Donegal Group Inc (DGICA) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2004 Donegal Group earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Ralph Spontak, Chief Financial Officer. Please proceed, sir.

Thank you very much. Good morning everybody. I would like to add my welcome to the Donegal Group Inc. earnings release conference call for the first quarter ended March 31st, 2004. Again, I am Ralph Spontak, Chief Financial Officer, and I will be starting the conference call off by reviewing some of the key financial components of the quarterly results. After I have concluded, Don Nikolaus, President and Chief Executive Officer of the Donegal Companies, will as usual then discuss some of the current trends we are experiencing.

Just as a reminder, all statements contained in this conference call that are not historic facts are based on current expectations. Such statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results could vary materially. Among the factors that could cost actual results to vary materially include the ability of the Company to maintain profitable operations, the adequacy of the Company's reserve for losses and loss adjustment expenses, business and economic conditions in the Company's primary operating areas, competition from various insurance and noninsurance businesses, terrorism, legal and judicial developments, changes in regulatory requirements and other risks that are described from time to time in the periodic reports that the Company files with the Securities and Exchange Commission. Undue alliance should not be placed on such forward-looking statements.

The first-quarter results for 2004 reflect for the first time the acquisitions of Le Mars Insurance Company, the Peninsula Insurance Company and Peninsula Indemnity Company, which were effective January 1st, 2004. Net income for the first quarter of 2004 was $11,732,306 or 87 cents per common share on a diluted basis, which included an extraordinary gain of $5,445,670 or 40 cents per share on a diluted basis related to one of the acquisitions that we completed earlier this year. Net income before that extraordinary gain was still $6,286,636 or 47 cents per share on a diluted basis compared to $3,844,432 or 41 cents per share on a diluted basis for the first quarter of 2003. The extraordinary gain of $5,045,670 resulted from the GAAP purchase accounting for unallocated goodwill resulting from the Le Mars acquisition.

The Company's recent fine underwriting results continued during the first quarter of 2004 with the Company posting an excellent GAAP combined ratio of 92.7 percent for the first quarter of 2004 compared to 97.2 percent for the first quarter of 2003. Both personal lines and commercial lines both posted combined ratios well under 100 percent in the quarter and personal lines posting a substantial improvement in its combined ratio.

The Company's total revenues in the first quarter of 2004 increased 30.3 percent over the same period in 2003 to $68,001,661. The Company's GAAP expense ratio in the first quarter of 2004 was 27.7 percent compared to 30.2 percent in the first quarter of 2003.

Although we are still very early in 2004 and it is probably too early in the year to accurately project loss development, the early trends do seem to indicate that loss reserve developments will be similar to those that we saw in 2003, which would be a development that would result in some small redundancies for the year. But again, very early in the year to be making those decisions, but the early trends are favorable.

The Company's effective tax rate in the first quarter of this year was 29.7 percent, up from a year earlier due primarily to the higher levels of underwriting profitability that we saw in the first quarter of 2004. The Company's excellent operating results also help boost the Company's book value per share, increasing 5.6 percent during the first quarter ending up the quarter at $17.20 per common share at March 31st, 2004.

The Company's Board of Directors increased the Company's cash dividend last week to 12 cents per share for Class A common stock and 10.5 cents per share common share for the Class B common stock, and that dividend will be payable May the 15th to shareholders of record as of May the 1st.

At this point, I would like to turn the call over to Don Nikolaus, President and Chief Executive Officer of the Donegal Companies. Don?

Thank you, Ralph. Good morning to everyone and welcome to our earnings release conference call.

As you can see, the first quarter was a successful quarter for us both from the standpoint of looking at the net income both with the extraordinary gain, as well as the net income excluding the extraordinary gain. The combined ratio of 92.7 that Ralph has referred to certainly represents an accomplishment which we believe bears out the disciplined underwriting approach and premium adequacy approach that we have been very much emphasizing in our companies over the last two to three years.

I would like to spend just a little bit of time talking about the inclusion of the acquisitions that we did. We think of them as two acquisitions, although there are actually three insurance companies involved. But starting first with the Le Mars acquisition. We certainly are pleased with the process that has taken place there. They have enjoyed a very good first quarter both in premium growth and in their underwriting profitability, which has certainly contributed as was anticipated to the overall results of Donegal Group. We are in the process of furthering the integration of Le Mars into the overall operation, although they will clearly remain as a separate domicile company in Iowa. There are certain backoffice functions that we are continuing to bring here on a centralized basis. But all of the core components of an insurance company will remain at that location, and we would expect to expand their operation as premium growth proceeds. We are also in the process of bringing them some additional technologies such as imaging in which they will cooperate and work with us in that regard.

The Peninsula transaction likewise has in the first quarter been successful. They also enjoyed a very good first quarter both in growth and in profitability. And as you know, when you do acquisitions, even the best planned ones, you are always pleased to see that the results turn out as it would have been projected.

From the overall standpoint of growth opportunities in our core companies as well as the acquisition, we are seeing that the companies continue to have considerable opportunities to grow in the various states in which we do business. We are aggressively looking to appoint quality agency appointments as we have spoken about previously. We are pushing for both personal lines and commercial growth in our core states. We are in the process of doing some 23 agency meetings in some 12 to 13 states, and what we mean by the is that we go to various city locations where we have invited any where from 50 to 100 agency personnel. They are primarily marketing and underwriting meetings. We have completed about 15 of those, and from that, we can generally get a sense of what is happening in the marketplace, how we are stacking up as compared to competition, and the general overall relationship that we have at that particular point with that particular group of agencies. They have been excellent meetings, very well attended, and we are certainly encouraged by that process in that it is very helpful to get the marketing effort for the year 2004 off to a strong start.

Ralph has indicated that the Board of Directors last week approved an increase in the dividend, which we are certainly pleased to do because we thoroughly understand that the investment community is interested in knowing what the returns will be to the shareholders, and we are certainly very pleased about that. The first quarter certainly has turned out to meet our expectations and to exceed them, and we continue to work to grow and advance the company.

One of the questions that certainly will come up and we will certainly be prepared to answer it in somewhat more detail, we, of course, continue to look for additional acquisition opportunities, and although we may be very early in that process for this year, we are certainly having the usual process of having various conversations through various sources to identify potential candidates.

So at this point, we would be pleased to open up the conference call to questions.

(OPERATOR INSTRUCTIONS). David Lewis, SunTrust Robinson-Humphrey.

Thank you and good morning. A few questions. First, I guess I was a little surprised that investment income was not a little stronger. Were there any timing issues there? Because clearly if we look at what you did in 2003 and then try to add-on the investment income from the acquisitions plus the income from the proceeds, I would have come up with something almost $1 million higher. Can you give us any direction on what you might anticipate on at least a quarterly or annual basis for investment income?

There are a couple of factors that impacted investment income. The most obvious of which is through the end of the first quarter, the level of interest rates that we were able to put new money into certainly was much lower than what we would have hoped for. Our returns are very hard to come there.

In anticipation of maybe a better environment with interest rates, we have attempted to keep a fairly high level of liquidity, and as you can see, our short-term investments at the end of March were around $55 million. So unfortunately that money, although it is not earning very much today being in short-term, we do have the ability, if interest rates continue to creep up here a little bit, maybe to get some of that invested in to help our returns. So I think that certainly impacted our return in the first quarter, keeping that high level of liquidity.

Also, related to the acquisitions, we are still in the process of reinvesting some of that money. Some of the money was not invested in a manner that we would have invested our money in the past. So we are still, and will be early in the second quarter, kind of getting that money readjusted. Again, the low-interest rates environment that we had in the first quarter made it a little more difficult to move that money that we might normally have seen. But we hope to have the investment portfolios of the two acquisitions certainly by the end of the second quarter reflect more in line of returns with what you would have seen from Donegal going back a number of quarters.

Dave, to add a little bit to that, certainly we did maintain a fair amount of liquidity, and with the fact that interest rates certainly in the last two or three weeks have certainly escalated, we would look to begin to put more of that liquidity money to work at hopefully what will be better rates of return than if we had rushed to do that in the very low-interest rate environment of about a month, a month and half ago.

Let's back up a little bit. I guess from the acquisition standpoint, were there investments that you did not appreciate the quality so you sold those investments, went to short-term securities, or is it just you are sitting in those investments and you looking for an opportunity to shift to something similar with higher quality?

I think there is a combination of both of those. Also, the portfolios of both the companies that we acquired were 100 percent taxable portfolios; whereas, our own would be somewhat less because of our fully taxable nature compared to theirs.

I think there were a couple of minor quality issues, and I think probably that the single biggest factor was simply the environment we were in. We did not see alternative investments would the kind of yields that would have -- I do not want to use the word forced -- but would have encouraged us maybe to get rid of some of the investments that came over and invested in something more like we would have had. So I think it is a combination of all those, Dave.

What is your current portfolio yield and new money rates that you would look to invest in?

Well, the portfolio yield for the first quarter was actually on an annualized basis, was 3.3 percent.

Is that gross or net?

That is net. And as far as what we are looking to get, obviously we are looking for returns better than that. Our average duration is fairly short and has become even shorter, keeping that much money in short-term investment. But certainly as Don indicated, we hope with interest rates having come up here a little bit and may be go a little bit further, that we will be in good position going forward to help that investment income line.

As an example, Dave, with shifting some of the invested assets and those acquired entities from some taxables to tax-exempts last week, we were making some purchases of tax-exempts without going to far out on the year curve where we were getting 4 percent, 4.5 percent, on a tax-exempt basis. Certainly taxables have moved up. We think it going to be a more favorable environment in which to be investing that money, and we think that the end of the day we were probably prudent in not rushing to invest a lot of our liquidity at the kind of rates of interest that were available in quality investment grade fixed-income securities in the months of February and March. So we would anticipate that things should look better from the investment income standpoint going forward.

As you know, we have always, both on the insurance side and the investment side, tried to manage our operations not necessarily for the next month or two months or three months, but based upon what is in the best interest of the Company over a longer time horizon.

Okay. Not to dwell on it too much, but what is the average duration? Is it roughly three to four years, somewhere in that range?

Well, I think it is closer to three years at this point.

Okay. So we will get some improvement. I think this would progress through the second quarter. By the end of the second quarter, you would probably be more on keel with where you need to be. Assuming that is the case and ten-year treasuries are holding around 340, what kind of quarterly investment income should we anticipate?

With regard to the ten-year treasuries, I think they are 430.

I am sorry. 430.

To be honest, Dave, we have not sat down and done a projection of investment income yet. I don't feel comfortable throwing out a number here without going through that.

I have other questions, but I will come back. Thanks.

Isaac Schwartz, Rimbaldi & Company (ph).

Good morning. I had a couple of questions for you. For one thing, your Southern lines. Could you talk a little bit about what the average on your small business commercial policy is? Could you talk a little bit about what the average premiums are for these and what the limits are and just how that business works and what niche you target in it?

This is Don Nikolaus. I will be happy to address that. Basically the profile of our commercial business, whether it is through the Southern Insurance Company or whether it is Donegal or whether it is the ponderous of it being $1000 to $25,000 to $30,000. So an average commercial account, not policy, average commercial account might range somewhere in the $5,000 to $7,000. And we are an account writer. We are not particularly interested in writing mono-line polices. The commercial business is bought business -- business owner polices, commerical auto, workers' comp, commerical fire, commerical package policy, and we are generally a writer of mercantile Atlantic States, it generally has the same profile. We consider ourselves to be a writer of mercantile, service establishments, certain percentage of small artists and contractors, some wholesalers, very little light industrial, and it is somewhat of a vanilla book of business. We do not write complicated risks. We don't write any pollution of any size. We do not write municipal risks. We are not into directors and officers' liability. So it is that type of a commercial book of business.

Okay. Another question I have for you is, you had a substantial improvement -- it looks like it was about 250 basis points year-over-year on your expense ratio -- despite all of the acquisitions and the various capital raising. I guess I was wondering if you could talk about that -- where does that other potential go and maybe why was it such a bump, such a big favorable bump this year?

We did benefit somewhat from some what I would describe as somewhat peculiar purchase accounting in that going through that process you need to net off deferred acquisition costs of the acquisition companies off your unearned premium. What that has tended to do is temporarily drive down the expense ratio. We will continue to have expense ratios lower than historic for the rest of this year, but not quite as dramatic as we would have seen in the first quarter as a bulk of the reversal of that effect came about in the first quarter of this year.

However, having said that, even with the acquisitions and all the work done in connection with incorporating them in the first quarter, on an apples-to-apples basis excluding the two acquisitions, we would have seen a decrease in the expense ratio from 30.2 percent a year ago to 29.9 percent on a GAAP basis for the first quarter of 2004. Again, that is excluding the Le Mars and Peninsula effects. So we believe we can continue to ratchet the GAAP expense ratio down, shaving off tenths here and there as we go forward.

One important factor, too, the effect that I described of the deferred acquisition had no bottom-line effect in that there is an exact offset to the earned premiums. So although that did affect the GAAP -- (multiple speakers).

It just changes the construction of your balance sheet; is that what you're saying?

It just changes the expense ratio, not the bottom-line.

My other question was about the combined ratios for the pool, which have been quite a bit higher, of course, than for the Company, I mean when you include the mutual. Is there some risk to that if that turns around in then Donegal Group begins to have worse results? Also, maybe if you could talk about the reason why the results have been different even though it is written as a single pool?

Well, I am a little confused by the question. The results of the pool -- when you say the results of the pool, I assume you mean the results for the mutual as compared to the results for the public company?

Yes.

Actually the results are exactly identical for the pool business. Both the loss and adjusting component, as well as the expense component of the pooled results, get shared exactly equally between the mutual and the public company. Certainly the public company's other subsidiaries had results in 2003 that were better than the pooled results of Donegal Mutual and Atlantic States as measured by a combined ratio. But the pooling itself, the results are exactly identical.

Then perhaps my confusion lies in the reinsurance arrangement that is set up from the pool. Does that somehow create a different level of profitability?

There can be, yes. In addition to the pool, there are various intercompany reinsurance contracts. A good example of that would be an intercompany catastrophe contract that is in place between the mutual and each of the subsidiaries. The reason for that is many of these subsidiaries that we own certainly have lower levels of surplus and cannot afford to absorb the entire retention from a catastrophe that we have with outside reinsurers. As a result of that, they can buy down that retention with the mutual.

In a year such as 2003 where there is a major catastrophic event like the hurricane that we had during 2003, the Mutual will end up absorbing a higher level of those costs related to that catastrophe than the subsidiaries will because of those intercompany contracts. In a period like the first quarter of this year, the exact opposite is true. The subsidiaries have paid the Mutual a premium, and of course, because of relatively calm weather results, there are no catastrophic events. So the mutual has actually benefited from that arrangement in the first quarter of this year.

I see. Thank you.

Beth Malone, Advest.

Good morning and congratulations on the quarter. I have a number of questions. I am going to try and group them together. First, could you give us some sense of what is going on with pricing on both the personal and small commercial in your particular markets, what you have seen in this last quarter?

Let me take a shot at that. This is Don Nikolaus. Needless to say, it varies in geographic areas, and it varies, of course, by productline. We have continued to take both rate and premium increases on the commercial side. As an example on worker's comp, we have made filings for increased loss cost modifiers in most of the states in which we write that line of business, and we are talking changes of anywhere, depending upon the state, anywhere between 5 and 9 percent.

We have recently and are still in the process of filing rate increases for our of business owner policies in most states in which we do business with that product, and those ranges would be anywhere between 4 and 7 percent. In homeowners, we continue to be aggressive on premium increases, and throughout this year, we will be making filings on homeowner changes as far as rates, not in every state, but in most states.

In private passenger automobile, I would not say that rates have in anyway declined, but they are not raising or rising to the same extent that they would have in the prior years and I think that is an industry experience. However, we see it at least maintaining its rate structure.

Our general sense is that the rate environment remains relatively firm, and certainly that might be different from state to state. Some states you can be much more aggressive in terms of getting rates. Others you have to be more moderate. So we are still encouraged by the climate out there. Although the industry did well on a combined ratio basis in 2003, clearly the industry as a whole has not had the kind of return on equities that are necessary and the only way to achieve in a lower interest rate environment is to have combined ratios below 100 percent. So we are cautiously optimistic about how that bodes for the balance of 2004 into 2005.

Okay. And do you see -- have you seen -- your year-end premium grew substantially in the first quarter, and I guess some of that is due to price increases. But also, do you see yourselves as gaining market share, and from whom do you think like generically are you getting marketshare?

I think we are gaining market share in most states in which we are doing business. I think it is primarily coming from large stock companies. As you know, Amvest (ph) generally segments the premium base between direct writers, large agency company and regional agency company, and it would be our experience that we have generally gained marketshare from the large stock companies, the large agency companies, and to a degree, although certainly to a lesser degree, from some of the direct writers who over the last couple of years have somewhat been less competitive than they historically were. So we would see it coming from those segments of the market.

Okay. As pricing has improved in the marketplace, as I have talked to some carriers, they are now concerned that there will be less stringent underwriting of place in the market. Like companies now they feel that after several years of rate increases, they have adequate rates, and they will accept any business that comes in from an underwriting prospective. Have you seen any indications that is the case in the market, and how do you respond to that as a carrier?

I do not know that we have seen a lot of that. Although as you probably realize, even in the hard market, there were carriers that were doing things on the premium side that it was difficult to understand why they were as competitive as they were. So there is always someone who is being a hero.

But we are not seeing it to any extensive degree. We see it here and there. But our position has been that we are going to stay the course with rate adequacy, and we are -- by tradition, we are an underwriting-focused company, and we do not think that you need to do crazy things in order to grow your marketshare. And it has been our experience that if you are consistent both in your appetite for the market, if you develop strong relationships with your distribution system, that you can maintain pricing discipline and underwriting discipline, and that certainly would be our intention.

Just one more question if you don't mind. The combined ratio in the first quarter was very good and certainly lower than it was a year ago. How much is that because of better-than-expected weather? Is there a way to quantify that?

It is always difficult to quantify when you say there was an absence of severe weather, and that is really what we are saying. The weather in most of the operating area that we do business in was what we would call normal winter weather.

In other words, we had a fairly large number of snowfalls, but the snowfalls with one exception were not very huge, although there were a number of them. Winter temperatures, although we had a somewhat cold winter, it was not abnormally cold.

So it is very difficult to say how much higher would it have been if you had had some of those winter events. But certainly we feel that absent some extraordinary winter windstorm or winter ice event, this is the result that we would have expected.

Let me add something to that. Yes, it was not some extraordinary unusual weather event, but if you go back over the last 18 months and the dialogue that has taken place in these various quarterly calls, we have talked about pricing discipline. We have talked about underwriting discipline. We have talked about in the hard market taking the opportunity not only to increase premiums but also to continue to refine the book of business. And I would like to think that certainly a part of the successful results in combined ratio in '03 and now coming into '04 is a direct reflection on the quality of the book of business both from the standpoint of its underwriting integrity and its pricing adequacy.

Okay. Now one more question on the negative goodwill. Are we to take away from this that the acquisition of Le Mars was actually a lot more advantageous or you get a better price on it than originally anticipated when you did it? Are we supposed to take the over $5 million and deduct that from the purchase price of Le Mars? Does it indicate that you were able to purchase Le Mars below what may be even statutory capital? And if that is the case, are there other Le Mars out there for you to acquire? Can we anticipate that there is a market out there that is willing to sell at these kinds of valuations?

There were a lot of questions in that question. I will try to address them one at a time. Certainly the Le Mars acquisition involving the demutualization involved a lot of different components.

To answer one of those questions, you asked if it was purchased for less than statutory book value? At the time the devaluation was completed, the valuation was actually for more than the statutory book value. We do believe it was a good acquisition for us. There were a number of components of that number that resulted in the negative goodwill. Among those components were the operating results in the last five months of the year. Certainly marking to market various assets and to their fair value various loss reserves. Recognition of deferred taxes.

So there is a lot of components that went into that final negative goodwill number that ended up being recognized as an extraordinary gain for us this year, any one of which could have gone the other direction. Certainly the valuation of Le Mars that was done in connection with the insurance department based upon the July 31st numbers, they did have good operating results. They could just as easily had very adverse operating results during the same period of time. But there are a lot of components that add up to that number.

A little bit of a follow-up on that. Needless to say, GAAP accounting we, of course, have to follow what the rules are of GAAP accounting. And as an example of deferred taxes, although it is for GAAP purposes is recognized as part of this negative goodwill extraordinary gain, from the standpoint of actual federal income tax returns, we will get that benefit over as much as a twenty-year period. So we are not talking about some significant current windfall in terms of funds or etc. that are available to us currently as a result of that.

Also, when you do these acquisitions of a demutualized company, we followed all of the procedures and all of the requirements, and the price was basically set as the result of valuations that were done last July and August. And from the period from that point to the end of the year, it so happens that one of the components of this negative goodwill is that that period turned out to be a good period for that company. But it could have been the total opposite. It could have been a disastrous weather period that we were assuming the risk for, and therefore, the result could have been totally different.

So I do not know that you should draw any definite conclusions about what can be done going forward with another unnamed acquisition, other than to say that we have always taken the position that demutualization of other companies was one of the acquisition targets or aspects of our growing policy. But we would not want you to draw any too significant of conclusions as to whether this is transferable into another acquisition.

I guess to clarify that, but you still see out there opportunities to acquire other companies and books of business that would be advantageous to your market?

Absolutely. We are just simply saying that we do not necessarily say that there will be any negative goodwill components affiliated or associated with other acquisitions. There might, there might not be. But that is not why we do the acquisition. We did not really have a sense at the time that there would be any negative goodwill when we agreed to acquire those companies at that price.

Going forward, we think there are definite opportunities to do demutualizations. It is very much on our radar screen. We are simply saying we cannot represent anybody, nor are we necessarily looking to do them because there might be some negative goodwill.

Okay. That is fine. I understand now. Thank you very much.

Michael Tasen (ph), Legg Mason.

Good morning. I was trying to get my hands around the components of your underwriting income just a little bit better. You stated that expense ratio, a portion of the combined ratio was a little understated for particular reasons. So I guess what I am trying to get my hands on is the 64.5 percent loss ratio number that you put up.

If you look at the past three quarters, they were in some cases significantly below that if you the major hurricane in the third quarter. So it seems to me that the 64.5 percent was quite high, and if you had more of a normalized expense ratio, then the combined ratio would have been somewhere north of where it was now. So I guess I am a little surprised that the loss ratio component of that was as high as it was, and I was wondering if that is the sequence of events throughout the year that the first quarter tends to be a little higher than the rest of the quarters?

Mike, I believe that the effect on the expense ratio that I tried to explain earlier in the conference call does have some corresponding offsets, and one of it is that the loss ratio does tend to be slightly higher because of the same peculiarities in the accounting for the purchase. A more normalized loss ratio for the quarter would have been somewhere around 63 percent give or take a little bit. So that number tends to be artificially high by a small percentage just as the expense ratio tended to be artificially low.

That is great. One quick other question. If we assume going forward that that the underwriting profitability is roughly where it is the first quarter, is the tax rate going to continue to be as high as it is, 29.7? Is that just a function of the increased underwriting income, or is there something embedded in there that might cause the tax rate to come down a little bit throughout the subsequent quarters?

Well, it is very difficult for that with the high levels of underwriting profitability we are having to get that number down much lower. However, as we described earlier, both investment portfolios for Le Mars and the Peninsula Companies were fully taxable. We would look to try to find some comparable yields in non-taxables that would help lower that effective tax rate a little bit.

Don McKenna (ph), CV McKenna & Company (ph).

Guys, I was not able to catch the second conference call last time around, but I had some concerns with the new shares being issued and the new companies coming on board that we were not going to be able to maintain the earnings per share level that we had before. But obviously you have done that. But can you give me an idea that if you had treated old business as one division and the new businesses that came on as the second one, if they had the same kind of profitability? Or to put it another way, if the new businesses is coming on did not, how much of a difference would it be if we were looking at the old Donegal by itself? And in turn, how much of an improvement might we see from these new businesses that you are bringing on?

Well again, there are a number of components there, Don. What I would say is this, that the profitability levels of the two new acquisitions, the three companies, was generally about what we would have expected and were generally in line with what the Donegal underwriting results would have been as well. Certainly you try to break out the pieces or components of net income because there are so many things going on with the stock offering, new money coming in, money being invested, and acquisitions coming on, the new number of shares outstanding -- all of those tend to impact it.

I think the most important thing to take away from this conference call is that the two new acquisitions are profitable, and from an underwriting prospective, they are more or less profitable on the same tier that the Donegal Companies are.

Is that before you have experienced all your cost savings that you might anticipate?

I would say we would continue to hope that we would be able to whittle away at our expense ratio and get a little more savings out of the synergies of combining the companies. That will always be a goal of ours to continue to whittle away at that expense ratio. We have done a great job I think of that over the last four or five years, but we are not done and we will continue to look at that.

In any acquisition, either these that we have completed or others that we may be looking at, we are always looking at ways of leveraging our current fixed expenses into benefit from the synergies of bringing a new company on board.

Thank you.

David Lewis, SunTrust Robinson-Humphrey.

A couple follow-ups. Can you talk a little bit about the excess capital at the holding company? I think you had about 12 million at the end of the year. Is that pretty close still?

That is almost exactly where it is. It is right around 12 million, and obviously we have our line of credit that is untapped at this point available if we need to in connection with any acquisitions.

Refresh me what that amount was.

It is 30 million.

Can you tell us whether you have seen any changes in frequency of claim trends over the past year? Some of the industry are saying they are continuing to see improvements on the frequency side.

I would say generally we would agree with that. On the frequency side, our claim counts are down somewhat, particularly in a line like automobile. So the frequency does seem to be coming down slightly. 2003 was a difficult year to look at frequencies because we did have the hurricane in there, but pulling that number out, we would have seen a decrease.

And refresh my memory going back to the first quarter of 2003. You said a more normalized loss ratio in the first quarter here of '04 would have been closer to 63 percent if we did not have the unusual purchase accounting issues.

Right.

Wasn't the year ago a fairly normal weather pattern too or no?

We tended to have some, I will describe them as somewhat worse winter storms as some higher winds related to that, and as a result of that, our loss ratio was quite obviously a little higher for the first quarter of last year. We did have some weather effect over and above what we would describe as normal in the first quarter of '03.

Okay. Do you know what the pre-FAS 115 book value is, or what the adjustment is?

I can sure get that for you real quick.

I think, Don, you indicated that both the personal combined ratio, as well as commercial combined ratios, improved. Do you all care to share those figures?

I think that Ralph had given those, but as an example in personal lines, automobile personal lines, automobile came in at 95. This is on a statutory basis. Homeowners came in at -- (multiple speakers)

Can you give us the year ago if you have it there?

I think the year ago was 102, and homeowners in the first quarter of this year is 90.7. A year ago, it would have I believe been about 105.8. Other personal lines which were miscellaneous lines, a combined ratio of 75, we cannot say that we are always going to have a 75, but that is what it was. A year ago, it was 103.1. So we are looking at comparing 103 of a year ago to a little under 93 percent this year.

The pre-FAS 115 book value number was $16.73. So the FAS 115 effect is 47 cents.

Okay. That is helpful. I cannot remember who went into this, but I know you have had 15 of the 23 agency meetings, and they are giving you feedback, etc.. I guess I would be interested in a little more feedback of what they are telling you? Are you priced in line with the other competitors -- a little more aggressive, a little less aggressive? Are they anticipating they can shift a little more business your way? What is that feedback you are hearing in general?

I would be happy to share that. Having done these for quite a few years, we always anticipate that we are going to be told where things stand. We were pleasantly surprised that we apparently look quite good in the marketplace, not necessarily from the standpoint that we have always in any way have the lowest price, but the combination of product and price and process which agents are looking at ease of doing business and the technology that you are presenting, one of the significant portions of the presentation we, of course, always do a presentation of this -- was the demo a significant portion of our Website and our latest technology that we have been rolling out.

So as a combination of feedback, we have been told that we look quite good from the standpoint of product and price, although not necessarily always the lowest, and on the process side that we have been told that relative to even a lot of the very large companies that our technology is looking quite good. So we came away very encouraged that agencies that are licensed with us have a very positive outlook for doing business with us in '04, and we are interpreting that to mean that we will get an increased share of their business.

That is helpful. Final question. If I recall and I don't know if you have actually put formal EPS guidance out for '04, but the general range was $1.95 to $2.00. Can you share whether you still have a reasonable comfort with that level on an operating EPS basis before realizing invested gains or losses or any other extraordinary items and, again, assuming fairly normal weather patterns?

Well, as you know, we do not give guidance. But we have in the past responded if we thought that a particular kind of view was somewhat off the reservation, and I think that we are probably reasonably comfortable with what you have just said.

Great. That is helpful. Thank you and have a wonderful afternoon.

There are no more questions at this time.

Okay. I would just like to thank everybody for joining us today. I appreciate all of the good questions and look forward to talking to you next quarter. Thank you all very much.

Ladies and gentlemen, thank you for your participation. This concludes the presentation. You may now disconnect. Good day.