Erie Indemnity Co (ERIE) 2008 Q3 法說會逐字稿

Hello and welcome to the Erie Indemnity Company's third-quarter 2008 earnings conference. At the request of Erie Indemnity, this conference is being recorded for instant replay purposes.

At this time all participants are a listen-only mode. Following prepared remarks from management, we will open the call for questions and answers. Now I would like to introduce your host for today's conference call, Karen Kraus Phillips, Vice President and Manager of Corporate Communications and Investor Relations. Please go ahead ma'am.

Thank you (inaudible) and good morning everyone. We appreciate all of you joining us for today's call.

On today's call, management will discuss our third-quarter 2008 results. Joining me are Terry Cavanaugh, President and CEO; Executive Vice President and Chief Financial Officer, Phil Garcia (technical difficulty) Executive Vice President and Secretary General Counsel; and George Lucore, Executive Vice President, Field operations.

Today's prepared remarks will be approximately 30 minutes. Following those remarks we will open the call for questions.

We issued our earnings release and additional supplement yesterday afternoon. If you need a copy of the press release or any of (inaudible) you can find these in the investor relations section of our website at Erieinsurance.com. We also filed Form 10-Q with the SEC.

On today's call, the management of Erie Indemnity Company will share important information about current and future initiatives being undertaken at the Company. As a result, certain forward-looking statements may be incorporated into their comments.

These forward-looking statements reflect the Company's current views about future events and are based on assumptions subject to known and unknown risks and uncertainties. These risks and uncertainties may cause results to differ materially from those anticipated as described in those statements.

Many of the factors that will determine future events or achievements are beyond our ability to control or predict. For information on important factors that may cause such differences, please see the Safe Harbor statements in our latest 10-Q filing with the SEC filed November 5, 2008 and in the related press release and 8-K.

In this (technical difficulty) discuss some non-GAAP measures. You can find the reconciliation of those measures to GAAP measures in the press release and in the supplement posted on our investor website at Erieinsurance.com. This call is being recorded and the recording is the property of Erie Indemnity Company.

It is not intended for reproduction or rebroadcast by any other party without the prior written consent of Erie Indemnity Company. A replay will be available on our website today after 12:30 PM Eastern time.

Your participation on this call will constitute consent to the recording publication webcast broadcast and use of your name, voice and comments by Erie Indemnity. If you do not agree with these terms, please disconnect at this time.

Now I'll turn the call over to Erie's President and CEO, Terry Cavanaugh. Terry?

Good morning. About 90 days ago, a week into my new job, I had the opportunity to join all of you on Erie's second quarter earnings call. My perspective of Erie at that point was still largely as one looking in from the outside. And while I'm sure you'll agree that I picked an interesting to become the CEO considering the country's economic condition, I'm now fully engaged and more confident than ever that I made the right call to join the Erie team.

Today I will share some of my early observations with you and where I see the Company headed in 2009. In addition to covering key points of the third quarter financials, I have asked Phil to talk about our capital and liquidity position both at the indemnity company and at the Erie Insurance Exchange which I know is a primary interest to all of you.

Over the past quarter, we have been riding the financial storm along with everyone else. We incurred $41.4 million in realized capital losses for the third quarter, saw a substantial reduction in our share of earnings from the limited partnership investments and a $10.1 million loss from our equity and earnings from Erie Family Life.

As you might expect, Erie Family Life also had significant realized capital losses from investments. These factors and the impact of Hurricane Ike on our underwriting performance were the primary drivers of our earnings per share results of $0.07 per share for the quarter.

Even after taking into account the impacts of the capital and securities markets, the quality and substance of our balance sheets at both the indemnity company and Erie Insurance Exchange continues to be remarkably strong. As of September 30, 2008 we had over $900 million in capital at Erie Indemnity Company and (inaudible) surplus of more than $4.4 billion at Erie Insurance Exchange. The strength of our balance sheet continues to give us a distinct advantage in the current insurance marketplace.

We see additional evidence of our competitive strength as well. Overall, policies of the Property & Casualty Group are growing at 2.8% on a year-over-year basis. Underlying that result are new policies enforce growth of 3.3% on a year-over-year basis and all lines policy retention rate of 90.5%. These results contributed to a slight increase in direct written premiums of the Property & Casualty Group despite giving $8.2 million in rate back to our policyholders during the quarter.

(technical difficulty) that company that resulted in a slight uptick in management fee revenue for the third quarter of 2008 compared to the third quarter of 2007. We also saw a margin improvement in the management operations segment during quarter to 19.3% from 16% a year earlier.

While this is positive news, it's primarily due to $8 million of onetime charge that was incurred in the third quarter of 2007. Removing the effect of the onetime charges, the margin in the third quarter 2007 would have been 19.1%. Expense management is a critical area of concentration for the Company and I'll talk more about that in a moment.

Erie has always had a reputation of a disciplined underwriting company. Within the context of the securities markets crisis, this discipline is more important than ever as we move forward.

Underwriting profitability is key to our ongoing success. I'm a big believer in equilibrium. Every (technical difficulty) counts. We need revenue growth to remain strong and return value to you, our shareholders.

However growth must not come because of an inadequately priced or poorly underwritten exposure. There are signs that the market is beginning to harden but true our philosophy of not overreacting to market swings and not shocking our policyholders, Erie doesn't need to take dramatic price increases.

We're positioned well to take modest rate increases wherever our experience warrants and continue to remain competitive -- where we continue to remain competitive for agents and our policyholders. Our focus is profitable revenue growth. The bottom line -- growth should not come at the expense of weak underwriting margins or no margin at all.

Since joining the Erie in late July, I've spent considerable time talking with agents, employees, policyholders and shareholders to gain a broader perspective on the Company. Based on those discussions and my own observations, I don't see a need for wholesale changes here. Erie's steady-as-you-go approach and focus on our core business has and will continue to serve the Company well.

However, there are areas of focus that we're concentrating on for the remainder of 2008 and 2009 -- profitable revenue growth, expense management, resource alignment, and agency management. I will start with revenue growth which I've already touched on but allow me to elaborate a bit.

One of Erie's primary growth strategies has been expansion into new states. The Company had been working on plans to begin writing in Minnesota in 2009, a topic discussed often on our previous earnings calls.

In September, I announced internally and to agents that we decided not to proceed with entry into Minnesota. We have incredible potential to expand market share in our existing territories and can reallocate hard dollars in labor costs to this effort.

We're creating a more strategic and more precise approach to growth; focusing on products, expansion into our existing territories and enhanced management of our agency distribution system that will lead to profitable revenue growth. On expense management, I believe we can do better.

Erie has traditionally had an expense ratio that has fared well against our competitors and that's an advantage I don't want to lose. So we're not going to spend less in 2009.

Non-commission expenses will increase primarily driven by IT investments. (technical difficulty) talking about here is better expense application.

We need to invest in the right things and concentrate our expense allocation on those things that will bring us the greatest return -- growth, underwriting profitability, great agent and customer service and staff development. Alignment, I see a lot of opportunities to better align reporting relationships, employee capabilities and development and incentive compensation.

Earlier this week we put a structure in place (technical difficulty) reporting relationships in the field. It leverages talent and skills of some key personnel and provides opportunity for staff development.

We're also looking at better alignment of incentive compensation; for example, between our underwriting and sales staff. In addition, we can never afford to forget that there always needs to be strong alignment between underwriting and pricing.

A good risk that's poorly priced and has weak terms and conditions is a policy that will be a drag on our resources and ultimately on our balance sheet. Our resources could be better used by better customers.

And finally, agency management. One of the first impressions that struck me about the Erie was the intense loyalty Erie agents have for this Company. In early August I spent a long weekend with our top producers and immediately followed that up with agent meetings in several of our territories.

You hear about the Erie loyalty factor within industry circles. But this was my first opportunity to experience it firsthand. It is impressive and certainly something we need to nurture and protect.

With this in mind, we're examining our agency management approach which goes hand in hand with our refocused growth strategy of concentrating our efforts on existing territories. Erie is committed to doing business through independent agents. That will not change. But we will incorporate better, more productive (technical difficulty) to support our top agents sales efforts and encourage and assist our other agents to strive for more profitable business.

We will also be opportunistic in our approach to new agent appointments. With the disruption in the financial markets, I anticipate a corresponding disruption in agency distribution channels of some of our competitors who may be distracted by deteriorating balance sheets. We have the advantage here. I look forward to welcoming our share of new high performing agents into our system.

The shareholders I've heard from touched on the issues I just covered -- profitable revenue growth and diligent expense management and maintaining Erie's service reputation and the loyalty of our agency force. Now let me address another issue they talked to me about -- Erie's capital management strategy.

I support Erie's long-standing approach to capital management. I believe returning to our shareholders in the form of dividends and share repurchase is appropriate and we have adequate cash flows to continue these programs. Phil will review that with you when I turn the call over to him in a minute.

But before I do, I'd like to update you our CFO search. We decided to search externally for Phil's replacement. Phil has committed to stay on through the search and selection period and we expect him to be with us for our year-end earnings release in late February.

Phil (technical difficulty) now to discuss our investment portfolios, capital strength and liquidity position before getting into a brief review of the quarter's financials.

Thanks Terry. Good morning everybody. Our third-quarter 2008 results show that Erie was not immune to the (technical difficulty) securities markets. For the third quarter 2008 net income decreased to $4.2 million from $53.5 million at September 30, 2007.

On a per diluted share basis, net income decreased to $0.07 in the third quarter of 2008 compared to $0.87 last quarter. Net operating income per share decreased by 35.2% to $0.54 per share compared to $0.84 per share last year.

As you know, net operating income includes the results of our limited partnership investments and our share of the earnings of Erie Family Life Insurance Company which also incurred significant realized capital losses on investments in the quarter. We also experienced catastrophe losses from Hurricane Ike which reduced underwriting income for the quarter.

As you would expect, the decrease in net income for the third quarter was driven primarily by net realized losses on investment. These were due to $37.4 million of impairment charges, $3.4 million of changes in fair value on our common stocks, a decrease of $13.1 million in the equity of earnings of our limited partnerships and a $10.1 million loss on our equity in the earnings from our ownership in Erie Family Life.

As I mentioned, EFL also recognized significant impairment charges during the third quarter of '08 which was the primary reason for their net loss. As Terry noted, Erie has managed through the investment market disruption quite well. Indemnity continues to have a very strong capital position and our underlying operating performance continues to be strong.

Indemnity also has a strong liquidity position with strong underlying cash flows from our management and insurance operations and from our investment. Our cash position is strong. We have $70 million undrawn on our current credit facility.

With the heightened interest on investments, I'm going to change the order of my discussion today and begin with our investment operations and also discuss the investment results for EFL which are relevant to our earnings and also discuss the investment results of the Exchange.

Investment income from interest and dividends decreased 16.5% to $10.2 million during the third quarter 2008 compared to $12.2 million for the same period in 2007 mostly as a result of a smaller asset base due to our prior period share repurchase. Our private equity in mezzanine debt limited partnerships generated losses of $0.7 million in the third quarter of '08 compared to earnings of $8.5 million in the third quarter last year.

Our real estate limited partnerships generated earnings of $1.8 million and $5.7 million in the third quarters of '08 and '07 respectively. As we mentioned, the reduced earnings recorded by our real estate limited partnerships are a result of the general slowdown in recent economic downturn in the real estate market.

We provided some supplemental information for you regarding our impairment charges on the portfolios of Indemnity, the Erie Insurance Exchange and (technical difficulty) Life Insurance Company. The information details impairments for Frannie and Freddie, AIG and Lehman Brothers and our overall (technical difficulty) reach portfolio.

The market freeze-up late in the quarter produced extreme evaluations on invested assets and was particularly rough on our corporate bonds and preferred stock. [Those have] normal conditions in the fixed income markets resulted in extreme credit spreads and pricing marks at quarter end.

As a result, Erie Indemnity incurred investment impairment charges of $37.4 million for the third quarter of '08 included (technical difficulty) $15.7 million on fixed maturities and $21.7 million on preferred stock. For the nine months ended September 30, '08 and '07, impairment charges on fixed maturities were $29.7 million and $1.6 million respectively and impairment charges on preferred stock were $32.1 million and $2.5 million respectively. In the third quarter 2008, valuation losses on common stock that were reported in earnings were $3.4 million.

During the third quarter of '08 Erie Insurance Exchange recognized impairment charges on its investment portfolio of $325 million. Even with these impairment charges at September 30, 2008 the Exchange had $4.4 billion in statutory surplus and a premium to surplus ratio of less than one to one. The Exchange has very strong capital levels that are more than sufficient to weather further market stresses.

During the third quarter 2008 we also substantially raised our cash position at the Exchange to further enhance our liquidity position which is also very strong. The Exchange generated $397 million in operating cash flow in the nine months ended September 30, 2008 and had cash and cash equivalents at September 30, '08 of $242 million. In addition, the Exchange has an undrawn credit facility of $75 million.

As you can see from our financial statements and the investor supplement, Erie Family Life recorded a large net loss for the third quarter '08 with our share being $10.1 million. In total for the third quarter 2008 EFL recorded net realized losses on investments of $46.4 million which included impairment charges of $40.1 million from the Company's bond and preferred stock portfolios. Although these are substantial incurred losses, we believe that EFL maintains strong statutory risk-based capital levels that support its current credit rating.

With respect t our share repurchase activity for the third quarter 2008, we repurchased 20,000 shares of our outstanding Class A common stock at a cost of about $900,000 in conjunction with our stock repurchase plan authorized in February '06. Beginning in July 2008, we suspended share repurchase activity during our quiet period which is the time period from the end of the quarter until our public filings for the quarter. As a result, our share repurchase activity is limited to two months per quarter going forward.

Through the first nine months of 2008, two million shares were repurchased at a total cost of $98.7 million. At September 30, 2008 $93.3 million of repurchase authority remains under the plan. So now I am going to review the results of the Indemnity's management operations and underwriting operations.

Our management fee revenue increased slightly as direct written premiums of the Property & Casualty Group remained level in the third quarter of '08 compared to the third quarter of '07. As you know our management fee rate was 25% for the third quarters of both '08 and '07.

As you know we frequently evaluate our pricing and currently we estimate that pricing actions approved, filed and considered for filing could reduce the direct written premiums of the Property & Casualty Group by approximately $31 million during 2008. Approximately $26 million of that amount occurred in the first nine months of 2008.

Given our accident year loss experience and the market conditions we're seeing, we're projecting premium rate increases of 1% overall for 2009. (technical difficulty) the trend toward increased policy growth continued in the third quarter 2008 as policies in force and new written premium continued decline. Premiums generated from new business increased 2.7% to $109 million from $106 million in the third quarter 2008 as compared to 2007.

Underlying the trend in new business premiums is a year-over-year increase in new business policies in force of (technical difficulty). Our year-over-year total policies in force grew 2.8% (technical difficulty) 7000 policies to almost four million policies at September 30, 2008.

As (technical difficulty) said, our policy retention rate improved to 90.5% at the end of the third quarter compared to 90% at the end of the third quarter last year. Total cost of management operations decreased by 2.8% during the third quarter. Commissions to our independent agents make up the majority of these costs.

Our commissions in the third quarter of '08 include a decrease in the estimate for agent bonuses of $5.2 million due to the decrease in underwriting profitability in 2008. There was an increase in normal and accelerated rate commissions of $1.6 million in the third quarter of '08 due to an increase in (technical difficulty) and higher accelerated commissions because we have more newly appointed agents.

The management operations excluding commission costs decreased $4.4 million or 6.5% for the third quarter of '08 compared to the third quarter of '07. Our personnel costs decreased $1.8 million or 4.8% in the third quarter of '08. In the third quarter of '07 there was a charge of $3.7 million for severance awards to a former executive officer.

All other operating expenses decreased $2.5 million or 15.1%. The third quarter of 2008 consulting fees increased $2.2 million primarily due to contract labor costs related to our technology and development effort.

(technical difficulty) remainder of '08 we will continue to develop the detailed planning, the design of our policy administration replacement system and as a result expect to incur external expenses of approximately $8 million. The third quarter of '07 included a charge of $4.3 million for a judgment against us in a lawsuit.

Now I'll just move on to our underwriting operations. Our insurance underwriting operations generated a profit of $0.3 million compared to $6.2 million in the third quarter of '07.

Our share of catastrophe losses as defined by the Property & Casualty Group amounted to $2.9 million and $1.8 million in the third quarters of '08 and '07 respectively. The third quarter of '08 included flooding, tornado and windstorms related to Hurricane Ike primarily in Ohio and Pennsylvania.

The GAAP combined ratio for the Company was 99.4% in third quarter of the year compared to 88% last year. Our catastrophe losses contributed 5.7 points for the GAAP combined ratio for the third quarter of '08. Our catastrophe losses were 3.4 points in the third quarter of '07.

Catastrophe losses incurred for the first nine months of '08 and '07 were $5.3 million and $3.2 million respectively and contributed 3.4 points and (technical difficulty) combined ratio respectively. Our 5.5% share of the Property & Casualty Group's favorable development of prior (inaudible) losses after removing the effects of salvage and subrogation recoveries was $0.2 million and $4 million and improved the loss ratio by (technical difficulty) 7.8 points in the third quarters of '08 and '07 respectively.

Favorable development in '08 resulted from improvements in frequency trends and slight improvements in severity trends on our automobile bodily injury and uninsured underinsured motorist bodily injury. Overall, our private passenger auto loss trends have remained favorable.

That concludes our prepared remarks. I just want to reiterate that despite this unprecedented disruption in the financial markets, the Erie Indemnity Company and the companies of the Erie Insurance Group are in solid financial position and our underlying results are very strong.

(inaudible) you can open the call for questions.

(Operator Instructions) Michael Phillips, Stifel Nicolaus.

Question first around, Terry, your opening comments about we don't need to take large rate increase, I hear that. I guess one question kind of on a line-specific question in homeowners. I'm hearing Maryland and kind of some surrounding states, obviously your bread and butter, and (inaudible) seen some competitors take some what I would call not modest rate increases. And so I guess I just want to hear your thoughts on how (technical difficulty) your margins might be allow you not to do the same thing.

We have a historical preference to be able to move rates in a way that is not disruptive to our distribution system that allows us to have a much more consistent approach to working with (technical difficulty) times and bad. My commentary is not meant to belie the fact that we need rate in certain places in certain lines of business and we will do so with a clear eye towards making sure there's a proper margin in that business.

But I think that we do run a business that we don't want to have peaks and valleys that are disruptive again, to customers and to our agents and have served us very, very well in terms of our ability to grow market share over a long period of time; a three, a five, a ten year cycle. And that's one of the things I have been very impressed about in terms of my involvement here. I can assure you I have a keen eye towards underwriting profitability and that it is a balance between doing what is appropriate for the balance sheet and what is appropriate for the longer-term strategy of the Company.

Okay, no, great, thanks. I guess staying with homeowners (inaudible) the second. Could you comment if we forget about catastrophe, what you're seeing in homeowners in terms of either frequency and severity trends combined without catastrophe?

I don't think we're really seeing too much a change over this last year of either severity or frequency in terms of our loss trends. We're not seeing anything in terms of the economic overview that might concern us. And I think clearly the issue in the homeowners is a lack of production based upon the economic realities.

Second question for me drills on the non-commission expense. I guess are your assumptions for the 9% growth this year, does that exclude those charges in third quarter of last year? You had 3.7 for severance and 4.3 for the quarter (inaudible) back out $8 million or does that includes -- how does that factor in?

It includes it -- now you're going to say that we're only at 2% through nine months, how are we going to get to nine?

I was going to say that, yes (multiple speakers) you can get to nine if you grow the fourth quarter around 20% (multiple speakers) or more than 20.

First of all you have got to look at fourth quarter last year where we had some intercompany reimbursements that resulted in very low salary and wage numbers in the fourth quarter for Erie Indemnity Company. So we're coming off a smaller base in the fourth quarter of last year. And we are going to have some substantial technology spends in the fourth quarter of this year. So take a look at that fourth quarter last year and you're going to see that the fourth quarter expenses were very low.

No, I see it; looking like a big percent for the fourth quarter this year, I see that. Thank you.

And then I guess one last one for me. The fact that some of Terry's comments in the opening comments -- Terry, you're not doing the Minnesota thing, I understand that. you said reallocating some dollars, some hard dollars to grow in our current markets, profitable growth in our current markets. Can you just draw down a little more detail on where the reallocation is going to take place? You mentioned some things but a little more detail on that?

Sure. One, we're refocusing our efforts in terms of looking at the geography and seeing where we are underrepresented and we're not maximizing our take from a distribution standpoint. We also have probably a page of small technology fixes that were not being addressed because our Minnesota project.

So we have now reallocated those technology people to be able to tweak some of our commercial and personal line capability to be able to go in and create some technology platforms for our agents that again we believe with better execution and focus on both the underwriting side and the sales side, we can do a better job of creating growth and margin in our existing territory.

(Operator Instructions) [Dan Schlemmer, SPK].

Question on a comment you made during the opening remarks just about ratings and overall capital strength seen in competitors or how that will impact the competitive dynamic troubles that other insurers might be seeing. You know, are you seeing that yet or is that something you're expecting to see? What are you seeing in the market right now that is maybe being driven by capital strength?

First of all, I didn't make any commentary on ratings. What I do believe though is that --and it's supposition currently. I have not seen it in the marketplace currently that based upon what we're seeing in terms of the results coming out both in terms of the capital market issues as well as the catastrophe losses that occurred throughout the country and within our footprint, that we do believe that there will be some dislocation or lack of focus by some of our competitors and we hope to take advantage of that like we would any normal situation.

I think we're clearly focused on doing that as we move into 2009. I think over the last year, Erie has done a great job of marshaling its resources and creating a more focused approach to both underwriting and sales management and I think we can take advantage of any kind of dislocation that may occur in '09.

What would you expect that to come through? Would it be more in terms of rates or more in terms of PIF over would you expect to see it both ways or is there I guess an expectation on your part at this point?

I think again, I mentioned equilibrium before. One, if you have that dislocation you should be getting more price for your product. I think clearly we're beginning to see that in the personal lines arena.

Although I would say in the last year in our footprint, there have been more of our competitors and we've raised rates then decreased rates in various tiers for various products. And I also believe that if we execute effectively, we ought to be able to grow PIF which then should be able to grow revenue.

And then going back again to some of the earlier comments, you made the comments on the Exchange and premium to surplus et cetera. Is that -- where is that headed? I guess I was hoping you could give us a little information on their portfolio just because as we have seen in October some pretty huge moves in the market and just trying to understand the likelihood that there problem could develop there as the market continues to gyrate pretty wildly obviously.

You can go to our website and we've provided some additional data as I mentioned on my prepared remarks, that we provided impairment charges by portfolio for each company, Indemnity, Exchange and Erire Family Life. We broke it down between bonds, preferred stocks and common stocks.

So you can see where our impairment charges were and we listed the high-profile defaults from Fannie and Freddie and Lehman. So you can see where the impairment charges are for the Exchange, $324 million which brought our surplus down about $350 million for the quarter and for the year to $4.4 billion. But we're still very strongly capitalized. Now you can look at for instance the equity position of the Exchange which is about $2.3 billion at September 30, use a proxy of what's happened to the S&P 500 during the month of October and apply that times 65% taking into account taxes and you will know what the equity portfolio has decreased and how much it has affected the Exchange's surplus in October.

That's exactly what I was looking for. That's very helpful.

I believe the S&P 500 is down about 17% in October (multiple speakers) on a $2.3 billion number. You can do that math (multiple speakers)

Thank you. Last question, just wanted to check in on sort of detail number. But in the release, the workers comp, you give numbers on the average premium per policy. What is going on in the workers comp that we are seeing the huge decreases? Is that rates or is -- are there other dynamics that are impacting that new business et cetera?

I would suggest it's a combination of some rate, some that went into West Virginia that was a smaller profile in terms of customer base there. And the third thing I think we're seeing the effects of the economy where just payroll is going down and therefore we're getting less for our -- disclosure is going down.

It's not a significant amount of rate cutting there. Is that (multiple speakers)

We have had some -- I think we've had some jurisdictions (technical difficulty) force us to take some rate down (multiple speakers) which is our biggest state for work comp. So some has been forced.

I think that trains about to end in terms of what the industry is looking at. And we have obviously also some -- we have a program now where we're monitoring our workers compensation underwriting and and loss trends closely. We've obviously got a continuing review of medical costs and it has our attention.

Ron Bobman, Capital Returns.

I had a couple of questions. The first one is in the area of auto and in the third quarter I was wondering with the change in driving patterns that's been sort of much discussed in the industry, did you see an improvement in claim incidents as the third quarter progressed that's sort of noteworthy?

That much talked about change really has not played out either way, either negatively or positively in our numbers. And then quite frankly, with gas now well below $3, I think the good old American driving habits are changing back to where they were before. So we have not seen any emperical evidence in our claims numbers that would dictate that.

So you highlighted the writings, the surplus of the Exchange and it is an extraordinary -- even despite the third-quarter impact, it's still an extraordinary amount of capital relative to the exposure (technical difficulty) and I was wondering given sort of the depression in whether it be sort of private equity, transaction cost or public equity markets where you have credit spreads widening; is there any thought or plan to expose more of the balance sheet to whatever you want to call it, sort of equities or high-yield bonds or corporate credit to be opportunistic?

We have a pretty conservative portfolio particularly in the fixed maturities. But if we balance that with the higher yield on our equity portfolio and our alternatives, we're comfortable with our asset allocation as it is.

We will be talking about that with our investment committee going forward at the board. We are happy with our asset allocation. We think it has like I said, the fixed maturities are very conservatively allocated. We don't have a lot of high yielding stuff. We don't have a lot of junk there. But it is balanced with our equities, our equity exposure which is fairly substantial and our alternatives.

I guess you experienced like all portfolios do sort of the old-fashioned effect of rebalancing the equities suffering a disproportionate more of a hit in the fixed income, the conservative fixed income side of the house. So just by the sheer movements, there has been sort of a shifting I would think.

And you can see from our balance sheet we are -- in these times we want to be cautious and we have raised our liquidity profile almost $300 million in cash and cash equivalents on the balance sheet (multiple speakers)

You're not putting more money back into equity so as to return it to the what I will call the pre-correction relationship?

No, we're not doing that at this point.

Okay and (inaudible) third question regarding sort of underwriting and in particular the CMP line and the workers comp lines. I don't have a time series of sort of what's transpired, but it sort of looks to me that retention levels for those two lines of business are pretty flat while at the same time for the last few quarters, average rates for those types of policies, CMP and workers comp, have come down and obviously (inaudible) combines are pretty darn poor. And so I think this is -- I don't think this is anything new but I guess correct me if I am wrong but why hasn't there been sort of more aggressive rate action which obviously would translate into higher average premiums, lower retentions and presumably better at least accident [year] picks for those lines of business not to mention the calendar year picks which were even worse because you (inaudible) adverse development?

Well first of all let me -- CMP is being affected here in the quarter and for the year by storms. So, the CMP line has really been affected along with the homeowners line during the quarter by Ike. We had about $60 million of losses. Workers comp (multiple speakers)

114 (multiple speakers) I think the CMP accident year combined excluding cat is 114. I'll make the second to last (multiple speakers)

I think we've been affected in the CMP line will by a couple of large claims in the year and also in the workers comp line by several large claims. So that is what is going on in those lines.

Ron, it has my eyes on it, believe me. Commercial insurance is more frustrating in some ways than personal because in many cases, personal as it has been created today is a more systemized machine underwriting and pricing capability where even today underwriting of commercial business is usually distributed throughout a field system and there's one over one underwriting judgments being done every day by the competitors and ourselves.

I am very excited about our capability as it improves because one, we don't have distributed underwriting. All of our underwriters sit under one roof in this building and we are going to be focusing on making sure that they have the discipline to price the product effectively. Obviously we're in a competitive market.

Our results I think are indicative of what the market looks like and it is obviously a market that needs to have some correction to it. So I look forward to having discussions in the future that would indicate that we are on top of this issue and improving those results.

Phil, you mentioned sort of for lack of a better word, sort of one-off, onetime -- a couple of large losses in CMP and workers comp. What are the accident year calendar year numbers for the nine months or '07? I thought my recollection was you had pretty high combined figures for both those lines for some period of time.

CMP for the calendar year for nine months is at 100 and we have one very large claim in there, a fire claim. Workers comp is at 107 for nine months and there are two or three very large workers comp claims in there that we have this year.

Okay, thanks a lot and best of luck. And Phil, I am sorry to see you're going. Pleasure to follow the Company all these years. I think you did a great job.

You have got him at least one more time (multiple speakers) all right?

I wouldn't mind (multiple speakers) longer. I wouldn't mind if you dragged longer. Best of luck at any rate (multiple speakers)

Mike Phillips, Stifel Nicolaus.

Just two quick follow-ups. I think I just missed this. The share repurchase suspension in July, did you say that was suspension was still in effect?

No. We remain cautious during the quarter taking a look at market conditions and making sure we had the right liquidity.

Mike, we didn't suspend the repurchase.

I thought it was suspended after July because it was a blackout (inaudible)

We suspended it for a month after the end of the quarter until (multiple speakers)

We were just informing you that that's a practice we're going to be utilizing going forward.

Sorry, okay; good, thanks. And then finally the operating tax rate obviously lumpy this quarter, can you just remind me what's kind of a good run rate that going forward?

Yes, you want to use about 33, 34%. But there is -- because of this big loss that's in there from Erie Family Life, it distorts the tax rate because tax rate we use for that income is 7%. It is 20% to 35% and I can explain that to you offline.

When you have a large $10 million number that comes in -- normally don't even notice that number. But it's an outsized number in our financial segments, the Erie Family Life (inaudible) so that is what is distorting it a little bit. Remember at 7% of the EFL line in the tax rate we use.

And just following up on the impairments that we talked about earlier, I think it's important to note that we had underlying our impairment strategy is a tax strategy on investments to realize significant -- be proactive and realize significant capital losses because we have significant capital gain -- capital loss carrybacks in '05, '06, '07 as we recognize significant capital gains during those periods of time.

So our investment people are proactively managing (technical difficulty) capital losses so we can monetize our deferred tax assets. Now what that translates into when you're looking at impairments is we no longer have the intent to hold some of these securities that -- because of tax selling -- that we would normally have the intent to hold and would not have impaired. So I think it's very important to our shareholders to know that both at the Exchange and the Erie Indemnity Company that that is an underlying strategy that did affect our impairment numbers.

Ron Bobman, Capital Return.

My question was answered.

With no further questions in queue, I would like to turn the conference back over to Karen Kraus Phillips for any additional or concluding comments.

Just a reminder that the recording of the call will be posted on the website, Erieinsurance.com after 12:30 PM Eastern time today. And as always, if you have any questions, give me a call at 814-870-4665. Thanks again and make it a great day guys.

This does conclude today's conference, ladies and gentlemen. We appreciate your participation today and you may disconnect at any time. Have a great day.