Old Republic International Corp (ORI) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by.

Welcome to the Old Republic International fourth quarter 2005 earnings conference call.

Today's call is being recorded. At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for the questions. If anyone has difficulties hearing the conference, please press star-zero for operator assistance.

I would like to remind everyone again that this conference is being recorded, and would now like to turn the conference over to Leslie Loyette.

Please go ahead.

Thank you.

Good afternoon, and thank you all for joining us today for Old Republic's conference call to discuss fourth quarter and year-end results.

This morning, we distributed a copy of the press release, and hopefully, you've all had a chance to review the results. If there is anyone online who did not receive a copy, you may either access it at Old Republic's website at www.oldrepublic.com, or you can call [Deanna Walcott] at (312) 640-6771, and she will send you a copy immediately.

Before I turn the call over to Al Zucaro, Old Republic's Chairman and Chief Executive Officer, please be advised that this call may involve forward-looking statements as discussed on the Add 5 and Add 6 page of the press release. Words associated with these statements can be found in the Company's latest SEC filings.

With that said, I would like to turn the call over to Al for his opening remarks.

Al, please go ahead.

Okay.

Thank you, and thanks to everyone for joining us on this regular quarterly update on our business.

The report, as you saw, that we put out this morning, by the way, covers the 82nd year for Old Republic, and it turned out to be our most profitable year ever. If you look at most of the particularly significant numbers that make up the income statement and the balance sheet, you will see that they are all up very nicely.

I think that one of our -- of the best brag lines, if you will, for 2005, in so far as we are concerned, has to do with our general insurance business, which registered net premiums earned of about $1.8 billion for the year, and that is up about 110% from our 2000 base year. I mention that because, as you may recall -- some of you may recall -- we said in the past, early in 2001, one of the objectives we set for yourselves was to basically double the size of our general insurance book of business year-end 2005, and we have exceeded that objective. And we have done it by producing very good underwriting results in the past several years, and, in the process, we have brought, I think, much greater balance to our overall book of insurance business.

From the standpoint of the consolidated results you see in the press release for 2005, vis-a-vis, 2004, the numbers we published this morning, show that net operating earnings per share were up by more than, what, 38% percent in the fourth quarter and up about 25% for the year in total. And those, of course, are great comparisons, but in all fairness, they tend to guild the lily by quite a bit, because results for 2005 and 2004, were affected inversely by credits on the one hand and charges on the other hand that are not of a repeating nature.

In the press release this morning, we attempted to provide all the details of the effect of these items, but in the event you have not taken the time to line them up -- put your ducks in a row -- you might note that a more meaningful apples-to-apples operating earnings per share comparison would be something like $0.50 for the fourth quarter of '05, which would be up 6.4%, according to this calculation I'm looking at, from 2004, and $1.99 for all of 2005, which would be up 5.9% from full-year 2004. So what all of this says is that recurring operating earnings really grew in mid-single digits last year, and if you take into account realized gains, mostly from our equities portfolio, the fourth quarter's net income for '05 was up about 13%, whereas, for the full year, net earnings were up about 7.5%.

As I say, all the numbers are in the press release, and what I have just cited for you is, in fact, doing some of the math for those of you that have not had a chance to put all these numbers in perspective. So, even though the numbers are not as lush as they appear at first blush, I think that Old Republic still delivered a real nice report for 2005.

Because of the mix of our business in general insurance, focused, as it is, on liability coverages with very limited exposures to the property side of insurance, we were obviously able to dodge the costs of a particularly mean hurricane season last year. That, plus the fact that the aggregate of our claim reserves that have been established in prior years continue to prove adequate -- and that is a key reason for the postings of the very good underwriting results that we have, which, in our view aren't reflective of the current business that we are underwriting, as opposed to being inclusive of issues dealing with past underwriting commitments.

As we pointed out in this morning's release, 2005 underwriting operations produced a composite ratio of about 91.5%. So that the average for the past five years, it looks like it was about a 95% composite. So, last year's results were very much favorable compared to those of the past five years, which have all been basically positive years for us from an underwriting standpoint. And even though investment income growth in this, as well as the other segments that we run at Old Republic, has been nothing to write home about, the combination of the very strong underwriting profitability and moderate investment income is providing a very strong anchor to our Company's consolidated profitability and margins.

From a basic underwriting standpoint, our general insurance business hasn't looked this good since the early 1980's, I would say, and for the vast majority of our product lines, we are getting decent prices. The effect of cost and social inflation, I might add, on our claim costs is reasonably manageable except, perhaps, for the continuing effect that medical care cost inflation has on some of our claims, particularly in the workers comp area and other liability coverages, in particular with automobile insurance and the truck insurance being the case-in-point, with respect to the bodily injury content of that line.

We still continue to manage our production and administrative cost structures within the bounds of our topline growth. If you look at the underwriting results for our major insurance coverages, both loss costs as well as production costs on tracking with our original expectations this year -- last year, I should say -- and the favorable trends we have experienced since 2000, when the current underwriting cycle began to turn positive.

Earned premium-wise growth for last year came to about 11, and for the quarter, it was about -- a little more than 6%. That is a drop from what we have experienced particularly in the first half of 2005, but there is one bit of an explanation as to why the fourth quarter was lower than what we ourselves had expected, and that is that we did have some significant retrospective premium adjustments for -- that apply to so-called loss sensitive products. And -- don't mean to get technical, but what happens in a retrospective environment is that premiums are adjusted up or down on an account-by-account basis that is subject to the adjustments.

Premiums adjusted up or down based on what's happened to lost costs, and we had a couple of accounts in -- that were -- that came up for review in the final quarter of the year. The effect of which was to reduce both premiums as well as claim costs by a similar amount. So that is from a bottom-line standpoint, it had no effect, but from the standpoint of the top line, obviously, the decline in the -- in the premium caused by the retrospective adjustment resulted in accentuating a downtrend in the quarter. Adjusting for this, we probably produce earned premium growth of about 9.5% for 4Q '05, and about 12% for the year.

If we put these numbers in the context of the quarterly trends we reported in 2005, it suggests that earned premium growth has moved from the mid-teens in the first half of 2005, to the high-single digits for the second half, and when we consider the various markets in which we operate, our assumption about economic trends in general, and the likely impact that they could have on our customer base, as well as our assessment of pricing trends for the particular book of business we write in General insurance. I would say that our best guess, at this moment, is that 2006 earned premium growth for general insurance is likely to range between 6 and 9%, for the existing makeup of our general insurance business.

Let's see. Loss ratio wise -- 2005 was basically a mirror image of 2004, as well as 2003, at about 66.5%, as you see there, and the expense side of the composite ratio also mirrored those years at about 24.5%. And again, looking at our crystal ball for 2006, I think it is pretty safe. It would be a pretty safe bet that this year's composite underwriting ratio should land within a range of about 91% to 93%, which some of you may recall is about the same as we expressed at the beginning of 2005, for that year.

Cashflow, in this general insurance business of ours, has remained very positive at -- for 2005, even if we take out the benefit of the tax recovery of about 46 million into account, all of which applied to a couple of our general insurance subsidiaries. And what this means, of course, is that the outflow of cash is being well-contained by good cash collections from premiums and investment income as well as a reasonably steady claim payment out-go, which again you can see from the ratios that are posted in the statistical exhibit that is attached to this morning's release.

Turning to our mortgage guarantee line -- the final quarter of 2005 really represented a continuum of the activity and the trends of the first three quarters of 2005, and if we look at the hot button items for this particular segment of business, both new traditional primary and bulk insurance written for the fourth quarter came in close to the average of the first three quarters.

Ditto, as I look at net premiums earned as well as persistency trends, pretty much steady as she goes. Net risk in force for traditional primary insurance, it continued on the slight downtrend. It ended the year at roughly 4.5% below year-end 2004, and this, of course, is reflective of what is happening to new insurance-written trends and the related persistency factors.

As to bulk insurance, net risk in force grew significantly in 2005, but still represents just 10% or so of our overall net risk in force in mortgage guarantee.

The delinquency ratio again, for traditional primary, has continued to inch up as it has been for several quarters, whereas the related ratio for bulk has been relatively stable, oddly so since this business is beginning to mature for us, but it averaged just 3.5% during 2005. The uptrend, I might add, in the traditional delinquency rate and the paid-loss ratios are, of course, the basic reasons for the nearly symmetrical rise you see in the claims ratio for 2005.

I might add that in our case the 2005 claims ratio was not affected by the Katrina-related hurricane defaults, and we still expect that most of the cases attributable to non-occupancy of homes and, therefore, in default on the mortgage for unemployment or what have you, that most of those cases will be settled under the property insurance policies and will not have any significant impact on the mortgage guarantee policies we have issued. But we are tracking those claims separately from the overall book, and they have increased as you might expect, but again, our reading of the issues involved with those claims indicates to us, at least, that they should not have a significant impact on loss costs in the current year as those claims mature.

From an operating margin standpoint, 2005 mortgage guarantee results were slightly better than those of the preceding year. As you can tell from the stats and release, the increase in the loss ratio was again, more than offset by a drop in the expense ratio. We also had as you see a slight uptick in investment income, which obviously aided profit margin comparisons.

So all-in-all, our MI business reflected steady-as-she-goes performance for 2005. At this point in time, we see 2006 for mortgage guarantee shaping up along the same lines of 2005, with, I would say, a continued bias toward moderately higher loss ratios and some off-setting continued downward pressure on operating and production costs, as well as some moderate rise in investment income.

So all-in-all, as I say, 2006 should look somewhat better than 2005, and be affected by the same factors that have affected the bottom line in the year just ended.

Not much to say about our title insurance business. It's produced very respectable results for both the final quarter and the full year. Quarter-over-quarter, as we reminded in this morning's release, the most recent three months compared, obviously, quite favorably with the prior year in as much as they were not burdened by the litigation settlement costs that affected the last quarter of 2004. But leaving that aside, the segment still produced comparable underwriting as well as operating margins. So what that means in that business, given that it is a relatively low loss-exposed type of business, is that we are managing the expense portion of the business, which accounts for most of the underwriting ratio component, that we are managing that feature of the business very well, and in light, it has great symmetry with what is happening to the top line.

Our current view for title insurance is that 2006, is going to be perhaps a little more difficult from a topline standpoint, so that pressure to roll-back fixed costs in the business is going to be more intense.

Let's see, to conclude, I simply might add that balance sheet-wise, from a consolidated standpoint, we expect no surprises for the foreseeable future. Asset quality for Old Republic remains excellent. Liquidity is in very great shape. Aggregate claim reserves, as I have mentioned, continue to pan out favorably, and I would say that we have sufficient fire power in our capital base to take on greater underwriting commitments than we are currently anticipating for the year.

So things are looking good for our company, and we expect a very fine year for it. So, we look forward to visiting with you in the coming quarters, and in the meantime, as was suggested, we'll open it up to any questions you may.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll take our first question from Greg Peters from Raymond James.

Good afternoon, Al.

Hi, Greg.

First of all, thanks for the guidance that you provided.

Okay.

I wanted to just follow up with a question or two regarding some of the commentary that you had.

First of all, I think that you were talking about the strong operating cashflow results in general insurance. Pardon me, I -- I don't think you gave a number, or if it is in the release, I didn't see it.

We usually have not been giving a number for the segments. We have been giving aggregate numbers, but for your purpose, suffice to say that it was very much inline with last year for all three of our segments. If you look at your year 2004 numbers for general mortgage and title, which you have in the annual review we publish every year, that the three segments were pretty much inline, with the general insurance, as I said, being impacted favorably by that special tax recovery that we had.

When you say -- I'm not sure what you mean by inline.

Inline meaning "about the same."

Okay, so pretty much flat year-over-year.

Exactly.

I see.

Well, the total as you see for the year, this year, was 880. Right. And, you take out, roughly, 46 post-tax on that special adjustment, and it brings you down to about 830, and in 2004 -- pardon me -- we had 828.

So, essentially flat.

Right.

I think also in your opening comment, you mentioned how back in -- I believe it was -- 2001, you set the objective of doubling the top-line of the general insurance.

Yes.

By the end of 2005 --

Yes.

Which you --

Have exceeded.

Yes. I'm wondering, now, here we are at the beginning of 2006, if you are willing to provide some similar four to five year out type of top-line guidance for general insurance that we should be thinking about?

I think -- yes, I think that would be very foolish of me or anybody else to say that -- to do that for the simple reason that it was an easy call back in 2000-2001, because we knew we were in a turn-around situation. Whereas, the cycle, as you know, I'm not telling you anything new, Greg, has matured in general insurance, and at best, what we can expect right now is, a flattish type of rate situation, so that the name of the game is the ability of individual companies, such as ourselves to, one, profit from a topline standpoint by virtue of what occurs with their customers' business, on the one hand, as well as hopefully gain some market share in selected areas.

Well, that's fair, I thought it was worth a shot though.

Of course.

It's -- it's the crystal ball, the long-term crystal ball, that we are looking for.

Which is more difficult, you will agree, to do that at this time.

Absolutely.

Well, let me ask you two other questions, and then I'll requeue and come back at you with a couple others afterwards.

First, would be re-insurance costs.

Yes.

Do you anticipate any changes in '06 versus '05?

Very little. Most of our major treaties come up for renewal as of January 1st, and those have been put to bed, and there is very little change there. We continue in some -- in some isolated areas, we continue to retain perhaps a little more where there are issues of re-insurance, security quality, and what we will do as we have done for several years now, will be to retain the amount that would otherwise be re-insured as opposed to re-insurancing it with companies that do not pass mustard from a quality standpoint. But otherwise, since we are not involved as a company to any significant degree with property insurance, which has been the main recipient of significant rate increases in this last go around, we have not had any significant amounts to impact.

I'm -- I'm curious, given your -- your -- your operating results, why it wasn't possible for you to actually achieve some cuts in pricing, given that you have very little property-type exposure?

Yes, well, we do -- we do sometimes hit our re-insurers, and they are in there for the long-term, and to some degree, no matter who you are, I mean nobody controls the insurance business in this country, everybody tends to share to varying degrees in the difficulties that re-insurers have, so that to some degree, everybody, when the re-insurers need rate increase or rate relief, everybody is going to pitch in. That is the nature of the business.

Okay. Fair enough.

The other -- the other area that I just wanted to touch on briefly before I re-queue was risk management. As has been a habit of mine for pretty much several quarters now --

Yes.

I'm always looking for additional information versus what you provide in the press release and what you say on the -- on your opening comments.

Right.

So, I'm throwing it out for you to provide some additional color on how the conditions are of that business, how the competition is, if you can give us any update with respect to policy -- are new accounts signed on, accounts lost, retention ratios, just give us some additional flavor of what is going on that would be helpful.

Yes.

You are talking -- we have more than just large accounts that are subject to what is referred to as risk management, or alternative market, solutions to customers' insurance needs, but just focusing on the large accounts, I would say this. First of all, we are gaining some, and we are gaining more than we are losing. We tend to lose accounts mostly by virtue of mergers that take place. A few situations we lose because of re-insurance considerations, where the re-insurance cost that we are either passing through or, in fact, warrantying to accounts, are higher than may be available in other markets. But by and large, that is still a growing business for us.

By the same token, it has not produced the kind of growth potential that we and others anticipated by virtue of the various scandals that were attached to that part of the business in particular, and that blew up earlier last year.

It goes to show you that there is a degree of inertia in the business, and that business does not move that quickly. That risk managers take their time to figure out markets and what is happening in them before they will necessarily move a business of business, either on their own or through their broker. So that business is, one, performing exceedingly well for us, just as it has for many years. Number two, it is growing some, but not growing at a rate -- at a rate, which is as high as we had -- perhaps were dreaming of getting.

And when you talk about the -- the troubles of some last year, I assume you are talking about within the insurance industry, correct?

Yes, I'm talking about the -- the -- the impact of the rates issues and so forth.

Right.

On selection of insurance company.

What about the other aspect of that business? So the growth hasn't lived up quite to the expectations, what about the margin on the business? Has that -- ?

As I say, I think that business remains -- has been -- profitable for us. In a few times here and there, we might get nicked because of our re-insurance participations in it, but by and large, it has been a good business for us.

On the topline -- the growth -- ?

We have got good credibility in it. There is great acceptance of Old Republic's security and way of doing business, and we are in it for the long-term, and I'm certain that it is going to be a vehicle for further growth for us over the years.

Alright.

We'll take our next question from Geoffe Dunn with Keefe, Bruyette & Woods.

Hello, Geoffe. How are you?

Good. Thanks.

How are you?

Good.

A couple of follow-ups -- within the GI line, can you give a little bit more flavor as to the stronger versus weaker organic growth opportunities in the various business lines?

Okay.

I would say that workers comp remains a big line for us. I would say that the trucking area still has quite a bit of room to run in. I would say that the aviation line has quite a bit of room to run in. I would say that our automobile -- that our home warranty line is very much of a -- remains very much of a growth area for us, and I think that the E and O, D and O area, which has not produced steady quarter-to-quarter increases in writings, but overall the last number of years has been nicely growing line of business for us, and, again, not to brag, but I think that the good security that Old Republic provides is going to keep providing us opportunities to grow that very nicely over the foreseeable future.

So you take all the lines that I enumerated and they probably account for 80%, 85% of our business, and I think we've got good opportunities as I said to grow them, and grow them by remaining focused on the relatively few industries that we are focused on.

You take the trucking industry, we probably have no more than a 6% market share in that business. So there is lots of room to grow. It's a big part of the American economy, and we obviously have got our kite tied to it.

Okay.

Jumping over to title -- was there much of a commercial impact on the quarter? Just judging by the average revenue per closed order, it looks like you might have had boost profitability there?

No, no. There was no -- no real change in the makeup of that business.

I think what is happening is that you have less refinance business, Geoffe, and as a result, you have got more of the traditional business,s which has the higher premium rate attached to it.

Okay.

And then, finally, I -- I heard your comment on the hurricane-related delinquencies and your expectations there, but did you put up any specific reserve for any the hurricane-related delinquencies in the quarter, and would you be able to quantify that?

Not as such. Not as such.

Thanks, Al.

We'll take our next question from Kelly Nash, KeyBanc Capital Markets.

Hi, Al. How are you?

Okay.

Welcome back.

Great.

Thank you.

I wonder if you could talk, with your growth expectations for the federal insurance segment, how much of that 6 to 9% -- how much of that is price increases versus just core account growth?

That is a combination of those three elements that I mentioned. One, the economy growing and its impact on the growth prospects of our own customers from a sales standpoint, from an employment standpoint. Two -- rates. We are just going to keep getting nibbled here and there, and we might have a 2% or 3% decline in rates overall, and I would say just the ability to, as I tried to say before with respect to trucking, that we should be able to increase our market share in these particular areas that we focus on. So you wrap it all together, and that is how we come out to the 6 to 9%, which is a pretty wide range, but it is the best we have right now.

But your expectations for rates are to be down modestly?

Yes.

Okay.

And then, if you look at geographic expansion, that is one of the areas you talked about briefly, can you indicate how that faired in '05, and then what your expectations might be in '06?

More of the same. We don't expect any major changes, contractors' business throughout our bituminimis operations.

We keep increasing the geographical spread of that. Ditto with trucking. Ditto with our home warranty business. Our aviation business is pretty much over the country already, but those three areas are the key areas where we think we can still get some increase in premium volume through geographical spread.

And then with the -- just looking at the pricing, the modest decreases, are there any lines that are notably different from that?

I would say that the -- the basic -- the three lines where you are going to have -- where we expect some price declines are probably the comp and the automobile liability trucking and, perhaps, a little bit in the GL, general liability line. Those three.

The other lines, we are in pretty good shape of -- at one time, we were concerned about the D and O, and those did experience some price give-backs, but of late, they seem to be firming up again. I think that is a reflection of some of the law suits and major cases that have hit the fan, and as a result, insurers that are in that business have tended to tighten up, as we have.

Okay.

And then turning to the mortgage insurance segment -- are you seeing any -- you mentioned the impact on the -- from the hurricane activity might be minimal. Any other regions that you are seeing a notable increase in claims costs delinquencies?

I think we have the Midwest issue. You read the papers that the Midwest, Ohio, Michigan, et cetera, are experiencing some job losses, particularly in the manufacturing area with automobiles and what have you. We still have some losses in the -- in the furniture area down South. Those are the ones that stand out as being particularly prone to some upward pressure on the claims side.

Okay.

And then, in terms of persistency, what level is a sustainable level that you might see going into '06-'07 on a percent basis?

As you see from the statistics, if you plot them for the last eight quarters or so, it has been very, very slow moving, positive move, but very slow.

Excuse me.

But so -- and we don't expect any significant change there.

And I wondered if you might share with us your view on interest rates, and what your expectations are?

We expect them to be pretty steady. We think the fed is pretty much through in terms of inching them up, and we think the rest of the market is going to follow suit.

Thanks a lot, Al.

Okay.

[OPERATOR INSTRUCTIONS]

We will move to Mike Dion with Sandler O'Neill.

Good afternoon.

Hi, Michael.

Just a couple of follow-up questions -- first off, in the mortgage guaranty segment, I think in the outset you had mentioned that you expected the loss ratio -- the claims ratio -- there to increase a bit from where it was in '05, for the full year.

Yes.

Maybe you can just expand on that a little bit, and is that a function of, perhaps, taking the bulk insurance up more than the 10% of where it was at year-end, and I just have one follow-up on the title segment as well.

Well, taking up the bulk in particular first, as I think I mentioned, we are surprised that it is looking as good as it is in terms of delinquencies, but common sense tells you that since that book of business is beginning to mature for us, that if anything, we should expect the delinquencies attached to it to go up and not down, and then with respect to the traditional book, we have had a pretty consistent issue with both frequency and severity in the past several quarters, and right now, we just don't see the makings of that changing for the better for the -- as far as we can tell.

So the combination of those feelings is what leads us to think that there is going to be a modicum of upward pressure in that area. But again, as I think I said, Mike, we still think that given the mix of our business, how we produce it and so forth in the MI side, we think there is still some room for jiggering down the expense ratios so that we could again experience pretty much of an offsetting type of pattern between the claims ratio and the expense ratio in 2006.

That is why I used term steady-as-she-goes. I think '06 for that business, for a number of these reasons, is probably going to be a mirror image.

The increased interest rates also should begin to change the lay of the land, so to speak, when it comes to our competing with 80/10/10 structures, in that higher rates make those structures less appealing to the borrowers and, therefore, are more favorable to the MI companies, and when that occurs we should get some upside potential on the topline.

Okay. Fair enough.

Thank you.

And just a follow-up on the title segment. the growth was strong in the fourth quarter, and I just wanted to see if there are any regional aspects to that? Perhaps it was strong growth out West versus anywhere else, and is that something that you think could fall over for the next quarter or two?

I think, in all fairness, Michael, I think what occurs is there are cases that because of the vast majority -- some 60% or so -- of that business is generated by agents that you still have, therefore, a substantial lag effect in the reporting and the booking of premiums. So that what happened in the fourth quarter is that we got production from the -- primarily from the third quarter of the year, which was still a relatively strong quarter. So that -- I would not expect that to occur for the next couple of quarters. I think it is going to be a slower book of business for the next 6-9 months.

Okay. Fair enough.

Thanks a lot, Al.

Yes.

We'll take our next question from David Merkle with Huffy Capital.

Hi, Al.

We have been holders of the stock for the past two years, and we've have been really happy with it.

I wanted to ask you some qualitative questions. Where -- what are you doing on underwriting these days? Any emerging issues that you see either in your general insurance lines or your mortgage insurance lines?

In the general insurance area, we just keep doing what we have been doing when we don't have any major new industries that we are focused on. And other than the issue of pricing adequacy, which we are very always very conscious of, we are not -- are not changing our underwriting standards or letting down our guard, so to speak.

I would say the same thing with MI. I think we -- whenever there is a new product out there, we historically have always tip-toed into the water before attempting to swim, and we have tried to hedge our bets, and for example, that is one of the reasons why our bulk insurance business did not grow as quickly or as early as it did for some of our competitors.

So, I think the basic answer to your question is that we are not doing anything new. We are just staying the course with our usual underwriting practices.

Very good.

Thanks, Al.

Yes.

We'll move to Greg Peters with Raymond James.

Al, two follow-ups.

Yes.

Just the question before you were talking a little bit about the backlog in title, and how you had, at least in the fourth quarter, benefited from the backlog.

Yes.

From the prior quarters -- and if I recall in prior conference calls, you have actually commented on where the backlog stands at the end of the quarter to give us a snapshot of how it looks the next quarter or two.

I just would not --

Are we down?

I would not venture a guess on that.

Best we can do on that score, Greg, is to give you numbers as to closings and openings for our direct business, which, as I say, accounts for about 40% of the business.

Okay.

So that where we are, which is in the same position as you are on the outside, which is to try to read the tea leaves, so to speak, on the basis of what is available for us.

If you look the those numbers quarter-to-quarter, on our direct business, they are fundamentally only -- on the down trend as opposed to up-trend in terms of openings, and therefore, that is why I said before, in answer to the earlier question, that for the next couple of three quarters I think topline growth is going to be an issue with that business.

Okay.

On the risk management business, Al --

Yes.

Would I assume that -- you talked about you still hope to grow the business, but not as much. Could I assume that the guidance for general insurance net premium earned -- ?

Reflects that business.

Reflects in part that -- I mean is that -- well, would I assume the growth rate of that business would mirror what the guidance is for the whole group?

No, I would not say that because that business does not produce -- does not typically produce very much by way of net premium since that business is run on the basis of using captive insurance sessions or -- or similar or other underwriting approaches, which have a similar effect, which is to leave the lion's share of the risk-exposed premium with each of our assured.

So I would not necessarily come to the conclusion that if our overall business grows by 6%, ipso facto, that is proxy for the growth, either actual or potential of our risk management business.

How are you measuring the growth of your risk management?

We look at direct premiums, or the standard premium, the make-believe premium. By that, I mean what would be the premium if we wrote that book of business in a standard or traditional fashion and kept it and made it subject to our regular treaty structures and so forth. That's how we measure it, which is basically an exercise because you are not charging the standard by definition.

Understood.

Thank you so much so much for your answers.

Yes, sir.

William Laemmel, Divine Capital Management, has your next question.

William Laemmel, how are you, sir?

Well, I'm super, especially if things are going like they are. It's good to hear -- I hope I can congratulate you on another great year.

Well, we're all hopeful of that.

We got our fingers crossed because in this industry that is the way you have to run it, but don't forget us in February, us poor shareholders.

I see. We made you richer, a month or so ago.

You made my customers very happy, and that "very there" is capitalized.

Okay.

All right.

Thanks a lot, Al. Good talking to you, bye-bye.

And we will move to Mark Finkelstein with Cochran, Caronia [Waller].

Hello, Mark.

Hi. How are you?

Okay.

You just changed your name?

We did. We did -- went through a little bit of name change and adding an individual to it.

Good.

I have a couple of quick questions.

Firstly, on the I guess on the movement in the equity portfolio from an actively managed to an index approach, what was the -- what was the rational-slash-reasoning for that?

That we get better diversification of the portfolio, and can do it in a very cost efficient basis.

Okay.

And then, I guess just a little bit of a philosophical question. Clearly rates are continuing to moderate in liability line,. and a good part of your book is focused on loss-sensitive accounts.

Right.

Are you seeing a gravitation towards guaranteed-cost type structure as opposed to a retro-deductible structures.

No. If anything the larger accounts, in particular, are much more attuned to retaining -- don't forget, it is also a function of risk-carrying capacity, and as you know, Mark, corporate America's balance sheet today is a lot stronger than it was even three or four years ago.

So there is a lot of cash there, and there is a lot of appetite to put that capital to work, and if you have concerns about the insurance inter-mechanisms and what its cost is, you are going to be very seriously looking at your own ability to carry risk on the one hand, and to absorb risk.

So I think the opposite is occurring, that there is much more of an appetite to retain risk.

Okay.

Sounds to me like that is a little bit of a different approach than in the late-90's when, particularly, in the confines where -- ?

Yes. You're correct.

Okay.

And then, I apologize if you addressed it already. Are you seeing any lightening up in terms of the credit requirements on the retros?

No, we have not encountered it.

The companies we compete with are, in our view, at least the majors, are reasonable competitors. So we are not seeing a softening there. I think that you will see softening if you get new entrants in the business, and that will be typically a way that they will try to get market share by giving the store away.

Right, but you're not seeing that?

Nothing's new.

Okay. Those are my questions.

Thank you.

Okay.

There are no further questions in the queue at this time. I would like to turn the conference back over to you for any closing remarks.

I have none.

I appreciate all the questions and interest in listening and participating in this call, and look forward to reporting back in another three months or so ,with hopefully good news about the continued success of our business, and with that said, I'll bid you all a good afternoon.

That does conclude today's conference. We thank you for your participation, and you may disconnect at this time.