Donegal Group Inc.
Q2 2008 Earnings Call Transcript

Published: 22 Aug 2008

[Operator:]

Good morning, my name is Terry and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2008 Donegal Group earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Mr. Miller, you may begin your conference.

[Jeffrey Miller:]

Thank you. Good morning and welcome to the Donegal Group earnings release conference call for the second quarter ended June 30, 2008. I am Jeff Miller, Senior Vice President and Chief Financial Officer and I will begin the conference call by presenting financial highlights and some analysis of the quarterly financial results. I will then turn the call over to Don Nikolaus, President and Chief Executive Officer, for his comments on our quarterly results and commentary on the business trends we are currently experiencing. Certain statements made in our earnings release and in this conference call are forward-looking in nature and involve a number of risks and uncertainties. Please refer to our earnings release for more information about forward-looking statements. The second quarter of 2008 brought a number of challenges to property and casualty insurance companies including an unprecedented number of catastrophe weather events and an unsettled investment market. Although we were not immune to those challenges in that we incurred a significant number of weather-related claims as well as market value declines within our investment portfolio, within the context of the announcements that we have read from a number of our peers, it would appear that we are relatively fortunate to be able to report underwriting profitability and positive operating results for the quarter. Our net income for the second quarter of 2008 was $6.9 million or $0.28 per share of Class A common stock on a diluted basis compared to $10.8 million or $0.43 per share of Class A common stock on a diluted basis for the second quarter of 2007. I will provide further commentary about a number factors that contributed to the variation from the very favorable results we enjoyed in the second quarter of 2007 as I discuss the various income statement line items. On the positive side, total revenues for the second quarter of 2008 were $94 million, an increase of 11.1% over the total revenues of $84.6 million in the second quarter of 2007. The driver behind this increase was 12.6% growth in net premiums earned to $87.3 million compared to $77.6 million for the prior year quarter. Our net premium writings increase 13.8% for the second quarter of 2008 compared to the year earlier period with personal lines writings increasing 15.4% and commercial lines writings increasing 10.8%. The increases were primarily the result of a pooling change effective March 1, 2008 as described during our first quarter call with our allocation of net premiums written and earned from the pool increasing by approximately $8 million in the current quarter as a result of the change. As in the first quarter of 2008 we also benefited from lower reinsurance rates largely due to an increase in our per loss retention from 400,000 to 600,000. Removing the impact of the pooling increase and reinsurance savings, our direct writings for the quarter increased 2.7%, split fairly evenly between personal lines writings at 2.8% and commercial lines writings at 2.5%. Our investment income was $5.8 million for the second quarter of 2008, an increase of 4.2% over the $5.6 million reported for the second quarter of 2007 with growth in investment income somewhat slowed by lower short-term investment rates. We continued to purchase tax-exempt municipal bonds during the quarter where we found tax equivalent yields to be relatively favorable. The increased tax-exempt interest income contributed to our low 20.8% effective tax rate for the second quarter of 2008 as our tax-exempt interest income represented a significant component of our pretax income. Realized losses during the quarter consisted primarily of $780,000 of other than temporary impairments. These write-downs were related to market declines within our equity portfolio and specifically related to common and preferred securities issued by financial institutions including write-downs of all of our holdings with Fannie Mae and Freddie Mac preferred stocks to their market value as of June 30. Our second quarter 2008 loss ratio was 63.5% compared to the 52.3% loss ratio we reported for the second quarter of 2007. As I mentioned previously, weather-related losses totaled $8 million after reinsurance in the quarter representing nine points of the second quarter loss ratio. Also contributing to the higher loss ratio was the fact that there was essentially no loss reserve development in the current quarter compared to an abnormally high $5.5 million in the second quarter of 2007 when there was a substantial number of prior year claims settlements. The weather losses were incurred throughout our operating regions with substantial claim activity in the Southeast and the Midwest. I have read that ISO identified 15 catastrophe events during the quarter compared to six in the second quarter of 2007. And estimates that I've seen indicate that Cat losses in the first half of 2008 already exceed those incurred for the full year of 2007. So in that context, we believe that our efforts to manage our catastrophe exposures have served us well and limited the extent of the impact of the 2008 cat event on our company. Our expense ratio was 32.8% for the second quarter of 2008 compared to the 35.4% reported for the second quarter of 2007 with the decrease attributable to a higher premium base and lower underwriting based incentive cost due to the less favorable underwriting results year-over-year. Our combined ratio for the second quarter of 2008 was 96.6% compared to the record quarterly low of 88% posted in the second quarter of 2007 with the increase directly reflecting the higher level of claims incurred. Our net income for the six months ended June 30, 2008 was $13.6 million down from net income of $16.3 million in the first six months of 2007. Earnings per share for the first six months of 2008 were $0.55 per share of Class A common stock on a diluted basis compared to $0.65 per share of Class A common stock on a diluted basis for the first six months of 2007. And our combined ratio for the first six months of 2008 was 97% compared to 93.2% for the year earlier period. Our book value per share increased to $14.05 with an increase from positive operating results partially offset by unrealized losses in are available for sale fixed income and equity portfolios. We are pleased to announce that yesterday our Board of Directors declared dividends of $0.105 cents per share of our Class A common stock and $0.0925 per share of our Class B common Stock payable August 15 to stockholders of record as of the close of business on August 1. At this point I will turn the call over to our President, Don Nikolaus, for his comments on the quarterly results. Don?

[Don Nikolaus:]

Thank you, Jeff. Good morning, everyone. Thank you for joining our earnings conference call. As Jeff has reviewed with you, it certainly was a quarter that reflected for us a considerable amount of storm and weather losses. However, relative to what took place in the property and casualty insurance industry and the results of many of our competitors, we feel fortunate that our results are relative to all that quite good. From the standpoint of competitiveness, and that's always a topic in the current soft market in the P&C industry that is of concern and interest to you. On the commercial side we would describe the competitiveness as being comparable to what it would have been in the first quarter and the third and fourth quarter of 2007. So we are not necessarily seeing at least in our book of business any further deterioration in the pricing. From the personal lines standpoint, we are seeing some definite indications of competitors making rate filings to moderately increase rates. We see that in a number of various states in which we do business both in auto and home, I would say probably more predominantly in automobile. With that regard, as far as Donegal Group is concerned and its subsidiaries, year-to-date we have made 10 personal lines rate filings for both home and auto in basically six states and the average increase of those rate filings is in the approximate range of 4% to 5%. And we would expect that most of those rate increases have either gone into effect or will take effect within the next 30 to 60 days. As you may be aware when you make a rate filing you have to state the effective date as to new business and then a subsequent date as to renewal. And we would expect that all of those would be in effect by no more than 60 days from the current time with some of them already being in effect and some going in over the next -- and taking effect within the next 30 days. I am pleased to tell you that in this competitive environment that as we have stated in prior quarters, we are putting a fair amount of emphasis into building our distribution system. We believe it's an excellent time to build for the future. Our industry will not always be in a soft market and we recognize that our future growth will have a lot to do with our ability to expand the distribution system. In the second quarter, in all of our regions, we made agency appointments of approximately 74 new agencies. One of the questions that is always answered, well how many terminations? We would probably have terminated approximately 8 to 10 agencies in that same quarterly period reminding you that an agency distribution system is similar to a vegetable garden. You have to feed it and weed it, and hopefully the terminations are a significant minority of the action that you look to take. We are encouraged by the receptivity that we are receiving in the regions in which we are doing business as it relates to the appointment of new agencies because it is easier to appoint agencies in a hard market than it is in a soft market because in a hard market they need more distribution channels. So we are particularly pleased with the fact that we are making traction particularly in geographic areas where we are relatively new or new within the last 10 years. I generally report on the technology front. We have continued to aggressively roll out WriteBiz and WritePro. In the second quarter, we would have completed rolling out the -- some would call it an umbrella policy. We call it an excess, a personal excess so that our agents are able to quote and issue that through WritePro. We are in the process of very soon going live with our boat product in WritePro. In WriteBiz, we have rolled out all of our products in all of our states that we are actively doing commercial business with the exception of the commercial package. And we have rolled that out into two states and we would expect to complete it in the majority of the remaining states over the next 60 days. We have found that as we bring additional technology to our agents that it is a factor, and we think a significant factor in enhancing our role within the agencies and being given opportunities to quote and hopefully issue new business. One of the areas of focus continues for us to be to manage the quality, location and concentration of business. As Jeff would have referred to earlier in his comments that managing of your catastrophe exposure is important in our business and we have, over the years, paid particular attention to that. And when you see substantial weather events, it brings home the point of the value of continuing to focus on not only the products that you write but where you do business and what is the concentration of that business particularly property business within any given geographic area. Even in a soft market, we continue to be very focused on that because we recognize that profitability over time is extremely important for us. As we said at the first quarter call, this is certainly a time for a Donegal Company to be focused on balance sheet strength and we believe we currently have significant balance sheet strength. We certainly are protective of that whether it be from the standpoint of investments that we hold or the quality of the business that we write because we recognize that as the soft market progresses that there will be opportunities for a strongly capitalized company not only to write new business on a policy-by-policy basis but also to appoint new agents and build our distribution system but also a topic of interest to a number of you is to pursue acquisitions. Although we are not in a position today to tell you that we have any current new acquisitions that we are in the process of bringing to fruition, I can only say to you that we continue to very proactively pursue that agenda and we are always having conversations with various companies with the hope that over time we will be able to achieve what we look to do. We do have in process which is not a new topic, the Sheboygan Mutual conversion from a mutual company to a stock company, and we are working our way through the regulatory process. And when that is all accomplished, we would expect that Donegal Group would become the owner of the demutualized mutual company which would then be a stock company. We look forward to the opportunity of answering your questions this morning and I will now turn it back to Jeff Miller.

[Jeffrey Miller:]

Thank you, Don. Terry, if you would like to open the line for questions please?

[Operator:]

(Operator Instructions) Your first question comes from the line of Michael Phillips.

[Michael Phillips:]

Thanks, everybody. Good morning. A couple of questions. A lot of people are talking, including ourselves, about the impact of the higher gas prices and I guess just curious to hear what you see if anything and the impact of that on your results?

[Don Nikolaus:]

Well, I think that, Mike, I think it is too early to see any clear indications, but we read the same articles that all of you do. The number of miles driven over I think in the month of March and April has been reported to be certainly decreases, and we all believe that there is a correlation between miles driven and the frequency of losses. And although we cannot statistically point to the gas prices as having an impact on frequency, we continue to see favorable frequency trends in private passenger automobile. We will certainly be monitoring that closely going forward, but we would be encouraged by the fact that there is a decline in miles driven and we will certainly report it as we learn more.

[Michael Phillips:]

Okay, thanks. I guess historically you guys have talked about prior reserve development as a certain percent. I think you typically say about 5% of the prior period's reserves, and last quarter it was minimal, this quarter it was [gone]. Any commentary about why that is, kind of what's happened there with the prior period development?

[Jeffrey Miller:]

Sure, I will be glad to address that, Mike. As we looked at the loss development in the second quarter of '08 and compared that to the second quarter of '07, the obvious question is what is the difference between those two periods in terms of the underlying reasons for the difference in favorable loss development. And as we have looked at it, what we determined is that it really relates to the claim settlements in the two periods. In the 2007 second quarter, there was quite a high number of claims settlements for reserves that had been set up in 2006. So, primarily the positive development that we experienced was related to the prior accident year. We had concentrated very heavily in the early part of 2007 on reducing our open claims inventories to the extent that it made sense to close down claims, and as a result we experienced an abnormally high amount of claims settlements and therefore redundancies. Throughout the year of 2007, we were accelerating the rate at which we were settling claims to the extent that a lot of the claims were settled in 2007 that might historically have been settled in 2008. And so we are not seeing the same level of claims settlements in the current year specifically in the second quarter. As I reported, there was no overall redundancy. However, the accident years prior to 2007 are all showing modest favorable development. 2007 is still developing and we would believe that throughout the remainder of 2008 as reserves that are attributable to the 2007 accident year, as those claims are settled, we believe there are further redundancies in the reserves and that they just have not yet been recognized.

[Don Nikolaus:]

And as a reminder, Mike, as we have said in prior quarterly calls, we have not taken down in prior quarters any IBNR or any bulk case -- bulk reserves. Our redundancies have always been the result of the settlement and closing of files, the adjusting of files and there can be timing factors associated with that and I think that Jeff has very adequately explained that.

[Michael Phillips:]

Thanks, that was very helpful. And I guess finally, kind of a question on the whole demutualization process, not specific to Sheboygan but just kind of in general. If I go back in history and go back pretty far, Southern Delaware and I guess the pioneer companies that you did back in the mid '80s, it took -- it looks like on average about to four to five years from the initial investment to when you finally put that as part of a public company. And then when you did Le Mars it was a bit quicker, and it sounds like your commentary on Sheboygan seems like it is kind of more like the Le Mars period where it's a little bit quicker. Anything, I guess, in general, overall changing from the mid '80s process to today's process that makes it faster or is Le Mars a bit of an anomaly or kind of what has changed there, if anything at all?

[Don Nikolaus:]

All right. That's a very excellent question. I think there is a number of factors at work. Number one, I think that we are far more experienced than we were in the 80s. I think we have honed the skills. Secondly, it is on a case-by-case basis. If the company that we invest the surplus note in that the mutual does. If it has lots of issues, capital issues, underwriting issues; as you may remember we always make sure that we took the time to write the ship and to make it profitable before we would demutualize it. In the case of Sheboygan at the June of 2007, they were well capitalized and had good results. So we did not have to do a lot of re-underwriting and rightsizing. So, that certainly played a factor in the acceleration of the demutualization.

[Michael Phillips:]

Okay. Perfect. Thanks. That’s all I have.

[Operator:]

Your next question comes from the line of Joseph DeMarino.

[Joseph Demarino:]

Hi. Thank you. Did you buy back any shares during the quarter?

[Jeffrey Miller:]

Yes we did. I am pulling that information out here. We bought 52,031 shares in the second quarter.

[Joseph Demarino:]

Do you know the average price?

[Don Nikolaus:]

That is in the $16, $17 range -- calculating as we speak here. $16.70.

[Joseph Demarino:]

Thanks you. Also, what was the premium -- the impact on premiums from the increased retention?

[Jeffrey Miller:]

The impact on premiums as a result of the increased retention was about $2 million in the current quarter, $2 million savings in the current quarter.

[Joseph Demarino:]

Of savings, okay. Thank you. And I know you said you wouldn't comment specifically on acquisitions, but what size of companies for acquisitions would you be looking at right now, if you can comment on that?

[Don Nikolaus:]

Yes. First of all we would be willing to look at and do look at either mutual companies or stock companies. And any company between a premium of -- the low would be $10 million. Our preference would be $15 million to $75 million. It's not to say that we couldn't do one larger than 75, but if you are asking us what is our preference in terms of size, it would probably be within that range. And we would, of course, want that entity to be in the right geographic area of the country and that sort of thing.

[Joseph Demarino:]

Got it. And then last question is -- your storm damages, was that on the property -- obviously it was property. Was that commercial or personal though?

[Don Nikolaus:]

Well, I would describe it as mostly probably -- and the financial guys can give you exact numbers. But you would generally expect in storms to have a lot of personal lines property damage although there's certainly going to be some commercial. Keep in mind that you also -- in Iowa as an example with all of that flooding, you have comprehensive losses on private passenger automobile so that you can have clearly automobile losses in storm.

[Joseph Demarino:]

And that occurred during the quarter?

[Don Nikolaus:]

It did. Yes, because in Iowa, if you may remember, there was extreme amount of flood activity and there would have been automobile comprehensive losses, but generally the bulk of the dollars are on the property side.

[Joseph Demarino:]

All right. Thank you. That’s it.

[Operator:]

Your next question comes from the line of Scott Laura.

[Scott Laura:]

Hi, Jeff, how are you today?

[Jeffrey Miller:]

Good morning, Scott, I’m doing fine. How are you?

[Scott Laura:]

The note -- $15 million, it was due a month ago. Did you pay it off?

[Jeffrey Miller:]

It will be paid off on August 15.

[Scott Laura:]

All right. As you know you have a 40,000 square foot headquarters on your -- 40,000 square foot expansion on your headquarters, what is the mindset of that, Don?

[Don Nikolaus:]

Well, Scott, I would be happy to answer that. What Scott is asking about is the mutual company, not the public company. The mutual company is in the process of building a 39,000 close to 40,000 square foot addition to its corporate headquarters in Marietta, Pennsylvania. And simply we have always going back 20 years whenever we have built building additions, you have to plan for the future. From the point that you begin to conceptualize it, to go through the municipal approvals, to have architects design it, to get labor industries to approve plans, and then the building process, it can take three years. So, our history has always been that we look out into the future and say that somewhere two to three years down the road that the overall corporate organization will need additional facilities. It is that simple. And its owned by the mutual company and all the construction costs and design costs is paid by the mutual company in the initial investment.

[Scott Laura:]

All right. Fair enough. 52,000 shares you only repurchased during the quarter. I mean, that is truly pathetic. You are at three-year lows on share price. What is your reasoning there?

[Don Nikolaus:]

Well, a couple of things, Scott. First of all, I would like to say that I think if you look -- you will see that lots of companies have either slowed down or backed off of how aggressive they have been in this market in the repurchase of their shares. Also, we have -- and I realize that you may think we ought to increase it, but we have a year ago, whenever it was, announced that the repurchase was a maximum of 500,000 shares. So, we only have so many shares -- I think we have 93,000 shares left of that repurchase. And thirdly, our stock price is certainly not where we would like it to be, but relative to what's happening in the marketplace I would say in the overall investment market, it's better than most. Also, it takes cash to buy back stock and our preference was to take that cash and be paying down the debt that you are inquired about where we are paying down the $15 million and we, going forward, will take a look at the other trust preferreds. We are looking at managing our capital and trying to be responsible in terms of doing that and looking at a broad scope of agendas in terms of debt, stock buybacks where we might need the capital going forward to. So that is sort of the background of it, Scott.

[Scott Laura:]

Finally, is there anything you can say on acquisitions? As you know since 1986 how Donegal has grown is through acquisitions. What is taking so long?

[Don Nikolaus:]

Well, Scott, you know we have discussed this with you before in prior conference calls. We are very interested in doing acquisitions, but we try not to do dumb things and we are just not going to go do an acquisition for the sake of doing one or to please someone. It has to fit. And then secondly, there has to be the opportunity out there and we continue to pursue them and when we identify one or two or three that are going to work, we will do them. We are not being hesitant about doing it. It is just all the stars have to align.

[Scott Laura:]

I understand. I mean we just look at it, Don. I mean you are going through a Taj Mahal expansion on your headquarters. Since '86 you have grown through acquisitions. The time is ripe and I will shut up.

[Don Nikolaus:]

Well, just let me make one final comment. We do not build Taj Mahals. If you are from Lancaster County you look to spend your money and get value and not have glitz.

[Scott Laura:]

I respectfully disagree. Being in your headquarters, it is a Taj Mahal compared to Eerie Indemnity, trust me. So have a good day.

[Operator:]

Your next question comes from the line of Dan Schlemmer.

[Dan Schlemmer:]

Good morning. I want to go through, first, just make sure I got my numbers right here. On the written premium numbers you went from year-over-year 83.1 to 94.5, so the delta there is 11.4. $8 million of that is pooling, so that leaves $3.4 million and I think if I heard it correctly on the prior question, $2 million out of the $3.4 million is due to the change in the reinsurance program. So, about $1.4 million year-over-year or pure organic growth. One, is my math right or am I thinking that through correctly? Two, can you quantify out or give us just any color on rate versus change in exposures for that $1.4 million increase?

[Jeffrey Miller:]

Dan, your math is very good. There is one piece that you are missing in there and that is that because of the recoveries on the reinsurance, there was 500,000 reinstatement premiums that were incurred during the quarter, a minor amount, but that increases the organic growth to like $1.9 million and I'll let Don give some commentary as far as rate versus just new business coming in.

[Don Nikolaus:]

Well, I would say that clearly the $1.9 million of increased premium is certainly new business which means that it's new exposures because prior to the current quarter that we are in, none of the rate increases that I have talked about earlier would have taken effects. So, I think the straightforward answer is that they would be increases of exposure because we would, in a commercial book, not have gotten rate increases and in the personal lines field only very -- maybe in one state would we have actually in the second quarter had the benefit of any rate increases. So, it would be increases of exposure which are not necessarily dramatic but they are increases of exposure.

[Dan Schlemmer:]

Great, thank you. Separate question changing gears real quick on the Cat. Can you give us a little background there or a little info on just where you are at in actually resolving claims? So is there still -- I think your number -- I hope I didn't get it mixed up with the reinsurance. I think you have put in $8 million of basically the weather-related losses and where you are at, is that a pretty firm number or are you still just getting into a lot of the claims resolution on those?

[Don Nikolaus:]

I think the answer to that is that a high percentage of these claims would not be large claims. It is always, at least for our book, it’s generally been volume of claims. They generally settle out very quickly. And yes, there will probably be some modest development, but in the geographic area where a lot of these came from the Midwest, we have reinsurance arrangements that attach at lower levels than some of our other regions. So, there will always be some development but we would expect that it will be modest and some of that development will actually be seeded to reinsurers. But, I would expect that by the end of July that probably 90% of the claims will have been settled and closed.

[Jeffrey Miller:]

Dan, I will just add to that that some of the major events have already hit our retention amounts with the intercompany treaties with Donegal Mutual, and therefore any further development from those events, and I believe there were four of them within the year, the first six months. So, any further development on those events would not impact our numbers.

[Dan Schlemmer:]

Last question, I guess sort of follow-on to that, but I guess you wouldn't -- let me put this way it. It would not be fair then to say that you hold back on recognizing favorable development because of uncertainty associated with cat or anything? Those are basically two totally unrelated issues that you didn't recognize favorable development in the quarter and it is relatively high cat or weather-related quarter. Is it accurate to say those are just completely unrelated?

[Jeffrey Miller:]

It is accurate to say that those are completely unrelated.

[Dan Schlemmer:]

Great. Thank you.

[Jeffrey Miller:]

You are welcome.

[Operator:]

Your next question comes from the line of Gerry Heffernan.

[Gerry Heffernan:]

Good morning, gentlemen. Thank you for the call.

[Jeffrey Miller:]

Good morning, Gerry.

[Gerry Heffernan:]

You may have -- I missed the first couple of minutes here. In regards to the $8 million of cat claims, can you give a comparative number for the second quarter '07?

[Jeffrey Miller:]

Sure, that number is approximately between $4 million and $5 million higher than we would have incurred in the second quarter and it is a normal quarter of weather claims for us is in the $4 million range.

[Gerry Heffernan:]

Okay. So it was $3 million to $4 million in Q2 '07?

[Jeffrey Miller:]

Yes.

[Gerry Heffernan:]

Okay. When the gentleman was asking the question about share buyback and in the answer, the answer as to why only the number of shares that had been purchased had been purchased, but there were several aspects to it. One aspect was the statement that basically -- and I am paraphrasing here -- that there are many companies that right now are concerned about the preservation of capital and therefore kind of husbanding cash and not buying back shares which would reduce overall capital. I find that a very interesting and somewhat perplexing statement because I guess while that's a true statement for the financial sector, I don't see that as a true statement for the insurance sector, in general, with the exception of some people who have some very large investment books that are suffering due to what's going on in the financial morass largely started here on Wall Street. So, -- but for someone -- a company like yourself that has a much more kind of basic investment portfolio, I am not sure why the idea of preserving capital would be highlighted as an answer to that question?

[Don Nikolaus:]

Well, let me clarify that for you. What I was saying, there was a bifurcation in my answer. What I was saying to start off with that from what we read that, and I was not referring specifically to the property and casualty insurance industry, that what we read is that there are many companies, public companies that as part of their capital management over a declining market were taking a fresh look at stock buybacks. I did not say that Donegal was participating in that same logic. The primary reasons for the fact that we repurchased 50-some thousand shares is that we only had so many shares remaining of the announced buyback. We basically are focusing on utilizing cash for the repayment of debt. And keep in mind that Donegal Group receives its money for the repurchase of stock or the payment of holding company debt, it receives it from its property and casualty insurance company subsidiary. And I would say to you that this is a time as many times when property and casualty insurance companies, you want to make sure that you are well capitalized, and that the rating agencies with whom we have excellent relations that we retain and have ratios that are superior because we think that's extremely important. So, that would be our view of it. Now reasonable people can differ. You could come to a different conclusion, but we think that the way we are approaching it and the way we are managing it is the currently the prudent thing to do. And you have to recognize that as a property and casualty insurance company and holding company, we have multiple audiences, investors, regulators, rating agencies -- so that we have to take a look at the broad picture and do what we think is the best at the given period in time.

[Gerry Heffernan:]

Understood. I fear you may have taken the direction of my question there a little bit incorrectly. I was more thinking just not challenging the buyback as much as just trying to understand your thoughts as to why capital level would have come into that discussion because my review is that the capital levels are strong unless I am making a big mistake here.

[Don Nikolaus:]

No, no the capital levels are very strong and what we are basically conservative people and what we are basically saying is that we would want that strong capital position to on an ongoing business to be perceived by the various audiences that we address.

[Gerry Heffernan:]

Okay, in regards to the distribution, I believe the number was 74 agencies added. Can you just give us a little bit more detail as to where they were added and of these 74 how many of them are mixed personal and commercial agencies versus just one or the other?

[Jeffrey Miller:]

Sure, I would be happy to do that. We have some breakdowns. What we call Marietta Marketing, which is sort of the traditional states which would be Pennsylvania, Maryland and Delaware; there are 11 appointments. The Virginia marketing which is Virginia, North Carolina, there were 22 appointments; Georgia marketing which includes Georgia, Tennessee and Alabama, there were 14; the state of Ohio, 9; Le Mars which is South Dakota, Iowa and Nebraska, 11; and Peninsula that deals in Maryland, Delaware, New Hampshire and Tennessee, there were twelve appointments. Generally, they would be both commercial and personal line shops. They may have somewhat of a higher percentage in one of the other but if I would say that they were all multi-line appointments.

[Gerry Heffernan:]

Okay, now as you start these agencies, are you getting the WritePro and WriteBiz into these offices basically on an immediate basis?

[Don Nikolaus:]

Yes, generally it takes about 60 days to get an agency up to speed, knowledgeable in your products, loaded with all the technologies. Certainly within 60 days they have all of our offerings including the technology.

[Gerry Heffernan:]

Okay. And is there any common denominator as to be to the -- why these were targeted or how these -- I mean this is an agreement between both parties. You have to want them and they have to accept you. As to why the arrangement was committed to, has a competitor pulled out that is a common denominator to many of these -- someone having troubles? What do you offer to these agencies that is new and/or different that they couldn't get from their current portfolio of underwriters?

[Don Nikolaus:]

Well, a number of aspects to that. There is always something going on in terms of a carrier that may have some disruption in their presence in the marketplace. To my knowledge, we can't point to any specific carrier in this particular quarter that we would be replacing. I would bring to your attention that the vast percentage of these appointments are in the geographic areas where we have targeted to grow and that our sales and marketing managers have certainly identified many communities where we currently do not have representation in those regions where we are looking to grow. As far as, why an agency would be receptive to an appointment, I think that it reflects multiple factors. But, there is certainly an inclination on the part of many agents to make sure that they have strong regional companies in their portfolio of companies. And candidly, we compare in our judgment, very favorably among the regional companies and that includes the super regionals in the marketplace. So that -- we also have very good technology in our judgment and we have comprehensive products and I believe that we enjoy a good reputation within the marketplace. And I think it is multiple factors that would encourage an agency to give us an opportunity.

[Gerry Heffernan:]

Last question on -- well, I'm sorry -- more than one question. You are seeing competitors file for rate increases in personal lines, and you have a number of examples to cite for that, yet you are still referring to the market as a soft market. Generally, those two things don't go hand in hand unless we are hitting an inflection point. How is it still a soft market if people are filing, including yourself, for rate increases?

[Don Nikolaus:]

Let me answer it in this way that not every company is filing for rate increases and therein I think lies the issue. You can have -- keep in mind that let's say in a state like Pennsylvania there are probably 150 plus property and casualty insurance companies that are doing business there. There may have been 15 of those who filed for rate increases. I think that it is more a matter that there is leadership being demonstrated by many quality companies to make rate increases, and I think that it hopefully is the beginning of a trend. So, in my opinion it's not inconsistent. There still can be a soft market because there is still lots of companies -- there are still companies lowering rates. But I think the majority of companies either have stopped lowering rates in personal lines or a certain percentage are beginning to make rate filings for increases. So I am looking more at what the trend seems to be.

[Gerry Heffernan:]

Okay, so in your mind you are not going to give up the title 'soft market' until you see the lesser quality companies follow the price leadership here of increasing price?

[Don Nikolaus:]

Or where maybe a majority of the market share in a particular state or states has demonstrated that they have made rate changes. Because there is a tipping point where even if you have certain carriers that are still extremely competitive, there is only so much of the market that they are able to penetrate. So, as we would know, many times the leaders can set the tone and I think we are beginning to see some signs of that.

[Gerry Heffernan:]

Okay, last question. In regards to market share and other regional competitors, there's regional/super regional company out of Ohio, some large city that begins with a 'C' who is having some troubles in their investment book rate now. Do you see any effect in regards to the underwriting or the way the agents are handling their business or any competitive concerns with that large regional player?

[Don Nikolaus:]

Has not -- I know who we are talking about. That has not as yet been a factor in the marketplace. That particular carrier has a very strong following by their agencies and they are only in a percentage of agencies, but we have not seen any sign of that. We compete with them everyday. It will be interesting to see whether there is some shift in placement patterns by agents, but I don't know that we have identified it yet.

[Gerry Heffernan:]

Okay, do you think there will be?

[Don Nikolaus:]

In all honesty, I doubt that there will be, but that's just my opinion.

[Gerry Heffernan:]

I appreciate that. Thank you very much for the time.

[Don Nikolaus:]

You are welcome.

[Operator:]

We have no further questions. Do you have any closing remarks?

[Jeffrey Miller:]

I would just like to thank everyone for their participation today on the conference call and I wish everyone a good day.

[Operator:]

This concludes today's conference call. You may now disconnect.