Earnings Call: Q3 2011

Nov 3, 2011

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Employers Holdings earnings conference call. My name is Tanya and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance, please key star 0 and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to hand the presentation over to your host for today, Vicki Erickson, Vice President of Investor Relations. Please proceed. Thank you, Tanya, and welcome everyone to the third quarter 2011 earnings call for Employers Holdings, Inc. Yesterday, we announced our earnings results, and today we will file our Form 10-Q with the Securities and Exchange Commission. Our press release and Form 10-Q may be accessed on the company's website at employers.com and are accessible through the investors link. Today's call is being recorded and webcast from the investor relations section of our website, where a replay will be available following the call. With me today are Doug Dirks, our Chief Executive Officer, and Rick Yockey, our Chief Financial Officer. Statements made during this conference call that are not based on historical fact are considered forward-looking statements. These statements are made in reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent developments. We use a non-GAAP metric that excludes the impact of the deferred gain from the 1999 Loss Portfolio Transfer, or LPT. This metric is defined in our earnings press release available on our website. As has been our practice, a list of our portfolio securities by CUSIP is available in the investors section of our website under Calendar of Events: Third Quarter Earnings Call. As you know, in August of this year, we announced we were exploring a potential acquisition and that we had submitted a non-binding indication of interest. In September, we announced that we had withdrawn our non-binding indication of interest. Now I will turn the call over to Doug. Thanks, Vicki. Welcome, thank you for joining us as we review our third quarter results. Yesterday, we reported third quarter net income before the LPT of $7.6 million, or $0.20 per diluted share. Our financial results in the third quarter include several significant items. First, we recorded a third-quarter tax benefit of $4.4 million, primarily related to tax-exempt interest income, the impact of the Loss Portfolio Transfer, and favorable reserve development related to older years when we were a non-taxable governmental entity. Second, we incurred $1.1 million in charges for acquisition due diligence activities. Third, we repurchased 1.6 million common shares at a cost of $19.7 million. Finally, our provision rate for current accident year losses remained stable in the third quarter relative to the second quarter but was 5.9 percentage points higher than the loss provision rate in the third quarter of last year, largely due to increased loss costs in California. Losses for prior period reserves were stable. We had a $160,000 addition to losses due to assigned risk business. Our growth initiatives continued to yield positive results in the third quarter. Net premiums written increased 26% year-over-year, driven by a 30% increase in policy count. We exceeded our monthly targets for adding policies in the past seven consecutive months, with 12,040 new policies at the end of September. Final audits increased earned premium $15.1 million for the nine months ended September 30, 2011, but did not contribute to third-quarter premium growth. We surpassed our 24-month target for adding agents with over 960 new appointments at September 30, 2011, nine months ahead of schedule. Additionally, as planned, we succeeded in shifting a larger percentage of our payroll exposure, which increased 16% year-over-year at September 30, 2011, to lower hazard groups. The percentage of payroll exposure company-wide in the two lowest hazard groups, A and B, increased four percentage points to 31% in 2011 from 27% in 2010. For each hazard group C through G, percentages of our overall payroll exposure declined or were flat year-over-year. As of September 30, 2011, we grew in-force premium 12% year-over-year and 15% since the beginning of this year. Our strategic partner business represented 24% of our in-force premiums as of September 30, 2011, compared to 21% at the end of last year's third quarter. Retention of strategic partner policies in the third quarter was 91%, compared to overall retention of 87%. Overall retention improved nine percentage points year-over-year and was stable quarter-over-quarter. In California, which represented 56% of our in-force premium at the end of the third quarter, payroll increased nearly 9% in the past 12 months and grew 10% year-to-date. In September, the WCIRB released its report on aggregate California data as of June 30, 2011. Here are some of the key points based on the latest release and other previous bureau publications. In the first half of 2011, California written premium increased 10% year-over-year to $5.5 billion. The 2010 accident year pure loss ratio was 81.8% at June 30, an increase of nearly one and a half points since the end of March. The 2010 accident year combined ratio was 128%, an increase of two points since the end of March. Indemnity claim frequency was up 9% for accident year 2010 compared with accident year 2009. The California Rating Bureau believes this may be due to an increase in the number of small-dollar indemnity claims in 2010 that were typically medical-only claims in years past. Indemnity claim severity was down 0.3% for accident year 2010 compared to 2009. The average changes in indemnity and medical dollars for those indemnity claims were down 0.8% and flat respectively for accident year 2010 compared to 2009. The WCIRB stated that downward pressure may have been due to the more recent increase in small-dollar indemnity claims that had been medical-only claims in past accident years. Please keep in mind that these are current estimates and projections by the Bureau and are subject to change at future evaluation dates. The 2010 California data for indemnity claim frequency and severity is relatively green. Indemnity claim severity in California had been trending up with each successive accident year since 2005, and frequency has been declining. Only time will tell if these trends will continue in California. Illinois continues to be our second-largest state in terms of both payroll and premium. Policy count grew to 2,045 at September 30, 2011, from 850 at September 30, 2010. As we stated during our last earnings call, we are exercising caution, underwriting caution in Illinois due to regulatory and pricing conditions in that state. That caution has resulted in an increase in the percentage of September 30 in-force payroll exposure in lower hazard groups A and B from 19% in 2010 to 30% in 2011. At the same time, we increased our payroll exposure in Illinois 44%. In Florida last week, the insurance commissioner approved an 8.9% pure premium rate increase effective January 1, 2012. While our net rate declined 3% nationally year-over-year, it declined by just over 2% in the first nine months of 2011 and increased 10% year-over-year in our largest market, California. The workers' compensation market continues to be impacted by uncertain economic conditions and historically low yields on investments. We continue to actively and cautiously manage through these challenging operating conditions. Our balance sheet remains strong, evidenced in the repurchase of 1.6 million common shares in the quarter at a cost of $19.7 million, which contributed significantly to our 8% increase in book value since December 31 of last year. At September 30, 2011, approximately $45 million of the current repurchase authorization remained. In October of this year, we repurchased nearly 1.4 million shares of common stock. Additionally, yesterday, we were pleased to announce that the board of directors authorized a $100 million expansion of our current stock repurchase program and an extension of the repurchase authority pursuant to the program through June 30, 2013. Now I'll turn the call over to Rick for further discussion of our financial results. Thank you, Doug. Doug discussed loss trends in California earlier, and California represents over half of our book of business at the end of the third quarter. Our underwriting margin in the third quarter was pressured by these accident year loss trends that Doug mentioned. We recorded an unadjusted underwriting loss of $12 million in the third quarter with a combined ratio of 112.9. Excluding the impact of the LPT, our underwriting loss was $16.2 million with a combined ratio of 117.5. Our third quarter loss ratio increased 7.5 points year-over-year, due primarily to the difference in the third quarter provision rate for current accident year losses. Underlying losses and LAE expense increased $14.7 million or by 28% year-over-year, with approximately $7.8 million or 53% of that change related to premium growth. The remaining 47% change in losses in LAE expense was largely related to the increase in the provision rate for current accident year losses, resulting from increasing medical and indemnity cost trends, particularly in California. We believe our reserves for prior accident years continue to remain adequate. As we noted before, while we evaluate prior accident year reserves collectively, we have seen some unfavorable development in more recent periods, 2007 and subsequent, offset by favorable development in earlier accident years prior to 2007. Our prior period reserves remained largely unchanged. In 2010, we completed a review of our open indemnity claims in California. This review resulted in a net increase in individual case reserves. Total case reserves reflect growth in premium, which has led to a corresponding increase in the volume of claims, particularly in the second and third quarters of this year. Aggregate reserves have not increased because we believe the actuarial methodologies already reflected ultimate loss costs. Recent adjustments to case reserves have not altered our opinion on overall reserve adequacy and have been largely offset by corresponding adjustments of IBNR reserves. Case reserves are reported in Form 10-Q and in Schedule P of our statutory filings. The increase in our loss ratio was partially offset by 4.5 points improvement in our underwriting and other operating expense ratio year-over-year. This improvement was largely driven by the 15 percentage point increase in net premiums earned and a 1.5% decrease in underwriting and other operating expenses, despite a non-recurring charge of $1.1 million for due diligence activities in the quarter. Third quarter pre-tax net investment income declined to $19.6 million from $20.7 million in the third quarter of 2010 due to a slight decrease in yield. The tax benefit recognized in the third quarter was primarily attributable to tax-exempt interest income, the impact of the Loss Portfolio Transfer, and favorable reserve development in years when we were a non-taxable government entity. Our $2 billion portfolio remained largely unchanged in the third quarter. The portfolio is comprised primarily of fixed income maturities, which are rated on average A or better. Our portfolio is weighted towards short-term and intermediate-term bonds. At September 30th, 2011, equity securities represented only 3.7% of our total portfolio. The average yield of our portfolio was 5.2% on a tax equivalent basis with a duration of 4.65. At September 30th of 2011, we had approximately $412 million in cash and securities at the holding company. Our uses of capital remain the same. First, we invest in and support the organic growth of our operations, which Doug described earlier. Second, we look for opportunistic strategic acquisitions. Third, we return capital to shareholders through stock repurchases and dividends, which Doug also discussed earlier. With that, I'll turn the call back to Doug. Thanks, Rick. In summary, we have reduced operating expenses related to underwriting, implemented rate increases since early 2009 of more than 30% in our largest market, California. We've made strides to increase market share while exercising the underwriting discipline necessary to further shift business mix to classes in the lowest hazard groups A and B. We believe these initiatives help position us for improved results in the future. With that operator, we're now ready to take questions. Ladies and gentlemen, if you wish to ask a question, please press star one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press star two. You may begin by pressing star one at this time for all audio questions. Our first question will come from the line of Matt Carletti with JMP Securities. Please proceed. Thanks. Good afternoon. A few questions. First one, I guess, Doug, this is probably best for you. Just on the new business, I was curious, how are the loss ratios, I guess, You're picking the loss ratios on the new business. Is it looking any different than the seasoned business in the same states, so in the same sort of regulatory picture? Then more broadly, how does that new growth on a loss ratio basis look versus California? Let's start by describing that it is relatively green. As I referenced earlier, a lot of this growth has come in Q2 and 3. On a loss development basis, it's relatively green. As we compare it to the book of business we currently have and as the losses are developing in the green period for those as well, we're not observing any material differences between the new business and the existing business. Kind of the loss ratios say, the country X California versus California. The point of me asking it is, if the growth is coming largely outside, is there reason to believe that even absent pricing, we could see accident year loss ratios improve just from mix of business? Are they kind of running ballpark the same? Matt, this is Rick. One of the things that we watch carefully, but as Doug has already pointed out, it's very green, so it's difficult to know. As you migrate business from one hazard group to another, there's impact on both the rate as well as loss experience. Trying to correlate those is what we're looking carefully at in terms of what the ultimate loss experience or loss ratio is going to be. We haven't seen anything that tells us yet exactly what that's going to be. We would expect that we should at least maintain our current experience, and hopefully, if we can migrate to the A and B hazard groups, we should see improvement. We don't know that. Okay. Then just a clarification question on, Rick, your comments on kind of percentage of reserves in IBNR versus paid in case. Am I interpreting that right? It sounded like you were saying that, say you take the 2011 accident year or some comparable basis now versus, say, 2010 at a similarly developed level, that more of the stated reserves are residing in paid in case today than they had in the past, and the percentage that's in IBNR is a little less. Right. We looked very carefully at those changes that were made to the case reserves. We believe we're, maybe for a kind of a casual way to refer to it, we're moving it from one bucket to the other. It did not change our overall assessment as to our liability, our reserve requirement, but it did put it into the case reserves as opposed to having it in the IBNR. We believe our actuaries had appropriately assessed the situation prior to the change. Has that move been material, or is it just kind of on the fringes? Well, we looked at over 3,000 case reserves. The adjustments were not immaterial. Again, I think we had anticipated that through our actuarial analysis. Okay. Just lastly, Doug, I won't ask why you called off the discussions with Guard, but just higher level. Can you just discuss your view on M&A and specifically, if I did the math right, the indicated price you had put out there on Guard would've been a decent premium to book value. I want to say something like 1.3 to 1.4 times. How do you balance that sort of idea of paying a significant premium to book value for a property against, at that time, I think your shares were trading at about 55% of book and taking that capital and buying back your shares at that sort of discount, which I got to think has over any sort of near or intermediate term timeframe, probably has a bigger return on capital than an acquisition at a premium. Well, again, I'm not going to reference any of my comments to the announced diligence and non-binding indication of interest. We still view acquisitions as an important use of capital to extend the strategic plan of the company and to drive creation of long-term value. Any transaction has to be looked at individually, and the ultimate pricing that may be paid for a particular transaction is case specific. Beyond that, Matt, I really can't provide you any more guidance other than to say we remain committed to looking for opportunistic acquisitions that will advance value creation. Okay, fair enough. Thanks a lot. Our next question comes from the line of Amit Kumar with Macquarie. Please proceed. Thanks, Anna. Good afternoon. I guess just going back to the last question, or I guess lines of the last question. This new business, what exactly are your return expectations on the new business, which is coming from these new agents? If you look at it across the entire book of business, our appetite has always been directed towards A to D, low hazard, small accounts. That's exactly the type of business that we've been producing this year, and you can see the shift in the book. Over the course of the cycle, this strategy and that book of business has produced results that have outperformed the industry by 10 points. At any particular point in time, it may be better or worse than that. Over the course of the cycle, we expect this business to outperform, as it has for us in the past. I'm sorry. Is there a numerical range? Well, I think the numerical range is relative to the industry performance. We expect that low-hazard small account business outperforms by, on average, 10 points. That's the range. Okay. That's helpful. Secondly, just going back to being ahead of the schedule, I think you mentioned nine months ahead of schedule. I'm curious, what exactly is the driver of it being so much ahead of schedule? Is it higher commissions, or what exactly is leading that much growth to your doors? Number one, it's hard work. Number two, it's introduction of our brand in parts of the country where we weren't previously well-known. When we survey agents, number one on their list is ease of doing business. We've rolled out technology that allows them to access a sound and solid market for small account business with an ease of doing business that allows them to achieve their objectives. I think those three things are the primary drivers of why we've been able to produce the number of new agents that we have. I know we discussed this last quarter, too. What exactly is this new technology initiative, which is unique in nature, it's letting you capture this amount of new business? What we've rolled out over the course of the last approximately 12 months is a technology that in small account business, under $25,000, in approximately 85 to 95 classes of business, depending on the state, allows an agent to go in, submit an application, get a real-time quote and an opportunity to request to bind. Although that is not unique, we are finding that our technology is being embraced and adopted not only by our new agents, but also by our existing agents who have seen the advantages of real-time quoting and rapid turnaround. Was this developed in-house? Yes. That's helpful. Just one other question. Can you just talk about the tax rate expectations for 2012? How should we think about that? The projection for the tax rate, as we've discussed before, is a combination of the actual results year-to-date, in combination with a projection for the remainder of the year. It's somewhat formulaic. We don't foresee any changes at this point in time through the remainder of the year. As you note, we recognized a tax benefit in the third quarter, largely driven by the relationship of the tax-free component of our portfolio relative to our operating income. We don't see that being much different in the fourth quarter than we see it being in the third quarter. For 2012? Again, we don't talk about future periods, unless the relative value of our operating income changes to our tax-free portfolio, you can pretty much forecast that it's not going to be changing. Yep. Got it. Thanks for your answers. Our next question comes from the line of Mark Hughes with SunTrust. Please proceed. Thank you very much. The net rate in the quarter down 2%. Could you refresh me on how much that's influenced by mix? It's definitely being influenced by mix. That calculation is a little bit challenging. If you look at where we've had big mix changes, Illinois leads there with a fairly significant shift. When you think about the growth and the shift from higher hazard A and B, that's a part of it. Really the key things are we're getting rate in California, and then you're seeing that business mix away from the higher-rated C and D to the lower-rated A and B. Right. In other markets outside of California might be maybe a pure view on pricing. If you look outside of California, and you looked at the, say, same account or same class codes, any guess you could venture on pricing under those circumstances? Let me just give you generally the numbers around the shift to A and B. If you look for the total company for 2010 versus 2011, that shift is about five points. In California, it was about two points. Again, in Illinois, it was about 11. Right. If I were to try to think about pricing, aside from that shift, again, same class code, same type of account or even renewal account, pricing seems like it would be up. Is that fair? We've got a mix. Some states are still going down in terms of rates. It appears that more are headed up now, California being the dominant part of the change in rates. Right. Okay. I mean, Florida as well. You're going to see increases in Florida next year. Right. How about frequency in California? I think you had touched on this earlier, I'm not sure whether you addressed specifically, In California, frequency was up last year and seems to be down so far this year. Is that consistent with your experience? Yeah. What the bureau's observing, we're seeing a similar trend. We are seeing a movement in indemnity claims. The frequency of those is going up. As I indicated earlier in my comments, the view of the bureau is that may be the result of some of those medical-only claims, previously medical-only, now converting to indemnity. If you think about the impact of that, what it will do is increase the number or frequency of indemnity. If they truly were smaller claims, it should bring down the severity of all indemnity claims in California. That's what the bureau is speculating. Our numbers are consistent with that. We're seeing a similar trend. I guess, more recently, it seems like the Bureau has frequency down in California for this year. I can't remember whether that was the nine-month or the six-month data. Is your experience similar to that you had a uptick last year, and as I say, the State seems to be describing a reversal this year? Yeah, Mark, we are consistent with those findings. You're correct in noting that that is what the Bureau is seeing. It is also the case with the Bureau that the credibility that's being assigned to that at this point is somewhat soft. They're not sure they fully understand that trend. Until they do, I don't know that anybody's willing to cast their fate to the wind saying things are getting better. Right. At least better start than previously. Oh, it's far better that it's down than up. Yeah, exactly. Finally, the issue of distribution, you've had good success there. You hit your target early. Do you continue at the same pace to develop more distribution? Yeah, we're not going to turn this off. To the extent that we continue to identify agents that have an appetite to produce low hazard, small account business, we'll continue with our appointment process. We haven't settled on our 2012 plan just yet, but we have no intention of turning this off. What we have found through this process is there are a large number of small agencies that own small account business. Whereas previously we focused on larger agencies, with the technology, we can have a broader appetite to appoint smaller agents that can do business with us more efficiently and maybe don't have as much subject premium as our current agency force has. We've identified a lot of that as a result of this initiative to appoint more agents. Thank you. Our next question comes from the line of Ken Billingsley with Fig Partners. Please proceed. Hi. Good afternoon. Just wanted to ask a couple questions on the press release. You talk about a 30% increase in policy count, but a 16% increase in payroll exposure. Obviously, I'm assuming that the account focus has moved to smaller account, smaller policy size accounts. Is that correct? Yeah. I would describe it a couple of ways. Some of it is the change in our view as we try to accumulate more of the lower hazard business, and it is an average smaller account size. Some of what we've seen, and I'm looking for a bottom here, is that as the economy was continuing to be down to flat, the average account size we were expecting to write as we went into this initiative almost a year and a half ago, has been smaller than planned. Again, some of that's the business mix, some of it was the economy. We're also finding that the market is much more competitive as you go up in the size of the account. We're seeing a lot of competition in an average account size above $10,000, which is somewhat surprising because we would have expected that to be a larger number. The market continues to be very competitive, and we continue to be more successful on the smaller end of the account size. When you're talking about account size, I'm assuming you're talking about the average policy in force account? Correct. Now, I want to also look at the payroll exposure itself. You said overall payroll exposure increased 16% year-over-year. Obviously, I guess some of that's a shift to different hazard classes. Are these also smaller businesses as well? It's probably a combination of both of those. I would say it is likely to be smaller businesses, and it's likely to be hazard group A to B, which is going to have a lower payroll. If you're obviously working with smaller payrolls, but maybe more of them with these add-ons with new agents, will we likely see an increase maybe in the expense ratio as Doing more smaller account business? Our objective is to manage the expense ratio and to actually improve it by getting scale. A lot of that is dependent on deploying, not only externally, but internally, technology that will allow us to handle more business without adding people, because most of the cost is in the salary and benefits. To the extent that our technology can allow us to scale that more efficiently, we would expect to see more relief on the expense side. Over the last two quarters, we've not changed our headcount. Okay. I think you might have actually answered this, but I had the question written down in a particular way, so maybe if you could rehash the answer. You had the 30% policy count, but gross premiums grew about 26% there. How much of that was a mix between the net rate decline versus the shift to hazard class? Is it 50-50, where the growth in policy count not matching premium growth? I can't break that out in that level of detail. Certainly, business mix has been one of the impacts on that number, and also the smaller average account size. I just don't have the detail that would allow me to break that out specifically. Last question I have is, in the press release, I just wanted to make sure I understood this. You announced that there were about $4.6 million of reserve releases during the quarter, and none in the third quarter of last year? There were no reserve releases in the current quarter. What I think you're referring to is the tax benefit that arose from the shift in some of our reserves within what we refer to as prior period reserves from accident years in which we were a non-taxed governmental agency to periods, accident years, in which we are a taxable entity, and for which we have now, by that virtue, that shift, recognizing a tax deduction where there was no tax deduction in those earlier years. That's what you're seeing. There is no change in our view of the collective prior period reserves, and consequently, no reserve release. Oh, okay. I guess the line, the $4.6 million increase in non-taxable favorable reserve development related to periods prior to January 1, 2000, that's what you're talking about right there? That's right. That is nothing new. We have that going on every quarter. It's somewhat masked in earlier periods because we actually did have reserve releases, and that drew everybody's attention and eye. Since June of 2010, we have not had reserve releases, but we continue to monitor the accident years. Just to verify, so what exactly where is that $4.6 million, if it was a favorable reserve development? To the extent that it was between July 1st, 1995, which was the LPT date. Everything prior to that is in the LPT, and changes to those reserves don't have any tax implications. From July 1st, 1995 to December 31st, 1999, any favorable reserve development on those years is non-taxable. Okay. There isn't a reported reserve release in the numbers which would adjust the reported accident year for the current quarter? There would be. To the extent that we strengthened reserves in later periods, those were offset by reserve releases in prior periods, some of which were non-taxable. Got it. Okay. That answers my question. Thank you very much. Our next question comes from the line of Jason Bussell with Surveyor. Please proceed. Hi, thank you. I had a few questions about the growth. What kinds of competitors is Employers taking share from with that growth? Are they more regional? Are they national in scope? It's going to be a combination of those. I would say in the Southeast, Midwest, those are more likely to be regional carriers. What we are finding, though, is not just for new business, but across the board with renewals as well, some of the larger national carriers are tending to be the most competitive at the moment. Are the most competitive? Yes. From a package writer perspective, the national writers are still competitive. The regionals are where you're getting more success? I think that's generally correct. What are you- It does vary by region. What does your rate tend to be versus the renewal rate that your new business was getting? It depends by class. There are some classes of business where we are finding it very difficult to write new business at the rate that we think is required. If you look at our retention rates, our retention has moved back up to levels that we think are expected for our book of business. They dropped significantly in 2009 and 2010, we're now back to retention levels. That gives us some sense that we remain competitive in the market for renewals, but we find new business opportunities to be particularly challenging. If that's the case, then the new business, is it that the incumbent is declining to renew it? No, I don't expect that that's occurring very often at all, given how competitive the market is. I think it's more driven by the rollout of the technology and the ease of doing business, that when you present the agents with an opportunity to easily write business in a company that they have confidence in, they'll move it. I think that's what we've found over the last 12 months. Even though if somebody has the renewal in place, where presumably there isn't a lot of work that goes into renewing a piece of business, just given the ease of writing a new piece of business with you, they'll move it? In some places, that will be the case. Some of it, frankly, is being driven by what we're at least being told anecdotally is some service level problems amongst competitors. Just looking broadly at the results, with rates in general down in the low single digits, and your combined ratio excluding the LPT in the 118 range. Presumably you have a view that the growth that you're putting on is going to be better than perhaps where you're booking it, hopefully. When do these combined ratios get to a more acceptable level? Given the yield on investments, you would expect that the market would have made that turn by now. The industry as a whole struggles from excess capacity. I think there's a sense out there if you can just put the business on the books today, that market's about to turn. Our view is that the market remains extremely competitive. Even though we hear about firming and a turn in the market, and all of the things that point to a better tomorrow, we are still finding the market to be extremely competitive. Some places more so than others, and we are trying to pick our opportunities where we can write good business that we expect over the course of the cycle will generate historic returns, which for us, as I indicated earlier, is something that outperforms the industry by about 10 points. Okay, the business that you're putting on today, you still expect would outperform the industry by 10 points? Yes. That is our expectation. If we look back over the last 10 years to how this strategy has performed, it has consistently outperformed the industry. Okay. Thank you very much. Appreciate it. Ladies and gentlemen, as a reminder, that is star one to ask a question. Our next question will come from the line of Robert Röhl with Pioneer Pac Capital. Please proceed. Yeah. Good afternoon. Couple of questions, please. Just on your last point there, Doug, at what point do you have to say, let's not look at our goal on a relative basis. Let's not look at 10 points better than this industry and think that's okay. Because frankly, if the industry's at 130 or 140 or 150 combined, I don't think you'd want to be writing business at 120 or 130. Do you see what I'm saying? Absolutely. If you look historically, we are at cycle highs, and if you believe in cycles, there should at least be a reasonable expectation that things are going to improve. You're correct. There are others in the market that are reporting 125, 130. Our goal has been to get some of the scale back that we have lost, and to do that by writing business that we expect will outperform over time. I think everyone in the industry agrees that the market needs to turn, that these combined ratios are not sustainable, and they're especially not sustainable in a low yield environment. Okay. Turning to net rate and loss trend. I think some questions have been asked about it, but maybe I'll just ask very directly. There's two different numbers in the press release. One said, I guess 2% net decline year to date, and there's another one in the text that says the year-over-year percentage decrease in net rate was 3.4% in 2011. Just looking for clarity as to what each of those two numbers is referring to. Yeah. If you look at the year to date and the year-over-year, I think what those numbers are telling you is that there's been improvement in the nine months of this year when you compare it to the year-over-year. Really, we're comparing a 12 to a nine, and we've seen improvement year to date, the last nine months. The nine months year-to-date is minus 2%, and then the third quarter-over-third quarter is minus three point. Yeah. What we're saying is. Four The nine months are better than the 12. Okay. Net rates are still declining. Presumably trend is up. What is your view on for your book of business, what has been the loss trend combination of frequency and severity in total, and then in California, and then non-California? Let me talk first about that net rate number. Again, there will be noise in that number because of business mix. I can't give you that number, but I think business mix is a large influencer on the continuing decline in net rate. We're just writing business that overall has a lower rate because it has less hazard and less exposure. When I look across the country, California is our strongest rate environment, where we're seeing a year-over-year increase of 10 points. It's double digit in California. California is superior to the rest of the country in that respect. I would temper that a bit with California also needed the rate because the loss trends were moving up. The piece we don't have for you is, in the case of the shift in mix, is we don't have the visibility on what that rate would've been for a new account last year. It may be that if we swap from a hazard class C policy with higher rates to something in a hazard class B, that rate is down from a C to a B. Had we written the B policy a year ago, the rate may be up. We don't have that visibility. Okay. All we can tell you is that overall, there was a rate decrease. Fair enough. What about loss trend, in terms of percentage increase, apples to apples, what do you think it is in California? What do you think it is outside of California? I commented earlier that that is very green. We're watching it very carefully. There's nothing that tells us that it's enough to say that it's worse or better. Assuming it was the same, what would it be? Well, we're providing at 78%. That's unchanged. Okay. I guess, do you have an expectation as to when the net rate will be enough to stop the increases in the provision level? Well, we've not seen any need to increase the provision rate since we announced the change in the first quarter of this year. It's driven by two things. One is going to have to be either an improvement in the loss environment or better margin on the pricing or a combination of those two, and that's ultimately what brings it down. Clearly. One last question on reserves. Just going back to what Rick was talking about on California. Moving IBNR to case, I don't remember which policy or accident year were you referring to? Was it 2010? It wasn't restricted to any particular accident year. Okay. He was looking at all open claims. Presumably the more recent years, correct? Again, it wasn't restricted. Okay. The question is, if you saw an increase in indemnity claims, such that you needed to make an adjustment by moving IBNR into the case, given the long tail of the business, why wouldn't that precipitate kind of a recast of the ultimate? I guess I don't understand that point. Well, we could have a long discussion about actuarial technique, the actuaries are looking at, if you will, the way losses are paid, the way they're reported. They make note of the fact that if there is a pattern, a consistent pattern on the part of the adjusters in terms of how they adjust case reserves, it is built into the IBNR. Now the claims adjusters want to review the way they've done it, and essentially accelerate that recognition into case reserves, the actuaries are going to say, "Okay, fine. You're going to do that. We will adjust accordingly. We don't think you're recognizing anything that we haven't previously recognized through our actuarial techniques. The risk would be if you did take that approach, and if you were with the individual claims examiners on a case basis accelerating, if the actuaries didn't make the adjustment, you would end up double counting. That's why we can move it, as Rick indicated earlier, from one bucket to the other and not necessarily say the ultimates have increased because the actuaries are picking that up in their techniques already. Right. What I'm saying is if the original pick of the IBNR was made before the new trend in claims appeared, it wouldn't have been taken into account when the ultimate was picked. I think the key word in what you may have just said there was new. We're not suggesting that there was a new trend. It's recognition of trends, existing trends. Okay. That's why the actuaries, we believe that they had already accounted for that. Okay. Robert, going back to your earlier question, you were talking about when would we recognize this? If you're asking how much time needs to elapse before the actuaries believe that they have enough data to discern a trend downward, if you will, in loss experience, it takes something more than one year. We're sitting here looking at 2011, we've got, at best, two quarters of data that you can look at, that's not nearly enough to discern a trend line. Even if you see one, not sure that you would necessarily assign a high level of credibility to it until you had seen it repeat itself for at least one year or so. Thanks for the answers, guys. Appreciate it. You're welcome. Our next question comes as a follow-up from the line of Matt Carletti with JMP Securities. Please proceed. Thanks. Rick, just a couple numbers questions I'm hoping you could provide. One is, going back to your comments on just kind of the shifting pieces within accident years, I think you said 2007 and more recent, there was a little adverse offset by favorable in the prior, which I believe has been the trend for most of the year. Do you have the year-to-date numbers, the additions in millions of dollars to 2010 and 2009 accident years handy? If I get the right set of glasses on here. We moved about, well, actually, which year were you asking about again, Matt? 2010 and 2009, the net additions to them in 2011. In the quarter, we moved about $1.7 million into 2010. Okay. Do you have the nine-month figure? That's closer to a double-digit number. Okay. Great. Do you have it for 2009, or no? Or wasn't there much? It's roughly the same for the nine. For the nine months. For the nine months, okay. Yes, correct. Okay. Then the only other question is investment portfolio related. What is the kind of new money rate you're investing at, and what's the average that we're rolling off at? Again, because of the share repurchase plan, we really haven't had, quote, new money. Good point. issues. To the extent that we've been purchasing new securities in the quarter, the shift in allocation, these are not material numbers, Matt, but we have been purchasing corporates and some mortgage backs. As you've seen previously, the shift away from munis, although it's relatively small. When you go online and look at our portfolio, you'll be able to see that. It is our objective to move to corporates and take advantage of more attractive yields there. Great. Thanks very much. We have no additional questions at this time. I would now like to hand the conference back over to Doug for closing remarks. Very good. Thank you. Thank you everyone for your questions today and your participation. We look forward to talking with you again next February as we report our full year 2011 results. Thank you. Thank you for attending today's conference. This concludes the.