250 years exposure, which we've kind of characterized to be less than expected annual earnings, it's significantly below that. In fact, it's exceeded. It's below half of that and it continues to move nicely lower so I feel -- we feel really good about where we are in terms of overall cat aggregate exposure to extreme events. It doesn't mean we can't get some impact but on a relative basis we think we're much less exposed than we have been for quite some time.

Congratulations on the quarter. Thanks for taking my questions.

Robert Farnam, KBW.

Most of my questions have been answered, maybe a couple more. So did you have any reserve development during the quarter?

We have a small amount. This is John. We had about $3 million of adverse development overall, relatively small compared to the overall total reserves, so we do get slight movements from quarter-to-quarter (multiple speakers).

Right and the -- in diversified.

It's spread across the segments. You know, you saw the quota share then and the ACAC Quota Share had a small amount of development in it.

Okay, all right. So it sounds like the competition is there for the larger quota share stuff so you -- is there any changing competition for smaller stuff?

No I mean I think I wouldn't say that we've seen a dramatic uptick. I think premium rich accounts tend to generally get attention and I think that's -- and I don't mean to suggest that we have hyper competition and we're -- the sky is falling but I think in a relative basis we're seeing some incremental increase. On the smaller accounts I don't think we're seeing quite the level of competitive thrust.

All right and, John, pardon me if I missed it but did you provide operating cash flow?

We had about $125 million operating cash flow in the quarter.

Okay great thanks.

Dan Farrell, Sterne, Agee.

Just a question on the AmTrust business, it's obviously been a great contributor to earnings growth and profitability for you guys. In the past you've talked about trying to achieve more balance within your overall portfolio but partly because of the success of that business, it continues to become a bigger piece and then with losing this other quota share that sounds up as well.

What I was wondering is is how do you weigh any of the potential risk of that becoming a bigger piece of your business versus the earnings benefit? And I was also wondering if you could just sort of refresh us some of the structure of that transaction how it might mitigate some of those potential risks?

Yes I mean -- I guess we're very pleased to have the relationship and it -- and we're benefitting significantly from it today and we think we see reasonable prospects for continued sort of favorable performance in that segment. This has been an extraordinary year for them in terms of kind of the tailwinds that are driven by the strong pricing environment as well as some of their selective acquisition and where we're happy with the acquisition activity we've seen but we don't anticipate that this is going to be the annual growth rate for that business long-term.

I think if you look at this, our portfolio two years ago, you would have seen significantly more growth coming from the diversified business as we brought on our international and services business and actually we grew our client count in the US and developed some large relationships so I think the portfolios will ebb and flow over time. When we started this business just before the acquisition of GMAC RE 99% of the business was generated through that AmTrust Quota Share even with growing size of AmTrust in this period of time, we still have a very large component of diversified business and it's our objective to continue to build and expand it.

In a lot of respects, Dan, it actually gives us I think a strong profitable segment that ensures that where we're taking a balanced technical underwriting approach on all of our business and not feeling undue pressure to just kind of build the revenue race. We think our prospects to build diversified are strong, not just in the US but also internationally. Our IS business is entertaining a number of new opportunities that we think can expand our footprint globally and diversify our relationships on the auto side.

And we still believe that a cautious expansion into international markets is another area for us to continue to build our business. We'll only do that when we have requisite skills to do that effectively. But I think on balance we still feel the same way, that over time the diversified business will continue to build and grow. We happen to have an embarrassment of rich this year in terms of just the strength in AmTrust and we're very pleased to see it and not at all uncomfortable with it.

I think sometimes people misunderstand our relationship as well. AmTrust doesn't have an ownership interest at Maiden. Maiden is an independent Company. We maintain significant diligence and active involvement with our client relationship and like a lot of our client relationships, we're pleased to have a long extended term with them and we hope that continues long into the future. So I wouldn't necessarily read into this quarter that it suggests that we're in for a dramatic tail off our diversified business.

That's very helpful and then one additional thing, to the extent that the losing this quota share arrangement frees up any capital, you're obviously have a lot of growth opportunities. Are you incrementally positioned better when we think about the refinancing of the trust preferred next year? I know you've increasingly talked about refinancing versus paying it with capital but does this -- this does give you some I think at least near-term incremental flexibility to potentially do some other stuff, correct?

I think it's premature to make any kind of projections but, at least as it stands today, I think we would replace that with lower cost, some lower cost form of capital, so I think that's still in our thinking. I don't think we have sort of enough headroom to pay it down with our existing balance sheet.

And we've always said that in terms of using the balance sheet the calculus for us was we'll pursue growth opportunities that represent a higher return than the cost of capital associated with the TRUPS or any incremental replacement. I feel pretty comfortable that that standard is being held today so if it does result in us taking out the TRUPS with some replacement capital, it's going to be because the run rate of the business is stronger.

Great. Okay thank you very much.

Thank you. This concludes today's Q and A session. I'll turn the call back over to management for closing remarks.

Thank you to everyone for joining us today and we look forward to speaking with you in the future. Have a great day.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.