ProAssurance Corp (PRA) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Eastern Insurance Holdings Inc. second-quarter 2008 earnings conference call.

At this time, all participants have been placed in a listen-only mode. Following the formal remarks with respect to the earnings press release, the call will be open to questions specific to the earnings press release. Afterwards, a presentation will commence regarding Eastern Insurance Holdings Inc.'s acquisition of the Employers Security Holdings Company and subsidiaries, with questions to follow.

I would like to remind you that, as noted in the press release issued yesterday, a presentation specific to the EIHI acquisition of the Employers Security Holdings Company and subsidiaries is available on the EIHI Web site at www.EasternInsuranceHoldings.com. Please note, this conference is being recorded. (Operator Instructions)

It is now my pleasure to introduce Kevin Shook, Treasurer and Chief Financial Officer for Eastern Insurance Holdings. Sir, you may begin.

Thank you and welcome to EIHI's second-quarter 2008 conference call. Representing the Company today are Bruce Eckert, Chief Executive Officer, Michael Boguski, President and Chief Operating Officer, and myself, Kevin Shook, Treasurer and Chief Financial Officer.

Before I turn the call over to Bruce for opening remarks, I would like to remind you that the statements made during the conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provision of the private securities litigation Reform Act of 1995 and are subject to uncertainties and risks. EIHI's future results may differ materially from those anticipated and discussed in forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the press release issued yesterday and in EIHI's filings with the SEC. Please note that EIHI filed its Form 10-Q for the quarterly period ended June 30, 2008 yesterday. We refer you to these sources for additional information.

I would also like to point out that remarks made during the conference call are based on information and understanding that are believed to be accurate as of today's date, August 8, 2008.

With those announcements complete, I give you Bruce Eckert.

Thank you, Kevin, and thank you all for joining us for this morning's conference call.

Strong results in our Workers' Compensation insurance and Group Benefits insurance segments were partially offset by disappointing results in our Specialty Reinsurance segment, which experienced a substantial increase in the amount of prior-period reported losses and loss-adjustment expenses from the seating company during the second quarter.

You may recall that business in the Specialty Reinsurance segment is assumed through participation in the Reinsurance Treaty with a nonaffiliated seating company related to an underground storage tank insurance program referred to as EnviroGuard and a non-hazardous waste transportation product referred to as EIA Liability.

You may also recall that, as of the treaty renewal on January 1, we decreased our quota share participation from 25% to 15% in order to take some of the volatility out of those results. With this quarter's results, we have decided to begin expediting the termination of this reinsurance treaty. In this regard, we have informed the ceding company that it is our intent to exit this business effective July 1, 2008.

Our combined ratio for the three months ended June 30, 2008 in our Workers Compensation insurance and Group Benefits insurance segments were 74.2% and 98.4%, respectively. Our consolidated combined ratio was 96.9% in spite of the combined ratio in our specialty reinsurance segment of 174.2%.

I am very pleased with the operational results of our Workers Compensation insurance and Group Benefits insurance segment in the second quarter. Our Workers Compensation insurance segment continued to produce truly excellent results again this quarter, driven by strong individual account underwriting and favorable claim closure patterns which have resulted in exceptional accident year loss ratios and favorable loss reserve development on prior accident years.

I am particularly pleased with these results considering the continued competitive market, particularly in the Southeast, and the very challenging times in the investment markets. The combined ratio in our Workers Compensation insurance segment includes an increased expense ratio associated with the opening of our Charlotte, North Carolina office, which we anticipate will normalize as we add premiums in subsequent quarters -- also of note, our additional expenses related to state licensing initiatives, which we have commenced in other states, particularly those east of the Mississippi River.

Underwriting discipline remains strong with excellent premium renewal retention rates and renewal rate decreases of only 7.2% on a very profitable book of Workers Compensation insurance business.

The combined ratio in our Group Benefits segment of 98.4% was driven by an overall loss ratio of 69.1%, including a dental loss ratio of 78.6%, short-term disability ratio of 60.4%, long-term disability ratio of 64.9%, and a term life loss ratio of 38.0%. We continue to prudently manage expenses in this segment [for] the 2008 second-quarter expense ratio of 29.3%.

As of June 30, 2008, our segregated portfolio sell reinsurance business has 14 total programs with two currently in runoff, as previously reported. We obviously view this intercompany reinsurance business as integral to our core Workers Compensation insurance segment. We therefore continue to pursue new programs for 2008 in this very profitable aspect of our business.

Next, I'd like to introduce Michael Boguski, our President and Chief Operating Officer, to review our Workers Compensation insurance and Group Benefits insurance operating results. Michael?

Thank you, Bruce. After providing a brief overview of our operating results, I will turn the call back to Kevin for a review of our financial results for the three months ended June 30, 2008 and 2007. Finally, we will open the call to your questions.

The focus in the Workers Compensation insurance segment continues to be on individual account underwriting and adhering to disciplined underwriting principles in the competitive marketplace.

Net income was $3 million in the Workers Compensation insurance segment for the three months ended June 30, 2008, compared to $3.7 million for the same period in 2007. The Company's direct written premium increased from $19.2 million for the three months ended June 30, 2007 to $22.5 million for the same period in 2008, an increase of 17.1%.

Production highlights for 2008 include renewal rate decreases of only 7.2% on our profitable book of business, with a renewal retention rate of 88.8%, an excellent result in an environment where competition for business continues to intensify. Our underwriters continue to manage our policyholder dividend liability exposure with 87.5% of our 2008 book of business written on a guaranteed cost basis. The second quarter of 2008 included new business writings of $7.3 million.

In the Group Benefits insurance segment, we continue to emphasize profitable new sales opportunities, premium retention initiatives, and expense-saving strategies. The Company produced new sales of $1.2 million for the second quarter of 2008 and ended the quarter with annualized premium volume of $39.4 million. Renewal rate increases in our dental product and short-term disability product were 1.9% and 2.5%, respectively.

I am now going to turn it over to Kevin Shook for a review of our second-quarter financial results.

Thanks, Mike.

EIHI reported net income of $1.5 million or $0.16 per diluted share for the three months ended June 30, 2008, compared to net income of $4.3 million or $0.40 per diluted share for the three months ended June 30, 2007. Our consolidated combined ratio of 96.9% includes a loss ratio of 62.3% and an expense ratio of 34.6%. The decrease in net income of approximately $2.8 million in 2008 compared to 2007 is due primarily to after-tax unfavorable loss reserve development in our Specialty Reinsurance segment of $1.6 million, after-tax net realized gains of $250,000 for the three months ended June 30, 2008 compared to $611,000 for the same period in 2007, an after-tax decrease in investment income of $757,000, and an increase in the consolidated expense ratio of 2.2 points, partially offset by an increase in net premiums earned from $31.8 million in 2007 to $33.2 million in 2008.

Furthermore, after-tax favorable loss reserve development in the Workers Compensation insurance segment was $650,000 for the three months ended June 30, 2008, compared to $780,000 for the same period in 2007. And a decrease in the 2008 accident year loss ratio from 62% to 60% was recorded in the second quarter of 2008, adding after-tax earnings of approximately $293,000.

The favorable loss reserve development in our Workers Compensation insurance segment was driven by solid claim closure patterns during the second quarter of 2008, during which the claims department closed 94 or 16.5% of the 570 open-loss time claims as of December 31, 2007. These claims were settled for amounts at or less than previously established loss reserves. The claims department has now closed 193 or 33.9% of the 570 open-loss time claims from December 31, 2007 during the first half of 2008.

Consolidated revenue for the second quarter of 2008 was $36.1 million compared to $36.2 million for the same period in 2007. Consolidated revenue is comprised of an increase in net premiums earned, offset by a decrease in investment income. The increase in consolidated earned premium was primarily driven by the increases in earned premium in the Workers Compensation insurance and Group Benefits insurance segments, partially offset by a decrease in earned premium from the Specialty Reinsurance segment.

The decrease in investment income is primarily driven by limited partnership losses of $358,000 for the three months ended June 30, 2008 compared to limited partnership gains of $152,000 for the same period in 2007, a decrease in short-term investment rates and a decrease in overall invested assets as a result of our stock repurchase program, which utilized $30.6 million of cash from July 1, 2007 to June 30, 2008.

Our book value per share was $16.93, and our diluted book value per share was $16.33 as of June 30, 2008.

Lastly, with respect to capital management, since the implementation of our stock buyback program in the first quarter of 2007 to June 30, 2008, we have purchased 2,008,777 shares of EIHI stock for $31.6 million.

This concludes our formal remarks on our second-quarter 2008 earnings.

Before I open the call to your questions, I would like to tell you that the Company will not be providing forward-looking earnings guidance and thus will be unable to answer questions pertaining to that subject. Please hold questions specific to the EIHI acquisition of the Employers Security Holdings Company and subsidiaries until after EIHI's presentation subsequently.

At this time, I would like to open the call to your questions specific to the EIHI second-quarter 2008 earnings. (Operator Instructions). Sam Kidston from North & Webster.

I obviously will have some questions on the merger in a few minutes but I just wanted to check on the capital position and thoughts on using that.

Sam, it's Kevin. The capital position is relatively the same at June 30 as it was at March 31. We've got about $60 million of "excess capital". We only purchased about 250,000 shares of stock in the second quarter, and that was down from about 780,000 shares of stock in the first quarter. So we've certainly seen a slowdown in the stock repurchase program, which in turn hasn't eaten away at the capital in the second quarter like it did in the first.

Now, obviously with the transaction, that's going to eat into that a little bit further.

Right. In terms of the repurchase, is that just because of volumes traded as opposed to appetite, or --?

It is volumes traded as opposed to appetite. We are not seeing the opportunities this quarter that we had seen in the first quarter and in quarters prior, so that is correct.

Okay, and any thoughts on the dividend?

Our expectation is it will be the same, moving forward.

Okay, thanks, guys.

[Bob Schwerin], [Schwerin Boyd] Capital Management.

I just wanted to follow up a little on that. It looked like, based upon the share count on the 10-Q, you had bought back another 28,000 in July, or at least by August 6, so I wanted to see if that was correct.

That is correct, Bob.

Okay. Now, I was a little confused about -- it said, it looked like you only had 31,000 shares left to buy as of June 30, but it said there was something in the 10-Q about it not including the $10 million. I guess you were waiting approval on that $10 million. Does that come through?

We do have approval on the $10 million. It's a little bit confusing because the original authorization from the Pennsylvania Insurance Department came in the form of a share count. You are correct that the total share count in the first authorization was 2,046,500 shares and when we went for the authorization subsequent to that, they authorized a dollar amount, which was $10 million. So we've got $10 million above the 2,046,500, which you've correctly -- you know, the 30,000 shares is about the right number, but we have $10 million on top of that, and that has been approved.

Okay, so you've got quite a bit of room there.

We have quite a bit.

Second, any change in the asset quality issues which were pretty strong (inaudible) in the last quarter?

From a subprime perspective, we are very, very comfortable. From an Alt-A perspective, we are very comfortable. We do own two prime home-equity line of credit products that are in a fairly significant unrealized loss position. The total position is about $800,000 of an unrealized loss. It's fully disclosed in the Form 10-Q.

We did not believe it warranted a write-off obviously for the June 30 quarter. The market value has continued to increase subsequent to June 30. We believe they are trading at the depressed market values because of the perception of the bond insurers and because of liquidity issues, but we will continue to closely monitor that piece of the portfolio, but other than that, the fixed income portfolio remains to be very clean.

Okay, the last question -- are you satisfied with the progress made on the Charlotte operations?

Bob, it's Mike. I will take that. Just to kind of give you a summary of our progress in the Southeast regional office, the office officially opened on February 4, 2008. We have an integrated team of professionals down there led by Lucia Tomkins who is our Regional Business Executive to service four states -- Virginia, North Carolina, South Carolina and Georgia.

We've appointed 14 quality agents in 2008 servicing 18 locations. We expanded our Internet-based small business technology to all of these agents and have conducted formal training, and we've seen very consistent and profitable production in the second quarter of 2008.

Finally, I would add, on state expansion, we have received approvals in the last quarter for licenses in Washington DC, Kentucky, Mississippi, Indiana, Michigan and West Virginia for expansion of our state licenses, which we mentioned east of the Mississippi and into the Midwest. So overall, we are very pleased with the level of talent, the quality of the agents in the Southeast and our second-quarter production was very solid. We expect that to continue in the third and fourth quarter.

Stewart Johnson, Philo Smith.

Good morning. I have a question regarding your long-term disability results. You indicated that there were several terminations with reserves in excess of $100,000. Just in terms of context, are those large reserves? What are your average reserves per case (inaudible)?

The average reserve per case, without having it in front of me, it would approximate about $30,000. The terminations were a combination of debts, people coming off disability earlier than we had suspected, and those are really the two drivers of that, Stewart.

Okay, I'm just trying to get a sense of where that $100,000 (technical difficulty).

The second question related to your dental business. You indicated increased utilization and some claim cost inflation headwinds there. Is the increased utilization primarily from new business that you are writing?

Stewart, it's Mike. I'll take that question. That is the case, particularly in our Southeast region. The new business over the last 18 months has run higher than our mid-Atlantic region and is a key driver of that loss ratio.

Okay, great. Then last question -- the claim costs portion of that, how are you looking at pricing on your new business to account for that going forward?

What we've looked at is, one, Stewart, we want to continue to emphasize our more profitable mid-Atlantic region sales. Two, we are certainly looking at strengthening our Southeast renewal pricing. However, I will say it's been very difficult in a competitive environment.

Overall, when we look at the other ancillary lines, we are very pleased with STD and (inaudible) have come down about 9 points year-over-year on the loss ratio side. So as we start looking at multiline sales, we need to be cognizant of the dental pricing, but we are very pleased with where the other ancillary benefit lines are starting to come in.

Okay, thanks. I guess just one big-picture question -- I generally think of the dental business as being kind of a scale business, high-volume, low-margin, and you're obviously competing against some bigger players. What are your thoughts on that?

Well again, we are looking at it from the perspective of it's a lead product for the multiline sales and when we wrap up all of the products together, we would like to deliver our target loss ratios moving forward.

We think we're making a difference on the service side. Although it is a commodity-driven market, we've gotten consistent feedbacks from our agents indicating that our service levels are above the industry standards. That has been helpful in our growth in dental.

But there is no question, Stewart, there's a lot of competition in that business with obviously bigger players in the marketplace.

Okay, so I should think of that business as being more of a door opener than a profit driver?

Yes, I think that's a fair statement.

Stewart, this is Bruce. I would only add to what Michael has stated -- is that there are some indications that we do -- there is a little less competition in some of our rural and suburban geographic areas where we've been very successful in Workers Compensation. So, we are trying to overlay dental sales emphasis, if you will, away from the urban areas into those territories where we've been particularly strong in the Workers Compensation, and we're trying to emphasize that with our agents in those territories.

Okay, terrific, all helpful. Thank you, guys.

Sam Kidston, North & Webster.

Yes, I just had a couple of little housekeeping things here, guys. In terms of the licensing, are you still -- are there additional states that you are pursuing in this quarter?

Yes, Sam, we filed in 11 states in the second quarter, primarily east of the Mississippi contiguous states to our core markets and exclusive of New England. As I stated earlier, we have five of those six approvals, and we would expect, over the next six to nine months, to have the other approvals. Again, it just positions us, both in the Southeast mid-Atlantic region and with our new acquisition in the Midwest, to be able to have those contiguous state licenses and serve our agents better.

Okay. Will that -- that as well as -- will that affect the Workers Comp expense ratio at all in the quarter, going forward, or is that not really a big driver? Is it more the startup expenses on that?

Actually, it's a little of both, Sam. There's a component of it that you're paying a consultant to help you get licensed in these states. When you do get licensed, there's a lot of filing fees and rate filing fees that you pay. The larger component of it certainly is the Southeast region, where it's not so much licensing costs; it's making sure you've got this great team in place down there to get the good accounts in upfront. So you really are incurring the expenses and the revenue follows.

As Mike said, we are starting to see an increase in that revenue but it's not quite where it needs to be in order to have a positive impact on the expense ratio yet, but it certainly is heading in the right direction. I would point out that we are being very selective and prudent in the business that we are writing down there in that competitive marketplace.

Okay. Then just in terms of the reinsurance, the specialty reinsurance treaty, if you guys -- so you're going to exit that as of, what, the middle of this year? Have you already given them notice and everything on that?

Sam, this is Bruce. We have given them notice. It's now in their court to accept our suggested termination as of July 1. They do have the option of allowing the existing treaty to run out at 12-31. We are hopeful of sitting down and not necessarily negotiating but certainly sitting down and having them come to agreement that a July 1 termination is the appropriate time. So we are working on getting meetings and that and looking at how to possibly commute that treaty, the historic treaties at the same time.

Okay, yes, that was other question -- is what is the tail like on that, on that business?

The tail can be anywhere from two to five years, Sam. It's claims-made business for the underground storage tanks, but where you get into an issue with the tail is where they are digging up a tank and there is a leakage situation that it was worse than they thought, and then a lot of times, in some of the bigger cases, it will go into litigation; it can sit in these courts for a couple of years. That kind of is more of the five-year scenario. But that's the tail.

So you guys are actually going to seek to commute the whole exposure? Is that correct?

That would be one of our intents, yes.

Okay, great. Thanks, guys.

(Operator Instructions). Randy Binner, FBR.

Hello. This is [Kevin Barker] in place of Randy Binner at the time. I had a couple of questions concerning follow-up on the Reinsurance segment. Were the losses you are almost incurring coming from tanks, or is it purely tanks, or is it also trucks involved?

These are -- this is -- the predominance of the adverse development this quarter was from the tank business.

Okay. If you were to commute this by July 1, how big of a charge -- can you give any like color on a charge you would expect from that if you were to incur one?

You know, we haven't been out to market to test that, so I can't answer that question accurately.

I will tell you that the business, the reserves are on the books. There is about $14.5 million of case reserves, and we've got on the books almost $13.5 million of IB&R. So, the price would obviously depend on someone's view of the reserves. We think that having almost $1 of IB&R for every $1 of case reserves is pretty conservative, so maybe we will be pleasantly surprised.

Okay, great. I've got one more question on the investment income beyond the $358,000 charge you took from the limited partnership. Do you expect that to recover going into the third and fourth quarter, and do you expect your yield outlook to start to increase as we go into the rest of the year?

No, I can tell you that it has recovered and this is an investment where we get the results after we file the Q, so it's quarterly in arrears. So the loss that you saw in this quarter was in reality the March 31 quarter. We are up about $0.02 in the June quarter, which we are going to record in our third-quarter Q. So it is recovering.

Great, I appreciate it. Thank you.

We show no further questions, so at this time, I would like to turn the call over to Bruce Eckert, Chief Executive Officer of Eastern Insurance Holdings Inc., to begin the presentation on the EIHI acquisition of the Employers Security Holdings Company and subsidiaries.

I would like to also remind you that EIHI will be following the presentation that is posted on their Web site at www.EasternInsuranceHoldings.com.

I would also like to remind you that the Company will not be providing forward-looking earnings guidance and thus will be unable to answer questions pertaining to that subject.

Mr. Eckert, you may begin.

Thank you. If all of you would turn to Page 4, or scroll to Page 4 of our presentation, I intend to start with discussing the strategic rationale behind this transaction.

It's been very interesting to find Employers Security as having a very similar history to that of the Eastern Insurance Group of companies, particularly as it relates to Workers Compensation. Both [Mike Michael] out in Indiana who started his company in 1992, and Michael Boguski and myself who started our Workers Compensation company in 1997 chose strategically to focus on Workers Compensation for small business and to bring a very strong service component to the management of that business and then to really incorporate an investment by insurance agents as one of the strategies.

In Mike Michael's case in Indiana, the Employer Security was exclusively owned by agents. They and Michael started the company.

In our case, we asked all of our agents to be a shareholder and all of them chose to do so. We also, in Pennsylvania, however, as you know, had other private and institutional investors. But it's a very similar background and history, and a very similar approach to Workers Compensation.

The other thing that's of interest is that management teams have remained intact from the outset and have been very determined to be best in class, if you will, as a specialty Workers Compensation underwriter. Some of the rationale behind the geographic diversification -- we talked about opening our Charlotte office. As you know, we have been looking to find an acquisition in the Southeast, not being able to do so at a price or at a quality of company that we were after. We chose to look into the Southeast as an opportunity to grow organically. At the same time, that allowed us to expand our focus for acquisitions into the Midwest, which is how we have -- we are delighted to have been able to find Employers Security. We think the combination of organic growth in the Southeast and growth via acquisition in the Midwest is going to be a very interesting dynamic within our company. So, it has a couple benefits to us, not only geographic.

The financial benefits -- we think this is just a great use of capital for us. It's immediately accretive to both our earnings per share and our return on equity. Employers Security has a very solid balance sheet so we have no concerns about their financial construct as we find them.

The important and exciting opportunities I think arise under revenue-enhancement possibilities. I think we first have to -- and we certainly have been trying to applaud Mike Michael and all of his staff for the success that they've had at Employers Security and at a time of using unrated paper to achieve that success. That success also indicated to us that the strong commitment and the strength of the agency relationships that have been out there since they started the company in 1992.

What we think we can bring to Mike Michael and his staff and to those committed agents is obviously A- paper, our capital, access to a slightly larger product spectrum in Workers Compensation. We would add to his guaranteed cost and deductible policies our loss ratio dividend plans, our retrospective plans, and then I think most importantly our separate segregated portfolio sell business, which I think will be very attractive to his group of agents in Indiana.

The other thing that we bring, in terms of a product spectrum, is a pricing spectrum. We would intend to pool Employers Security with at least two if not all of our three other Workers Compensation companies and will give Indiana the pricing flexibility and the rating flexibility that they haven't had for some time.

Then we are also very intent, as we stated earlier, on expanding to Employers Securities licenses in Missouri and Illinois with overlaying ours in the states that we do have as of now, namely Michigan, Kentucky and some other -- and the applications we have in for some other contiguous states.

In the area of operational economies of scale, we think we can add the kinds of systems, particularly on the management reporting side and on the financial underwriting side and predictive modeling side of that underwriting, that Mike Michael hasn't -- which we didn't have when we were Mike Michael's size and he doesn't have. We think that is really going to add to the underwriting abilities of Employers Security.

Then most importantly, again cost-containment measures which we have in place now and are available to us at our size weren't available to us when we were at the size of Employers Security. Importantly, all of those cost-containment measures on the claims management and claims handling side are with vendors that are national and therefore very scalable to Indiana and contiguous states. We see some real benefit to loss ratios from -- as a result of that.

The other thing that I should add is that we really intend to enhance the marketing at Employers Security. Mike Michael has done a fabulous job; he's kind of done it by himself. We think adding to that and picking up some other agency relationships, which he has in mind to do, will really also add to the scale of that business.

In terms of some other cost-saving measures that we think will be unavailable to us, we see them more from the external side. We think there probably is a pickup of some actuarial fees and audit fees, obviously. We also think that we can improve, collectively, our reinsurance terms and pricing by having Employers a part of our family of companies. So we do foresee those operational economies.

Turning then to just a brief description of Employers, as I stated earlier, it was started in 1992 by Mike Michael. He's been the President and Chief Operating Officer ever since. It's domiciled in Indiana, located in Indianapolis. It was and still is principally owned by investor agencies and/or principals or former principals of those agencies. It is not currently rated by AM Best. It's a monolines provider of Workers Compensation. The premium volume that we're showing there on Page 6 is somewhat deceptive because of the rather high concentration of its book of business that's represented by deductible policies. So on a run rate, it would -- 2007 premium would look more like $16 million. The large amount of deductible business also is a principle driver and a wonderful driver of lower loss ratios for that book of business.

As I said earlier, Employers Security has focused on small to medium-sized risks, as do we, and there are its licenses in three states.

I think the summing up of the similarity of operational strategies and culture and approach to business is really best represented by the charts on Pages 7 and 8. These are reports that are published annually by AM Best. We've been very proud. As we've grown from starting in 1997, we've been very proud to grow to have been consistently in the top 10 underwriters of Workers Compensation in Pennsylvania in the last three and four years, but we are even more proud of having the best three and five-year average loss ratios.

On Page 8, you can see that Employers Security has the best three and five-year loss ratios in Indiana. So without getting into all of the blocking and tackling, we find ourselves in absolutely the same position in our two core marketplaces, and we really do feel that our approach to these markets is scalable into contiguous states, not only for us in the mid-Atlantic and the Southeast but now into the Midwest.

With that, I'm going to turn it over to Kevin to talk about the financial aspects.

Thank you, Bruce. Please turn to Page 9 of the presentation. Page 9 is a historical compilation of Employers Security's consolidated financial results prepared in accordance with GAAP.

The first item of note is Employers' profitable growth from 2004 to 2007 and into 2008 despite not having an AM Best rating. We believe that having Employers leverage EIHI's A- AM Best rating at capital will accelerate the growth significantly and the profitability accordingly.

I would also like to point out the impressive return on average equity and debt statistics in the middle of the page, which is of no surprise considering the operating ratios that Bruce just reviewed with you from the top right as of Workers Compensation in the state of Indiana. The Workers Compensation environment in the state of Indiana is favorable, and we believe we will have the same growth and profitability prospects as we have enjoyed in Pennsylvania.

Please turn to Page 10. As many of you know, we are a balance-sheet focused company, so finding a transaction partner with a strong, clean, simple balance sheet was a high priority. After having performed due diligence procedures on a few target companies, we walked away from potential transactions because of balance-sheet issues. I'm happy to report that this was not the case with Employers Security, as our in-depth due diligence procedures confirmed.

Over 68% of Employers Security's total assets are in cash and invested assets. The underlying investment portfolio is of high credit quality with no subprime or Alt-A exposure. Employers Security has done an excellent job of managing credit risk with only $5,000 of its premium receivables past 90 days due. The reinsurance recoverable is from reinsurers with strong financial security and importantly, Employers has treated its reinsurers well from an economic perspective.

Of paramount importance to the strength of the balance sheet is the reserve for losses and loss adjustment expenses. Employers Security has recorded favorable loss reserve development each year for as many years as we reviewed in due diligence.

Ernst & Young are the consulting actuary to Employers Security. According to Ernst & Young's actuarial certification of the December 31, 2007 reserve for loss and loss adjustment expenses, Employers Security is at the high end of the actuarial range. This was confirmed by a consulting actuary from PriceWaterhouseCoopers who assisted EIHI with this extremely important due diligence point. Ernst & Young is in the process of updating the review through June 30, 2008. As you would expect, our merger agreement requires that Employers Security remain at the same point in the actuarial range from December 31, 2007 through the transaction close, which will be confirmed by our PriceWaterhouseCoopers due diligence actuary.

Page 12 describes the significant aspects of the transaction. The total transaction value is approximately $14.9 million, including the assumption of $2.9 million in debt, which represent a multiple to total capitalization of 1.59 and a purchase price multiple to 2007 earnings of 7.9 times. The total estimated transaction value is subject to certain true-up adjustments for changes in shareholders equity from the June 30, 2008 to the counter months immediately preceding the closing of the transaction. The cash purchase price component of approximately $12 million will be financed through the utilization of cash from EIHI's operating subsidiaries. Because EIHI is currently debt-free and this transaction is being financed with existing cash, EIHI's debt-to-equity ratio will approximate 1.8% post-transaction. The merger agreement has been approved by the Board of Directors of both companies, and I expect the transaction to close in mid to late September 2008.

A post-transaction organizational structure is depicted on Page 13. Please note, in the bottom left-hand corner, the four tiered Workers Compensation rating structure that will be available to underwriters. Also of note is Employers Security third-party administrator, Affinity Management Services, which will eventually be merged into Employers Alliance, EIHI's third-party administrator.

Please turn to Page 14. Page 14 notes that Employers Security will be a party to the EIHI Workers Compensation intercompany pooling arrangement, which will receive an A- AM Best rating at the transaction close, as disclosed in AM Best's press release issued yesterday.

I'm now going to turn it back over to Bruce.

Well, I'd just like to close briefly by directing your attention to Page 16 to discuss the benefits of the transaction. I think many of them are apparent, the first one of which I would add is that we are acquiring a very, very professional manager in Mike Michael, which is important to not only Employers Security but it's important to the expansion and growth of EIHI.

But equally important is that we have really been desirous of finding a transaction, particularly a first transaction that, all things being equal, would present an ease of integration for us. We think we've found that with Employers Security. They were the issues, as in every transaction, but with the balance sheet as clean as Kevin has described it, with the actuarial analysis that we have in hand and the loss reserves at the high end of the range, we think we really have found the company that we can integrate fairly easily into our system.

We are also -- have been, from afar, very favorably impressed with Indiana's Workers Compensation environment. Clearly, we are happy to have found Employers Security as having the best ratios in that state for an extended period of time, but if you go back and look at Page 8, you will find that almost all of the top carriers in that state have had very favorable experience in Indiana. So we think it's a great state for us to build a base from and leverage our Workers Compensation platform by moving more strongly into Indiana with Mike Michael's existing agency relationships and trying to grow those relationships, and then add to them because of our capital abilities.

I think I'm going to end there. I should note obviously, as we've said in our release, that this transaction is contingent on Insurance Department approvals for both the states of Indiana and Pennsylvania. I will add that I've met with both departments and those meetings went well, and I'm certainly very hopeful of timely approvals by each of those departments. So I will conclude with that and we will open it up for questions.

Thank you. (Operator Instructions). Sam Kidston, North & Webster.

Just a few quick things -- one is to what extent are you going to integrate this acquisition, or is it to large extent going to remain a standalone subsidiary?

Well, the integration, it will be part of the pooling agreement, which is important to give our presence in Indiana more flexibility than has been just represented by Employers Security. We are still working out -- I think, in the short term, we certainly intend to keep the name Employers Security. We would intend to keep it as a company so that we are not -- we certainly don't have intent, Sam, to merge Employers Security into one of our other three existing companies. We are delighted to have a fourth existing Workers Compensation company in our pool.

Is that responsive?

Yes. I mean I guess just to flush that out just a little bit in terms of, you know, once the deal actually closes, I mean how long do you think it will take for you guys to -- how long do you think your integration plan, to whatever extent you are going to do that, will take to play out?

Well, in terms of integration, number one, I think Mike Michael has, as I said, a staff that has been intact with him from the outset. We think that staff is capable of growing the company. We would probably add, just as a result of growth, we would add some, as I said earlier, some marketing efforts to that, both in terms of branding and personnel. That's important, obviously, if we are looking to increase the number of agency relationships not only within Indiana but in contiguous states. That same growth would probably indicate that there's some additional underwriting personnel that are needed, and as well as risk management personnel. So those are the areas where I think personnel would be added if we attract the kind of growth that I think we will be able to do so.

In terms of systems -- so then you get to systems integration. I'm not a systems guy but that's probably going to be the more involved integration, if you will. Though we have just gone through installing image rights, we are not all through our companies in Lancashire, but we would intend to start imaging the claims department first out in Indiana and then go from there.

So, it's really -- I don't have a handle on the systems integration, Sam, but that's probably the more extensive but again, not something that we haven't spent a good amount of time already thinking about and find it to be manageable.

Okay. Then could you just walk through how the transaction came about just to sort of briefly give us the background on that?

Yes. It came about as a result of just having friends in this line of business. I think a shareholder who is common to not our company but to some other companies that were asked if they would have an interest in either a strategic relationship or something more than that with employers, and that company said no, it's a little out of their line of business, but they knew of someone that might be of interest, and that was us. So, it was either as complicated or as simple as that. There have been no brokers involved from either party.

Okay. Then just finally, are you guys still in the market, the M&A market, or are you going to take a breather for a while or what's going on there?

Well, no, I think we are still -- we still have excess capital. We think this has been a great deployment of some of that, and I would intend to remain open and a taker of calls.

Excellent. Thank you, guys. Thank you. It looks like a great deal.

Thank you very much.

Bob Schwerin, Schwerin Boyd Capital Management.

A couple of financial-related questions -- what are the terms of their debt? Are you likely to pay that off?

The debt can be paid off at any time without any prepayment penalties. With a debt-to-equity ratio of 1.8%, I think we are going to evaluate it, but I think there's a good possibility. It's so small, we may just get it off the books sooner rather than later. Again, there's no prepayment penalties under the terms.

And the interest rate?

Interest rate is three-month LIBOR plus 165.

And you paid off your own junior subordinated debt in the second quarter?

Yes. As we speak, we are debt free. That's correct.

Right, so are these terms better than your own debt was or --?

Pretty comparable, pretty comparable -- but again, it's so small, relative to equity in the overall company, we may just pay it off just to get it off the books.

Now, it looks like it creates about $5.5 million of goodwill. Will it all be goodwill, or will you be able to amortize any of the excess over tangible book for tax purposes?

Bob, my expectation is that I would think that the majority of the excess is going to be in intangible asset and amortizable, so it will be off the books. You know, the first year, the first year, you amortize about 25% of it through income. The second year, you amortize about 18% of it, so you get a lot of the intangibles off the books in the first two or three years. So my expectation is, with the book of business, that a lot of it's going to be intangible.

Okay. Then thinking about the excess capital, you said $60 million, so do you just take $15 million for this purchase and so your excess capital is $45 million?

Well, here's what I would say. You know, yes, it's about $15 million if you're going to look at 2007. You've got $10 million of writings, so we will throw $1 of capital up for that $10 million. In the intangible asset, we will set aside $5 million for that, so on a pro forma basis, it's $15 million. Obviously, the intent is to grow the business profitably, so my expectation is, moving forward, it will be a greater use of capital then that, but you're absolutely right on, on a pro forma basis.

Then last, do they retain less of their premiums written than you do? So in other words, can you grow their net written premiums immediately by using less reinsurance?

The reinsurance is, probably from a retention perspective, probably pretty much a wash, except for maybe a potential savings on the net rate, but I don't think it would be that noticeable.

Okay, one last question -- I noticed that the return -- I think the proper way isn't to look at return on equity because the debt was a big component of the company four or five years ago, but the return on debt plus equity line that you showed that the company has gotten considerably more profitable over the years. Do you worry that you are buying sort of at the sweet point of the cycle? Now, obviously, you are buying at a pretty little PE but how do you think about the general cycle of the business?

I think we are very comfortable with it. You know, they are an individual account underwriter so they have the same philosophy as us. Regardless of market conditions, they look at the individual profitability of the accounts. I am extremely comfortable with where we are with the reserve position. So if I were sitting here with those results and saying they are at the low end of the reserve range, I'd have some concern, but it's the exact opposite, so I'm very comfortable. They have an excellent management team and I think that the profitability is sustainable on a prospective basis. I think the thing that Bruce pointed out, like the A- rating, leveraging our products, just overlaying some of these initiatives that you don't get if there are premium levels that we have I think are only going to help further the profitability of the business on a prospective basis.

I would just add to that, Bob, that Employers has done an excellent job of carving out a niche large deductible product. As you go back into the 2000/2001/2002 years, there was very little business, large-deductible business on the books. That's been a more recent product that's developed very nicely and, as an underwriter, I'm a big fan of deductible products. There's a lot of incentive for everybody to manage losses. So I think that piece has really been attractive to us as well.

All right, it looks good. Thanks for the input.

Stewart Johnson, Philo Smith.

I have a couple of questions regarding the integration. I don't know if you can talk about this but in terms of the risk of integrating this company, and I'm looking for some benchmarks going forward that would tell me you're on track with your expectations now -- I'm thinking of things like getting some of your salespeople out into the territory, integrating systems, maybe integrating the investment portfolio, management teams, that sort of thing and maybe an idea of the total cost that you are expecting.

I will take that question. Stewart, we, first of all, you know, during a due diligence process, we do -- our senior management team does spend a lot of time looking at the cost of integrating the companies, the cost synergies and the actual game plan. I would just say this. I think, on the front lines, underwriting, marketing, risk management, I think we can deploy the resources we need fairly quickly. I'm talking the fourth quarter of 2008.

On the systems side, we are very fortunate, as is Employers Security, two very talented systems people, and we think that's more of a late fourth-quarter '08 item into the first quarter -- you know, back-office financial systems and some of the other components I think are fairly low risk from what I've assessed.

I think the real key here to getting off to a great start is to have all of the components available for early '09. What I mean by that is all of the rates filed for the multiple companies, new agents appointed, personnel comfortably in place. So, I see this as the majority of the integration taking place in the first three to six months and with a heavy focus on products, rates, agency appointments and systems upfront, as well as the overlay of our claims management strategies. I think that's kind of the time frames that we can get this rolling.

Okay. Then can you comment at all on the total cost that you expected?

Well, I think -- yes, I'm happy to. I think it's basically a wash longer-term. I mean, we have some cost synergies longer-term that we've already talked about with respect to systems and reinsurance and other areas.

In the short run, the Company is undercapitalized and we have the ability to grow, so we will add the staff. But over the long haul, I expect Employers Security to run at comparable expense ratios to Eastern Alliance Insurance Group. They've done a great job of managing expense in their company, so we really kind of looked at this more as getting the financial benefits out of the growth pattern than really cutting expenses dramatically.

Yes, okay. I don't mean to push but I'm going to. How about the next six months? What are you expecting the costs to run?

Again, Stewart, I would say it's going to be more breakeven. We are going to beef up the marketing staff, some underwriting resources as Mike Michael sees fit, and I think there's going to be some savings but the savings are going to be largely from the outside vendor perspective, as Bruce talked about earlier, so I really expect it to be a wash. As Mike said, he has run a very lean, well-managed shop over the last several years. We think that the expense savings long-term are going to be coming from the growth in premium, not from expense reductions.

Okay, so just to clarify in the short run, the next six months, the cost to integrate systems and all that you expect to be offset by savings?

Yes, offset by slight savings with outside vendors and those other things. Quite frankly, we've always run a lean information technology shop of our own, so this isn't the traditional merger where there's going to be huge IT costs upfront because of the talent on the IT staff on both sides of this transaction.

Okay, great. Thanks.

(Operator Instructions)

Well, if there are no other questions, I thank all of you for your participation in this morning's call and we look forward to talking to you after our third-quarter results. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.