Employers Holdings Inc (EIG) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Employers Holdings earning conference call. My name is Tanya and I will be your conference moderator 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 hand the presentation over to your host for today, Vicki Erickson, Vice President of Investor Relations. Please proceed.

Thank you, Tanya, and welcome, everyone, to the third quarter 2011 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, and Ric Yocke, our Chief Financial Officer.

Statements made during this conference call that are not based on historical facts 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 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. As has been our practice, a list of our portfolio securities by QCIP is available in the investors section of our website under Calendar of Events, Third Quarter Earnings Call.

As you know, in August of this year, we announced we were exploring a potential acquisition and that we had submitted a non-binding indication of interest. Then in September, we announced that we had withdrawn our non-binding indication of interest. We will not be answering questions or addressing the reasons for the withdrawal of our non-binding indication of interest.

Now, I will turn the call over to Doug. Thanks, Vicki. Welcome, and thank you for joining us as we review our third quarter results. Yesterday, we reported third quarter net income before the LPT of $7.6 million, or $0.20 per diluted share. Our financial results in the third quarter include several significant items. First, we recorded a third quarter tax benefit of $4.4 million, primarily related to tax-exempt interest income, the impact of the loss portfolio transfer, and favorable reserve development related to older years when we were a nontaxable governmental entity.

Second, we incurred $1.1 million in charges for acquisition, due diligence activities. Third, we repurchased 1.6 million common shares at a cost of $19.7 million. Finally, our provision rate for current acts of end year losses remains stable in the third quarter relative to the second quarter, but was 5.9 percentage points higher than the loss provision rate in the third quarter of last year, largely due to increase loss costs in California. Losses for prior period reserves were stable. We had a $160,000 addition to losses due to assigned risk business.

Our growth initiatives continue to yield positive results in the third quarter. Net premiums written increased 26% year-over-year, driven by a 30% increase in policy count. We exceeded our monthly targets for adding policies in the past seven consecutive months with 12,040 new policies at the end of September. Final audits increased earned premium $15.1 million for the nine months ended September 30, 2011, but did not contribute to third quarter premium growth. We surpassed our 24-month target for adding agents with over 960 new appointments at September 30, 2011, nine months ahead of schedule.

Additionally, as planned, we succeeded in shifting a larger percentage of our payroll exposure, which increased 16% year-over-year at September 30, 2011, to lower hazard groups. The percentage of payroll exposure company-wide in the two lowest hazard groups A and B, increased four percentage points to 31% in 2011 from 27% in 2010. For each hazard group C through G, percentages of our overall payroll exposure declined or were flat year-over-year.

As of September 30, 2011, we grew in-force premium 12% year-over-year and 15% since the beginning of this year. Our strategic partner business represented 24% of our in-force premiums as of September 30, 2011, compared to 21% at the end of last year's third quarter. Retention of strategic partner policies in the third quarter was 91%, compared to overall retention of 87%. Overall retention improved nine percentage points year-over-year and was stable quarter-over-quarter. In California, which represented 56% of our in-force premium at the end of the third quarter, payroll increased nearly 9% in the past 12 months and grew 10% year-to-date.

In September, the WCIRB released its report on aggregate California data as of June 30, 2011. Here are some of the key points based on the latest release and other previous bureau publications. In the first half of 2011, California written premium increased 10% year-over-year to $5.5 billion. The 2010 accident year pure loss ratio was 81.8% at June 30th, an increase of nearly one-and-a-half points since the end of March. The 2010 accident year combined ratio was 128%, an increase of two points since the end of March.

Indemnity claim frequency was up 9% for accident year 2010 compared with accident year 2009. The California rating bureau believes this may be due to an increase in the number of small dollar indemnity claims in 2010 that were typically medical-only claims in years past. Indemnity claims severity was down 0.3 of a percent for accident year 2010 compared to 2009. The average changes in indemnity and medical dollars for those indemnity claims were down 0.8 of a percent and flat, respectively, for accident year 2010 compared to 2009.

The WCIRB stated that downward pressure may have been due to the more recent increase in small dollar indemnity claims that had been medical-only claims in past accident years. Please keep in mind that these are current estimates and projections by the bureau and are subject to change at future evaluation dates. The 2010 California data for indemnity claim frequency and severity is relatively green. Indemnity claim severity in California had been trending up with each successive accident year since 2005 and frequency has been declining. Only time will tell if these trends will continue in California.

Illinois continues to be our second largest state in terms of both payroll and premium. Policy count grew to 2,045 at September 30, 2011, from 850 at September 30, 2010. As we stated during our last earnings call, we are exercising caution, underwriting caution in Illinois due to regulatory and pricing conditions in that state. That caution has resulted in an increase in the percentage of September 30th in-force payroll exposure in lower hazard groups A and B from 19% in 2010 to 30% in 2011. At the same time, we increased our payroll exposure in Illinois 44%.

In Florida last week, the Insurance Commissioner approved an 8.9% pure premium rate increase effective January 1, 2012. While our net rate declined 3% nationally year-over-year, it declined by just over 2% in the first nine months of 2011 and increased 10% year-over-year in our largest market, California.

Workers' compensation market continues to be impacted by uncertain economic conditions and historically low yields on investments. We continue to actively and cautiously manage through these challenging operating conditions. Our balance sheet remains strong, evidenced in the repurchase of 1.6 million common shares in the quarter at a cost of $19.7 million, which contributed significantly to our 8% increase in book value since December 31st of last year. At September 30, 2011, approximately $45 million of the current repurchase authorization remained.

In October of this year, we repurchased nearly 1.4 million shares of common stock. Additionally, yesterday, we were pleased to announce that the Board of Directors authorized a $100 million expansion of our current stock repurchase program and an extension of the repurchase authority pursuant to the program through June 30th of 2013.

Now, I will turn the call over to Ric for a further discussion of our financial results.

Thank you, Doug. Doug discussed loss trends in California earlier and California represents over half of our book of business at the end of the third quarter. Our underwriting margin in the third quarter was pressured by these accident loss trends that Doug mentioned. We recorded an on adjusted underwriting loss of $12 million in the third quarter with a combined ratio of 112.9%. Excluding the impact of the LPT, our underwriting loss was $16.2 million, with a combined ratio of 117.5%.

Our third quarter loss ratio increased 7.5 points per year-over-year due primarily to the difference in the third quarter provision rate for current accident year losses. Underlying losses and LAE expense increased $14.7 million or by 28% year-over-year with approximately $7.8 million or 53% of that change related to premium growth. The remaining 47% change in losses in LAE expense was largely related to the increase in the provision rate for current accident year losses resulting from increasing medical and indemnity cost trends, particularly in California.

We believe our reserves for prior accident years continue to remain adequate. As we noted before, while we evaluate prior accident year reserves collectively, we have seen some unfavorable development in more recent periods, 2007 and subsequent, offset by favorable development in earlier accident years prior to 2007. However, our prior period reserves remained largely unchanged.

In 2010, we completed a review of our open indemnity claims in California. This review resulted in a net increase in individual case reserves. Additionally, total case reserves reflect growth in premium, which has led to a corresponding increase in the volume of claims, particularly in the second and third quarters of this year. Aggregate reserves have not increased because we believe the actuarial methodologies already reflected ultimate loss costs. Therefore, recent adjustments to case reserves have not altered our opinion on overall reserve adequacy and have been largely offset by corresponding adjustments of IBNR reserves.

Case reserves are reported in Form 10-Q and in Schedule P of our statutory filings. The increase in our loss ratio was partially offset by 4.5 points improvement in our underwriting and other operating expense ratio is year-over-year. This improvement was largely driven by the 15 percentage point increase in net premiums earned and a 1.5% decrease in underwriting and other operating expenses, despite a nonrecurring charge of $1.1 million for due diligence activities in the quarter.

Third quarter pre-tax net investment income declined to $19.6 million from $20.7 million in the third quarter of 2010 due to a slight decrease in yield. The tax benefit recognized in the third quarter was primarily attributable to tax exempt interest income, the impact of the loss portfolio transfer, and favorable reserve development in years when we were a nontaxable government entity.

Our $2 billion portfolio remained largely unchanged in the third quarter. The portfolio is comprised primarily of fixed income maturities, which are rated on average AA or better. Our portfolio is weighted towards short-term and intermediate term bonds. At September 30, 2011, equity securities represented only 3.7% of our total portfolio. The average yield of our portfolio was 5.2% on a tax equivalent basis with a duration of 4.65.

At September 30, 2011, we had approximately $412 million in cash and securities at the holding company. Our uses of capital remain the same. First, we invest in and support the organic growth of our operations, which Doug described earlier. Second, we look for opportunistic strategic acquisitions. And third, we return capital to shareholders through stock repurchases and dividends, which Doug also discussed earlier.

With that, I will turn the call back to Doug.

Thanks, Rick. In summary, we have reduced operating expenses related to underwriting implemented rate increases since early 2009 of more than 30% in our largest market, California, and we have made strides to increase market share while exercising the underwriting discipline necessary to further shift business mix to classes in the lowest hazard groups A and B. We believe these initiatives helped position us for improved results in the future.

And with that, Operator, we're now ready to take questions.

(Operator Instructions). Our first question will come from the line of Matt Carletti with JMP Securities. Please proceed.

Thanks. Good afternoon. A few questions. The first one, I guess, Doug, this is probably best for you. Just on the new business, I was curious how are the loss ratios I guess how you're picking the loss ratios on the new business, is it looking any different than the seasoned business in the same states on the same sort of regulatory picture? And then more broadly, how does that new growth on loss ratio basis look versus California?

Let's start by describing that it is relatively green as I referenced earlier. A lot of this growth is has come in Q2 and Q3, so on a loss development basis it is relatively green. But as we compare it to the book of business we currently have and as the losses are developing and the green period for those, as well, we're not observing any material differences between the new business and the existing business.

And kind of the loss ratio say the country ex-California versus California, and I am really -- just the point I am asking it is if the growth is coming largely outside, is there reason to believe that even absent pricing, we could see accident year loss ratios improve just from mix of business or are they kind of running ballpark the same?

Matt, this is Ric. One of the things that we watch carefully, but as Doug has already point out, it is very green, so it is difficult to know, but as you move, you migrate business from one hazard group to another, there is impact on both the rate , as well as loss experience. And trying to correlate those is what we're looking carefully at in terms of what the ultimate loss experience or loss ratio is going to be. We haven't seen anything that tells us yet exactly what that's going to be. We would expect that we should at least maintain our current experience and hopefully, if we can migrate to the A and B hazard groups, we should see improvement, but we don't know

Okay. And then just a clarification question on and, Ric, your comments on sounded like percentage of reserves and IBNR versus paid in case. Am I interpreting that right that it sounded like you were saying that take the 2011 accident year or some comparable basis now versus say 2010 at a similarly developed level that the more of the stated reserves are residing in paid in case today than they had in the past and the percentage of IBNR is a little less?

Right. We look very carefully at those changes that were made to the case reserves. We believe we're maybe for a kind of casual way to refer to it, we're moving it from one bucket to the other, did not change our overall assessment as to our liability, our reserve requirement, but it did put it into the case reserves as opposed to having it in the IBNR. We believe our actuaries had appropriately assessed the situation prior to the change.

Has that move been material or is it just kind of on the fringes?

Well, we looked at over 3,000 case reserves, and the adjustments were not immaterial, but, again, I think we had anticipated that through our actuarial analysis.

And then just lastly, Doug, I won't ask why you called off the discussions with Guard, but higher level, can you discuss your view on M&A and specifically, if I did the math right, the indicated price you put out there on Guard would have been a decent premium to book value, I want to say 1.3 to 1.4 times, you know, what -- how do you balance that sort of idea of paying a significant premium to book value for a property against at that time I think your shares are trading at about 55% of book and taking that capital and buying back your shares of that discount, which I got to think has over any sort of near or intermediate term timeframe, probably has a bigger return on capital than an acquisition at a premium.

Again, I am not going to reference any of my comments to the announced diligence and non-binding indication of interest. We still view acquisitions as an important use of capital to extend the strategic plan of the company and to drive creation of long-term value. Any transaction has to be looked at individually. The ultimate pricing that may be paid for a particular transaction is case specific. And beyond that, Matt, I really can't provide you any more guidance other than to say we remain committed to looking for opportunistic acquisitions that will advance value creation.

Fair enough. Thanks a lot.

Our next question comes from the line of Amit Kumar with Macquarie. Please proceed.

Thanks and good afternoon. I guess just going back to the last question, or I guess lines of the last question, this new business, what exactly are your return expectations on the new business which is coming from these new agents?

If you look across the entire book of business, our appetite has always been corrected towards A to D, low hazard, small accounts. That's exactly the type of business that we've been producing this year, and you can see the shift in the book. Over the course of the cycle, this strategy and that book of business produced results that have out performed the industry by ten points. At any particular point in time, it may be better or worse than that. But over the course of the cycle, we expect this business to out perform as it has for us in the past.

I am sorry, is there a numerical range?

I think that the numerical range is relative to the industry performance. We expect that low hazard, small account business out performs by on average ten points. That's the range.

Okay. That's helpful. Secondly, just going back to being ahead of the schedule, I think you mentioned nine months ahead of schedule, I am curious what exactly is the driver of it being so much ahead of schedule? Is it higher commissions, or what exactly is leading that much growth to your doors?

Number one, it is hard work. Number two, it's introduction of our brand in parts of the country where we weren't previously well known. When we survey agents, number one on their list is ease of doing business. We've rolled out technology that allows them to access a sound and solid market for small account business with an ease of doing business that allows them to achieve their objectives. I think those three things are the primary drivers of why we have been able to produce the number of new agents that we have.

I know we discussed this last quarter. To what exactly is this new technology initiative which is unique in nature and it is letting you capture this amount of new business?

What we've rolled out over the course of the last approximately 12 months is a technology that in small account business under $25,000 in approximately 85 to 95 classes of business depending on the state, allows an agent to go in, submit an application and get a real-time quote and an opportunity to request to bind. And although that is not unique, we're finding our technology is being embraced and adopted, not only by our new agents but also by our existing agents who have seen the advantages of real-time quoting and rapid turnaround.

And was this developed in-house?

Yes.

That's helpful. Just one other question. Can you just talk about the tax rate expectations for 2012? How should we think about that?

The projection for the tax rate as we have discussed before is a combination of the actual results year-to-date in combination with a projection for the remainder of the year. It is somewhat formulaic. We don't foresee any changes at this point in time through the remainder of the year. As you note, we recognized a tax benefit in the third quarter and it's largely driven by the relationship of our tax-free component of our portfolio relative to our operating income. We don't see that being much different in the fourth quarter than we see it being in the third quarter.

And for 2012?

Again, we don't talk about future periods, but, again, unless the relative value of our operating income changes to our tax-free portfolio, you can pretty much forecast that it's not going to be changed.

Yep. Got it. Thanks for your answers.

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

Thank you very much. The net rate in the quarter down 2%, could you refresh me on how much that's influenced by mix?

It is definitely being influenced by mix. That calculation is a little bit challenging, but if you look at where we have had big mix changes, Illinois leads there with a fairly significant shift so when you think about the growth and the shift from higher hazard A and B, that's a part of it. So really the key things are we're getting rate in California and then you're seeing that business mix away from the higher rated C and D to the lower rated A and B.

Right. So in other markets outside of California -- so California might be a pure view on pricing. If you look outside of California and you looked at the same account or same class codes, any guess you can venture on pricing under those circumstances?

Let me give you generally the numbers around the shift to A and B. If you look for the total company, for 2010 versus 2011, that shift is about five points,in California it was about two points, and again in Illinois it was about 11.

Right. And then if I were to try to think about pricing aside from that shift, again, same class codes, same type of account or even renewal accounts, what pricing seems like it would be up, is that fair?

We have got a mix. Some states are still going down in terms of rates. It appears that more are headed up now, California being the dominant part of the change in rate.

Right. Okay.

I think Florida, as well, you're going to see increases in Florida next year.

Right. How about frequency in California, I think you had touched on this earlier, and I am not sure whether you address specifically, but in California, frequency was up last year and seems to be down so far this year. Is that consistent with your experience?

Yeah, what the bureau is observing, we're seeing a similar trend. We are seeing a movement in indemnity claims as they -- the frequency of those is going up. As I indicated earlier in my comments, the view of the bureau is that maybe the result of some of those medical-only claims, previously medical-only now converting to indemnity. And if you think about the impact of that, what it will do is increase the number or frequency of indemnity, but if they truly were smaller claims, it should bring down the severity of all indemnity claims in California. That's what the bureau is speculating. Our numbers are consistent with that. We're seeing a similar trend.

I guess more recently it seems like the bureau has frequency down in California for this year. I can't remember whether that was nine months or six months data. Is your experience similar to that, that you had an uptick last year and as I say the state seems to be describing a reversal this year?

Mark, we are consistent with the findings, and you're correct in noting that that is what the bureau is seeing. But it is also the case with the bureau that the credibility that's being assigned that at this point is somewhat soft. They're not sure they fully understand that trend, and until they do, I don't know that anybody is willing to cast their fate to the wind saying things are getting better.

Right, but at least better start than previously?

Far better that it is down than up.

Yeah, exactly. And then finally, the issue of distribution, you've had good success there, you hit your target early. Do you continue at the same pace to develop more distribution?

Yeah. We're not going to turn this off. To the extent that we continue to identify agents that have an appetite to produce low hazard small account business, we'll continue with our employment process. We haven't settled on our 2012 plan just yet, but we have no intention of turning this off. What we have found through this process is there are a large number of small agencies that own small account business, and where as previously we focused on larger agencies. With the technology, we can have a broader appetite to appoint smaller agents that can do business with us more efficiently and maybe don't have as much subject premium as our current agency force has. So we've identified a lot of that as a result of this initiative to appoint more agents.

Thank you.

Our next question comes from the line of Ken Billingsley with BGB Securities. Please proceed.

Good afternoon. Just wanted to ask a couple questions on your press release. You talk about 30% increase in policy count but a 16% increase in payroll exposure. So obviously I am assuming that the account focus has moved to smaller account, smaller policy-size accounts, is that correct?

Yeah. We described it a couple of ways. Some of it is the change in our view as we try to accumulate more of the lower hazard business, and it is an average smaller account size. Some of what we have seen and I am looking for a bottom here, is that as the economy was continuing to be down to flat, the average account size we were expecting to write as we went into this initiative almost a year-and-a-half ago has been smaller than planned. Again, that is some of that is the business mix, some of it was the economy. We're also finding that the market is much more competitive in as you go up in the size of the account. We're seeing a lot of competition in the average account size above $10,000, which is somewhat surprising because with would have expected that to be a larger number. But the market continues to be very competitive, and we continue to be more successful on the smaller end of the account size.

When you talk about account size, I am assuming are you talking about the average policy in force.

Correct.

When you talk about -- my question, I want to also look at the payroll exposure itself. You said that overall payroll exposure increased 16% year-over-year, so obviously some of that is a shift, just different hazard classes, but are these also smaller businesses, as well?

It is probably a combination of both of those. I would say it is likely to be smaller businesses and it is likely to be hazard Group A to B, which is going to have a lower payroll.

And will that -- if you're obviously working with smaller payrolls but maybe more of them with the add-ons with new agents, will we likely see an increase maybe in the expense ratio as they're doing more smaller account business?

Our objective is to manage the expense ratio and to actually improve it by getting scale, so a lot of that is dependent on deploying not only externally but internally technology that will allow us to handle more business without adding people, because most of the cost is in the salary and benefits. So to the extent that our technology can allow us to scale that more efficiently, we would expect to see more relief on the expense side.

And over the last two quarters, we have not changed our headcount.

Okay. And I know you talked -- I think you might have actually answered this, but I had the question written down in a particular way. Maybe if you can rehash the answer. You had the 30% policy count but gross premiums grew about 20%, only 26% there. How much of that was a mix between the net rate decline versus the shift to hazard class? Is it 50/50 where the growth in policy count not matching premium growth?

I can't break that out in that level of detail. Certainly, business mix has been one of the impacts on that number and also the smaller average account size. I just don't have the detail that would allow me to break that out specifically.

Last question I have is in the press release, and I just wanted to make sure I understood this, you announced $4.6 million of reserve releases during the quarter and none in the third quarter of last year?

There were no reserve -- well, there were no reserve releases in the current quarter. What we -- I think you're referring to is the tax benefit that arose from the shift in some of our reserves within what we refer to as prior period reserves from accident years in which we were a non-taxed governmental agency to periods accident years in which we are a taxable entity and for which we have now, by that virtue, that shift, recognizing a tax deduction where there was no tax deduction in those earlier years. That's what you are seeing. There is no change in our view of the collective prior period reserves. Consequently, no reserve release.

Okay. I guess the line, the 4.6 million increase in nontaxable favorable reserve development related to periods prior to January 1, 2000, that's what you're talking about right there?

That's right, and we have had -- that is nothing new. We have that going on every quarter. It is somewhat masked in earlier periods because we actually did have reserve releases and that drew everybody's attention and eye. Since June of 2010, we have not had reserve releases, but we continue to monitor the accident years.

And just to verify, so what exactly -- where does that 4.6 million if it was a favorable reserve development?

To the extent that it was between July 1, of 1995, which was the LPT date, so everything prior to that is in the LPT, and changes to those reserves don't have any tax implications. From July 1, 1995 to December 31, 1999, any favorable reserve development on those years is nontaxable.

Okay. But it does not -- there isn't a reported reserve release in the numbers which would adjust the accident reported accident year for the current quarter?

There would be. Those were, to the extent that we strengthened reserved in later periods, those were offset by reserve releases in prior periods, some of which were nontaxable.

Got it. Okay. That answers my question. Thank you very much.

Our next question comes from the line of Jason Busell with Surveyor. Please proceed.

Thank you. I had a few questions about the growth. What kinds of competitors is Employers taking share from with that growth? Are they more regional or are they national in scope?

It is going to be a combination of those. I would say in the southeast/mid-west, those are more likely to be regional carriers. What we are finding, though, is not just for new business but across the board with renewals, as well, some of the larger national carriers are tending to be the most competitive at the moment.

Are the most competitive?

Yes.

So the large -- so from a package writer perspective, the national writers are still competitive; the regionals are where you are getting more success?

I think that's generally correct. It does vary by region.

What is your rate tend to be versus the renewal rate that your new business was getting?

It depends by class. There are some classes of business where we are finding it very difficult to write new business at the rate that we think is required. If you look at our retention rates, our retention has moved back up to levels that we think are expected for our book of business. They dropped significantly in 2009 and 2010. We're now back to retention levels, so that gives us some sense that we remain competitive in the market for renewals, but we find new business opportunities to be particularly challenging.

So if that's the case, then is the new business, is it that the incumbent is declining to renew it?

Now, I don't expect that that's occurring very often at all given how competitive the market is. I think it is more driven by the rollout of the technology and the ease of doing business, that when you present the agents with an opportunity to easily write business and a company that they have confidence in, they'll move it. And I think that's what we found over the last 12 months.

So even though somebody has the renewal in place where presumably there isn't a lot of work that goes into renewing a piece of business that's given the ease of writing a new piece of business with you, they'll move it?

Well, in some places that will be the case. Some of it, frankly, is being driven by, or at least being told anecdotally, is some service level problems amongst competitors.

Okay. Just looking broadly at the results with rates in general down in the low single digits and your combined ratio, excluding the LPT in the 118 range, when presumably you have a view that the growth that you're putting on is going to be better than perhaps where you're booking it hopefully. When do these combined ratios get to a more acceptable level?

Certainly given the yield on investments, you would expect that the market would have made that turn by now. I think the industry as a whole struggles from excess capacity, and I think there is a sense out there if you can just but the business on the books today, that market is about to turn.

Our view is that the market remains extremely competitive. And even though we hear about firming and turn in the market and all of the things that point to a better tomorrow, we are still finding the market to be extremely competitive. Some places more so than others, and we're trying to pick our opportunities where we can write good business, that we expect over the course of the cycle will generate historic returns, which for us, as I indicated earlier, is something that outperforms the industry by about ten points.

Okay, so the business that you're putting on today, you still expect would outperform the industry by ten points.

Yes. That is our expectation. If we look back over the last ten years to how this strategy is performed, it has consistently outperformed the industry.

Okay. Thank you very much. Appreciate it.

(Operator Instructions). Our next question will come from the line of Robert with pioneer capital. Please proceed.

Good afternoon. A couple of questions, please. Just on your last point there, Doug, at what point do you have to say let's not look at our goal on a relative basis, let's not look at ten points better than industry and think that's okay because, frankly, if the industry is at 130 or 140 or 150 combined, I don't think you'd want to be writing business at 120 or 130. Do you see what I am saying?

Absolutely. If you look historically, we are at cycle highs, and if you believe in cycles there should at least be a reasonable expectation that things are going to improve. But you're correct. There are others in the market that are reporting 125, 130. Our goal has been to get some of the scale back we had lost and to do that by writing business that we expect will outperform over time. But, I think everyone in the industry agrees that the market needs to turn, that these combined ratios are not sustainable, and they're especially not sustainable in a low yield environment.

Okay. On turning to rate and loss trend, I think some questions have been asked about it, but maybe I will ask very directly. There is two different numbers in the press release. One said I guess 2% net decline year-to-date and there's another one in the text that says the year-over-year percentage decrease in net rate was 3.4% in 2011. Just looking for clarity as to what each of those two numbers is referring to.

So if you look at the year-to-date and the year-over-year, I think what those numbers are telling you is that there has been improvement in the nine months of this year when you compare it to the year-over-year, so really we're comparing a 12 to a nine, and we have seen improvement year-to-date, the last nine months.

So the nine months year-to-date is minus 2% and in third quarter, over third quarter is minus three points?

Yeah, so what we're saying is that the nine months or better than the 12.

Okay. And how far away -- but net rates are still declining, presumably trend is up.

How -- what is your view on for your book of business, what has been the loss trend combination of frequency and severity in total and then in California and non-California? So let me talk first about that rate number. Again, there will be noise in that number because of business mix. So I can't give you that number, but I think business mix is a large influencer on the continuing decline in net rate. We're just writing business that overall has a lower rate because it has less hazard and less exposure.

When I look across the country, California is our strongest rate environment, where we're seeing a year-over-year increase of the ten points. It is double-digit in California. So California is superior to the rest of the country in that respect. I would temper that a bit with California also needed the rate because the loss trends were moving up.

And the piece we don't have for you is in the case of the shift in mix is we can't -- we don't have the visibility on what that rate would have been for a new account last year. So it may be that if we swap from a hazard class C policy with higher rates to something in a hazard class B, that rate is down from a C to a B but had we written the B policy a year ago, the rate may be up, and we don't have that visibility, so all we can tell you is overall there was a rate decrease.

Fair enough. What about loss trend in terms of percentage increase apples-to-apples? What do you think it is in California? What do you think it is outside of California?

That's -- I commented earlier that that is very green. We're watching it very carefully. But there is nothing that tells us that it is enough to say that it is worse or better.

Assuming it was the same, what would it be?

Well, we're providing it 78% and that's unchanged.

Okay. I guess do you have an expectation as to when the net rate will be enough to stop the increases in the provision level?

Well, we have not seen any need to increase the provision rate since we announced the change in the first quarter of this year.

It is driven by two things. One, it's going to have to be either an improvement in the loss environment or better margin on the pricing or a combination of those two. That's ultimately what brings it down.

Clearly. One last question on reserves. Just going back to what Ric was talking about on California, so moving IBNR to case, I don't remember which policy or accident year were you referring to, like 2010?

It wasn't restricted to any particular accident year. It was looking at all open claims.

But presumably the more recent years, correct?

Again, it wasn't restricted, so --

The question is if you saw an increase in indemnity claims, such that you needed to make an adjustment by moving IBNR into the case, why wouldn't -- given the long tail of the business, why wouldn't that precipitate kind of a recast of the ultimate? I guess I don't understand that point.

Well, we could have a long discussion about actuarial technique, but the actuaries are looking at, if you will, the way losses are paid, the way they're reported. They make note of the fact that if there is a pattern, a consistent pattern on the part of the adjustors in terms of how they adjust case reserves, it is built into the IBNR. If now the claims adjustors want to review the way they have done it and essentially accelerate that recognition in the case reserves, the actuaries are going to say, "Okay, fine, you're going to do that; we will adjust accordingly. We don't think you're recognizing anything that we haven't previously recognized through our actuarial techniques."

The risk would be if you did take that approach and if you were with the individual claims examiners on a case basis accelerating, if the actuaries didn't make the adjustment, you would end up double counting. And so that's why we can move it, as Ric indicated earlier, from one bucket to the other and not necessarily say the ultimates have increased because the actuaries are picking that up in their techniques already.

Right, right, but what I am saying is if the original pick of the IBNR was made before the new trend in claims appeared, then it wouldn't have been taken into account when the alternate was picked.

I don't think we were -- I think the keyword what you may have just said there was new. We're not suggesting that there was a new trend. It is recognition of trends, existing trends.

Okay.

That's why the actuaries, we believe that they had already accounted for that.

Okay.

Robert, going back to your earlier question, you were talking about when would we recognize this. If you're asking how much time needs to elapse before the actuaries believe they have enough data to discern a trend downward, if you will, in loss experience, it takes something more than a year. We're sitting here looking at 2011 and we've got at best two quarters of data that you can look at, and that's not nearly enough to discern a trend line, even if you see one, not sure that you would necessarily assign a high level of credibility to it until you had seen it repeat itself for at least a year or so.

Thanks for the answers, guys. Appreciate it.

You're welcome.

Our next question comes as a follow-up from the line of Matt Carletti with JMP Securities. Please proceed.

Thanks. Rick, just a couple numbers questions I am hoping you can provide. One is going back to your comments on just kind of the shifting pieces within accident years, I think you said 2007 and, more recent, there was a little adverse offset by favorable in the prior, which I believe has been the trend for most of the year. Do you have the year-to-date numbers, the additions in millions of dollars to 2010 and 2009 accident years handy?

We moved -- find the right set of glasses on here -- we moved about -- actually, which year were you asking about again, Matt?

2010 and 2009, the net additions to them in 2011.

We moved -- in the quarter, we moved about a $1.7 million into the 2010.

Okay. Do you have the nine month figure?

That's closer to a double-digit number.

Okay. Great. Do you have it for 2009 or no? Wasn't there much?

It is roughly the same for 2009.

For the nine months.

For the nine month. Okay.

Yes, correct.

And then the only other question is investment portfolio related. What is the kind of new money rate you're investing at and what's the average we're rolling off at?

Again, because of the share repurchase plan, we really haven't had "new money."

To the extent that we have been purchasing new securities in the quarter, the shift in allocation, and these are not material numbers, Matt, but we have been purchasing corporates and some mortgage backs as you have seen previously, the shift away from munis, although it is relatively small. And when you go online and look at our portfolio, you will be able to see that. But it is our objective to move to corporates and take advantage of more attractive yields there.

Great. Thanks very much.

We have no additional questions at this time. I would now like to hand the conference back over to Doug for closing remarks.

Very good. Thank you. Thank you, everyone, for your questions today and your participation. We look forward to talking with you again next February as we report our full year 2011 results. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.