Employers Holdings Inc (EIG) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Employers Holdings fourth-quarter 2015 earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Vicki Mills, Vice President, Investor Relations. Ma'am, you may begin.

Thank you, Kaley. And welcome, everyone, to the fourth-quarter and full-year 2015 earnings call for Employers. This morning we announced our earnings results and later this week we expect to file our Form 10-K with the Securities and Exchange Commission. These materials 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 on the call are Doug Dirks, our Chief Executive Officer; Terry Eleftheriou, our Chief Financial Officer; and Steve Festa, our Chief Operating Officer.

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 be materially different from our expectations including the risks set forth in our filings with the Securities and Exchange Commission.

All remarks made during this call are current at the time of the call and will not be updated to reflect subsequent developments. We use certain non-GAAP metrics that exclude the impact of the 1999 loss portfolio transfer, or LPT, and other items. These metrics focus on operating income and operating equity and are defined in our earnings press release, available on our website.

Now, I will turn the call over to Doug.

Thank you, Vicki, and thank you all for joining us for our fourth quarter and full year 2015 call. Today we reported one of our strongest quarters and our most successful year since 2007. Given our strong financial position and improved underwriting results and our continued confidence in the operating performance of the Company, we announced this morning a 50% increase in the first-quarter cash dividend and a two-year, $50 million stock repurchase program.

As I've mentioned in the past, we periodically reassess our capital needs to ensure an optimal use of capital, consistent with our goal to create shareholder value over the longer term.

Our capital strategy remains focused on, first, supporting our business operations by maintaining capital levels commensurate with our desired A-minus excellent rating from A.M. Best, and to satisfy other regulatory and legal requirements. And, second, to sustain a level of financial flexibility to prudently manage our business through insurance and economic cycles, while allowing us to take advantage of investment opportunities, including mergers and acquisitions, as and when they arise. We expect to return capital not needed for these purposes to our shareholders in the form of dividends and stock repurchases, and our announced capital actions are consistent with that strategy.

Again, our recent performance has been strong. Our annualized operating return on equity was 16.1%. That is an increase of 9.4 percentage points year-over-year and 6.2 points or 63% over the third quarter of 2015.

We achieved an underwriting income before the LPT of $12.7 million, compared with an underwriting loss in the fourth quarter of 2014. Our combined ratio before the LPT of 93% improved 9.2 points year-over-year in the quarter and 2.6 points over the third quarter.

We lowered loss reserves by $9 million due to favorable development in our voluntary business. Reserve releases, net of required contributions to the assigned risk pools, were $8.5 million in the quarter. For the calendar year 2015, our actuarial analysis indicated that we had favorable reserve development for each accident year from 2008 through 2014, with the exception of 2012 where we observed adverse development of less than $160,000. Our accident year combined ratio, which excludes impacts of the LPT and favorable development was 97.7%.

We reallocated reserves from pretax to taxable years, which created a tax benefit in the quarter. We believe these adjustments encompass the known redundancies remaining in the pretax, non-LPT accident years.

Our book value per share was $29.50 at year-end. Our adjusted book value per share, excluding unrealized gains, was $26.90 at year end, an increase of 8% since the end of 2014.

Our strong financial and operating results reflect our continuing focus on our pricing and data-driven underwriting strategy, early claims settlement and our success in targeting profitable classes of business nationally. By successfully implementing our operating strategies, we have delivered increased profitability in the fourth quarter and the full year.

In the full year, and less so in the fourth quarter, our growth in in-force policies and premium was negatively impacted by our initiatives to either non-renew or increase pricing for a higher loss business, particularly in Southern California.

Significantly, another result of our actions was that we were able to reduce our premium concentration in California by more than 3 percentage points and our policy concentration in California by nearly 5% since we began our pricing and underwriting initiatives in Southern California.

While the impact of the initiatives in our California premium is lessening, we expect that current market conditions, including competitive pressures and softening rates, will challenge organic growth throughout 2016. And while we expect these conditions to persist throughout this year, we are encouraged by the stronger-than-expected renewal and new business production that we observed in January which is historically one of the industry's highest production months. In addition, final audit premium has been strong, generally reflecting improvements in our insureds payroll.

Throughout 2016, we will work to retain our best business and seek new business opportunities that meet our desired return objectives by continuing to focus on disciplined risk selection and pricing across all of our markets.

With that, I'll turn the call over to our Chief Operating Officer, Steve Festa. Steve.

Thank you, Doug. Our results in the fourth quarter, in particular the improving bottom line results, continue the trends exhibited over the past several quarters. These outcomes are reflective of initiatives described in previous calls and they have led to the desired results, most recently a combined ratio before the LPT of 93% for the quarter.

A substantial amount of our success can be attributed to our actions taken in Southern California over the past several quarters, which included rate increases and reducing our exposures in this part of the state. Since June of 2014, we have non-renewed 10.7% of our premium available to renew in this market because of poor individual risk characteristics.

In addition, over the same period of time, we walked away from an additional 15.8% of our renewal book in this market because we were unable to achieve the appropriate price based on our profit expectations. We will continue to execute this disciplined pricing and risk selection strategy to new business acquisition and we expect the impact on non-renewals to stabilize over time.

Outside California, we've had success in growing revenue, in particular in classes of business with historically low ultimate loss ratios. Despite a declining rate environment in many states, our new business growth in our Eastern Region has increased 11.1%. In addition, in states outside of California, we have increased policy count 5.8%, in-force premium by 4% and payroll exposures 6% on a year-over-year basis. This growth, coupled with our results in California, has reduced our percentage of in-force premium in California.

We have spoken previously about our diversification strategy of growing revenue outside of California and lessening our dependence on the Southern California market. These results speak to the success we are having in achieving this objective.

Despite the impacts our initiatives within the Southern California market are having on retention rates in that market, we are recognizing improved retention rates overall. Our policy unit retention rates for our book of business across all states has improved more than 7 points on a year-over-year basis with an acceleration of that trend in the second half of last year.

We believe that this improvement, coupled with some of the information shared earlier, speaks to the success we are having on culling underperforming business from our books, but at the same time maximizing our influence on retaining the profitable business that has positively impacted our bottom-line results.

Consistent with our geographic diversification strategy, in 2015 we entered Michigan and most recently we started writing business in New York. We expect to enter several additional states in 2016. We are taking a prudent approach to entering new states.

For example, in New York, we are currently writing business with existing long-term distribution partners to include national payroll partners as well as independent agents in border states that have New York opportunities. Our distribution channel will broaden later this year as we start appointing New York domiciled agents.

Now I will turn the call over to Terry Eleftheriou, our Chief Financial Officer, for a more detailed discussion of our financial results.

Thank you, Steve. We again delivered solid operating earnings in the current quarter, in line with our expectations. Net written premium increased 8.9% and net earned premium increased 5.3% year-over-year in the quarter. These increases were driven by higher final audit premium, compared to the fourth quarter of 2014.

Consistent with our experience in the third quarter, our insured payrolls have continued to grow in recent months, driven by increases in hours worked and the number of employees. Fourth quarter net investment income increased $500,000 year-over-year, reflecting an increase in our invested assets. Yields were unchanged with an average pretax book yield on invested assets of 3.2%, and a tax equivalent yield of 3.8% at year end.

Our underwriting and other operating expenses for the quarter were $37.6 million, an increase of $6.7 million relative to the fourth quarter of 2014. This represents a 2.8 percentage point increase to the underwriting expense ratio for the quarter year-over-year. Of the increase, approximately $3 million is considered to be of a non-recurring nature, representing 1.7 percentage points on the underwriting expense ratio for the quarter. Our full-year underwriting expense ratio of 19.5% was in line with our expectations.

Our fourth quarter loss ratio before the LPT improved 12.7 percentage points over the prior year, driven largely by our lower current accident year loss provision rate of 64.5%, a decline of 7.7 percentage points year-over-year and 1.8 percentage points relative to the third quarter.

Consistent with our experience in recent quarters, our indemnity claims frequency decreased year-over-year and this is reflected in the current accident year loss estimate. The loss pick also reflects a number of other factors including rate changes, loss trends, changes in business mix by territory and class, our strategic underwriting initiatives, and the nonrenewal of higher loss business in Southern California.

The fourth quarter loss pick was primarily the result of three factors, including the shift in business mix by state and territory, improved pricing in Southern California, and to a lesser degree than in past quarters, the nonrenewal of underperforming business in Southern California.

Over the past three years we have made significant investment in our internal actuarial capabilities and reserving practices. Our internal chief actuary has been named the appointed actuary effective for the 2015 statutory financial statements. Although we continue to use an outside consulting actuary as an external data point in selecting our loss reserve estimate, we now rely more heavily on our own internal reserve assessments than we have in the past.

Overall, our current loss reserves were reduced in the fourth quarter by $9 million of favorable prior accident year loss development for adjusting and other reserves, or AO, on our voluntary risk business, partially offset by $500,000 of unfavorable loss development related to the assigned risk business. The resulting net prior year reserve release reduced our combined ratio by 4.7 percentage points in the quarter, and increased operating income by $5.2 million net of tax or $0.16 per diluted share.

In the fourth quarter we reallocated reserves by accident year to address observed loss trends and align accident year carried reserves with our internal reserve estimates. These reallocations included $36.9 million of reserves from non-taxable to more recent taxable years. The impact of reserve reallocations during 2015 reduced our effective tax rate by 65.3 percentage points in the quarter, resulting in an increase to operating income of $11.5 million or $0.35 per diluted share.

The adjustments to the loss and DCC reserves will be reflected in Schedule P of our year-end 2015 statutory reports. We reiterate our prior comments regarding the challenges in using Schedule P for estimating our reserves due to our previously announced initiatives. That is, case reserve strengthening and claims settlements affecting certain accident years, and now the reserve reallocation. However, we do expect our accident year carried reserves reflected in Schedule P to show far more stability going forward.

We continue to actively manage our capital and our balance sheet remains strong. At the end of the fourth quarter, the market value of our investment portfolio was $2.5 billion, an increase of 1.6% since December 31 of 2014. The average credit quality of the fixed income portfolio was unchanged at double A minus with a duration of 4.3%. Equity securities represented 8% of our investment portfolio. In the quarter we recognized $17 million of other-than-temporary impairments of equity securities as a result of the continued downturn in the energy and commodity sectors. We believe in the long-term benefits of investing in these sectors. However, we anticipate that the unprecedented volatility experienced over the past six months will continue and we remain vigilant to the domestic and global developments impacting energy and other commodities.

In the fourth quarter, we repaid the $60 million remaining on the Wells Fargo amended credit facility and chose not to enter into a new facility. Instead, in January each of our insurance subsidiaries became members of the Federal Home Loan Bank of San Francisco which allows them access to collateralized advances to enhance liquidity management as needed. Currently, none of our insurance subsidiaries have advances outstanding under these credit facilities. At the holding Company, we had approximately $95 million in unrestricted cash and securities at December 31st.

Now, I will turn the call back over to Doug.

Thank you, Terry. Once again we are pleased to have announced two new capital actions today which provide the means to supplement our return to shareholders. A 50% increase in the cash dividend in the first quarter of this year, and a $50 million share repurchase program through February 22, 2018. Throughout 2016, we will continue to remain focused on creating value for our customers and for our shareholders.

With that, operator, we'll now take questions.

(Operator Instructions)

Our first question comes from the line of Mark Hughes with SunTrust. Your line is open.

Thank you very much. The strength that you're seeing in January of 2016, you've touched on a number of different topics. What is principally driving that?

It comes from both strong renewal rates and improved new business production over what we were seeing in 2015.

And why would that be emerging now? Seems like the market is probably getting a little more competitive. Why are you seeing it differently?

What we're seeing on retentions has given rate stability across most markets. We suspect our producers are feeling less demand to market the policies at renewal, particularly that's the case on the smaller accounts. Certainly as the accounts get larger, they're more likely to be marketed. So I think that's what's driving higher retention rates.

New business, we've just been very active in building relationships with our agents and getting more looks at business that are within our appetite.

You had also mentioned some credit market conditions will challenge organic growth in 2016. If I take the weight of your comments, it seems like you're speaking more optimistically about the top line.

When you look at it, Mark, it's a very competitive environment. We had a strong January and that's encouraging for the balance of the year, but I don't want us to lose sight of the fact that every market we're in is extremely competitive right now. And that's why we are somewhat -- I don't want to say pessimistic, but we're cautious about what all of 2016 could look like, given the continued high levels of competition.

How should we think about the reserves or the potential for further favorable development? It seems like historically with you and with other companies these things tend to go in cycles that once you start to see some favorable emergence, then it may be sustained over multiple periods, given that Q4 you had your first meaningful gain in quite a while. Should we assume or would it be reasonable to assume that, maybe not at this level but that you would continue to benefit from favorable trends in future quarters?

Mark, this is Terry. Couple of comments on that one. First of all, I think we can't predict the future. We make our actuarial reserve assessments at a given point in time and I think when we looked at the year end, we were very comfortable with our current reserve position at that time and in particular when we looked at the components of our reserve.

And I mentioned we reduced adjusting and other reserves, which is really a ratio that's applied to the losses in each accident year, we felt that there was a level of redundancy there that we needed to acknowledge. So predicting the future, I really couldn't do that. I would say, just to reiterate a couple of the comments that Doug made in his prepared remarks, we are seeing some favorable development in the loss experience.

And some of the initiatives that we have taken, particularly with regards to accelerated claims settlements, which are giving rise to fairly substantial levels of case reserve salvage, really haven't worked their way through the actuarial reserve estimates yet. And yet it's just a matter of time before they appear as part of the development factors.

So we've seen some positive trends I would say. In terms of how they might manifest themselves, in terms of future releases, I really couldn't comment on.

And then on the operating expense line, the $3 million nonrecurring, what was that?

The $3 million nonrecurring was essentially incentive compensation at both the officer level and the employee level. It included an adjustment to medical benefit accruals for the quarter which we don't expect to recur and there were some professional fees that were one-offs that we don't expect to recur as well.

How should we think about the California pricing? It was -- I think you'd been kind of mid single digits in Q3, then low single digits, kind of flattish in Q4. Should we assume that it will stay at that level? Is that an equilibrium level for you?

Mark, this is Steve. I'll take that question. When we look at California, we actually don't look at the state as a whole. We break it down into several territories.

And when we look at LA specifically, some of the trends that you've seen in terms of rate increases, we would expect that to continue. We're seeing very favorable progress in other parts of the state, in particular the Bay area as well as other parts, and in those particular areas we don't see the need to continue to raise rates. We look at those parts of California as potentially being a bit redundant from a pricing standpoint.

So net-net, flat?

I would say that's probably close.

Thank you very much.

You're welcome.

Our next question comes from the line of Amit Kumar with Macquarie. Your line is open.

Thanks for the questions. First one, just going back to the discussion on capital management, can you talk about the pace of capital management? I know you mentioned 2018. Is it more front-end loaded? How should we think about the timing of the capital management?

Amit, thus is Terry. In terms of the share repurchase program, the $50 million, it's a two-year program. We expect to execute that as a (technical difficulty) repurchase program. And it will be opportunistic. I think our expectation is it should take two years.

Got it. Okay. That's helpful. The second question I had was on -- is a follow-up on the growth discussion. Obviously you're talking about growth in the new states. Obviously we've seen what the impact can be of growth during different times of the cycle.

Can you talk about how different does your reserving or actuarial and underwriting department look versus, let's say, if we go back in 2009? Have you made meaningful more hires or has there been a lot of obviously investments in the infrastructure and technology. Just talk about that so we can have some comfort on that front.

I'll take that one, Amit. We've made substantial investments both in talent and in capabilities. And so we have far more insight today than I think we've ever had in terms of the book of business and our loss experience. As we go into new markets, we treat each one differently. Obviously writing in New York is different than writing in Michigan.

And so we have a tailored approach as to how we enter those markets. Our expectations in terms of new premium production in new states is very modest. We are not using these as an opportunity to aggressively grow the top line. We will do it very cautiously, very methodically, and we expect to have fairly modest results.

Got it. That's helpful. And final question. This goes back to the discussion on the underperforming business which you mentioned initially. When you look at the book of business, do you get the sense that you're close to sort of an end of the culling of underperforming business or is there more stuff which sort of needs to be hacked away? Thanks.

This is Steve. I'll answer that question. As you know, we started that culling process, for lack of a better description, more than a year ago. And based on the renewal cycle, we're past the 12-month period of time. And I want to emphasize too that the number of policies within California that impacted the negative results that we were trying to correct were a very small percentage of our overall policies within California, but they had a disproportionate impact on our overall bottom line results.

We have worked through that 12-month cycle and so, as we said earlier on the prepared remarks, we expect the impact on a go- forward basis to be very minimal relative to what it's been in the past year and a half.

Got it. That's very helpful. Thanks for the answers and good luck for the future.

Thank you.

Thank you.

Our next question comes from the line of Matt Carletti with JMP Securities. Your line is open.

Thanks. Good afternoon.

Hi, Matt.

You said a few -- mostly numbers questions. First, on the top line growth, I think, Terry, you might have mentioned that a contributor was the audit premiums in the quarter. What were the audit premiums -- what was the benefit from them this quarter versus year ago so I can just kind of size up what in the growth that contributed?

It was $12.4 million to both written and earned premium for the quarter; $12.4 million is the quarter-over-quarter, year-over-year improvement. So it's $12.4 million.

Okay. So that's the change year-over-year. Great.

Yes.

And then you also mentioned that indemnity claims frequency you continue to see improvement. I was wondering if you could put at least what your view is currently of how sizable those improvements are? And, likewise, on the severity front what's your best estimate of what you're seeing in your book for indemnity and medical severity change?

I think just broadly across the book, frequency declines are modest. They are declines. In terms of severity, again, I would characterize it as fairly modest increases in severity that are reflective of just general inflationary trends. Nothing outside of the ordinary there.

Would you make an assumption that maybe the overall loss trend, both those considered, is around about neutral in the ballpark?

I don't know that I could give you that number. That's probably close to right. If you think about what's happening in terms of rate filings around the country, for the most part states are -- the bureaus are filing rate decreases, which I think should tell us that net-net of frequency and severity we're seeing a decline.

Okay. And then last couple questions. Doug, I think you said, if I caught it in your opening comments, I think you said that the development we saw in the quarter was spread across 2010 to 2014 with the exception of 2012. Did I hear that right?

2008 to 2014.

2008 to 2014 Could you -- doesn't need to be hard numbers, but how was that spread? Was there any material amount in 2013 and 2014 or was it mostly from 2008, 2009, 2010, was it earlier weighted?

It kind of spreads across the years from fairly -- none of them, I would characterize, as significant changes. The one exception there would be 2014. We saw some pretty meaningful improvement in 2014. The other years I would characterize as -- they're not immaterial, but they're relatively small.

Okay. And then I guess the following question on 2014 would be meaningful improvement. Given it's such a young accident year, is that mostly just cases that you've closed at this point so there's finality to them? Is it something else? Is it IBNR or otherwise?

I don't think it has to do with the accelerated claims settlement as much as it had to do with a more conservative pick at the beginning of 2014. And ultimately what we've seen is as a result of the various initiatives we've described today, they had a more powerful impact than we expected.

Fair enough. Last question, I'm guessing for Terry, is just on tax rate. What's your best guidance as to what we should anticipate for tax rate going forward? I know we've had a lot of moving pieces over this year with some of the non-taxable years reserve releases. Something low 20%s in the ballpark or is that not where we should be thinking?

I think that's exactly right, Matt. I would say our expectation would be in the 22%, 23% effective tax rate. The things that -- I'll just refer you to note 8 of our consolidated financial statements which will be in the 10-K that is filed. In there we provide a full effective tax rate reconciliation. The components of it that really have been the items that we cannot predict are, obviously, the pre-privatization reserve adjustments and LPT reserve adjustments. Those two things we can't predict.

But again, just to reiterate my comment in my prepared remarks, I think with regards to pre-privitization reserve adjustments, our expectations are that we wouldn't see significant movements there going forward. But again, I can't guarantee it.

Great. Well, thanks for the answers. Congrats on a nice quarter and best of luck in 2016.

Thanks, Matt.

Thank you.

Thank you.

(Operator Instructions)

Our next question comes from the line of Brian Rohman with Boston Partners. Your line is open.

Good afternoon. Thanks for taking my questions. Couple of questions. First of all, about the share repurchase which we've talked about in the past.

Did you have to run this by A.M. Best? Did they have to approve, disapprove? Were they aware of this before you announced it? Because ratings issues have been part of why you haven't been more aggressive on share repurchase in the past.

Brian, this is Terry. No, we did not seek approval from A.M. Best. We believe we have a very strong capital adequacy position from a rating perspective, more than sufficient to sustain our current A- minus rating.

So, yes, we did not seek or obtain approval from A.M. Best on this. The capital that's been deployed is at the holding Company level. So we're really not addressing any operating Company capital adequacy.

Have you moved any capital from the operating Companies to the holding Company?

No, no dividends have been up-streamed at this point in the time.

Do you have the capacity to upstream dividends?

Yes.

How much?

Do I have the numbers? It's in our financial statements, as a matter of fact, that will be filed with the 10-K. So why don't we move on to your next one. We'll get that.

Okay, so we'll get the number, but generally that is for A.M. Best, the more relevant issue at this point is --?

It's about $50 million.

$50 million. Okay. And I think it was Amit who asked whether you had actually started the share repurchase program. I don't remember the answer. Had you actually started it or do you -- waiting?

The Board of Directors approved it yesterday. There is a waiting period before a share repurchase can become operational. We're currently in the closed window.

Okay. Great. Thanks. And then on the investment portfolio, you took a write-down against your energy exposure. I'm sorry, I must have missed it. How big is the energy exposure?

Maybe you could characterize what are the things that you took charges against? What were the precipitants there? I could figure it out, but maybe you could elaborate a bit.

Sure. So this is Terry again. We took a $17 million impairment charge for other-than-temporary impairments as required under GAAP. Those impairments were really driven by considerations around the severity of the declines in market values of specific holdings. The holdings are largely equity holdings in the energy sector, particularly within our master limited partnership, MLP strategy component.

Got it.

And that is largely it. I think the only additional comments I'd make, which is to reiterate my prepared remarks, is we're seeing tremendous volatility in the marketplace, in the capital markets, as I'm sure everybody's experiencing.

So these are MLPs, so these are really efforts to enhance cash flow and yield off the investment portfolio? Have any of these experienced cuts in their dividends yet?

No, none. At this --

Yes. It's possible. That's for sure.

It's always possible.

Okay.

But at this juncture, none of our holdings. Our holdings, our MLP strategy is actually focused, just to give you a little bit more color on it, is focused on transportation and storage names. So they're very much midstream companies and they are largely gas as opposed to crude oil oriented names.

And so the whole sector, I think -- well, the entire market has shown a strong correlation to crude over the past six months and I guess I don't need to comment further on that matter.

How big is the rest of the -- at market, how big is the rest of the energy exposure in your portfolio?

So we have energy exposure beyond our equity strategy. We obviously had it as part of our corporate one portfolio. Energy we maintain a benchmark weighting for energy at 8% and that's largely where we are within our fixed income portfolio.

Basic materials is 3% and that's where we are. So the energy exposure within the dividend -- sorry, within the equity portfolio that includes both the MLP and the high-dividend equity strategy is about 27% of the market value of the equity securities which were about $200 million at the end of the year.

Okay. All right. Thank you very much. Good quarter. Thank you for your answers.

Our next question comes from the line of Mark Hughes with SunTrust. Your line is open. If your phone is on mute, please unmute.

And we have a follow-up from the line of Amit Kumar with Macquarie. Your line is open.

Thanks. Just one quick follow-up on Brian's question regarding the ratings agency. Obviously the review came out and the ratings, the review was not taken off, the negative outlook was maintained. Can you talk about that? Were you sort of disappointed? Were you expecting that?

And what did they tell you? Why was the negative outlook not removed? It was a bit puzzling to us. Thanks.

I'll answer that one, Amit. Let me reference you to the press release issued by A.M. Best. They indicated two areas of concern. One was continuing adverse development in more recent years. As I indicated in my comments earlier, in fact, in 2015 we had no actuarial adverse developments in any of the years from 2008 to 2014.

The second reason A.M. Best cited is the concern for our forward outlook having to do with our business concentration in California. As we indicated multiple times in the call today, in fact, our exposure to California has decreased meaningfully over the last 18 months. So I can only reference you to the two items that they identified in their press release as to why they need to keep us on a negative outlook. Obviously, we would disagree with both of those points.

Do you get the sense, when is the next cycle, i.e., I know when the last time happened, I think we were waiting for two, three years. Is that sort of the next -- is that a time period when this thing could change or could this be a 2016 event where they could take you off?

A.M. Best has indicated to us that they reset the outlook annually. So conceivably they could do a review in later 2016, which would be our normal rating cycle or they could continue it indefinitely. All I can point to is the two areas that they've identified that were of concern to them and, in fact, we believe that actually that's incorrect.

I think it's important to note that although we would certainly like to have an A-minus stable outlook, the negative outlook has had no impact on our business whatsoever.

That's very helpful. Thanks again for the answers.

Thank you.

(Operator Instructions)

And I am showing no further questions at this time. I'd like to turn the call back to Mr. Doug Dirks for closing remarks.

Thank you. Thank you, everyone, for joining us on the call today. We appreciate your interest and your participation. We look forward to speaking with you again as we report our first- quarter 2016 results. Thank you and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.