Kestrel Group, Ltd. (KG) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Maiden Holdings Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the conference over to Noah Fields, Vice President, Investor Relations. Sir, you may begin.

Good morning, and thank you for joining us today for Maiden's Fourth Quarter and Year Ended 2011 earnings conference call. Presenting on the call, 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'd like to note that 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 based on the company's current expectations and beliefs concerning future developments and the potential effects on the company. 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 nonreceipt of expected payment, changes in interest rate, the effective performance of the financial market on investment income and fair value of investment; the impact of competition in pricing; changes in demand for the company's products; the effects of general economic conditions and unusual weather-related activities; adverse state and federal legislation regulations to the regulatory investigations into industry practices; developments relating to existing agreements, heightened competition, changes in pricing environments, and changes in asset values. The company undertakes no obligation to publicly update any forward-looking statements, except as may be required by law. Some of our discussions about the company's performance today will include reference to both non-GAAP financial measures and the information which reconciles to those 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 Maiden's Investor Relations website. And with that, I will turn it over to Art.

Thank you, Noah. Good morning, and welcome to the Maiden Holdings Fourth Quarter Earnings Call. Without question, 2011 has been one of the more challenging years on record for the reinsurance sector, in contrast for Maiden with our highly differentiated business model, which is focused on serving the non-catastrophe needs of regional and specialty insurers. I'm very pleased to report that fourth quarter and full year results continue to reflect profitable underwriting and improved cost of capital following our June debt refinancing, growth in both invested and investable assets, a year-over-year increase in book value and strong written premium growth. Importantly, we believe that Maiden is well positioned to benefit from improvements in the pricing environment in 2012 and beyond. For the most part, I'll focus my comments on the full year, while John Marshaleck, our Chief Financial Officer, will discuss the fourth quarter. While many reinsurers have ended 2011 with a net loss in many ways, 2011 was a validation of the logic of our lower volatility non-catastrophe oriented business strategy. For 2011, we delivered an operating return on equity of 9.2% and a profitable combined ratio of 98.1%. While we aspire to a medium-term return on equity -- return on operating earnings target of 15% and a combined ratio of 96% or better, given the headwinds that were created by weakening investment yields, a challenging economic environment and record levels of catastrophes, overall, we're pleased with the results. Growth in 2011 came from all of our business segments with Diversified Reinsurance, our fastest-growing segment, increasing 44% to $798 million. As you may remember, the Diversified segment includes our U.S.-based reinsurance subsidiary, Maiden Re, and our international insurance services subsidiary. The majority of the diversified increase in revenue was in our U.S. book, and it resulted from the expansion of programs with existing clients. With the objective of maintaining significant relationships with our clients, the expansion of existing customer relationships is a very key part of our growth. In addition, we were also successful in attracting a number of new clients. A portion of the increase in the Diversified Reinsurance segment came as a result of demand for non-catastrophe capital support from new clients who were impacted by the unusually high frequency of weather losses in the U.S. during the second quarter of 2011. And as we've previously reported, 2011 was IIS' first full year as part of Maiden. In 2011, net premiums written reflect a full year of writings and an additional $76.2 million over the 2010 written premium book by Maiden. I'm pleased to say that the IIS reinsurance business development team, which was acquired from GMAC in 2010, successfully renewed all key relationships and programs. We're well-positioned to continue our cautious international expansion through this platform, and expect our regional and specialty-based reinsurance model to further benefit European-based insurers in the future. With our specialty focus, we believe that by providing for non-catastrophe reinsurance capital needs, we can fill a valuable niche by developing customized solutions for small to midsized companies in Europe. We continue to benefit from our relationship with AmTrust, our largest client, with net premium written of $669.3 million, up 43% in 2011. During the year, we negotiated a favorable 1% reduction in the ceding commission for 2011. Maiden also gained from AmTrust entrance into the European Hospital Liability sector, where we have a 40% quota share of what has been a well-timed opportunistic and profitable venture for AmTrust. In addition, the growth in AmTrust written premiums also reflects their continued successful acquisition activity. Maiden's 25% reinsurance quota share with ACAC, that's the GMAC Insurance Personal Lines business, which is today a successful niche-oriented personal auto insurer, generated net premium written of $256.2 million. That's an increase of 24.5% in 2011, reflecting the full year impact of this contract, which actually incepted in March of 2010. We continue to benefit from the relative underwriting stability of this portfolio. Again, as I mentioned, despite significant global catastrophes in 2011, we were able to achieve underwriting profitability in each quarter of 2011. The business model was tested during the second quarter when an unprecedented frequency of tornadoes and thunderstorms hit the Midwestern U.S., which caused losses for a number of our clients. Both storms impacted our second quarter result by $9.5 million. Maiden's 2011 full year combined ratio of 98.1% reflects losses from these events, as well as some variations from the target loss ratios in each of our reporting segments. We've commented in the past regarding the changing business mix in the AmTrust segment, which was addressed with the change in the ceding commission. Additionally, consistent with their own experience, we did see an increase in their overall loss ratio, which is reflected in their full year results and in the fourth quarter, but still within our performance expectations. We also believe that AmTrust's performance should benefit significantly from the strengthening pricing environment in the latter half of 2011 and on into 2012. In the fourth quarter, our diversified combined ratio of 97.7% reflects the impact of late third quarter 2011 weather-related losses recorded in the fourth quarter from our auto reinsurance portfolio at the Maiden International Insurance Services Group, and specifically, we observe an elevated loss ratio on one of our programs. That elevated loss level reflected the impact of weather, specifically hail, over the third quarter. While certainly not a major event, it did result in roughly $2 million of increased losses, but importantly, we subsequently negotiated revisions to our contract, which will reduce future concentration exposure to weather-related activity in 2012 and beyond. And then finally, on a full year basis, ACAC's combined ratio is performing slightly above expectation, driven by a higher-than-anticipated fourth quarter loss ratio. The increased loss ratio reflects the level of unexpected loss activity generated in specific jurisdictions. We're confident that action plans in place at ACAC will moderate future performance, and for 2012, we remain focused as a group on achieving our 96% target combined ratio across the entire Maiden underwriting portfolio. For the year, net investment income increased $3.2 million or 4.5% to $74.9 million as growth in invested assets from increased writings offset lower yields. Our conservative high-quality fixed income portfolio remains focused on government-sponsored entity bonds and high-quality investment-grade corporate bonds. Our investment portfolio continues to reflect our view that in the current investment environment, a move towards longer duration securities does not make sense. Investable assets increased $170.4 million in 2011 to $2.5 billion. In the quarter, investment earnings were down from the prior quarter by roughly $1.6 million, which reflects the continued elevated amounts of cash and cash equivalents and reduced portfolio duration as well. As we previously reported in June of 2011, Maiden issued $107.5 million of 30-year 8.25% senior notes. The proceeds from that issuance were used to retire a like amount of 14% to a 30-year trust preferred securities that were issued in early 2009. You may remember that was a very important element of the funding of the GMAC RE acquisition. The $35 million nonrecurring cost of the debt issuance related charges lowered net income to $28.5 million, which was 59.2% below 2010, but certainly strengthened the earnings power of Maiden going forward. Operating income was $69.6 million or $0.96 per diluted share compared to $72.7 million or $1.02 per diluted share in the previous year. Given the challenges of 2011, we believe that our operating performance demonstrates the effectiveness of Maiden's disciplined underwriting approach and stringent risk management. Our shareholders' equity increased 2.5% in 2011 to $768.6 million despite the fact that nonrecurring charges from the June debt issuance also had an impact on shareholders' equity. In light of our low volatility underwriting and conservative investment portfolio, we remain comfortable with our risk-based capital position, and believe that a more normalized level of growth in 2011 will be well-supported by our balance sheet. I'd like to turn the call over to John Marshaleck now to review the fourth quarter result in a bit more detail.

Thank you, and good morning. As Art mentioned, I will focus my comments on the fourth quarter results. Net operating earnings were flat at $17.2 million or $0.24 per diluted share compared to the fourth quarter of 2010. Net income was $17.5 million or $0.24 per diluted share compared to $19.1 million or $0.26 per diluted share in the fourth quarter of 2010. The income was down during the quarter relative to the same period last year as a result of the lower investment yield, which is partially offset by increased investable assets. The combined ratio for the fourth quarter 2011 was 98.3% compared with 97.3% in the comparative quarter in 2010, and Art described the various drivers of each segment combined ratios with the fourth quarter. Net premiums written were up 23.8% or $78.4 million to $408.5 million in the fourth quarter of 2011 compared to 2010. Maiden's 3 business segments all increased premiums and our fastest-growing segment, Diversified Reinsurance, up 32.8%. The growth in this segment was primarily attributable to the expansion of established client relationships and new business in the U.S. The AmTrust Quota Share Reinsurance segment increased 20.1% as AmTrust core business continue to grow. Maiden also benefited from its 40% quarter share of AmTrust European Hospital Liability business. The ACAC Quota Share segment increased 9.1%, reflecting growth in its underlying business. Net premiums earned also increased across all 3 business lines, with Diversified Reinsurance up 41.3%, AmTrust Quota Share reinsurance up 31.9%, and ACAC Quota Share up 17.3%. Net premiums are, in total, $417.8 million, an increase of 33.7% compared to the fourth quarter of 2010. When reviewing our operating performance, it is important to focus on our combined ratio results, as well as the individual components. Our reinsurance portfolio consists -- contains a significant amount of quota share business. Some of these contracts contain experienced sensitive commission adjustments, which allow for a reduction in commission expense, following a corresponding increase in the loss ratio. Net loss and loss adjustment expenses of $296.8 million were up $87.9 million. Changes in business mix, which led to a higher-than-expected loss experience, resulted in an increase of the loss ratio by 4 percentage points to 78 -- to 70.8% versus the fourth quarter of 2010. We reported a fourth quarter total expense ratio of 27.5% compared with 30.5% in the fourth quarter of 2010, commission and other acquisition expenses, plus general administrative expenses, totaled $115.4 million, an increase of $20.2 million from the year ago quarter. General and administrative expenses for the quarter totaled $16.3 million compared with $13.3 million for the fourth quarter of 2010. The differentials from the prior quarter reflects some expense seasonality, but ultimately, we have maintained our target operating efficiency. The general and administrative expense ratio was 3.8% compared to 4.3% in the fourth quarter of 2010 on a full year basis. On a full year basis, the operating expense ratio was 3.5%. This is consistent with our target of keeping G&A expenses below 4% of earned premium. We expect improving prices and lower ceding commission cost to benefit the combined ratio in the future. Net investment income was $17.2 million, a decrease of 2.9% compared to the fourth quarter of the prior year. Investable assets increased 7.2% or $170.4 million to $2.5 billion. The book yield on the fixed income portfolio, excluding cash, is 3.59% with an average duration of 2.78 years, and this compares to an average duration at the end of 2010 of 3.87. We purchased approximately $256 million of fixed income securities during the quarter with the majority of which were high-quality corporate bonds. The new money yield was 3.14%, and the duration on the new fixed income investments was 4.62 years. As of December 31, Maiden's cash position was $303 million, and reflects our continued strong operating cash flow, as well as continued increases in the prepayments of the agency mortgage-backed securities. During the fourth quarter, we had $47.3 million in operating cash flow and finished the year with $152.4 million in cash flow from operations. Despite these strong results, like all insurers and reinsurers, the continued impact of the low investment rate environment making fixed income investment -- is making fixed income investment duration and allocation decisions more challenging. As a result, our net investment income continued to be impacted by these factors during the quarter. Total assets grew to $3.4 billion, an increase of 12.5% compared to $3 billion at year end 2010. And I'll turn it back over to Art for some additional comments.

Thank you, John. Before we close, I'd like to give you some color on our recently completed January 1 renewal fees, and which I characterize as favorable. Maiden's January 1 renewal activities are primarily focused on our U.S. business, Maiden Re. Our January 1 renewal book represents roughly 40% of our U.S. underwriting portfolio. Overall, we realized modest pricing improvements on U.S. treaty and faculty business, and we were able to negotiate rate increases for a significant portion of our renewal portfolio. In general, we were able to improve rate levels on accounts where experience warranted. New business was won at essentially target pricing. And while the shares of new programs were smaller than we would have liked, we are positioned as we always focus on expanding these relationships in the future. The other phenomenon that we observed during the renewal season was an increase in retention levels for several clients. This may in fact reflect client concerns about increased cost for catastrophe protections and essentially a prioritization of the reinsurance budgeting. The key question is whether primary rate strengthening continues, and we are cautiously optimistic in our target market it will. From a revenue perspective, while only around 40% of our current portfolio renews on January 1, we expect that year-to-year revenue for the January 1 renewal season will be down slightly. By any measure, 2011 largely reflects the benefits of business initiatives and strategies that were implemented in 2010. As an example, our Diversified segment reflects the full year impact of the late in 2010 acquisition of the GMAC International Insurance Services business development team and portfolio. In 2011, we also realized the full year benefit of the ACAC personal lines quota share transaction that actually incepted in March 2010, and we also realized an expansion of our AmTrust relationship through the Hospital Liability quota share. That's an opportunity which we initially evaluated in 2010. For 2012, while we will believe we'll have opportunities to expand our business, we do not expect to duplicate the dramatic growth of 2011. As we've stated before, we believe that our lower volatility underwriting portfolio and our proactive risk management afford us greater capital efficiencies in companies with a focus on more volatile lines of business. As a unique specialty-oriented reinsurer, Maiden has built a robust operating platform, focused on serving the non-catastrophe reinsurance capital needs of our regional and specialty insurer-focused clients. While the current investment environment presents a challenge towards meeting our medium-term 15% ROE growth goal, we are confident that we can make progress towards that goal in 2012. Our focus in 2012 will be to strengthen underwriting performance, deploy cash into productive high-quality invested assets, and of course, to maintain a strong balance sheet. We remain committed to delivering increased value to our shareholders, while providing exceptional reinsurance solutions for our clients. Thank you very much. I'll now turn it over to Noah.

Tyrone, can you please open the lines for Q&A?

[Operator Instructions] We have a question for Randy Binner of FBR.

So just wanted to kind of think about some of the loss ratios in the quarter and may be how to think about those going forward. And then so, I guess, we read from or, again, I've heard from the comments, and there was a lot of commentary that some of the business mix changes might be pushing the loss ratio higher, especially for Diversified Reinsurance, and so there was maybe 1 percentage point on the loss ratio there for weather this quarter, if I understand everything correctly, but that kind of implies it may have -- should we think about that as a high 60s loss ratio business because, previously, I think we're thinking more like mid-60s?

I mean, Our target in that business is essentially -- as we've stated before, across the portfolio, we're certainly aiming for 96. I think, we've been around 97 in that segment, and in looking at 2012, I think there's -- you have to recognize that there's about a 7/10 of a percent loss ratio impact from the second quarter weather-related losses in the U.S. And then I referenced this kind of relatively small loss that we saw in the fourth quarter unexpected from the international business. So I think it's reasonable to expect a lower loss ratio in the U.S. That certainly isn't our target level where we ultimately ended up.

So it's still 97 to 98 would be the goal for Diversified? Okay...

I think that's fair, yes.

And then on ACAC, the loss ratio is higher there, and I apologize if I missed it, but was there a specific issue that put that loss ratio a little bit higher than they have been running?

I think they did have some expansion in select markets that hasn't really performed at expectations. So they've essentially introduced very quick and aggressive plans to sort of strengthen pricing, change some of their underwriting selection. So we're pretty comfortable that they've got a handle on it, and that go forward should look better. But the other important point about the Quota Share is, as you know, we have a variable commission rate. So we look at the closed block experience as a 3-year contract. So we do get credit prospectively to the extent that results do improve. So while it's a out-of-the-ordinary quarter for us, we do anticipate it will settle down.

Okay, that's helpful. And then one on G&A if I could, I guess the comments on the 3.5% G&A ratio, if you will, relative to earned premiums, understood there. But I guess, as the business is bigger, 4% seems like -- it seems like you should be able to do better than that, as you have higher scale, thinking about how other models work. And so I mean, is 4% kind of a too conservative, like needlessly conservative or not needless, overly conservative there. Is it -- because it seems like there's a little bit of lack of scale on the G&A. Maybe I'm not understanding kind of the dynamic right, but we were -- I think we were expecting as the business scaled to see kind of a better run rate than that 4% level or 3.5% level on G&A. So any color there would be helpful.

Yes, actually, 3.5% represents an incremental improvement sort of year-over-year, I think, or over -- or since the formation of Maiden, and sure, we expect to see -- now, obviously, 3.5% puts us in a very small elite group of very efficient reinsurers, I think that, that's one of our competitive advantages, and it's critical for us. So now, if you're talking about the fourth quarter, there is, and we experienced this last year, as well. There is some seasonality to expenses. But the fourth quarter, in our view, isn't a run rate. I'd look more at the kind of the global view. Their operating expense relativities should be certainly at the 3.5% or better, as we move along through 2012, assuming, of course, that the portfolio stays current size or even grows. So I think that the fourth quarter is a bit of an anomaly, but it's kind of a repeat anomaly.

Our next question is from Ken Billingsley of BGB Securities.

Let me just go ahead and follow-up on the expense ratio question since Randy asked that. On the acquisition expense, I think you did explain a bit of the low number, and that was related to the fact that the loss ratio ran higher and you're able to make an adjustment there?

That's yes. That's partially correct, and then it also is impacted by the business mix itself. So there's really 2 things happening there. This business mix, certainly, has an impact than that, but then there is an adjustable feature on some of our contracts, which also impacts that ratio.

Would you say that should be more along the lines of maybe 26%, 27% then after adjusting for the performance?

It's really hard to say because it's going to change every quarter, depending on the earned premium, and that, obviously, is impacted by the business mix coming forward. It's a very difficult projection to make on a quarterly basis.

That's why we kind of say that the combined ratio is really the way we evaluate and manage the business because if we have a shift, for instance, to a more pro rata business, generally pro rata business has sort of a higher expense component to it. So that's -- but again, we would calibrate our pricing to ensure that the loss ratio associated with that higher expense ratio was lower than -- and it resulted in our operating target.

Very good. Another question I have is on the other income line. I believe that some revenues that are generated out of the diversified REIT portfolio, was there a shift? Did something happen that maybe pushed that a little bit lower or did that perform in line as expected at $1.3 million?

It performed in line with expectations. There is some seasonality effect on a quarterly basis in that number.

Yes, a lot of that relates to our German auto portfolio and a significant portion of that business is incepting in the first quarter of the year. So generally, we get a spike at the beginning, and then it starts to kind of move down a bit throughout the year.

And then -- sorry, I was writing here. On the investment yield itself, I mean, the calculating -- we, obviously, run our own calculation here, but it looks like it dropped pretty significantly from what we saw just in the prior quarter. Could you talk a little bit about the kind of strategy there, I mean, the expectation? It appears the interest rate -- I think some insurers are starting to expect that interest rates are going to remain low for a long period of time. So could you just kind of talk about your strategy there, and maybe if something in the quarter occurred that pushed that yield much lower than maybe we had anticipated? It seems like a pretty steep drop-off from just even the third quarter.

Sure. Some of that's impacted by our mortgage-backed securities portfolio. When we -- we purchased a fairly significant amount of mortgage-backed securities back in 2009, really, beginning of '09. Rates were fairly high there, and as those -- there's been acceleration in the pay downs on those goals. Some of that -- and that's been coming through in 2011 on a quarterly basis. They're fairly significant. That's driving down, and they have a fairly very nice yield at the time. Obviously, the pay downs are going to drop that yield. We have to reinvest that money at current rates, and that's certainly much lower. So that's probably the single biggest impact in the quarter, and that's been happening throughout really 2011.

And just to add to that, John, that we're actually sitting on a pretty large cash balance at the end of the year. We're up to roughly $308 million. So we've got to get to work and deploy that, and it's our constant focus, but we're not going to do that irrationally. We still believe that there's risk in the marketplace, and we want to make sure that we're building that portfolio with the right blend of high-quality securities. I think if we had an objective, it would be to sort of strengthen the universe of sort of high-quality corporates in there, offsetting a little bit of the government-backed, but it is a priority and we're certainly working to deploy that. It's sort of a challenge that we've been used to before. If you remember, after the acquisition of the GMAC RE business, we have about $1 billion of cash that we had to deploy so we're -- that's a high priority, and we certainly hope and expect that our run rate investment earnings will improve.

How much is less the -- mortgage-backed portfolio that you anticipate may continue to have an accelerated pay down through 2012?

It's pretty hard to project, but a significant amount did occur in 2011. We don't expect that number to continue to accelerate because rates are now somewhat stabilized at a lower rate obviously, but somewhat stabilized. So we really -- that's a difficult number to project for 2012.

I think the greatest sensitivity to that, Ken, is interest rates.

Yes.

Right, right. Well, I just -- obviously, I'm imagining that, that portfolio of those people that are in that portfolio still have higher rates to begin with. So I guess the question is did they all refinanced already or are they still looking to do so or attempting to do so in 2012?

Good question, I don't know the answer to that.

Last question, and I'll turn it over to someone else. When you talked about underwriting leverage and just your ability of having the capital to sustain the growth, and obviously, you're not expecting the same type of growth in 2012. But on a leverage basis, obviously, because of your business mix, you tend to run at a higher leverage ratio than some of your other reinsurance peers, but it seems a bit -- how high can you take that? It seems that it's moving up significantly above some of the others in the peer group, how high do you think you can get that before you'll need some capital support?

Yes, I wouldn't say that we necessarily see ourselves taking that leverage higher. I think, for 2012, we certainly anticipate capital growth and with a more moderate level of revenue growth. I mean, the challenge is, it's hard to time when everything comes on board. But our view is we're not going to see a repeat of the IIS business. That's already in the house, and we don't anticipate a significant growth level in that. We also have the Hospital Liability business related to AmTrust. That came in with an incoming portfolio. That's now in a stable track right now, and we feel pretty good about our position. And then, of course, ACAC is at a very stable level. We expect them to be pretty flat this year. So I think we can accommodate growth, but again, since we have 40% growth, I think we have to kind of rethink our position in terms of capital.

Our next question is from Matt Carletti of JMP Securities.

Ken covered a couple of mine, but I just have one left, and that's -- Art, I just want to go back and revisit your comments on the Jan 1 renewal season. And if I caught it right, essentially, my takeaway was new business was won at target pricing. The share of programs you got was less than what you wanted and cedents are retaining more, and that would result in a year-over-year revenue being down slightly. Can you just kind of walk us through what the biggest -- kind of in that down slightly, what the biggest piece is? Is it that the share of programs was a lot less than you wanted and was that because your -- may be your target pricing was a little higher than that of the market or is the cedents retaining more? Is that a significant change that's driving it?

I'd sort of do it in your reverse order. I'd say the first, and the most significant, is the several seasons that runs in retention, and that happens over time. There's a natural ebb and flow in terms of the client's capital needs. So many times, we've added, in the history of our relationship with clients, where they increased their retention, they reduced their retention. But that probably has the most significant effect on the year-end activity. In terms of the kind of size of transactions in the quarter, a bit smaller. I think that there were some large transactions in the market, but we just felt that the pricing wasn't supportable from our perspective. So maybe in past years, you might have seen a little more scale in transaction. We're pretty comfortable with our position on the smaller accounts, and I think there's a great opportunity for us to continue to build them. So it's kind of the reverse of the order you put forth, but I think you got most of the major items.

Your next question is from Ryan Byrnes of Macquarie.

I just had -- just quickly, I want to see if I could drill down in the loss ratio in the Diversified Reinsurance segment. I know you guys mentioned there was kind of $2 million in hail losses for the third quarter issues. Just wanted to see if there were any other noise there that brought the loss ratio.

No, actually not. I mean, we were pretty happy with the fourth quarter loss ratio, in general, sort of absent that movement. So I think we always get a little bit of fluctuation quarter-to-quarter, but we're pretty happy with the way the U.S. business is performing, and it's on balance. It's a pretty decent quarter absent this one anomaly.

Okay. And then quickly, just looking in 2012, I know you guys -- just wanted to see what your thoughts are with Solvency II issues and European growth potential for you guys for 2012?

I mean, I think one of our objectives in 2012 is really going to be to get ourselves sort of our name known and recognized, and I don't think we see an enormous amount of incremental growth in that. We see this as a long-term prospect, and we are somewhat unknown in that market. And so a big part of it is going to be getting ourselves in front of clients and getting them to understand the Maiden story. So I don't envision -- Solvency II as well, I think with all of the headwinds in Europe right now, there is some question about sort of whether the accelerated time frame for implementation will hold or whether there might be a transitional. I would suspect that when push comes to shove, there'll be a little more gradual transition. That said, I think it's still a good time to start to begin our business development process so that we're better known as some of the elements of Solvency II begins.

[Operator Instructions] Our next question is from Bob Farnham of KBW.

Just going back to the cash position, can you just remind us what's your kind of happy cash holdings are and what you try to work down to?

Sure, our target is $100 million or slightly below. That's where we would like to be on a going-forward basis...

Does that include the restricted cash?

Yes. That would be a combination of both.

Okay, all right. And did I hear correctly that, so far, maybe in first quarter, you've been looking more at high-quality corporate names to invest in? Is -- trying to figure out what you've been doing in the first quarter, thus far, with cash?

Yes, in the fourth quarter, we were looking at high-quality corporates, and I think we're going to continue that strategy, and obviously, we would like to push the duration out a little bit. It dropped significantly in the quarter over last year, but again, the challenge there is to get what we believe is a fair return for that duration, whatever the duration is on those bonds. So right now, we're focusing on high-quality corporate bonds, yes.

Okay. And maybe one last thing on ACAC, it sounds like they're trying to address the issues. Can we assume in the near-term the combined ratio is going to be higher if that stuff plays out?

I think it's too early to tell. I think, generally, there's some seasonality in the business anyway. So I'd say I wouldn't necessarily speculate how quickly those benefits will kick in, but I think there's a reasonable possibility that things will settle down over the next 2 quarters.

There are no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Thank you, all, for joining us today. If you have any follow-ups, please feel free to give us a call and have a great day. Bye bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.