Employers Holdings Inc (EIG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2010 Employers Holdings, Inc. earnings conference call. My name is [Carissa], and I'll be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host, Ms. Vicki Erickson, Vice President of Investor Relations. Please proceed.

Thank you, Carissa, and welcome, everyone, to the second quarter 2010 earnings call for Employers Holdings, Inc. Yesterday, we announced earnings results, and today we will file our Form 10-Q with the Securities and Exchange Commission. Our press release and Form 10-Q may be accessed on the Company's website at www.employers.com and are accessible through the Investors link. Today's call is being recorded and webcast from the Investor Relations section from our website, where a replay will be available following the call.

With me today are Doug Dirks, our Chief Executive Officer; Ric Yocke, our Chief Financial Officer; and Marty Welch, the President and Chief Operating Officer of our insurance subsidiaries. Statements made during this conference call that are not based on historical fact are considered forward-looking statements. These statements are made in reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission.

All remarks made during the call are current at the time of the call, and will not be updated to reflect subsequent developments. We use a non-GAAP metric that excludes the impact of the deferred gain from the 1999 Loss Portfolio Transfer, or LPT. This metric is defined in our earnings press release available on our website. Now, I will turn the call over to Doug.

Thanks, Vicki. Welcome, and thank you for joining us as we review our second quarter results. Net income in the second quarter was $0.39 per share and $0.29 per share before the LPT, slightly higher than this year's first quarter and $0.05 lower than last year's second quarter. We benefited in the second quarter from $5.5 million of favorable prior period development, all of which was attributable to Nevada. This represents a decline from levels we have seen in prior periods, indicative of the length of time since reforms were adopted in California, increasing severity trends and a more competitive pricing environment.

We have been monitoring and responding to medical and indemnity trends for the past few years. Medical utilization and claim durations have generally increased nationally, but have been most pronounced in California. Since 2008, we have strengthened pure premium rates in California in excess of 25% and have seen an increase in the net rate at renewal in California for the past 15 consecutive months. Through the first six months of this year, our loss provision rate remained essentially unchanged relative to last year at 70%. Yesterday, the actual committee of the California Workers' Compensation insurance rating bureau adopted an approximately 30% recommended increase in pure premium rates to be effective January 1, 2011.

Recall that the California Insurance Commissioner previously rejected a 22.8% increase to be effective January 1, 2010. Since we begin the 25% cumulative increase in our filed rates beginning in 2008, the Commissioner has approved no increase in the advisory pure premium rate. We will fully evaluate any actions the Bureau's governing board takes at its meeting next week regarding this recommending, and will take whatever additional rate actions may be required. In short, payroll, our best indicator of exposure, has declined 16% since June 30, 2009 and 9% in the first six months of 2010. We believe this decline is caused by a combination of factors, including a change in business mix related to the falling payrolls and higher average rate classes, such as construction; high levels of unemployment; and a decline in hour's worked. Overall, our total net rate declined 6% since June 30, 2009, and 2% since December 31, 2009.

As in the first quarter, our continued positive net rate in California improved our net rate results Company-wide for the year-to-date reporting period. Our overall In-Force Premium declined 21% since June 30, 2009, with the greatest declines of 50% in Florida and 40% in Wisconsin. Declines in these two states largely reflect the declines in payrolls and reductions in the number of larger accounts. Premium rates declined in Florida 6.8% in 2010, reflective of post reform declines and loss costs, while rates held stable in Wisconsin. On a GAAP basis, we had an underwriting loss of $1.5 million, with a combined ratio of 101.9.

Excluding the impact of the LPT, our underwriting loss was $5.8 million, with a combined ratio of 107.4. The combined ratios were impacted negatively by lower premiums earned and lower prior-year reserve releases and were impacted favorably by lower underwriting and other operating expenses. We expect that with lower premium levels, our combined ratio will continue to be pressured, at least in the near-term, by continuing impacts of the recession, rate reductions in some states, competitive pressures and our continued focus on profitable underwriting. To directly address the negative impact that declines in premium are having on our underwriting expense ratio, we recently undertook significant measures to reduce the operating costs by consolidating offices and reducing staffing levels.

These actions will result in a $3.7 million charge in the third quarter and a $1.8 million charge in the fourth quarter. Net of the one-time restructuring charges, these actions will result in pretax savings of $2.7 million in 2010 and $18.3 million in 2011 and thereafter. Our previous cost-control efforts, combined with other favorable adjustments and expense accruals, resulted in a substantial improvement in the second quarter of 8.6 points in our underwriting and other operating expense ratio compared to the first quarter of this year. Although the year-over-year comparison of the underwriting and other operating expense ratio for the second quarter reflects an increase of one point, actual expenses fell by $7.3 million. We have continued to grow book value since our initial public offering in early 2007. We grew book value by $0.96 per share since December 31, 2009 to $21.63 at June 30, 2010, resulting from net income, increases in net unrealized gains on investments and accretive share repurchases.

We continue to actively manage our capital. Through June 30, 2010, we repurchased nearly 1.5 million shares of common stock at an average price of $15.06 per share for a total of $21.9 million. At the end of June, approximately $28 million of the 50 million, 2010 share repurchase program authorization remained. In July, we repurchased an additional 614,000 shares. Yesterday, our Board of Directors declared a quarterly dividend of $0.06 per share, with a record date of August 18 and payable on September 1. Our trailing 12-month return on average equity, including the LPT-deferred gain, was 6.4% at the end of the second quarter. We believe we have taken necessary actions to reduce our operating expenses. More significant improvements in our operating results will depend on revenue production.

We remain committed to long-term growth through disciplined underwriting and prudent management of our portfolio. Although new claims for unemployment showed little improvement in the overall employment situation, ADP's National Employment Report this week showed some encouraging signs. Small and medium-sized businesses added 42,000 jobs in July, and non-farm private employment in the service sector rose by 63,000 jobs. We believe that, given our market focus on small, low hazard business, a trend in this direction would be beneficial for us. Now I will turn the call over to Ric for a further discussion of our financial results.

Thank you, Doug. Our operations generated a second-quarter GAAP combined ratio of 101.9% and 107.4% before the LPT, 4.5 percentage points higher than our GAAP combined ratio in the second quarter of last year, but a four-point improvement compared to our first quarter GAAP combined ratio. While lower premium volume continued to pressure our expense ratio, that ratio was generally flat relative to last year's second quarter and improved to 8.6 percentage points compared to the first quarter of this year. Our ongoing cost control efforts, combined with favorable adjustments to premium packs and bad debt accruals, successfully reduced underwriting and other operating expenses by $7.3 million or 22.5% in the second quarter compared to the same period last year.

The year-over-year increase in the combined ratio, which includes a 5.9 percentage point increase in our (Inaudible) ratio relative to the second quarter of last year was largely the result of lower favorable prior-period reserve development. We have been building California claim severity trends into our filed rates and our loss provision rates over the last few years. We have increased our California filed premium rates in excess of 25%, beginning with filings in 2008. We began increasing our loss provision rates 24 months ago. Consequently, despite unfavorable medical and utilization trends in California, our provision rate has remained unchanged year-over-year. We have realized substantial benefits from Workers' Compensation reforms in California, and in recent years, we have recognized these benefits as actuarial analyses confirm them.

Over time, it would be expected, and we have seen, our favorable prior period reserve development decrease as the recognition of such benefits is exhausted. However, we continue to write lower-hazard risks, we reserve conservatively, we review reserves quarterly, and we will release reserves if and when we see favorable development over time. Our policyholder dividend ratio of .4% dropped 1.4 percentage points compared with the same period last year due to fewer policies eligible for dividend payments and lower premium levels on dividend policies in Florida and Wisconsin. Our effective tax rate in the second quarter declined 5 percentage points to 9% year-over-year, largely due to lower pretax income.

Our pretax investment income was $20.6 million in the second quarter of 2010, compared with $23.1 million in the second quarter of last year. The difference was primarily attributable to a 2.8% decrease in the average invested assets resulting from debt reduction in 2009, and our return of capital to shareholders through dividends and share repurchases since June 30, 2009. We had realized gain on investments of $400,000 in the second quarter of 2010, compared with realized losses of $400,000 in the second quarter of 2009. And unrealized gains of $157 million at June 30, 2010, increased $26 million relative to December 31, 2009.

The decline in treasury yields led to improved fixed-income yields in the first six months of the year, primarily as a result of changes in spreads. Our portfolio's fair market value of $2 billion was largely unchanged since December 31, 2009 and was comprised primarily of fixed income maturities, which were rated on average AA-plus. Municipals make up 50% of our total portfolio, with no impairments or undue geographic concentrations in these securities at the end of the quarter. Our highest concentration was in Texas, which represented 6.6%, followed by New York, which represented another 5.7%. No other state represented more than 5% of our total municipals.

We regularly monitor our state and local holdings, and we believe our local municipal portfolio is fundamentally sound, consisting of diverse, high-quality securities. However, we recognize that given the severe economic challenges confronting some state and local governments, the portfolio carries a higher headline risk than it has in the past. This could impact valuations; an important consideration for us in evaluating any actions we may take on the portfolio. The average yield on our portfolio at June 30 was 4.3% pretax and 5.5% on a tax equivalent basis, with a duration of 4.8. A list of our portfolio securities by CUSIP is again available in the Investors section of our website under "Calendar Events, Second Quarter Earnings Call." As we discussed in our May call, we received dividend payments of approximately $110 million from our operating subsidiaries in the first quarter. Additionally, in the second quarter, we received $150 million in extraordinary dividends out of special surplus associated with the LPT.

As a result, the fair market value of cash and securities at the holding Company decreased to approximately $426 million at June 30, 2010. The impact of these dividends is twofold. First, the premium to surplus ratios of our insurance subsidiaries increased from .6 to 1 to approximately 1-1, which we believe is an appropriate leverage given current market conditions. Second, holding the remaining capital of the parent provides us with greater flexibility for strategic and capital management actions.

We experienced negative cash flow from operations in the quarter ended June 30, 2010. Cash flow is a measurement of payments related to past and present liabilities in comparison with collection of current revenue. In periods when the phase of the normal insurance cycle of soft pricing and high levels of competition coincides with a weak economy evidenced by declining payrolls and higher unemployment, negative cash flow can be expected. These conditions underscore the need for our continued commitment to remain focused on expense management and responsible underwriting.

In closing, we protect our balance sheet with a comprehensive reinsurance program that was renewed on July 1, and retained our coverage at $195 million in excess of our $5 million retention. And now, I will turn the call over to Marty.

Thank you, Ric. Across the country, net rate declined 6% year-over-year, 2% in the first six months of this year. Approximately one half of our business is generated in California, where we have seen increased net rate for 15 consecutive months. This net rate increase helped offset, though not completely overcome, the negative net rate in some of our other states and the effects of lower payrolls.

While California In-Force Premium decline 8% compared to the second quarter of last year, In-Force Premium was stable there relative to the first quarter of this year. We continue to see a steady flow of new business submittals in California, and (inaudible) accounts have grown 1% year-over-year, and over 2% since the end of the first quarter. Overall, In-Force Premium declined 21% year-over-year, with significant declines in Florida and Wisconsin. Total In-Force Premiums declined 3.5% quarter-over-quarter. In Florida, we non-renewed some of our larger accounts due to loss experience that was outside our parameters. The transition to a smaller, less hazardous book drove premium declines and resulted in a 30% decrease in average policy size. We believe Florida continues to be an attractive state, due to adequacy of rates and a more favorable claims environment.

Premium levels in Florida continue to be impacted by the 6.8% rate decrease effective January 1 of this year. In Wisconsin, year-over-year premium changes can be attributed to the loss of some larger accounts to competitors in the first quarter of this year. In-Force Premium in Wisconsin has been relatively flat quarter-over-quarter. Further impacting our premium decline has been a decrease in new business submittals compared to last year in the midwest and the southeast. Nationally, we saw a 17% decline in our average policy size to just over $7,900 in the second quarter of this year compared to the second quarter of 2009, resulting from lower payrolls on new and renewed policies and the loss of some larger accounts. Our strategic partnerships generated $71.6 million or 20.9% of our In-Force Premiums as of June 30, 2010. This compares to $76.7 million or 17.7% of our In-Force Premiums at June 30, 2009. The percentage increase in partnership business can be attributed to higher retention rates for this business than for our independent agent-produced business and a significant increase in strategic partnership business activity since June 30 of last year. Retention in our strategic partner business was approximately 86% at the end of the second quarter, while our overall Company retention was approximately 77%.

Our year-over-year decrease in policy count since June 30, 2009 was a modest 1,893 policies, or 4.2%, with 43,333 total policies in force at June 30, 2010. Policy count increased just under 1%, or by approximately 330 policies, since March 31 of this year. Changes in policy count were negatively driven by two of our more economically-challenged states, Nevada and Florida; while we are experiencing policy count increases in California. New business activity Company-wide was slightly higher at June 30 compared to the prior year. This was driven by increased activity in California and by our strategic partnership business. As I have said before, these are challenging times for a disciplined underwriting Company. While it is clear us to that some of our competitors are not exercising the same level of discipline, we continue to selectively underwrite and appropriately price our business.

We believe that the pain from a declining top-line premium in the near-term resulting from such discipline is clearly preferable to the greater pain from deteriorating loss experience that will come in the future as a result of compromising that discipline. That being said, we fully understand the need to find ways to grow our business profitably, even in the face of challenging economic and market conditions and remain committed to a strategy of long-term, profitable growth. With that, I will turn the call back over to Doug.

Thanks, Marty. Operator, we're now ready to open the line for calls.

(Operator Instructions). And your first question comes from the line of an Amit Kumar of MacQuarie. Please proceed.

Thanks, and good afternoon. Just going back to the discussion on medical claims, one of the companies took a meaningful reserve hit, and this adjusted -- the 70% of the results had was from medical claims. (Inaudible) applied for a 15.3% rate increase. I am trying to sort of reconcile the somewhat different commentary. If I understand this correctly, what you are saying is that based on the loss provisions over the past 24 months, you sort of saw this coming, and hence, you're in a better place. Is that fair?

That is correct.

Can you expand on that a bit more? Because if you look the CWCI report or any of the other reports, it seems this trend will only worsen only going forward. What gives you comfort that this (inaudible) going forward and, hence, you might have to revisit '07, '08, '09.

Amit, this is Doug. As we look at the results in California, we don't believe that the increase in severity of medical should come as a surprise. It is a trend that has been developing over a number of years. And as we indicated in our comments earlier, we have been reacting to that, as we have been filing rate increases and moving up our provision rate. So it has been our attempt to stay in front of those trends because we felt that they were clearly occurring. Ultimately, whether or not we moved far enough and fast enough remains to be seen. But as we look at our provision rate today, we believe our provision rate is appropriate to cover expected losses; and, again, we have been moving that rate up as we have seen the trend develop.

Great, that's very helpful. In terms of the rate increases, do you think since your competitors are filing for these rate changes, does that benefit you in any way? And if it does in terms of more accounts coming in your direction, would you even want them in the first place?

Well, if you look back at what's happened over the last several years, we, in fact, have been losing business, and we believe we have been losing business because it was priced at levels we weren't willing to price at. So when Marty referenced the decline in our retention rates in California below levels we had seen historically, we attribute that to others pricing below us. If, in fact, they stop pricing at those levels or start moving up, we think we have opportunities to write some of that business. We don't intend to chase it down.

Got it. That's fair. Thirdly, just on the expense initiatives, just based on what has happened recently, are there any other cost reduction measures in the pipeline, or is this it?

When we evaluate our corporate staffing levels and our expense structure, it's an eye -- with an eye forward, not an eye back it. It becomes increasingly more difficult every time we're required to take these actions to do the next one, because it really puts a great deal of strain on the organization that remains. But we believe we have appropriately sized the business for the activity levels we're seeing today and the activity levels we're anticipating going forward.

Got it. And then just two quick numbers questions, do you have -- did you -- I might have missed this. Did you give the payroll audit number -- the audit premium number?

We did not. Generally speaking, we have seen a decrease in premium audit, but we haven't seen anything extreme in terms of premium returns at this point.

Okay, and just finally, you were talking about the 80 (inaudible) report. Can you sort of break down your overall book? Into what percent is services, and what percent is manufacturing?

I don't have those numbers in front of me. But if you look at our low hazard book, the characteristics of our book of business, it definitely tends to more of a service-oriented book and much less of a manufacturing-type book than you might see with other carriers that write higher-risk business.

Got it. Okay, thanks. Great answers. That's all for now.

Your next question comes from the line of Mark Hughes of Suntrust. Please proceed.

Thank you very much. Are you able to share where you are now in terms of the net rate change in California on a year-over-year basis?

That's not a number we disclose. We consider that to be proprietary and of great competitive value. And so, as far as we're willing to go is to say that we have seen a consistent improvement in that number consecutively for the last 15 months. And I really don't want to go beyond that, because I consider it to be proprietary.

Right. Safe to say it's offset the declines elsewhere? You've got, what? A 6% net rate decrease nationally, but the gain in California not enough to offset that? Is that right?

Correct.

Okay. And then the Underwriting and Other was down very substantially on a sequential bases. Is that a sustainable level from an absolute perspective? Should -- would that depress by any unusual items?

There were a few one-time charges in the previous year that will impact that number. Whether or not it's sustainable, I would say we believe it is. Even at current levels, our underwriting expense ratio is above what we would expect to see in a normalized market. The actions we took roughly a month ago, we think, will continue to provide some benefit to the other underwriting expense ratio.

Okay. And then the payroll for your clients, any sense you can give us on the -- on how they doing, say sequentially, on a year-over-year basis with just the number of employees they have?

Well, we don't track it at an employee level. But we have continued to see pressure on the payroll; but I think that's a function of a continued weak economy.

Okay. And then finally, the tax rate expectations for the back half of the year?

I don't think we see any surprises. It's as we lose the benefit, if you will, the tax free munis -- because we have less underwriting income to offset -- it looks like the effective tax rate over the course of the year will be reduced. But I don't see a different trend than in prior years, if that's your question.

Yes. Thank you.

(Operator Instructions). And your next question comes from the line of Michael Nannizzi of Oppenheimer. Please proceed.

Thanks. So Ric, could I just follow-up on a comment you had made about the holding company liquidity. So you have $426 million in cash at the holding company. I think we have you paying back some debt -- about $50 million of debt this year, at the end of the year I think -- and in your dividend and debt service about -- it was less than $10 million a year. So what are you expected to do with the lion's share of that debt? I mean, it's maybe $300 million, even conservatively, of that capital. And how do you intend to either deploy it, or what purpose do you plan to segregate it for the holding company?

Well, we've always approached this discussion by talking about a three-legged stool. First focus on operations, secondly on opportunities as they may present themselves, and then lastly, return to shareholders. Now, it's important to focus that -- on the fact that not all that liquidity or the assets of the holding company are in the form of cash. Substantial portions of the dividends that we've spoken about -- or that I spoke about earlier -- came as a transfer of securities from the insurance operating companies. Now with respect to what we ultimately intend to do with that, as I said, we've always approached it as ordering of three priorities. Perhaps, Doug, you want to expand on that?

You know, Michael, it's consistent with what we've previously said, which is we view the uses of capital to be three; one is to invest in the operation, one is to pursue strategic opportunities, and the third is to return capital through share repurchases and dividends. We've done all three of those in the past, and all three of those will continue to be potential uses of that capital.

I mean, I was just -- I mean, the sheer size is -- would be another half -- I mean, half or more of your current market job. I'm just trying to understand, like, is that how you're thinking about -- I mean, that leg has been the leg that you've leaned on most heavily for good reason, given where your book value is. I mean, should we expect that you'll continue to lean in that direction with the majority of that capital as well?

It depends on what happens on each one of those potential uses, and so I can't tell you that we have an intention to change what we've done, but certainly that would be -- certainly would be possible.

Okay, great. Thanks. And then if I could, Ric, you had mentioned the $150 million dividend up from the Nevada sub. Should I assume that the reserve releases came from that same sub?

No.

No?

I'm sorry. I misspoke. That's correct.

Okay. So the reserve -- so were those all pre-LPT related reserve releases?

No, they were not.

Okay. Okay. And have you said what percentage of that related to the pre-LPT book and the Nevada book since LPT?

In the current quarter, I don't believe any of the releases related to LPT years.

Okay, okay, so it's all -- okay, so there wouldn't be the additional tax -- .

No, no, there is no tax exclusion there.

Okay. Okay. And then if I could, just on the non-California book -- if I remember right, a lot of the former AmCOMP's earnings came from development -- at least in the couple of years that we had been following them before the transaction -- and you've taken some underwriting action in a lot of those markets, it sounds like. I think Wisconsin and Florida are both former AmCOMP markets. I guess my question is, how much of legacy business that AmCOMP wrote do you still write? Or are you more leveraging the agent network in those markets to write a more kind of EIG-type of hazard and size account?

Michael, this is Marty. Off the top of my head, I don't know what percentage of the actual AmCOMP business that we acquired at close we still have on the books today. But really, the actions that we've taken on that book and our entire book would just be the normal underwriting actions necessary to respond to loss experience on individual accounts that don't fit our parameters, or classes of business, or risks within those classes that are heavier than we would normally have within our book of business.

I think what we've experienced in terms of a premium reduction in those areas is really still a hold over from actions that we have taken in the second half of last year and earlier this year, and you can tell by the In-Force Premium numbers that I talked about from second quarter over first quarter of this year, that that has abated. So we have taken the actions we believe are necessary to make this book one that will produce profit for us in the long run, and we believe we are coming to the point where we solidified that.

Great, thanks. And then just one last one, if I could. Was any of the reserve development in the second quarter -- or in first quarter, for that matter -- related to the California book?

No.

Okay. Great.

I would have to go back and look in the first quarter, but certainly not in the second quarter.

Okay. Great, thank you for the answers to all the questions.

(Operator Instructions). And you have a question from the line of Robert Farnam of KBW. Please proceed.

Yes, hi there. Kind of going along the same direction with the reserve development, you said it was mostly -- it was in Nevada and it's not the LPT stuff. So which accident years did that development come from?

2004, '03, '02.

So '02 to '04. Okay. And have you seen any change in claim frequency? We've been talking a lot about severity, but any changes in claim frequency yet?

If you look at the numbers comes coming out of California, it's suggesting there is an uptick in frequency, and there have been for a couple of periods now. So we think that's what's happening in our book consistent with the market. The other thing that I will comment on, Bob, that we haven't spoken to today is, we're also seeing an increase in the duration of claims, and we think that's a function of the difficult economic conditions and the high levels of unemployment; and the Bureau is observing that, and although we can't quantify that yet, we are observing the same trends in our book.

Okay, to the same -- I guess to the same extent that the broader market is?

It's difficult for us to quantify yet.

Okay.

But anecdotally, we're definitely seeing more difficulty in return to work efforts, which extends the duration of the claims.

Right. Okay. And would the -- it sounds like the policyholder dividends -- where they dropped -- the way it sounds, that may be -- at least for the time being, that may be a lower percentage now. In otherwards, we should expect a lower policy holder divided ratio for the next 18 months or so?

Again, I'd be reluctant to provide you a trend number there. But as we indicated, we think that's a function of some of the larger accounts that were on dividend plans that were underpriced and taken away from us. It's just the change in our book of business. But I am reluctant to trend that right now, because it's going to be dependent on economic recovery and really what happens in those two most dividend-sensitive states, Florida and Wisconsin.

Right. Okay, and this -- I didn't hear if you gave statutory surplus?

I did not provide the statutory surplus in my comments.

And we don't have that number --

Those statements aren't completed as of yet.

Okay. Very good. Thank you.

Your next question comes from the line of Michael Nannizzi of Oppenheimer. Please proceed.

Hi again, just a quick numbers question. On the expense side, you mentioned cost control, some bad debt provision-related items, and premium tax as driving the reduction in cost. Can you break that down a little bit just so we can try and understand what a run rate might look like?

Yes, let us pull the numbers, but what those were related to is we had been more successful in collecting accounts that we thought would be bad debt; and as we were able to collect that, we were able to reverse the accrual. And the other had to do with conservative reserving we'd done around potential premium tax liabilities that we determined were not going to be necessary to pay until we reversed those two.

Oh, I see. Okay. And maybe while we're waiting for that, just, is there a way we should think about -- within that other underwriting line, obviously there are fixed and variable expenses, the fixed piece -- the piece that you guys have done a nice chopping down here recently. Is there a way to think about the breakout there, or at least kind of what the fixed piece looks like or semi-fixed or something like that?

I guess that's the challenge for me, is it really depends on how you're defining those. Obviously, our greatest expense has been in our personnel costs, as you would expect it to be.

Right.

So that's where we've been able to make the largest adjustments. But I don't have a breakout of the fixed variable and semi-variable costs.

Or maybe put a different way, the variable component of that? So I mean, there were premium taxes, there --

Yes, the two largest ones are commissions and premium taxes. Premium taxes typically run about 4.5% or so of premium; and the commissions, you can see that we report that on a separate line. So those would be the two that are most variable to the premium line.

Got it, okay. Great. Thanks again.

You have a followup question from the line of Amit Kumar of MacQuarie. Please proceed.

Oh, thanks. Just quickly going back to the discussion on medical claims. Now obviously, the rates are sort of one leg off the issue and your loss provisions. I don't recall if you have discussed the manage management side of it. Some companies talk about how they're more proactive in sort of managing that side, interacting with doctors, et cetera, to keep the duration in check. Can you just sort of remind us what sort of medical management initiatives you have at your Company?

Yes, we do a number of things. We are very active in claims management and have a very high quality claims team. If you look at some of the bigger things we do, we have networks; and at the moment, we're focused on making those networks the best occupational medicine network we can put together and less of a general medicine network. So that's one area where we try to drive better results. We do things like formularies. We do thinks like bill review to make sure that we're minimizing costs. I think one of the more interesting trends we're seeing right now on the medical side in California is the impact that litigation is having. And that impact is trying to find ways to get around the reforms, to do things like add additional body parts that will drive up ultimately the severity of the claim, allegations that the claim has caused such things as sleep deprivation or sexual dysfunction. Those are the types of things that are probably having the greatest impact right now on medical trends in California. So we're constantly looking at ways where we can reduce those costs through an active claims management.

So essentially what you're saying is that with these measures, it's sort of more reacting as they evolve, and unless the economy improves in an overall manner, there essentially is no easier fix to the issue, right?

Well, the things I just described, I'm not sure what the link is to the economy. I think those might be factors that are independent of what the underlying economic conditions might be in California.

Amit, this is Ric. I would also add maybe just one point of emphasis. These are -- the things that Doug's been describing are practices we've always pursued. So I don't think we view it as a matter of catching up to anything in California. We've been on top or in front of this issue all along, and we believe that we are controlling it and have been controlling it.

And let me go back, because I want to make one more point on that subject. We have seen some uptick in post-termination claims, and that probably does have a direct link to the economy. Again, very difficult to apply a specific number to that. But when you're thinking about how you appropriately manage claims to drive the lowest cost, one area of concern is to make sure that the claim is legitimate, and post termination claims always generate some level of additional review.

Got it. Okay, this is helpful. That's all for now. Thank you.

There are no further questions. At this time, I would like to turn the call over to Mr. Addict deck for closing -- Mr. Doug Dirks.

Thank you very much, we look forward to talking to you with our third quarter results. Thanks and have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.