Employers Holdings Inc (EIG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter 2010 Employers Holdings, Inc. Earnings Call. My name is Modesta, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

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

Thank you, Modesta, and welcome, everyone, to the third quarter 2010 earnings call for Employers Holdings, Inc.

Yesterday we announced our 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 employers.com and are accessible through the Investors link. Today's call is being recorded and webcast from the Investor Relations section of 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 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 be 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 the non-GAAP metrics that excludes the impact of the deferred gain from the 1999 loss portfolio transfer or LTT. This metric is defined in our earnings press release available on our website.

Now, I will turn the call over to Doug.

Thank you, Vicki. Welcome, everyone, and thank you for joining us as we review our third quarter results.

The current operating environment presents a unique combination of challenges. First and foremost, the unfavorable employment situation, reflected in continued high levels of unemployment and underemployment, have reduced both our premium and the premium in the workers compensation line nationally. Not only has available premium declined, but industry-wide capital redundancy has led to an extremely competitive pricing environment, and yields are at historically low levels. The combination of all of these factors results in especially difficult operating conditions. We don't yet see evidence of a significantly improving economic environment.

Our net premiums written declined only slightly in the third quarter, 1.8%, compared to the third quarter of 2009, which may be an indication that we're seeing the bottom. However, our total payroll exposure declined approximately 15% year-over-year and 11% since December 31, 2009, with Florida, Nevada, and Wisconsin having the largest percentage declines for those periods among our largest states.

We believe this decline has a number of causes. These include the voluntary and involuntary loss of some larger accounts in Wisconsin, the continuing high levels of unemployment in Nevada and Florida, a decline in hours worked, and a change in business mix related to greater declines in payrolls in higher average rate classes, such as construction. Our net rate declined 4% nationally since the end of 2009.

The decline in net rate was partially offset by positive net rate in California through August of this year. In September, California net rate flattened as prior rate increases worked their way through our book of business. California represents just over half of our total in force premium at the end of the third quarter. Since 2008, we have increased filed pure premium rates in California in excess of 25%. Through the first nine months of this year, our overall loss provision rate has remained essentially unchanged relative to last year at nearly 70%.

In September, the California Workers Compensation Insurance Rating Bureau amended its August filing to recommend a 27.7% increase in pure premium rates to be effective January 1, 2011. We have initiated our analysis and anticipate making a California rate filing in mid-December with new rates effective during the first quarter of 2011.

In Florida, which represented approximately 5% of our in force premium at the end of the quarter, the commissioner approved an average rate increase of 7.8%, effective January 1, 2011. In the 30 states in which we operate, effective January 1, 2011, seven states have approved pure premium rate increases, and four have approved rate decreases.

Notwithstanding the economic conditions, the soft market, and other challenges impacting our business, we continue to execute plans to strengthen our Company. In July, we reduced our total staffing by approximately 160 positions in our regional operating units from five to three. We consolidated our underwriting activities and by the end of the year will have consolidated four of our offices. We expect that these combined actions will result in annual savings of $19 million beginning in 2011 and an additional restructuring charge of $1.4 million in the fourth quarter of this year.

The cumulative pre-tax expense savings resulting from our cost control actions in the last two years are expected to be $34 million annually, beginning in 2011. Of this total we expect annual savings over 2009 levels of approximately $25 million in underwriting and other operating expense and $9 million in loss expense.

Additionally, while economic growth remains sluggish, we're driving a set of initiatives that will strengthen our performance and better position us for growth. Our key objective is to grow organically, and while this is difficult to do in periods of declining payrolls, we are taking actions to increase low- to medium-hazard small-business premium over the next two years. We have initiatives in place to add a new agents and agencies, additional policies and additional premium nationally, with particular emphasis on our acquired states.

Specifically, we are targeting the addition of 20,000 policies and over 900 agents. We are expanding our pipeline by appointing additional agents in the newer jurisdictions where we're doing business and by deploying our technology into these states to make it easier for agents to do business with us. Our rollout of rapid quote capability to 19 states over the past three months now allows more agents access to a rapid quote system for approximately 65 classes of small-business customers with estimated annual premiums of $25,000 or less. We think that by increasing our number of agents and by enhancing their ease of doing business with us, there are opportunities to grow going forward, particularly in those states where we have had less presence.

Based on A.M. Best's data, our market penetration in California, which we consider mature, was 2.6% at the end of 2009, while market share at many of our newer states was 1% or below. We believe the difference between where we are in our most mature market and where we are in the younger markets represents the opportunity for us to grow share while maintaining appropriate and prudent underwriting focus. We will not buy business.

We expect our business mix to remain essentially the same as it is now, with an emphasis on small business engaged in low- to medium-hazard industries. Since June 30, 2010, we have increased in force policies to 43,511 for a three-month growth of 0.4 of 1% or 178 policies. While average policy size decreased approximately from $7,900 to $7,500.

Turning to capital. We have continued to grow book value since our initial public offering in early 2007. We grew book value just over $2 per share since December 31, 2009 to $22.69 at September 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 September 30, 2010, we repurchased 3.3 million shares of our common stock at an average price of $15.19 per share, for a total of $50 million, completing our 2010 authorized share repurchase program. Yesterday, our board of directors authorized a new $100 million stock repurchase program to be effective through June 2012. In addition, our Board declared a quarterly dividend of $0.06 per share with the record date of November 17 and payable on December 1.

We believe we have taken necessary actions to reduce our operating expenses while improving our ability to service existing business and produce new business. More significant improvements in our operating results will depend on revenue production and our success in achieving our growth initiatives. We remain committed to long-term growth through disciplined underwriting and to prudent investment portfolio management.

Now I'll turn the call over to Ric for a discussion of our financial results. Ric.

Thank you, Doug. Net income in the third quarter was $0.25 per share and $0.13 per share before the LPT, $0.42 lower than -- or lower on a GAAP basis than last year's third quarter. Net income of $0.13 per share before the LPT was net of structuring charges of $0.10 per share on a pretax basis and a charge of $0.04 per share in connection with a reinsurance commutation. In summary, the change in net income year-over-year was negatively impacted by lower net premiums earned, no favorable reserve development, restructuring charges, a reinsurance commutation, and a favorable LPT contingent profit commission in the third quarter of last year.

Net income was favorably impacted by lower underwriting and other operating expense. On a GAAP basis, we had an underwriting loss of $9.3 million with a combined ratio of 111.6. Excluding the impact of the LPT, our underwriting loss was $14.1 million with a combined ratio of 117.5. Restructuring charges added 5.2 percentage points to the combined ratio in the third quarter of this year.

A 22.7 percentage point increase in the third-quarter gap combined ratio was driven by a 13.7 percentage point increase in the commission expense ratio due to the favorable LPT contingent profit commission accrual adjustment that was booked in the third quarter of last year. Our increase combined ratio was also driven by an 11 percentage point increase in our loss ratio year-over-year, which was largely the result of the lack of any favorable prior period reserve development.

As I mentioned last quarter, we have been building California claim severity trends into our filed rates and our loss provision rates over the last few years in an attempt to stay ahead of those trends. We have increased our California filed premium rates in excess of 25%. Now we will file again in December for what -- whatever rates are indicated by our internal analysis.

Consequently, despite unfavorable medical and utilization trends in California, our overall provision rate remained unchanged year-over-year without the need to strengthen our reserves. In prior periods we realized substantial benefits from workers compensation reforms in California.

However, we believe those benefits are largely exhausted. In the face of increasing severity trends, competitive pricing, and a length of time since California reforms were implemented, we saw no favorable prior period reserve development in the third quarter. However, we continue to write lower-hazard risks, and we reserve conservatively. We will review reserves quarterly and we will adjust for reserves as necessary.

Finally, while lower net earn premiums continued to pressure our expense ratio, that ratio improved 2.4 percentage points compared to the third quarter of last year. Our ongoing cost control actions, combined with favorable adjustments to premium tax and bad debt accruals, successfully reduced underwriting and other operating expenses by $8 million or 23.6% in the third quarter compared to the same period last year.

Excluding restructuring charges, third-quarter underwriting and other operating expense declined 35% year-over-year. Our effective tax rate in the third quarter was less than 1%, as a percentage of tax-exempt income to pretax income increased compared to the third quarter of last year. Our pretax net investment income was $20.7 million in the third quarter of 2010, compared with $22.3 million in the third quarter of last year. The difference was primarily attributable to a 0.3 of 1% decrease in the average pretax book yield on invested assets.

There were no material realized gains in the quarter. Our portfolio's fair market value of $2.1 billion was largely unchanged since December 31, 2009 and was comprised primarily of fixed income maturities which were rated, on average, AA or better. Municipals made up nearly half of our total portfolio, with no impairments or undue geographic concentrations in these securities at the end of the third quarter. Equities represented 3.5% of our invested assets at the end of September. The average yield on our portfolio was 4.3% pretax and 5.4% on a tax equivalent basis, with a duration of 4.9.

A list of our portfolio securities by CUSIP is again available in the Investors section of our website under Calendar of Events, Third Quarter Earnings Call. We have been successful in moving capital that wasn't necessary to support operations from the regulated entities to the holding company, where it provides us with a maximum amount of flexibility.

Earlier this week, based on the post-dividend surplus of our operating companies, A. M. Best affirmed our A- excellent rating with a stable outlook. On September 30 of this year, we had approximately $400 million in cash and securities at the holding company. Our strategies for using -- for the use of the capital are unchanged. Ideally, organic growth would demand capital beyond that which already exists in the operating companies, but until the environment improves and demands on capital increase, we don't see that as the greatest and most likely use of capital in the short run.

Consequently, that leaves us with the two remaining capital management strategies. One is strategic acquisitions. To the extent that we can find opportunities that are both strategically significant and/or financially attractive, we intend to pursue them. In the absence of strategic acquisitions, we will return capital to shareholders through dividends and share repurchases, and in fact, we have returned in excess of $250 million through these vehicles since our 2007 IPO.

Yesterday we announced that the Board of Directors authorized a new $100 million stock repurchase program effective through June of 2012. In fact, we've returned approximately 90% of our earnings since the IPO to our shareholders. In terms of our debt, we are currently considering a range of alternatives for our Wells Fargo credit facility, one of which is the repayment of the facility as structured.

In closing, as I noted earlier, we commuted a reinsurance treaty during the third quarter that resulted in a $1.6 million charge. In addition, we have renegotiated the terms of a second reinsurance agreement which will result in the fourth quarter charge of $1.8 million. We enter into these types of transactions because we believe that the ultimate economic benefits of these transactions outweigh the one-time accounting charges.

And now, I'll turn it over to Marty.

Thank you, Ric. Our insurance operations continue to battle a difficult and competitive marketplace. Despite these challenges, we believe we are taking the actions necessary to drive our business forward and create ways to grow our business profitably. Doug has discussed some of our key initiatives to organically grow our business. I will expand on some of these initiatives and discuss additional actions that we believe will create growth opportunities for us.

Our plan to appoint additional agencies in underrepresented geographies is already well underway. Since August 1, we have increased our number of appointed agencies by more than 125. Most of these are already submitting this opportunities to us, utilizing our rapid quote technology. We are seeing a greater penetration with ADP in our newer states. Online quote capability in the East has increased submissions, quotes, and written policies for our ADP partner business. We are seeing this increased ADP activity particularly in Georgia, Texas, Florida, and Illinois.

With Anthem Blue Cross, we have now launched our integrated health product into Colorado. This will generate integrated health business in a previously untapped market. We continue to expand our relationships with industry-focused associations. You will recall, we recently announced that the National Federation of Independent Business officially named Employers as its workers compensation insurance provider of choice for its more than 18,000 Florida members. This complements our existing relationship with NFIB in California. We will continue to pursue these membership recommendations with NFIB in additional states, as well as other industry-focused associations representing small businesses in our core appetite.

We believe our policy count has stabilized in the third quarter. Since September 30 of 2009, the decrease in policy count was a modest 1,337 policies or 3%, with 43,511 total policies in force at September 30, 2010. Policy count has increased by 178 policies since June 30 of this year. This quarter-over-quarter increase in 2010 is despite policy count decreases in Nevada and Florida.

Nationally, we saw a year-over-year 17% decline in our average policy size to approximately $7,500 at the end of the third quarter of this year. Again, we believe this to be reflective of decreased payrolls and a competitive rate environment.

Overall, in force premium declined 19% year-over-year, with significant declines in Florida, Wisconsin, and Nevada. Total in force premiums declined just 4% quarter-over-quarter. New business submittals have increased since the rollout of our rapid quote capability in our newer states. Total company submissions, quotes, and written policies are up year-over-year at September 30, particularly in the Midwest and in our strategic partner business.

Our strategic partners generated 21.6% of our in force premiums as of September 30, 2010, compared to 18.6% in the previous year. The percentage increase can be attributed to higher retention rates for this business than for our independent agent-produced business and a significant increase in strategic partner new business activity, particularly ADP, since September 30 of last year. Our retention of strategic partner policies in the third quarter was 87%, compared to overall retention of 79%.

In summary, while we still expect pressure from both the economy and competitive pricing, we anticipate more business activity and continued policy count growth going forward resulting from the operating initiatives we are executing to drive improved performance. With that, I will turn the call back over to Doug.

Thanks, Marty. Operator, we will now take questions, please .

(Operator Instructions)

Your first question today comes from the line of Amit Kumar with Macquarie. Please proceed.

Good afternoon, and thanks. Just going back to your comment on reserve releases, if I look at your loss reserves and put them in three different buckets -- one, pre-reform of roughly $440 million, post-reform of $330 million, and then 2000 through 2009 of $500 million -- I'm just wondering if you can touch upon these three different buckets and talk about how you feel about these other two buckets, which still have a substantial amount of reserves.

I guess I would -- not sure about three buckets, Amit. We do look at it in terms of prior years, to which the releases refer to, as opposed to the current period, where we're looking at the adequacy of our current provision rate. I, we don't -- I guess I haven't come prepared to answer a question about pre-reform versus post-reform years in terms of the reserves, although we would look at the adequacy of any one year the same way as any other year. So I am not looking for a greater adequacy in either pre- or post-reform years.

I guess what I'm trying to ask is, do you think this is the end of reserve releases, either pre- or post-reform, based on the loss trends you're seeing?

Well, here's how I'd answer that. As we've moved forward from reform, as the evidence has accumulated, we have released reserves as it became clear to us that we had more than we needed. Those successive the analyses over time have, as you've noted in our financials, resulted in smaller and smaller amounts of release. We continue to be -- continue to look at this quarterly, and as evidence emerges that suggests that there might be additional reserve releases, we would, of course, release it as we have in the past. I don't know that I'm in a position to project what it might be in the future. But, I mean, logic tells you that at some point, you do achieve the right number and there are no further releases.

Okay, maybe I can follow up on this off-line --

Sure.

Because, obviously, the tail factors are different. But anyway, just quickly moving on -- in terms of, you said you make your rate filing in December, and you're still sort of getting close to it. Directionally, would that be in the mid-single digit range, or where do you see that headed, based on the market conditions right now?

Well, I'm less concerned about the market conditions and more concerned about the trends that we're observing in the marketplace. We haven't settled on a number yet. We're still conducting our analysis. Once we've completed that, we'll file something. We expect that to happen in mid-December. Our objective is to make sure that we have a rate that is adequate in the state and a rate that maintains our competitive position in the marketplace.

Okay. Final question. In terms of your capital position, $400 million is in cash and securities, you have $100 million buyback. You're looking to expand. Previously, you have mentioned that you have been absent in the Northeast market. I'm just wondering -- would you be, is that something that you're planning to go through new agents, or would you be open to M&A in Northeast?

Well, if you look at our initiative for the next two years, that is focused on the states where we are already conducting business. As I indicated in my earlier comments, in a lot of those states, we have shares well below what we believe our strategy should be delivering, in large part because those markets are relatively new to us in this strategy. It represents the acquired business.

So we're really focused on those states where we already have the infrastructure in place. It's a matter of deploying the technology and building out the pipeline.

In terms of M&A activity, as I've always indicated, we do that opportunistically. If we can find something that makes sense strategically and financially, we certainly believe we have the capital to complete a transaction, but those are really the two key objectives in any M&A activity for us. If you talk about geographic expansion, if we were to find an opportunity that had a presence in states where we don't currently do business, that would make it strategically more attractive than an acquisition in a market where we already have substantial presence.

Got it. Okay. That's all I have. Thanks. Thanks for the answers.

Your next question comes from the line of Matt Carletti with JMP Securities. Please proceed.

Hey, good afternoon. Thank you. Just a few questions, Ric. A couple on -- one on reserves and one on expenses. In the quarter, was there any noticeable movements that were different, say, California versus ex-California? I know it netted out to no movement, but did one move one way and one move the other?

No. That was a --

Okay.

I don't mean to be terse, I just -- the answer is no.

Okay. And then on the expenses, looking at the underwriting and other expenses in the quarter, adjusting for the restructuring charge, adjusting for the premium taxes and bad debt, it's about $25 million. Is a reasonable run rate to look at going forward, or are there portions of those July savings that aren't yet in that number, whether it be a few employees that weren't out of there right away, or leases that weren't vacated immediately?

We think that's a pretty clean number for you to look at, as I indicated earlier. That would put you at a run rate of approximately $25 million, less annually and other underwriting expenses compared to 2009.

Okay. And then lastly, Doug, just curious as to your thoughts on Jerry Brown, soon to be governor of California, and specifically, do you think that emboldens any of the people that have looked to roll back some of the reforms over time, or given the current economic situation, is that just a nonstarter and there's far bigger fish to fry?

Well, I would guess it may embolden some. Our view on this is that we think California is going to be distracted for some period of time as they focus on the budget issues and that workers compensation, as much as some would like to make that an issue, is something that's going to be put on a back burner. When it may be moved forward, I really don't have a guess on that.

I believe our greater concern is in the areas that there could be impact, and it's not so much in the legislative or statutory arena, but more in the regulatory arena, where you could see appointments to key regulatory positions that have significant influence on the marketplace. And so those are the areas we'll be watching as the Brown Administration begins to take shape.

Okay. Thanks, Doug. That's very helpful.

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

Thank you. Why do you think rates have flattened out here? Your experience is, obviously, combined ratios are still high, the pace of favorable development is slowed, but then you describe rates flattening. I would assume your experience is not too dissimilar from others. Why isn't that positive trend continuing?

I think what you're seeing in our numbers, and specifically, what we observed in California, is that the rate decreases are flattening out. Or the rate increases are flattening out, because of the timing of our rate filings. We just rolled off an August rate filing from the previous year, so that is starting to flatten those out. California has been offsetting the declines around the rest of the country.

So I think what we're going to see going forward is California rates, as I've indicated, we'll take a look at those in December, file something to be effective the first quarter of next year. And now we'll see a rate increase for the first time in Florida in quite a few years, and in a number of additional states that have already approved.

So then it really is, I think, going to be a more question of what happens to payrolls. You assume that rate levels net-net are about equal, any increase in premium is going to be dependent on increases in payroll and exposure.

Right. Well, your situation in California is still such that it seems like you would need higher rates in order to get to what you might consider adequate returns. Is that not fair, and if that's the case, wouldn't you be looking at rate increases going forward?

I would think, given the trends in California, that would be our bias. That's correct.

Okay. And then, the gross premium in the quarter down just 1% or 2% was very good compared to prior period, but you describe payroll and rates down pretty meaningfully. How did the gross come in pretty good when you faced such headwinds in the other metrics?

Well, could you rephrase your question a bit there? I want to make sure I'm answering it correctly.

Yes. You described, I guess, a 15% decline in payroll exposure year-over-year, I think a 4% net rate decline. At the same time, your gross premium was only down, what, 1% or 2%. What was the difference there?

Well, the gross from, was -- written was 81 in the quarter as opposed to earned. The difference between gross rate and premium, and Doug, I --

This has to do with the timing issues around when gross written premium gets booked. Whereas earned premium occurs over the life of the policy, there's some unevenness in when gross written premium hits the books.

I'm sorry. If the question is between earned premium and written premium, earned premium is a --

No. I think I understand the difference. When you're describing the payroll exposure being down and net rate down, I guess those are falling into the earned bucket, and so the gross bucket, those measures may be different. Is that fair?

Well, no. Let me back up and just make sure that we're on the same wavelength.

When you talk about earned premium, what you see there is a calculated composite number which is affected by not only the current quarter's writing but the prior four quarters' writings. So if you would look at our disclosed written premium over the past five quarters, you'd come with a total of -- total written of about $500 million. And the average of that is $100 million, and that compares with our earned of $98 million in the period.

So you can see that you can kind of do a proof of earned pretty easily from the disclosed information. But as I say, earned is a composite calculation, whereas the written is more a tabulation of the activity and the quarter, based on estimated annual premium of the policies actually written during the quarter.

Right. Yes. But I guess the question I'm asking is you is, you described your payrolls down meaningfully, your net rates down meaningfully, but your gross written in the quarter was flat. Was that a mix issue, was there something else?

Well, I think perhaps the difference is that we're comparing a year ago -- a quarter of one year ago to the current quarter. If we look at the quarter-to-quarter from second quarter to third quarter, it was a nominal change in written. But that impact of payrolls and rates that we are referring to, you can see in a drop from $104 million -- I'm sorry, I was referring to a wrong number here. I'm looking at a piece of paper that gave me a wrong indication. The other impact is the number of policies written.

Okay. Well, good. The gross number looked good, we'll say that. Thank you.

Your next question is from the line of Bob Farnam with KBW. Please proceed.

Hi there. Thanks. Have you seen any change in claim frequency yet, or is that still going down?

You know, there are some upticks in frequency, not enough yet to apply a trend to it. I think probably the more meaningful thing we're observing in the claims area is in extension and duration. And that's really -- we believe a function of fewer opportunities for return to work and light-duty assignments.

Right. Okay. And how often do you do a full-blown external review of your reserves?

Twice a year.

Twice a year? Okay. And one numbers question -- what was the statutory surplus, if you have it?

We'll grab that for you. We haven't filed our statutory blanks yet, but --

Okay. Great. Thanks.

(Operator Instructions)

Your next question comes from the line of Raymond Iardella with Oppenheimer. Please proceed.

Thank you. Good afternoon, guys. Quick question, I guess, about the growth initiative you guys talked about. I'm just curious -- do you guys planning on offering a different commission structure to the new agents you appoint?

You know, we think about commissions more tactically. And so if you look at what our expectations are for our total commission rates, we wouldn't expect to see any significant changes there. But we will use our commission plans and our incentive plans to try to drive the type of business and the behavior we would expect from agents.

So, for example, we are looking at providing incentives to transact business with us electronically versus through paper. Because we believe that drives much greater efficiency for us, and to the extent that we can influence that agent behavior, we think it drives a better result. So we will use it tactically, but we expect overall that there wouldn't be significant changes in our overall commission levels.

Okay. Thank you. And then, I guess, a quick numbers question. Was there any meaningful audit premiums in the quarter?

No, that's pretty much flat during the quarter.

Okay. Is that a better trend than you guys have been seeing, or is that kind of in line with the past few quarters?

It's consistent with Doug's comment that we think things are flattening out. So we're not seeing a worsening, and less activity in return premium.

Okay, thanks. That's helpful.

Your next question comes from the line of each Ken Billingsley with EGB Securities. Please proceed.

Hi. Good afternoon. Hello. Hello?

Mr. Billingsley, your line is open. Did you have a question?

Yes. My question is regarding the rate increases that you talked about in California and then obviously proposed rates for Florida.. My question is regarding discounts and experience modifiers, as well as dividends used in Florida. Is there an expectation though, that even though rates have gone up, that the actual premium dollars that are coming in the door may not reflect the rate increases, whether in your own book of business or from competitors because of the use of discounts and modifications?

Yes. If you look at the market dynamics in California, we filed for cumulative 25% rate increases over the last several years. The market doesn't give all of that. The competitive marketplace steps in, and through the use of scheduled credits and other mechanisms, we ultimately end up getting, at least in the current market, less than the filed rate.

In the case of Florida it's a little bit different, because it is a dividend, and that you use the dividend planned to lay on top of an administered rate in the hope that you can entice businesses that will have better than class average experience. So, maybe you get to a somewhat similar result, but they are very different mechanisms.

And so, talking about your 25% rates that you've bought. Where would you say the actual rate increase has been, based on your use of scheduled credits?

We've not disclosed what our net rate is. What I've indicated in the past, and I'll indicate it again today, is that we have seen double-digit benefit from our previous rate filings, but we've not received the entire 25% in the marketplace.

Okay. Thank you.

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

Yes, thank you. Refresh me on the overall base of agents. You've described a 125-agent gain. What is that relative to?

We started with approximately 1,600 agents.

So, a pretty good increase?

Yes.

Any numbers you can share about how much you'd like to increase that further, going forward?

Our target is to about 950 over the next couple of years.

Right. 950 in addition to the 1,600?

Correct. Now, you're constantly managing your agency force, so at any point of time we will not only be adding agents but potentially eliminating agents that have different appetites for business than perhaps we do. So that number constantly moves. But our net goal was to add about 950, in addition to the 1,600 we had in place at July 1.

Right. And then, just so I understood your discussion on expenses, the $25 million run rate -- is that the appropriate run rate to assume going forward, say, as we move into 2011?

Yes, I think that's a pretty good estimate of what the run rate would be.

Okay.

So that's in contrast to what the 2009 underwriting expense was.

Right. Thank you.

Your next question comes from the line of Robert Paun with Sidoti & Company. Please proceed.

Good afternoon. Most of my questions have been asked. But just one on the cost savings. Does the $34 million in annualized savings, does that include some higher costs for expansion, and what are the costs associated with the expansion plans?

We have incurred some additional costs related to some of the campaign and follow-up campaign to appoint agents. Those are not in addition to what we had planned to spend. It's a reallocation of what we had budgeted from other areas. So as we look at it, it wasn't incremental. It was in place of other anticipated expenses. So again, I think as you think about the run rate, the number I've given is probably the most accurate representation of what we expect it to be going forward.

Okay, thanks. That's all I have for now.

Your final question comes from the line of Amit Kumar with Macquarie. Please proceed.

Thanks. And just a quick follow-up on the reserves. Can you remind us what your medical cost inflation assumptions are?

In the reserves, we've been using an overall -- approximately 6% inflation rate on the actuarial side.

And how is that changed from '09, or I guess, how much, where do you think that will go for 2011?

I can't say where it will go for '11. That number varies only slightly, period-to-period. Or review-to-review.

Got it. Okay. That is all I had. Thanks so much.

I would now like to turn the call back over to Doug Dirks for closing remarks. Please proceed.

Very good. Thank you, operator. Thank you, everyone, for joining us today. We look forward to hearing from you again as we release our fourth-quarter results early next year. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.