ProAssurance Corp (PRA) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Eastern Insurance Holdings, Inc.'s third quarter 2008 earnings conference call. At this time, all participants have been placed in listen-only mode. Following the formal remarks, the call will be open to questions. (Operator Instructions). Please note this conference is being recorded.

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 third 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, November 7, 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.

The core results in our Worker's Compensation Insurance and Group Benefits Insurance segments continue to be strong. Our combined ratio in our Worker's Compensation Insurance segment was 88.7% for the third quarter of 2008. The fundamentals of our Worker's Compensation segment remain intact despite continued price pressures and some evidence of return-to-work issues. Our underwriting concentration on the small to midsize businesses located in rural and suburban areas of our state marketplaces helps us outperform statewide unemployment average. Audit premium offers some evidence of that outcome. Through September 30, 2008, our Worker's Compensation premium audits produced almost $1.1 million in additional premium, a result which is comparable to 2007 audited premium through that same date.

Our Charlotte office continues to make steady progress introducing all of our insurance products into the Southeast market. We increased our marketing visibility with a billboard and printed media campaign and added a Group Benefits marketing representative to our Charlotte office. Rate pressures do appear to be more intense in those states. However, we are pleased with our loss ratio results and are seeing steady increases in monthly submission activity from an expanding agency distribution network.

Also, we are very pleased with the successful close of our acquisition of Employers Security Insurance Company of Indianapolis, Indiana on September 29, 2008. We have already begun introducing the Eastern brand into the Midwest and strongly believe we have found a very strong platform in Employers Security from which to launch not only our Worker's Compensation products, but also eventually our ancillary Group Benefit Insurance policies.

Our Group Benefit Insurance segment combined ratio was 95.7%, with favorable loss ratio trends and an expense ratio of 30.7% for the quarter. The submission activity for new business in the Group Benefits Insurance segment has picked up considerably over third quarter 2007 levels.

The Company was successful in terminating the reinsurance treaty effective July 1, 2008 that comprises the Specialty Reinsurance segment. This segment, once again, had higher than anticipated loss results reported by our primary insurer. While disappointing, the results confirm our decision to terminate this segment of our insurance business.

The Segregated Portfolio Sell Reinsurance segment added one new program during the nine months ended September 30 and another new program effective October 1, 2008, bringing the total number of active programs to 13. Activity in this segment has increased despite current economic trends, largely as a result of our expansion into the Southeast and Midwest markets.

Like most other insurance companies, our operating results were overshadowed rather dramatically by deteriorating capital and equity markets during the course of the third quarter. While our overall results were disappointing, our balance sheet performed well compared to most property and casualty insurance companies.

Our diluted book value of $15.80 declined only 3.2% and 2.9% compared to the diluted book values as of June 30, 2008 and December 31, 2007, respectively.

Next, I'd like to introduce Michael Boguski, our President and Chief Operating Officer, to review our Worker's 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 September 30, 2008 and 2007, and finally, we will open the call to your questions.

The focus in the Worker's Compensation Insurance segment continues to be on individual account underwriting and adhering to disciplined underwriting principles in a competitive marketplace. The combined ratio in our Worker's Compensation Insurance segment for the three months ended September 30, 2008 was 88.7%, compared to 63.3% for the same period in 2007.

The increase in our combined ratio from 2007 to 2008 was primarily driven by the Company not recording favorable loss reserve development on prior accident years for the three months ended September 30, 2008 compared to $2.3 million of favorable loss reserve development on prior accident years for the third quarter of 2007, which reduced the 2007 Worker's Compensation Insurance combined ratio by 14.7 points.

The Company's direct written premium increased from $25.5 million for the three months ended September 30, 2007 to $26.4 million for the same period in 2008, an increase of 3.5%.

Production highlights for 2008 include renewal rate decreases of only 7.6% on our profitable book of business, with a premium renewal retention rate of 87.9%, an excellent result in an environment where competition for business continues to intensify. Our underwriting team continues to manage our policyholder dividend liability exposure with 89.1% of our 2008 book-of-business written on a guaranteed cost basis.

The third quarter of 2008 includes new business writings of $5.9 million compared to $3.7 million for the same period in 2007. Our strategy of building a highly diverse book-of-business by job classification should mitigate the downdraft of a deteriorating economy. We have added new state licenses during the quarter, which has helped the Company maintain and grow our book of business and expand multistate writings.

The integration of our newly acquired worker's compensation insurance company, Employers Security Insurance Company, continues to progress on an accelerated basis. Substantial integration progress has been achieved in the areas of systems, staffing, product filings, contiguous state license approvals and company branding initiatives. Employers Security received A- A.M. Best Company Financial Rating contemporaneous with the close of the transaction, which has been very well received by its agency base in Indiana. We believe the A- financial rating will provide us with access to Indiana worker's compensation insurance business that was rating-sensitive in the past. You may recall that ESIC was an unrated company. We have already relocated marketing and personnel -- underwriting personnel -- to Indiana in anticipation of these expanding opportunities.

The combined ratio in our Group Benefits Insurance segment for the three months ended September 30, 2008 was 95.7% compared to 96.6% for the same period in 2007. 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 $1.6 million for the third quarter of 2008 and ended the quarter with annualized premium volume of $39.1 million.

As Bruce noted earlier, we placed a Group Benefits marketing representative in our Charlotte office to heighten our sales focus in the Southeast. I am also pleased to announce the hiring of a director of sales for our group benefit segment who will not only bring additional focus and coordination to our marketing efforts, but will also allow us to redirect the talents of Bob Gilpin, our Senior Vice President of Marketing and Field Ops, to our profitable core business, Worker's Compensation.

I'm now going to turn it over to Kevin Shook for a review of our third quarter financial results.

Thanks, Mike. EIHI reported a net loss of $3.1 million, or $0.35 per diluted share, for the three months ended September 30, 2008, compared to net income of $3.6 million, or $0.34 per diluted share, for the three months ended September 30, 2007. The decrease in net income of approximately $6.7 million from 2008 compared to 2007 is due primarily to after-tax net realized losses of $2.5 million for the three months ended September 30, 2008 compared to after-tax net realized gains of $369,000 for the same period in 2007; a decrease in after-tax investment income of $1.5 million; an increase in the consolidated expense ratio of 2.6 points, which decreased enterprise income by $560,000; and an increase in the consolidated loss ratio of 5.4 points, which decreased net income by $1.2 million.

After-tax unfavorable loss reserve development on prior accident years of $1.5 million was recorded in the Specialty Reinsurance segment for the three months ended September 30, 2008 compared to $2.6 million for the same period in 2007, and no favorable loss reserve development on prior accident years was recorded in the Worker's Compensation Insurance segment for the three months ended September 30, 2008 compared to after-tax favorable loss reserve development of $1.5 million for the same period in 2007.

The decrease in net investment income is due primarily to after-tax limited partnership losses of $1.1 million for the third quarter of 2008 compared to after-tax limited partnership gains of $39,000 in 2007 and a decrease in overall invested assets as a result of the EIHI stock repurchase program, which has utilized $19.1 million of cash since October 1, 2007. Limited partnership losses include an after-tax reduction of $908,000 related to the recording of an other-than-temporary impairment on a limited partnership investment. After-tax net realized losses include $1.8 million representing other-than-temporary impairments on Lehman Brothers' debt securities and three prime asset-backed security investments.

Our 2008 accident year loss ratio remains at 60.0% through September 30, 2008. We continue our solid claim closure patterns. During the third quarter of 2008, the claims department closed 62 or 10.9% of the 570 open lost time claims as of December 31, 2007. The claims department has now closed 255, or 44.7% of the 570 open lost time claims as of December 31, 2007 during the first nine months of 2008.

Our consolidated combined ratio of 103.7% includes a loss ratio of 68.0%, an expense ratio of 34.7% and a policy holder dividend ratio of 1.0%. Our consolidated combined ratio includes the unfavorable loss reserve development at the Specialty Reinsurance segment, which increased the consolidated combined ratio by 6.9 percentage points.

Year-to-date, we have recorded $2.5 million in favorable loss reserve development on prior accident years in our Worker's Compensation Insurance segment. Our consolidate expense ratio of 34.7% is consistent with previous quarters in 2008 and is reflective of the continued state expansion expenses and indirect costs incurred during Q3 associated with our acquisition of Employers Security Holding Company and its subsidiaries.

Consolidated revenue for the third quarter of 2008 was $29.6 million compared to $38.1 million for the same period in 2007. The decrease in consolidated revenue is comprised primarily of a decrease in investment income and an increase in net realized losses as previously discussed.

Despite increases in net premiums earned in our Worker's Compensation Insurance and Group Benefits Insurance segments, consolidated net premiums earned decreased by 3.5% due to the termination of the reinsurance treaty effective July 1, 2008 that that comprises the Specialty Reinsurance segment.

Our book value per share was $16.35, and our diluted book value per share was $15.80 as of September 30, 2008.

Lastly, with respect to capital management, since the implementation of our stock buyback program in the first quarter of 2007 to September 30 2008, we have purchased 2,051,154 shares of EIHI stock for $32.3 million.

This concludes our formal remarks.

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 this subject. (Operator Instructions). The first question comes from Bob Farnam from KBW.

Hi, there. Good morning. With the Specialty Reinsurance segments -- I know it's discontinued, but could you give us an idea on the tail on that business and how long, potentially, that you can still be having development there?

Bob, it's Kevin. The payout for that business is as follows. Typically, in the first year, about 24.6% of the liability is paid down. Year two, it's 21%. Year three, it's 16.6%, and then for the rest of the next couple of years, it's kind of taken in about 5% to 7% increments. In terms of the expectation for future development, I will tell you that the reserves are as high as they've ever been in the history of the Company on the business at $28.5 million, which includes almost $14 million of IB&R specifically associated with it. So the IB&R to case in that business is about 1 to 1, and again, they're as high a reserve as we've ever reported.

Okay. But the tail sounds like it's -- it is pretty long, so theoretically you could still have some development there.

The second question I have would be the Worker's Comp reserves. This quarter was the first quarter you haven't had favorable development. Could you go -- what's the situation in the Worker's Comp reserves that led to no development this quarter?

Absolutely. First of all, the total reserves, as recorded on the balance sheet, are $47.4 million, which are about $2.2 million dollars higher than they were at June and just about any other quarter in the last couple of years. We are taking a wait-and-see approach with respect to the economic environment. We certainly think that in the midst of this economic crisis, that taking prior year reserve development in the third quarter was not a prudent thing to do, and we'll continue to assess the economic environment and its impact on our reserves on a prospective basis.

Okay. And one unrelated question is with the opportunities from the Employers Security book now, can you give us an idea, kind of ball park, of what you think is the benefit you're going to get from having a rated company go out there, in terms of production?

Bob, this is Mike. First of all, just a brief update. We do have a regional marketing manager and an underwriting manager on the ground as of October 13th, so we think we've put some talented people out there to grow that platform.

There is a lot -- the 18 agents that currently represent ESIC have not been sending ratings-sensitive business into the Company for some period of time. So we do view that as a growth office, and we do view Indiana as a very attractive state from a Worker's Compensation perspective, and we will continue to accelerate our marketing and underwriting efforts out there to grow that book-of-business. The loss ratios, historically, at ESIC have been very attractive.

Okay, so there's not really a way to quantify the opportunity that's out there for the new business that could come on because of the rating?

We'll have a better idea in the next 12 months, Bob. We're really early into the integration process, as you know, and we should be able to provide more color on that in the future.

Bob, this is Bruce. I will add that from what we've seen in these first few weeks of October, the submission activity has picked up rather nicely from existing agents, and I think January 1st business will give us some indication of -- that could lead, maybe, to a little more color to your question in our next call.

Okay. I'll leave it there, and I'll re-queue. Thanks, guys.

Thank you.

Thanks, Bob.

Thank you. And the next question comes from Randy Binner of FBR Capital Markets.

Hi, thank you. Good morning. Just to follow-up with Bob's question on the Re Insurance, so I guess we know it's longer tail, but maybe could you characterize more the nature of the claims? Meaning, is it litigation-related? Is it bodily-injury claims? What is it about the claims that keep coming that makes them longer tail? Just to give us a better idea of how this might run off.

No problem, Randy. It's Kevin. First of all, there's two products within that reinsurance contract. One of those is the EIA liability product, which is the auto liability product for non-hazardous waste transportation. And the other one is the underground storage tank product. The underground storage tank product of late has been the one that's been causing the problems. And from what we can tell, based on the information that we get from the primary insurance company, a lot of it is litigation-related cases where an underground storage tank will have a leak. They think it's a $50,000 claim. They get litigated in the case, and the judge decides in favor of the claimant instead of the insured, and your reserve goes from $50,000 to $750,000. And with the legal system being the way it is, this happens over a period of -- this happens over a period of years, which is where the tail really comes in.

And just to remind all of us, this is not the old underground storage tank issues the industry had like 10 years ago, but you are actually -- the primary company here was proactively writing liability coverage on people who went in and repaired or removed tanks. Is that right?

No, this is the original -- still the original program that covers on-site, which is really first party, and then off-site, third party, liability for underground storage tanks, not the contractor or -- not the contractor. So I think some of it also is -- some additional frequency is coming as a result of gas stations -- given the recent spike in prices, I think some gas stations have been closing, and so there is a spike in them going out of business in that marketplace, which was not seen, certainly, for most of the 1990s and into the early part of the 2000. So I think there's some of that increased frequency also as a result of the economics in that marketplace, Randy.

But the tail -- what we see in the tail, Randy, is definitely specifically related to litigated cases.

And thanks for clarifying that for me, Bruce. But it was -- maybe put it another way. You knew -- the policies are written when you absolutely know there's a tank under there and --

Oh, yes. And Randy, again, for the most part, as I think you're aware, the tanks have had to have been rehabilitated, and new tanks installed. So we're not dealing with -- we're dealing with new tanks in most cases, so it's not the market that was there in the early 1990s, when this program started.

Yes, I guess that's what I was getting at before, but that color is helpful.

On the investment portfolio, Kevin, I was hoping you could clarify the remaining limited partnership exposure, the nature of those investments and then maybe some indication of how much cash is still on the sidelines, if you will, for share repurchase. All of this is getting to trying to understand how we get back to more of a normalized investment income run rate that I would say would be somewhere north of $2.25 million.

Okay, from [an other] invested asset perspective, the portfolio's about $11.5 million at September 30, 2008. $5.6 million of it is at multimanager hedge funds. About $3 million of it is a commodity fund, hedge fund. We have a structured finance fund. That's about $2 million. And then there's just some miscellaneous small equity funds that we have, and I will tell you that prospectively we are not going to be investing in limited partnerships anymore. That's something that we're going to let just run off. So the investment income on a going-forward basis will hopefully be a little bit more predictable.

In terms of cash and the stock buyback program, we still have authorization for $10 million more of share repurchases. We have very little money at the holding company right now, but we have had conversations with the Pennsylvania Insurance Department, and we do not believe it will be a problem at all to move $5 million to $10 million up to the holding company, for which we would use to potentially repurchase our shares.

Now, having said all of that, liquidity and large blocks of shares in our Company stock lately and at these prices have been few and far between, so during the third quarter of 2008, we only repurchased 42,000 shares of stock and have had about equal luck so far in the fourth quarter.

Okay, great. And then on the other LTs, are those -- do you mark those to market every quarter?

We do. It gets marked to market every quarter, and all of the mark-to-market on that goes through investment income, which is the way the accounting treatment is, which is a little bit unusual. It's not an unusual accounting treatment for LTs. It's the way it's supposed to be accounted for. But when we have the other-than-temporary impairment on the one municipal hedge fund, the $908,000 there went through investment income, and it did not go through realized losses as you would expect.

Okay, so they're all -- they're classified as trading, so they all -- the mark-to-market goes right through investment income.

Absolutely.

And Randy, just to add a little color to Kevin's statement that we've decided to not move forward with additional investments in this category, it speaks to your point about trying to get a more predictable pattern of investment income. We always knew it would go through -- this category goes through investment income. But obviously given the turmoil in the markets in the last quarter, it's heightened our anxiety about having it run through investment income. So while we're not, at this point, getting out of that category, we're certainly not adding to it in the hopes of really having more predictable investment yields.

The other thing I wanted to add in response to your question about cash availability -- we've had cash flow of about $17 million through nine months, which is very strong -- we don't see that -- we see that continued pattern of strong cash flow, certainly, in this quarter, and don't expect any differences next year as well. So we have very, very positive cash flow that is obviously very helpful in this timeframe.

Okay, that's great. I'll get back in the queue. Thanks.

Thank you. And the next question comes from Sam Kidston of North & Webster.

Hi, guys. Just a couple of quick housekeeping here. One, on the intangible amortization, given the acquisition this quarter, I see that -- is that just a 15-year straight line on that stuff?

It's not a straight line, Sam. It's run off consistent with the benefit of the assets acquired. For the fourth quarter of 2008, the gross of tax number is about $492,000. 2009, it'll be around $1.6 million. 2010, $1.3 million, and then it kind of runs off from there pretty much pro-ratably.

Okay, great.

And that's all gross of tax.

Right, right. Okay. And then just you're changing the -- one, on the LT strategy, what is the run off on those? When can you get your money back? And then just are there any other changes in the investment allocation due to the market conditions here?

Yes, from an LT perspective, I would say out of the $11.5 million, about $9 million of it we could cash in any time over the next three to four months. We do have a newer limited partnership that's got a one-year lockup. The good news on the limited partnerships are that they are mark-to-market, and they run through the P&L on a real-time basis. So when you sell them or when you redeem your cash, there's not going to be an event from a P&L perspective.

Right. And so you guys have said you're going to effectively run them off, so what's the plan there?

The plan would be to run them off and to take the cash and to reinvest it into high quality fixed-income investments. Our overall strategy is really not going to change. We think that there's obviously some opportunities in the equity markets, and we think that there's some decent opportunities in the fixed-income market. So I think aside from the LT, you're going to see our strategy remain pretty consistent with what it's been from a fixed-income and from an equity perspective.

Okay, so just to -- I don't think I asked the question specifically enough. I apologize. So will you be redeeming these within the next three to four months?

We will be redeeming them as the opportunities allow us to over the next three to six months.

Okay. And then I guess you guys had talked a little bit about possibly selling or commuting the Specialty Re piece. Is there any update on that?

Well, Sam, it's a little early. We have talked about it. As we spent more time thinking about commutation, it became rather apparent very quickly that it's a little early in the game to attempt to do so. We still -- although we terminated the agreement July 1, we will still be earning premium through June 30 of next year. Obviously there were some policies that were probably put on the books on June 30. So those policies, although the termination was July 1 still had 12 months to run. So as to commutation, it's kind of difficult to even conceive of commutation when you still have nine months of active policies, three more quarters of active policies.

So I really think the first time that that topic could be even revisited -- and I'm not sure that even then it's timely to do so, would probably be about this time next year, where at least the active policy period has ended. You, for the most part, have had 12 months of a larger book of business that -- you're 12 months further away from a larger book of business that's been closed, if you will, and I think we'll start to get some focus on where we stand in the run off at that point.

Okay. And then just any thoughts on the M&A market? Obviously you've just closed a nice transaction here. You're well on your way with that one. But are you seeing anything else? Or could you characterize the market just a little bit?

Well, we have just closed one, and given our size and given the fact this is our first acquisition, we certainly want to take our time and integrate that company as best we can. And as Mike indicated, we're -- on any number of fronts, we're further along than we frankly thought we'd be by this point and are very excited about not only January 1 but all of 2009 for that.

We are continuing to see opportunities. Given the state of the market, it's difficult to gauge whether they're good or bad opportunities. I can't imagine that we won't continue to see opportunities. We still have excess capital. If another good transaction comes along, we will absolutely be interested in looking at that.

Having said that, having a little extra cash right now in this economic environment is not the worst thing in the world either, and buying back our stock is certainly something that we continue to try to do as well.

No doubt it's an acquisition that you're very familiar with the underwriting and all the rest, so it's one that we really like, so keep up the good work, guys.

Yep, thank you.

Thank you.

Thank you. (Operator Instructions). We do have a follow-up question from Randy Binner from FBR Capital Markets.

Hi, guys. Maybe I didn't follow that line of questioning that well, but so maybe commutation or a more rapid departure from reinsurance is potentially worth thinking about Was that how that went?

I think what we're -- in terms of commutation with respect to the business in the Specialty Re, the only likely scenario is that the front-end company would take it back, and we can't even start looking at that until the first half of 2009, and while it certainly is an option, I believe it's probably unlikely that something that would be economically favorable for us would get done.

You feel good about your reserves there as well, right?

We do feel good about our reserves, which is another reason why we wouldn't want to look at a deal that wasn't economically advantageous to us.

Okay, understood.

Just a question for Bruce. You guys -- it sounds like you like Indiana, and we've heard that from other worker's comp companies. It's a more -- less volatile state than a California or Florida, but doesn't that mean that competition's higher there? Maybe Bruce can talk about, high level, how you see Indiana and then maybe a little color on why the Mid Atlantic is a little tougher on pricing than maybe you had expected going in.

Well, first, as to Indiana, it's instructive to recall that this company was organized and owned by 18 agencies, so those agencies are intact. They're frankly, on average, larger agencies, than we have as our distribution network here in Pennsylvania. So there is room to grow, it seems to us, within those agencies by, A, having Employers Security get an A- rating, which it's accomplished, with adding our larger product lines than the Employers previously had, to that company, and then by also, I think, some of those agencies will be very attracted to our segregated portfolio product line, if you will.

So Randy, just staying within those agencies, it's not as though we have to go out and fight other carriers. Employers was the 20th largest writer of business in that state. It's about a -- Michael, about $1 billion --

$800 million.

$800 million state. So we think there is nice room to grow within the agencies. Obviously with their capital structure and their ownership structure, they were hesitant to appoint additional agents. We're going to go slow on that. We think it's smart to allow these 18 to have their time in the sun with some A paper. So we're going to go about that cautiously. But you can expect that there will be some additional appointments, and we're attracted to some of the contiguous states. So while our early intent is to focus on Indiana, we are, as Mike observed -- we now have licenses in a number of those contiguous states, and you can expect us to start getting some production from there as well.

Mike, do you want to --?

Yes, if I could just add to that. Randy, in the last six months on the contiguous state side, which was an important initiative, as we spoke to Mike Michael, the President and CEO of ESIC during this transaction -- in the last six months, we have Michigan, Ohio for stop gap, Missouri, Illinois, Kentucky and Wisconsin are contiguous states. We had Wisconsin already approved in Eastern, and Mike had one company in Missouri and Illinois. We just added three companies to Illinois this past week.

So I think the expanded platform is going to be extremely attractive to the agents and prospective customers. In addition, I think the color you're looking for maybe on the regulatory side is what we see is we don't see a lot of rate increases and decreases in the state. It continues to be fairly consistent, which is attractive from the standpoint of underwriting predictability, one. And then, two, we like the environment from a claim closure pattern perspective, which really mirrors our Pennsylvania book-of-business on that side of it.

And I think one of the things with having Mike Michael on board, we have an individual that has a track record of making money for a long period of time -- that company's been there since 1992 in Indianapolis -- and a very strong understanding of that local marketplace. So those are some of the things that we've looked at from that transaction, and we've built this platform fairly quickly for Mike and his team and hope to obviously take advantage in 2009.

Randy, as to the Southeast market, we clearly weren't the only company that observed that jobs have been moving south. So it is crowded space down there. We are one of the new kids on the block, as opposed to in Indiana, Employers Security had been there since 1992, I want to say. So although we're happy with our agency appointments in the Charlotte market and in that southeast territory, those are all new agency appointments to us, and it is taking a bit of time to have both sides of that equation, if you will, get comfortable with one another. We don't think we've missed that market in terms of its importance to us, and it's -- we kind of joke about the fact that we're at about where we thought we'd be except that it's an inverse equation. We're at about an 11% loss ratio from February through September and a 75% expense ratio. So we're at the right place. It's just upside down.

We are starting to get more submissions. We're starting to get more written premium and earned premium. So that expense ratio will start moderating as we go through the fourth quarter and into next year. We're frankly -- I guess at times we'd say we'd rather have written more -- and we thought we would write more. But frankly, we're very, very happy with an 11% loss ratio on $3 million of premium than having $10 million of premium and an 80% first-year loss ratio on green business. So we really think we're going about it the right way. It fits our nature. It's what we've done up here in Pennsylvania, and we're at the right place and I think at the right time as well.

Okay, great. All that color is very helpful. I appreciate it. Thank you.

Thank you. The next question comes from Bob Schwerin from [Boyle] Capital.

Hi. You mentioned excess capital. How much is your excess capital at the end of the third quarter?

If you take the net written premium and the surplus ratios that we've talked about in the past, literally it's about $40 million. We could lever up the ratios a little bit in comp, which would add another $10 million to that. You could take it the other way $10 million. So that's kind of a rough $40 million. We do -- we are required to keep an additional amount of capital in our group benefits company in order to maintain the A- minus A.M. Best rating, which is to the tune of about $18 million more. So that would come off of the $40 to $50 million. But it's not true allocated capital from a leverage ratio perspective.

So you could use approximately $20 million to either make acquisitions or buy back stock?

I think that's a fair number, yes.

And, of course, you can't make acquisitions at two-thirds of tangible book, like where your stock is selling.

Right.

That's probably right.

On your hedge funds, in the past, I think you've said that you get the data too late to report the same quarter, so you're one quarter delayed. Is that correct?

That is typically correct, Bob. In the case of -- the fund that you're referring to is the Anchor Capital Municipal Arbitrage Fund that historically was quarterly in arrears, and with the -- other than temporary impairment, we were able to get the information ahead of schedule, and that investment is reported at September 30 at a real-time value. It is not in arrears, so that is the actual value, and we don't expect any material movement one way or the other subsequently.

Okay. So all of them now are then up to date.

Yep.

Then one last question. Let's assume this economic cycle is one of the worst since the depression, if not the worst, and we have higher unemployment than we've seen in many years. I would think higher unemployment would cause more claims and maybe -- I don't know whether it affects severity. Maybe you could comment on that, and when you think about reserves, what kind of a stress test do you do in terms of thinking how high unemployment might go?

Bob, it's Mike. I'll take the unemployment question. First of all, from a controls perspective, we look very, very closely at the unemployment rates in each of our core marketing territories and really do focus on, one, financial underwriting, and two, return-to-work controls. What you can see in a tough unemployment environment is an -- you can see some frequency increase. However, the other side of that, in fast growing economies, sometimes you have employers that just hire, quote, warm bodies and don't train them as well on the safety side. So typically when a company gets in a tough environment, they have their core group of experienced employees that tend to understand the safety aspects of that company a lot better. And I'm just talking, really, specifically about this 5% to 7% unemployment environment. Obviously we haven't been in business during times that are rougher than that. But that's basically what you see over time.

And then I will defer to Kevin on the stress test question.

Before Kevin does that, the other thing, Bob, is that we have a very nice book of healthcare-related businesses, which are somewhat more immune, if you will, to the economic tides than construction or homebuilders or some other lines of business, as you might imagine. So there is that aspect of our business, which I think is somewhat sheltered from higher unemployment rates because healthcare is healthcare and you still have to operate your hospitals and assisted living centers and rehab centers and so on and so forth.

But Michael was right. There's a lot of historic anecdotal evidence of increased claim activity in higher unemployment timeframes. But recently you're starting to see a lot of literature that says that is almost equally offset, if not maybe more than equally offset by the fact that an employer is now down to his longer term, highly skilled workers, and so your frequency drops and it compensates. And those that are left employed really do want to stay employed, so there's that aspect as well that offsets increased frequency from the unemployed.

And Bob, from a stress test perspective, we run 21 different actuarial methodologies each quarter, all of those incorporating different characteristics. We have a reasonable amount of return-to-work issues baked into our base case reserves, and I think where we stand in the reserve range speaks to the fact that we always anticipate -- despite what we do on the underwriting side, which is the individual account underwriting, the financial underwriting, as Mike described. On the claims side and on the reserves side, we always incorporate potential future return-to-work issues within our reserves across the board, and where we historically sat in the reserve range, I think speaks even more about the fact that in the event of a bad economy, there's no question that you're going to have, theoretically, less favorable development, but the reserves should still prove out to be very adequate.

All right. Thank you very much.

You're welcome.

Thank you, Bob.

We show no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Well, I thank you for your participation this morning, and we look forward to a more stable balance of the year. But I thank you very much for being part of our Company. Bye.

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