Employers Holdings Inc (EIG) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Employers Holdings, Inc. Earnings Conference call. My name is Eric and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

As a reminder, the conference is being recorded for replay purposes. I would now like to turn our presentation over to Vicki Erickson, Vice President of Investor Relations. Please proceed.

Thank you, Eric, and welcome, everyone, to the first quarter 2007 conference call for Employers Holdings, Inc. We appreciate your participation. After the close of market yesterday, we announced our first quarter 2007 earnings results and filed our Form 10-Q with the Securities and Exchange Commission. These materials are available on the company's website at www.employers.com.

Today, Ric Yocke, our Chief Financial Officer, will provide an overview of our first quarter financial results. He will be followed by Douglas Dirks, our Chief Executive Officer, who will give a general company update. Then, Ric, Doug, and Marty Welch, the President and Chief Operating Officer of our insurance subsidiaries, will be happy to answer your questions.

Before we begin, I would also like to remind everyone that during today's call, we will make certain forward-looking statements that are intended to qualify under the Safe Harbor provisions for such statements established as part of the Private Securities Litigation Reform Act of 1995. All statements during the conference call, other than statements of historical fact, are considered forward looking.

Though we do believe that the expectations expressed in our forward-looking statements are reasonable, we cannot assure you that they will be correct. Risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission.

In measuring our financial performance, it is important to note that Employers uses a non-GAAP metric that excludes the impact of the 1999 loss portfolio transfer, or LPT. We believe these measures, as defined in our SEC filings, are helpful to us in identifying trends in our performance because the items excluded have limited significance in our current and ongoing operations. As many of you on the call know, the LPT was a non-recurring transaction that resulted in a gain which, on a GAAP basis, is being amortized into earnings as claims are paid.

Now, our CFO, Ric Yocke, will walk you through our financial results.

Thank you, Vicki. And thank you to everyone for taking the time to join us today. In the first quarter of this year, GAAP net income increased 53.9% to $27.9 million, from $18.1 million in the first quarter of 2006. Net income before the impact of LPT increased 74.2% to $23.3 million compared with $13.4 million for the same period in 2006. The increase in net income was primarily due to decreased losses and LAE, largely in California.

Favorable prior year pre-tax reserve development was $15.6 million in the first quarter of this year, compared to $6.3 million in the first quarter of 2006. During the first quarter of 2007, on a written premium basis, gross premiums declined relative to the same period last year but increased 5.5% compared with the fourth quarter of 2006.

On an earned premium basis, net premiums declined 13.1% to $89.8 million, compared with $103.3 million in the first quarter of last year. It's important to note that the declining rate environment in California, the first quarter net premiums earned declined only $3.1 million, or 3.3%, compared to the fourth quarter of 2006. Consistent policy growth continues to partially offset, but not completely overcome, the decline in premium.

Our overall in force policy count increased 10.7% compared with the first quarter of 2006. Our California in force policy count increased 15.7% over the first quarter in 2006, and counts in states other than Nevada and California increased 26.8% in the first quarter. In Nevada, there was a 7.4% decline in policies in force as a result of competitive pressures and our adherence to our continuing underwriting guidelines designed to minimize risk.

Net investment income of $20.8 million increased $5.1 million, or 32.7%, in the first quarter of 2007, compared with $15.7 million in the first quarter of 2006. Approximately $3 million of the increase was due to an increase in the tax equivalent investment yield to 5.3%. Additionally, short-term investment of the net proceeds from the sale of company stock as a part of our conversion from a mutual holding company generated $1.8 million in interest income in the first quarter.

Losses and LAE of $41.7 million in the first quarter of 2007 decreased $24.5 million, or 37%, compared to the first quarter of 2006. The decrease was due to a 5.9 percentage point adjustment in our current accident year loss estimate, to 68.9% in the first quarter of 2007. That's from 74.8% in the same period in 2006. The reduction in the loss and LAE ratio was primarily the result of decline in loss costs in California.

Additionally, there was a $9.3 million increase in favorable prior year reserve development in the first quarter of 2007, compared to the first quarter of 2006. Before the impact of the LPT, losses and LAE would have been $46.3 million in the first quarter of 2007, and $70.9 million in the first quarter of 2006.

Commission expense of $11.7 million in the first quarter of 2007, decreased approximately $600,000, or 5%, due to the decrease in net earned premium which was partially offset by mid-year 2006 increases in commission rates.

Underwriting and other operating expenses of $23.3 million, increased $4 million, or 20.9%, in the first quarter of 2007. This compared to $19.3 million in the first quarter of 2006. This increase included $1.3 million in costs for additional employees, which we hired to support increases in policy count and new public reporting requirements, $1.7 million in technology maintenance and depreciation, approximately $400,000 in consulting expense, and approximately $900,000 in costs related to the conversion. Our effective tax rate was 21% compared to 18.2% for the first quarter in 2006.

In summary, in the first quarter, we saw our overall GAAP combined ratio improve 9.3 percentage points, to 85.4% from 94.7% in the first quarter of 2006. Before the impact of the LPT, our combined ratio was 90.5% in the first quarter of 2007, and 99.3% in the same period last year. Compared to year-end 2006, shareholders' equity increased 15.9% to $352 million, and equity including the LPT deferred gain increased 5.8% to $790.4 million.

With that, I'll turn the call over to Doug Dirks, our Chief Executive Officer.

Thanks, Ric. Overall, we had a solid first quarter. Our gross written premium increased relative to the fourth quarter of last year. Compared to the first quarter of 2006, our combined ratio improved. Our policy count increased as did net investment income and net income.

California continues to be a profitable market for us and remains a significant part of our overall strategy. As you may know, the California Ratings Bureau recently recommended a reduction in advisory pure premium rates of 11.3%. Earlier this month, the California Department of Insurance held a public hearing on the rate filing, although no order from Commissioner Poizner has been issued.

It is important to note that the WCIRB has recommended changes to rate levels, or the expected amount required to cover losses and loss adjustment expenses across the entire market, arise from their analyses of the adequacy of currently improved rates. Ultimate premium levels are necessarily based on a number of additional elements, including such things as scheduled credits, experience modification factors, profit expectations, and competitive conditions in the market. At this time, we do not intend to file a change in our pure premium rates in California. However, we will continue to monitor and analyze the California market to ensure our rate filings remain appropriate and competitive.

Turning to our capital plans, last week our Board of Directors declared a dividend of $0.06 per share of common stock. This dividend, totaling approximately $3.2 million, will be paid in June to shareholders of record on May 24. This represents a per common share yield of 1.2% and is the first dividend declaration since the completion of our initial public offering.

Our Board also approved a share repurchase program of up to $75 million of our common stock during the remainder of 2007. Any repurchases in the open market or in private transactions will be subject to applicable laws, market conditions, and other factors.

Additionally, the qui tam action pending against our Nevada insurance subsidiary was dismissed with prejudice by the Second Judicial Court of the State of Nevada in early April. The order was effective immediately and is not subject to appeal. We did not make any settlement payments in connection with entry of this order.

In closing, our strategy in the state markets we serve has not changed. We will continue to pursue underwriting profitability, manage our expenses, and focus on specific markets within our targeted classes of business that we believe will provide greater opportunity for profitable returns.

Thank you for joining us for our first quarter investor call, covering our financial and operating results. That concludes our formal comments. Now, Ric, Marty, and I will be happy to take your questions.

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First question comes from the line of William Wilt with Morgan Stanley. Please proceed.

Hi. Good afternoon. I wonder if you could speak to the, I guess in light of the comments about pursuing an underwriting profitability, the (inaudible) in your combined ratio is up, I believe it was 108 this quarter, from memory, about 111 or 112 last quarter. I wonder if you could speak to that (inaudible) the pursuit of underwriting profitability and what it might look like going forward.

Bill, this is Ric Yocke. Thanks for that question. We have stated that it is our goal to write to 100% combined or less. In looking at the first quarter, there are really three distinct items that relate to the 107 that you've referred to.

The first is towards the very end of first quarter, we had a shock loss. Our process in reserving is that we provide separately and additionally for those shock losses. In this case, we had an injured worker who is a quadriplegic. We estimate that that may run us in excess of $3.5 million eventually. So that impacted our first quarter. That added 4 points. The conversion cost that I spoke to earlier, approximately $900,000, added another point that's non-recurring, that type of expense.

And then, lastly, although the rest of our underwriting expenses were largely in line with our expectations, the falling earned premium contributed another 3%. In other words, the relative value of those, the relationship with those expenses to earn premiums is higher than expected by 3 points just because of the decline in earned premiums. Those three explain our position at 107 in the current accident year.

That's certainly very helpful. Was there anything in the fourth quarter, I guess [analogous] to the shock loss? Or, to the fourth quarter combined ratio is, actually your combined ratio even higher, acknowledging that that would have been the first quarter out, would it have had more one-time or unusual items? But was there anything particularly notable in that, from memory, 111 or 112 that would take away a chunk of the excess over 100%?

No, I don't have that analysis right in front of me at the moment. Thinking back on it, I believe the fourth quarter would have been heavily influenced by expenses related to the conversion and the, well, the conversion and the IPO.

Great. Two other quick ones if I may. Thoughts, I guess, Doug, on the competitive ramifications of not taking the recommended rate decrease of 11%. I guess that, I don't want to put words in your mouth, but I think you said you were studying it. But I guess in just helping to think through the competitive ramifications of opting to break from the WCRIB recommendations.

Well, Bill, let me start by saying that this is obviously a very important issue for us and I think it's important for everybody to understand what our decision is on this. So what I'm going to do is ask Ric and Marty to provide some clarifying comments around it, first, relative to how rates are determined in California, and then how we view lost cost expense loading and then target rates of return. So why don't I start with Ric on that.

Thanks, Doug. Bill, to your question, I'll kind of start by just talking about the mechanics of the rate process in California. And in starting that, there's some key terms to make note of. First, lost cost, which is losses only. It's also referred to as pure premium. Second is lost cost multiplier, or LCM. Third term is filed rate. Then, scheduled credit debits. And then, lastly, effective rate.

The process starts with the WCIRB recommending to the Commissioner, and their recommendations are based on a study of approximately 86% of all the industry lost costs. And they study that by class of business. The Commissioner can accept, reject, or modify those finding suggested by the WCIRB.

Once the Commissioner has made his recommendations, the companies are free to accept, reject, or modify the Commissioner's recommendations. However, if they accept or modify, they will file new rates, filed rates. These are the product of the revised pure lost cost estimates the companies decide to utilize, which may be the Commissioner's recommendation or they may be the company's separate calculations. Those lost cost estimates are multiplied by the LCMs.

The LCM is designed to bring the company back to recovering their total cost, pardon me, by class of business. That then establishes the filed rates. But the companies also file rate deviation plans, which are referred to as scheduled credits or debits. These scheduled credits or debits are applied to modify the filed rates for individual policies, or groups of policy, to get at what is referred to as the effective rate. So that's the process that we work through.

Now, Marty can expand on how we're actually applying them.

Hi, Bill. It's Marty Welch. I just want to spend a little time, putting a little more clarity on what the Bureau is recommending, how the Commissioner is analyzing at this point, and then our view of it in general.

As we said in the earlier remarks, the Bureau has recommended a decrease in pure premium rates of 11.3% effective July 1, 2007. As Ric just explained, that pure premium level really only addresses the lost cost within that ultimate policy rate. We generate our own actuarial analyses of both current and anticipated lost cost trends because we want to compare those to the WCIRB's view of the industry to be sure they are reflective of the actual experiences we're seeing in our own book of business.

And then, we determine appropriate lost cost multipliers to make sure our expenses are in line, that's both underwriting and commission expenses. And then, we also have to be sure we're imputing our targeted unlevered return, which we have discussed in the past, that we build our rate models around a 12% to 13% return.

Now getting back to any future rate decreases in California, as we also said, the insurance commissioner has held his public hearing to address the WCIRB recommendation and also to receive input from other interested parties in the state, whether they're agents, policyholders, or carriers. And there's been a fair amount of debate that's been reported in the trade press regarding the proper lost cost levels that should be in play effective July 1. And right now, the industry is currently awaiting the Commissioner's approval of that or his own recommendation of proper lost costs.

But based on our internal analysis, we've decided we're not going to make any change in rate level effective July 1, primarily because we believe our current rate filing affords us the flexibility to both remain competitive in the marketplace and also achieve the targeted rates of return on our book of business. We'll continue to evaluate our ongoing business results as we go forward and we'll do that in light of the marketplace dynamics as they are in California, and we certainly may consider additional rate filings at some point in the future.

But I guess from an underwriting and an operations standpoint, I want to be sure that you understand, regardless of what rate filings that what we might deem appropriate in the future, whether that's in California or any state in which we do business, that you can be assured that our attention will always be to charge rates that reflect adequate and accurate lost cost estimates, appropriate expense loads to enable us to run our business, and then include a targeted rate of return that builds value for the shareholders.

As a former rate filing actuary, you made me re-live that experience, but I appreciate the details. I'll get back in the queue for more questions. Thank you.

Your next question comes from the line of Matt Carletti with Cochran Caronia Waller. Please proceed.

Good afternoon. Could you give us a quick update on the new states, primarily Florida and Oregon? And I know you just got in there, but you know, how things are going compared to planned so far. And then, if in the second half of the year, are there any further plans to add other states? Or is that kind of it for now and we'll take it from there?

Okay, Matt, I'll take this one. This is Marty. I'm happy to report we began doing business. We began writing business in Florida this month and that was after receiving approval of our application for license. We went through all the filed rate procedures, we've appointed producers there. We've also opened an office in Tampa and have a sales executive on the ground there. We continue to be optimistic about our long-term growth opportunities in Florida, but our premium expectations for 2007 will remain modest there at this point in time.

As far as Oregon, we have a license in Oregon and we began writing business in Oregon in April, and our opportunity there arose primarily from independent agents who are doing business in adjoining states. We have no plans at this point in time to open our own office in Oregon. Again, the majority of the business will come from agents that are already appointed to us. And we don't really see Oregon as a huge opportunity state for us. It's just an opportunity in the west for us to fill in some accounts for agents that are important to us already.

Okay.

As far as additional states, we continue to evaluate, as we go forward, state opportunities. Haven't made any definitive decisions for the remainder of 2007 or beyond at this point in time. Keep in mind that the expansions into primarily Texas, Illinois, and Florida in the last 18 months have us now doing business in states that represent 40% of the workers' compensation market in the United States. So we're going to work at this point to make sure that we are organically growing properly in those additional states.

Great. And then, just a couple numbers questions. One was looking at the commission expense that rose up to kind of about 13% from 12%, is there pressure for that to go forward, or higher going forward? Do you think that 13% is kind of the run rate?

Well, again, the commission rate has gone up because of the decline in premiums, not because we've done anything with our commission scales. But I think any changes in commission rates, up or down, in the future will be dependent on definitive pressures and our analysis of the costs. Currently, we believe our current commission levels are both competitive and provide for adequate rates of return.

Okay. And then, last question is how much -- I saw the, recently in April, the special authorization for a dividend. Assuming the Nevada Insurance Department approves that, how much capital does that give you as a holding company?

I'll take that one, Matt. The Nevada Division of Insurance has pre-approved up to $55 million. So that approval was in hand as a part of the adoption of the plan of conversion. So when you look at our total capacity as of year-end, it would have been in excess of $100 million.

Okay, great. Thanks, very much.

Your next question comes from the line of Amit Kumar of Fox Pitt, Kelton. Please proceed.

I guess going back to Matt's question and you mentioning the new office in Tampa Bay. Now, obviously, Florida is a $4-billion marketplace, and I'm wondering what exactly do you mean by modest expectations? Are we talking $10 million, $50 million? Or, is there like a ballpark number in your mind?

Let me take that one. We really have viewed 2007 as the year where we will establish our relationships in Florida, as well as Illinois, and continuing to build out a fairly new presence in Texas. And so, when we use the word modest, I won't put a specific number on it, but we really do look at 2007 as a chance to establish our relationships there, get a good understanding of the market, and then 2008 presenting us with a greater growth opportunity.

And then, do you expect to, many mentioned new states -- do you expect that growth opportunity to sort of offset the rate declines in California?

I guess, ultimately, that would depend on how much growth we have in California and to what extent premium levels will continue to fall, and that's one I'm just not comfortable predicting today.

Okay. Secondly, just going back to the PIF growth, I think 10.7% was the number, I'm just wondering where is this PIF growth coming from?

I'm sorry, Amit. Are you referring to policy count?

Yes, that's what I'm referring to.

Yes. Again, we're seeing increases in policy count, helping us to offset our decline in premiums. And we were up about 10.7% in the first quarter compared to that same time period in '06. It's a little higher in California. It's about 15.7% for the first quarter in California. And it's significantly higher in states other than Nevada and California, and that's primarily the growth we have seen in Utah, Nevada, Montana, Colorado. There's been a little decline in Nevada but it's been offset by our policy count growth, overall, in general.

ADP and Wellpoint, from a strategic partners' standpoint, are growing at about the same rates as our independent agents' operations are growing from a policy count standpoint.

Okay. And I guess final question in terms of the discussion we've had on the WCIRB and you guys not taking a rate decrease. Does that mean, in your mind, you feel that the inflection point has been reached where, I guess, any further rate reduction does not make sense?

Our decision on whether or not to file rate really goes back to our belief that our current rate filing will allow us flexibility in the market to write the type of business we want to write. And I don't know that I would read anything more into it than that.

Okay. That's all for now. Thanks, so much.

Your next question comes from the line of Robert Farnam with KBW. Please proceed.

Hi there. Good morning, I guess. A couple follow-on questions here. The progress of expanding into new states, how would you characterize progress this year? Is it going better or worse than you were expecting or more slowly or more quickly?

Our intention, Bob, was to be doing business in Florida in the second quarter of 2007, and we began writing business in the month of May, so that puts us at the front end of the first half of the second quarter of 2007 and I'd say we are right on track. And, again, that is a two-pronged approach that we have a sales executive in Tampa, appointing independent agents, and is a person who has about 20 years of experience in that state in that area. She has certain relationships with agents already. And then, it's also with our ADP partner whom we know has a significant amount of business opportunity in that state in the small business segment that we target.

And then, getting into other states, you said there's a couple of other states you may be looking at but you haven't been specific about it.

Yes, we started doing business in Illinois in the first quarter of 2007. It was our intent to begin in the first quarter in 2007 in that state. Again, the same approach with independent agents and with ADP. And we're just kind of getting up and going there. We also have an office in suburban Chicago, in Schaumburg in Illinois, along with a sales exec to deal with independent agents there.

And ADP has a strong presence in Illinois as well. And then with Texas, we're into the second year in Texas that started primarily as a partnership with ADP, but we are in the process of appointing additional agents there and we have a sales exec on the ground as well.

Okay. Have you established any more relationships with the strategic distribution partners? I know E-chx was the last one.

E-chx was the last one that was the last one in the fourth quarter of '06. We continue to pursue that as an important part of our strategic plan, and we will continue to seek out additional partners as those opportunities afford us opportunity.

Okay. The scheduled credits and debits in California, is there a min or a max there? And what, over the past year or so, how has the usage of the scheduled credits and debits changed?

Our current filing in California is not unlike a lot of other carriers, I don't think. This is all public information. It's out there. But our schedule rating plan files for plus or minus 40% scheduled credit. So that is a fair amount of latitude for us to recognize the objective individual characteristics of individual risks and groups.

And our application of schedule mods over the years has really not changed all that dramatically. It isn't like we see wild swings from quarter to quarter on what we afford on schedule mods, overall. And I would attribute that bob primarily to the focused appetite that we have on the selected classes of business that we have. We are pretty much in a band of opportunity in the marketplace that is very consistent for us.

Okay, but so you have plenty of latitude, and that's why you don't feel the need to actually file different file rates. You can use the scheduled credits. You have 40% leeway, positive or negative, to charge whatever you feel is more appropriate?

That's correct.

Okay. And the last question I had was you had $1.7 million of the tech-related expenses, I guess, were rolling out -- what was that? The EACCESS?

Right. Depreciation and maintenance.

Yes. Now what will that look like going forward? Is that something that's ongoing and we'll still see those expenses? Or, is that pretty much -- I know you started that in midyear '06. Is that winding down or --?

We've come to a higher level than we had in comparative quarters. In '07, first quarter of '07, depreciation and maintenance expense is relatively higher than the first quarter of 06. And we project that to be on a continuing level going forward through '07.

Okay, so we should expect that particular expense to be similar from hereon through the rest of the year.

Right, by quarter.

Okay. That's it for me. Thanks, guys.

Okay, Bob.

Your next question comes from the line of Ron Bobman with Capital Returns. Please proceed.

Hi. Thanks a lot, and good morning. Do you have a growth figure as a function of payroll, insured payrolls?

In terms of policy counts?

Well, no. You've given us policy counts, but I'm more interested in how your business is growing or contracting measured by insured payrolls. I would think that is a little bit more telling than PIF, which obviously somewhat ignores mix, the size of account.

We don't have that data with us and it's not something that we've included in our 10-Q.

Okay. I guess all I can ask then is you're free to consider it. Thanks a lot.

Thank you.

Your next question comes from the line of a follow up with William Wilt of Morgan Stanley. Please proceed.

Two follow ups. Somebody mentioned or used the word inflection point, which caused me to think that the WCIRB study looked like frequency and severity trends in '06 were either up or projected to be less favorable than they had been in recent years, albeit from very much improved levels over years before that. Comments or color you can add on the frequency and the severity of trends in your business?

Well, as we look at our business, Bill, first of all, the frequency trend that the WCIRB has identified was a 10% reduction of frequency, year over year, '06 over '05. That is a flattening reduction in frequency because it has been in the 16%, 17% range two years prior to that. That truly does not indicate that frequency is going up. It just means that the decrease is less.

Agreed.

From a severity standpoint, basically, the Bureau has reported an increase in severity. I'm not sure how that is measured. When we look at closed claim severity inside our organization, our closed claim severity has gone down.

Any quantification or just parameters that '06 over '05?

That's '06 over '05.

Any quantification you can offer or general order of magnitude?

Not at this point.

Okay. Fair enough.

Bill, this is Doug. Let me just jump in here. The other thing that's important to consider is that we're now three years into the reforms and I would expect that we are beginning to see full implementation of all of the reforms. I know there are a couple of minor regulations that are pending as options. But beyond that, reforms have been fully implemented. And I think as we look at it, as the Bureau looks at it, we're all going to be trying to identify where that point is where all the savings have been realized from the various reforms, 227, 228, and 899.

That's great. That's helpful. Thank you. The other one, if I may, quickly, a high level overview of the -- twofold question. The high level overview of the actuarial process during the quarters where you don't have the outside actuary scrubbing the reserves. Just a process, for instance, what caused the $15 million, roughly, and redundancies that came through in this quarter? And then, part two is will you still have the midyear reserve study and will the results from that be included in the second quarter or more likely in the third quarter? Thanks, very much.

Thanks, Bill. This is Ric. I'll answer it in reverse order. Our intention for the midyear reserve analysis is that we're trying to time it so that we will reflect the results of that in the second quarter. With respect to our off-quarter analysis that was completed for the March 31 quarter, we're looking primarily at measuring differences in paid information. We go through essentially the same process.

Our actuaries are trying to update, or do update, the paid development analysis, some of the other analyses. Management then looks at the results of that and, as we've described, our process in the S1, management then looks to be somewhat conservative. But it really gets down to a comparison of the paid assumptions to the actual paid development information that we're seeing in the quarter and trying to make determinations from there.

Thanks, again.

Your next question comes from the line of Richard Linhart with Opus. Please proceed.

Thank you. In looking at the accident year data for the past couple years, and in particular, looking at cumulative payments versus cumulative reserves, it seems as though your cumulative payments is a fair bit lower than they have been in years prior to that and also compared to your comparables, comparable companies, which suggests either you guys are being quite conservative on your reserving or that post-reform, the payment patterns are significantly elongated compared to the past. I'm wondering if you could comment on that and maybe shed some light.

Well, I think the only comment we could make is the one that's made consistently, and that is we monitor the data carefully, we react to it as trends emerge, we try to react to it, we intend to be somewhat conservative in our reserving approach. We believe we're being consistent about how we do that. With respect to the impact that reform may have on payment patterns, whether it elongates it or reduces it, we would expect that if reform, in fact, has had the impact of reducing losses, that'll express itself both not only in reported claims and their value but in how the payment pattern is made both over time and in its absolute value.

Is there any reason to suggest from where you guys sit today that the reform did have an impact on the length or duration of payment pattern?

I'm not aware of any change in the duration, or the timeframe, of the payments. What we think we're seeing and what we're reacting to is that, in fact, lost costs are down over historical California information. And that applies to payments as well. And as I say, as we confirm, as we see that and confirm it, we're convinced that that is a sustainable pattern and we react to it in terms of our reserve.

Okay, great. Thanks, very much.

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Your next question is a follow-up question from the line of Amit Kumar with Fox Pitt, Kelton. Please proceed.

Yes, hi. I just wanted to go back to that, the plus or minus 40%, and just understand that a bit better. Let's say it's [7.1] and we have some insurance companies who have a rate now which is lower by 11.3%. And if I'm a customer at that point of time and I am looking at that rate and then I'm looking at your rate, what is like a change at that point of time?

Marty, I can see Marty winding up to answer some of this, but let's just remember that there's a filed rate and there's an effective rate. If you're a customer, what you're looking at is the effective rate.

Yes, within our -- as we determine rates for policies, Amit, on individual risks, again, if you back up, that 11.3% rate decrease recommended by the Bureau is only the pure premium portion of the rate. That's the loss only part of it. Then, in addition to that, carriers have to load their expenses, profit loading, taxes, all of that into that ultimate rate to get what they have as their filed rate. But then individual accounts are worthy of higher or lower than those filed rates on the basis of their individual characteristics.

So if a carrier lowers loss costs and leaves everything else the same inside their rate-making formula, then that policyholder would indeed see an 11.3% decrease in their policy rate. But the insurance carrier process for determining those policy rates is always a number of moving parts between loss causes, changes, and expense loans, even in perspectives on the credits or debits worthy of certain insured or classes of business on the basis of how safe they run their operation or something else happening, economically.

So it's hard to sit here and say what will happen with any insurance carrier's scheduled rating plan on an individual risk in light of any change in loss cost.

Maybe to put one more nail in that coffin, Amit, the acceptance of the recommended loss cause adjusted does not mean that they've changed their filed rates because they could have adjusted their LCM. And as Marty has just said, to get the effective rate, they can also use the scheduled credits. So it is, there's no obvious answer. The fact that any one company might say that they adopted the recommendations, it does not necessarily mean there's a direct follow on with filed rates or effective rates.

Okay. That's very helpful. Thanks.

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Your next question comes from the line of [Jeff LeBlanc] with Greenlight Capital. Please proceed.

Hi. I just had a quick question. You guys have stated, historically, that your underwriting methodology gives you a 12% to 13% return on 100% combined ratio. Can you walk us through the math on that given that you said it's un-levered return? And how do we think about that relative to our ROE today?

Well, they're not directly connected, so when you ask me to walk you through that, I can tell you that our relative, our decisions on pricing, the discussion we just walked through in terms of how we view the recommendations coming from the WCIRB and eventually the Commissioner- our reactions are built upon our evaluation of pricing relative to our target of a 12% to 13% un-levered return. And that becomes the basis for our deciding whether or not we believe those kinds of adjustments are warranted or not.

Okay. Then, I guess on the unlevered return, are you assuming any different capital structure or is it literally just assuming as it is today, that 12% to 13%?

It's not looking at the capital structure. It's looking at the return on $1 premium.

Got it. Okay. Okay, thank you.

Ladies and gentlemen, it appears that we have no more questions in queue at this time. I would like to turn the call over to management for closing remarks.

Thank you, Eric. Let me conclude by recapping the first quarter. We did continue to see strong growth in our policy count, reflecting a sound execution of our business strategy. While, nevertheless, continued decreases in rate levels in our largest market, California, result in top line pressure, our capital position, however, remains strong. Thank you, everyone, for joining us today. And we'll talk to you next quarter.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.