Erie Indemnity Company
Q3 2008 Earnings Call Transcript

Published: 7 Nov 2008

[Operator:]

Hello and welcome to the Erie Indemnity Company Third Quarter 2008 Earnings Conference. At the request of Erie Indemnity, this conference is being recorded for instant replay purposes. At this time, all participants are in a listen-only mode. Following prepared remarks from management we will open the call for questions and answers. Now, I would like to introduce your host for today's conference call, Karen Kraus Phillips, Vice President and Manager of Corporate Communications and Investor Relations. Please go ahead Ma'am.

[Karen Kraus Phillips:]

Thank you, Cecilia and good morning everyone. We appreciate all you joining us for today's call. On today's call, management will discuss our third quarter 2008 results. Joining me are Terry Cavanaugh, President and CEO; Executive Vice President and Chief Financial Officer, Phil Garcia; Jim Tanous, Executive Vice President, Secretary and General Counsel and George Lucore, Executive Vice President, Field Operations. Today's prepared remarks will be approximately 30 minutes. Following those remarks we'll open the call for questions. We issued our earnings release and additional supplements yesterday afternoon. If you need a copy of the press release or any of these exhibits, you can find these in the Investor Relations section of our website at erieinsurance.com. We also filed Form 10-Q with the SEC. On today's call, the management of Erie Indemnity Company will share important information about current and future initiatives being undertaken at the company. As a result, certain forward-looking statements maybe incorporated into their comments. These forward-looking statements reflect the company's current views about future events and are based on assumptions subject to known and unknown risks and uncertainties. These risks and uncertainties may cause results to differ materially from those anticipated as described in those statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. For information on important factors that may cause such differences, please see the Safe Harbor statements in our latest 10-Q filing with the SEC filed November 5, 2008, and in the related press release and 8-K. In this call, we will discuss some non-GAAP measures. You can find a reconciliation of those measures to GAAP measures in the press release and in the supplement posted on our investor website at erieinsurance.com. This call is being recorded, and the recording is the property of Erie Indemnity Company. It is not intended for reproduction or rebroadcast by any other party without the prior written consent of Erie Indemnity Company. A replay will be available on our website today after 12

[Terrence W. Cavanaugh:]

Thanks. Good morning. About 90 days ago, a week in a my new job, I had the opportunity to join all of you on Erie's second quarter earnings call. My perspective of Erie at that point was still largely, as one looking in from the outside. And while I am sure you'll agree that I picked an interesting time to become a CEO, considering the country's economic condition. I am now fully engaged and more confident than ever that I made the right call to join the Erie team. Today, I will share some of my early observations with you and where I see the company headed in 2009. In addition, to covering key points of the third quarter financials, I may have still to talk about our capital and liquidity position, both at the Indemnity Company and at the Erie Insurance Exchange which I know is of primary interest to all of you. Over the past quarter, we have been riding the financial storm along with everyone else. We incurred $41.1 million in realized capital losses for the third quarter. Saw a substantial reduction in our share of earnings from a limited partnership investments and a $10.1 million loss from our equity in earnings from Erie Family Life. As you might expect Erie Family Life also has significant realized capital losses from investments. These factors and the impact of Hurricane Ike on our underwriting performance were the primary drivers of our earnings per share result of $0.07 per share for the quarter. Even after taking into account the impacts of the capital and securities markets, the quality and substance of our balance sheet of both the Indemnity Company and Erie Insurance Exchange continues to be remarkably strong. As of September 30, 2008, we had nearly... we had over $900 million in capital at Erie Indemnity Company and a policyholders' surplus of more than $4.4 billion at Erie Insurance Exchange. The strength of our balance sheet continues to give us a distinct advantage in the current insurance marketplace. We see additional evidence of our competitors' strength as well. Overall, policies of the property and casualty group are growing at 2.8% on a year-over-year basis. Underlying that result, our new policies enforced growth of 3.3% on a year-over-year basis and an All Lines policy retention rate of 90.5%. These results contributed to a slight increase in direct written premiums of the property and casualty group, despite giving $8.2 million in rate back to our policyholders during the quarter. For the Indemnity Company, that resulted in a slight up-tick in management fee revenue for the third quarter of 2008, compared to the third quarter of 2007. We also saw a margin improvement in the Management Operations segment during the quarter to 19.3% from 16% a year earlier. While this is positive news, it is primarily due to our $8 million of one-time charge that was incurred of the third quarter of 2007. Removing the effect of the one-time charges, the margin in the third quarter 2007 would have been 19.1%. Expense management is a critical area of concentration for the company. I'll talk more about that in a moment. Erie has always had the a reputation of a disciplined underwriting company. Within the context of the securities markets crisis, this discipline is more important than ever as we move forward. Underwriting profitability is key to our ongoing success. I'm a big believer in equilibrium, everything in balance. We need revenue growth to remain strong and return value to you, our shareholders. However, growth must not come because of inadequately priced or poorly underwritten exposure. There are signs that the market is beginning to harden. But true to our philosophy of not overreacting to market swings and not shocking our policyholders, Erie doesn't need to take dramatic price increases. We are positioned well to take modest rate increases wherever our experience wants [ph] and continue remain competitive for... and where we continue to remain competitive for our agents and our policyholders. Our focus is profitable revenue growth. Bottom-line, growth should not come at expense of weak underwriting margin or no margin at all. Since joining the Erie in late July, I spent considerable time talking with agents, employees, policyholders and shareholders to gain a broader perspective on the company. Based on those discussions and my own observations, I don't see a need for wholesale changes here. Erie's spending, as you will approach and focus, our core business has and will continue to serve the company well. However, there are areas of focus that we're concentrating on for the remainder of 2008 and 2009. Profitable revenue growth, expense management, resource alignment and agency management. I'll start with revenue growth, which I've already touched on, but allow me to elaborate a bit. One of Erie's primary growth strategies has been expansion in the new states. The company had been working on plans, to began writing in Minnesota in 2009. A topic discussed often on our previous earnings calls. In September, I announced internally into agents that we decided not proceed with entry in the Minnesota. We have incredible potential to expand market share in our existing territories and can reallocate hard dollars and labor costs to this effort. We're creating a more strategic and more precise approach to growth. Focusing on products, expansion into our existing territories and enhanced management of our agency distribution system that will lead to profitable revenue growth. On expense management, I believe we can do better. Erie has traditionally had an expense ratio that spread well against our competitors and that's an advantage I don't want to lose. So, we're not going to spend in 2009. Non-commission expenses will increase, primarily driven by IT investments. What I am talking about here is better expense allocation. We need to invest in the right things and concentrate our expense allocation on those things that will bring us the greatest return. Growth, underwriting profitability, great agent and customer service and staff development. Alignment. I see a lot of opportunities to better align reporting relationships, employee capabilities and development and incentive compensation. Earlier this week, we put a structure in place to streamlines reporting relationships in the field. Leverages talent and skills of some key personnel and provides opportunity for staff development. We are also looking at better alignment of incentive compensation. For example, between our underwriting and sales staff. In addition, we can never afford to forget that there is always need to be a... the need to be strong alignment between underwriting and pricing. A good risk that's poorly priced and has weak terms and conditions is a policy that will be a drag on our resources and ultimately on our balance sheet. Our resources could be better used by better customers. And finally, agency management. One of the first impressions that struck me about the Erie was the intense loyalty, Erie agents has for this company. In early August, I spent a long weekend with our top producers and immediately followed that up with agent meeting and several territories. You hear about the Erie's loyalty factor within industry circles, but this was my first opportunity to experience it first hand. It's impressive and certainly something we need to mature and project. With this in mind we're examining our agency management approach, which goes hand-in-hand with our refocused growth strategy of concentrating our efforts on existing territories. Erie's is committed to doing business through independent agents. That will not change. But, we will incorporate better, more productive ways to support our top agents' sales efforts and encourage and assist our other agents to strive for more profitable business. We'd also be opportunistic in our approach to new agent appointments. With the disruption in the financial markets, I anticipate a corresponding disruption in agency distribution channels of some of our competitors, who maybe distracted by deteriorating balance sheets. We have the advantage here. I look forward to welcoming our share of new high performing agents into our system. The shareholders I've heard from touched on the issues I just covered. Profitable revenue growth, and diligent expense management and maintaining Erie's service reputation and a loyalty of our agency force. Now let me address another issue they talk to me about, Erie's capital management strategy. I support Erie's long spending approach to capital management. I believe returning to our shareholders in the form of dividends and share repurchase is appropriate and we have adequate cash flows to continue these programs. Phil will review that with you when I turn the call over to him in a minute. But before I do, I'd like to update you on our CFO search. We decide to search externally for Phil's replacement. Phil has committed to stay on through the search and selection period and you expect him to be with us for our year end earnings release in late February. Phil, I'll turn it over to you now to discuss our investment portfolios, capital strength and liquidity position before getting into a brief review of the quarter's financials.

[Philip A. Garcia:]

Thanks, Terry. Good morning everybody. Our third quarter 2008 results show that Erie was not immune to the volatility and securities market. For the third quarter of 2008, net income decreased to $4.2 million from $53.5 million at September 30, 2007. On a per diluted share basis, net income decreased to $0.07 in the third quarter of 2008, compared to $0.87 last quarter. Net operating income per share decreased by 35.2% to $0.54 per share, compared to $0.84 per share last year. As you know, net operating income includes the results of our limited partnership investments and our share of the earnings of Erie Family Life Insurance Company, which also incurred significant realized capital losses on investments in the quarter. We also experienced catastrophe from Hurricane Ike which reduced underwriting income for the quarter. As you would expect, the decrease in net income for third quarter was driven primarily by net realized losses on investments. These were due to $37.4 million of impairment charges, $3.4 million of charges... changes in fair value on our common stocks. A decrease of $13.1 million in the equity of earnings of our limited partnerships and a $10.1 million dollar loss on our equity in the earnings from our ownership in Erie Family Life. As I mentioned, EFL also recognized significant impairment charges during the third quarter of '08 which was the primary reason for their net loss. As Terry noted, Erie has managed through the investment market disruption quite well. Indemnity continues with a very strong capital position and our underlying operating performance continues to be strong. Indemnity also has a strong liquidity position with strong underlying cash flows from our management and insurance operations and from our investment. Our cash position is strong. We have $70 million undrawn on our current credit facilities. With the heightened interest on investments, I am going to change the order of my discussion today and begin with our investment operations and also discuss the investment results for EFL which are relevant to our earnings and also discuss the investment results in the exchange. Investment income from interest and dividends decreased 16.5% to $10.2 million during the third quarter 2008, compared to $12.2 million for the same period in 2007. Mostly as a result of a smaller asset base due to our prior period share repurchases. Our private equity and mezzanine debt, limited partnerships generated losses of $0.7 million in the third quarter of '08, compared to earnings of $8.5 million in the third quarter, last year. Our real estate limited partnerships generated earnings of $1.8 million and $5.7 million in the third quarter as of '08 and '07 respectively. As, we mentioned the reduced earnings recorded by our real estate limited partnerships, are result of the general slowdown and recent economic downturn in the real estate market. We provided some supplemental information for you regarding our impairment charges from the portfolios of Indemnity, the Erie Insurance and the Erie Family Life Insurance Company. The information details impairments for Fannie and Freddie, AIG and Lehman Brothers and our overall charges for each portfolio. The market freeze up late in the quarter produced extreme valuations on invested assets, and was particularly rough on our corporate bonds and preferred stocks. Those abnormal conditions in the fixed income markets resulted in extreme credit spreads and pricing marks at quarter end. As a result Erie Indemnity incurred investment impairment charges of $37.4 million for the third quarter of '08 included $15.7 million on fixed maturities and $21.7 million on preferred stock. For the nine months ended September 30th '08 and '07, impairment charges on fixed maturities were $29.7 million and $1.6 million respectively and impairment charges on preferred stock were $32.1 million and $2.5 million respectively. In the third quarter of 2008 valuation losses on common stock that we've reported in earnings were $3.4 million. During the third quarter of '08, Erie Insurance Exchange recognized impairment charges on its investment portfolio of $325 million. Even with these impairment charges at September 30th 2008, the exchange had $4.4 billion in statutory surplus and a premium to surplus ratio of less than 1

[Karen Kraus Phillips:]

Cecilia, we can open the call for questions. Question And Answer

[Operator:]

Thank you. [Operator Instructions]. Our first question today comes from Michael Phillips with Stifel, Nicolaus.

[Michael Phillips:]

Thanks. Good morning everybody.

[Karen Kraus Phillips:]

Good morning, Michael.

[Philip A. Garcia:]

Good morning, Michael. How are you?

[Michael Phillips:]

Good, thanks. Question first around Terry, your opening comments about we don't need to take large rate increases, I hear that I guess one question kind of a one specific question in homeowners. I'm hearing Maryland and kind of some surrounding fees for obviously your bread and butter, and the orders received from competitors take some, what I would call now modest rate increases. And so I guess just want to hear your thoughts on how you're different there, what your margins might be, allowing you not do the same thing?

[Terrence W. Cavanaugh:]

Well, I think we have historical preference to be able to move rates in a way that its not disrupted to our distribution systems that allows us to have a much more consistent approach to, to working with them in good times and bad. So, my commentary is not meant to belie the fact that we need rate in certain places and in certain lines of business and we will do, with a clear eye towards making sure there is a proper margin in that business. But I think that, we do run a business that, we don't want to do have peeks and values that are disruptive again to customers and to our agents and it service very, very well in terms of our ability to grow market share over a long period of time, three or five or 10 year cycle. And that's one of the things that I've been very impressed about in terms of my involvement here. So I can assure you, I have a keen eye towards underwriting profitability and that it's a balance between doing what's appropriate for the balance sheet and what's appropriate for the longer term strategy of the company.

[Michael Phillips:]

Okay, great. Thanks I guess, staying with homeowners for just a second, could you comment on, if we... forget about cat or what you have seen in homeowners in terms of either frequency and severity trends combined without cat?

[Terrence W. Cavanaugh:]

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

[Michael Phillips:]

Okay, thanks Terry. Second question from me drills on the non-commission expense. I guess, are your assumptions for the 9% growth this year, does that exclude those charges in the third quarter of last year, 3.7 for severance and 4.3 for the quarter worth [ph], so you have back that $8 million robust does that include that already has that factor?

[Philip A. Garcia:]

No its included, now you are going to say Michael that were only as 2% through nine months, how we are get the nine.

[Michael Phillips:]

I was going to say that, yes.

[Philip A. Garcia:]

Yes, you were going to --

[Michael Phillips:]

You can get to nine if you go to fourth quarter around 20%.

[Philip A. Garcia:]

Well, yes, well.

[Terrence W. Cavanaugh:]

Well, more than 20.

[Philip A. Garcia:]

Well firstly, you got to look at fourth quarter last year where we had some inter-company reimbursements that resulted in very low salary and wage numbers in the fourth quarter for Erie Indemnity Company. So were coming off a smaller base in the fourth quarter of last year and we are going to have some substantial technology spend in the fourth quarter of this year. So take at look at that fourth quarter last year and you are going to see that the fourth quarter expenses were very low

[Michael Phillips:]

Yes, now I see it looking like a big percent for the fourth quarter. Now, I see that. Thank you.

[Philip A. Garcia:]

Yes.

[Michael Phillips:]

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

[Terrence W. Cavanaugh:]

Sure. One, we're refocusing our efforts in terms of looking at the geography and seeing where we're underrepresented and we're not maximizing our take from a distribution standpoint. We also have probably a page of small technology fixes that were not being addressed because of our Minnesota project and so we have now reallocated those technology people to be able to tweak some of our commercial and personnel line capability to be able to go in and create some technology platforms for our agents that again we believe with better execution and focus on both the underwriting side and the sales side, we can do a better job of creating growth and margin in our existing territory.

[Michael Phillips:]

Okay, thanks a lot guys. I'll hop out for now.

[Karen Kraus Phillips:]

Thanks, Michael.

[Philip A. Garcia:]

Thanks, Michael.

[Operator:]

[Operator's Instructions]. And we'll go next to Dan Schlemmer of FPK.

[Dan Schlemmer:]

Hi, good morning.

[Karen Kraus Phillips:]

Good morning, Dan.

[Philip A. Garcia:]

Good morning, Dan.

[Dan Schlemmer:]

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

[Terrence W. Cavanaugh:]

Well, f of all, Dan I didn't make any commentary on ratings. What I do believe is, though is in its sub-position currently, I have not seen in the market place currently, that based upon what we're seeing in terms of the results coming out both in terms of the capital market issues as well as the catastrophe losses that have occurred throughout the country. And within our footprint that we do believe that, there will be some dislocation or lack of focus by some of our competitors and we hope to take advantage of that, like we would in any normal situation. So I think we are clearly focused on doing, as we move into 2009. I think over the last year, Erie has done a great job of marshaling its resources and creating a more focused approach to both underwriting and sales management. I think we can take advantage of any kind of dislocation that may occur in '09.

[Dan Schlemmer:]

And what do you... what would you expect that to come through in, would it be more in terms rates or more in terms of PIF or would you expect to see it both ways or is there I guess a expectation on your part at this point?

[Terrence W. Cavanaugh:]

I think would, again I mentioned I mentioned a little bit before. One, if you have the dislocation, you should be getting more price for your product. And I think clearly we are beginning to see that in the personnel lines, I would say in the last year in our footprint, we... there're been more of our competitors and we have raised rates than decreased rates in various tiers for various products. And I also believe that if we execute effectively, we ought to be able to grow of our PIF which then should be able to grow revenue.

[Dan Schlemmer:]

And then going back again some of the earlier comments, you made some comments on the exchange and the premium, the surplus, etcetera. Is that where's that headed, I guess I was hoping you can give us a little information on their portfolio just because as we've see in October some pretty huge moves in the market and just trying to understand the likelihood that their problem could develop there as the market continues to tirade pretty widely obviously.

[Philip A. Garcia:]

Yes, did you... you can go to our website and you can... we provided some additional data, as I mentioned on my prepared remarks that we provided impairment charges by portfolio for each company, Indemnity Exchange and the Erie Family Life. We broke it down between bonds, preferred stocks and common stocks. So you can see where our impairment charges were and we listed the high profile defaults from Fannie, and Freddie and Lehman. So you can see where the impairment charges are for the exchange $324 million which brought our surplus down about $350 million for the quarter and for the year to $4.4 billion. But we are still very strongly capitalized. Now you can look at for instance the equity position of the exchange which is about $2.3 billion at September 30th, used a proxy of what's happened to the S&P 500 during the month of October and apply that times, 65% taking into account taxes and you'll know what the equity portfolio has decreased and how much it's affected the exchanges surplus in October.

[Dan Schlemmer:]

Yes. That's exactly what I was looking for and --

[Philip A. Garcia:]

That can leave the S&P 500s are down about 17% in October.

[Dan Schlemmer:]

Yes.

[Philip A. Garcia:]

On that $2.3 billion number. You can do that math.

[Dan Schlemmer:]

Yes. Okay. Thank you. Last question, just wanted to check in on sort of a detailed number, but in the release, the workers comp, you give numbers on the average premium per policy. What's going on in the workers comp that we're seeing the huge decreases? Is that rates or are there are other dynamics that are impacting that new business, etcetera?

[Terrence W. Cavanaugh:]

I would suggest that it's a combination of some rate, some went into West Virginia, there was a smaller profile in terms of customer base there and the third thing is that we are seeing the effects of the economy, where just payrolls are going down and, therefore, we are getting less, where the exposure's going down.

[Dan Schlemmer:]

To you, it's not a significant amount of rate cutting there, is that?

[Terrence W. Cavanaugh:]

We've had some George [ph], we've had some jurisdictions obviously caught a lot of forces to take some rate down.

[Unidentified Company Representative:]

Pennsylvania delivery was --

[Terrence W. Cavanaugh:]

Yes, which is our biggest state for work comp. So, some has been forced. I think that trend's about to end in terms of what the industry is looking at. And we have obviously also some... we have a program that we are monitoring our workers compensation, underwriting and the loss trends closely. We've obviously got a continuing review of a medical costs and it has our attention.

[Dan Schlemmer:]

Great. Thank you.

[Karen Kraus Phillips:]

Thanks, Dan.

[Operator:]

[Operator Instructions]. And we'd go next to Ron Bobman of Capital Returns.

[Ron Bobman:]

Hi, good morning.

[Philip A. Garcia:]

Hi Ron, how are you?

[Ron Bobman:]

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

[Terrence W. Cavanaugh:]

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

[Ron Bobman:]

Okay and then, so you highlighted the ratings, the surplus at the exchange that it is an extraordinary, even despite third quarter impact, still an extraordinary amount of capital relative to the exposure with the writing. And I was wondering given sort of the depression, whether it be sort of private equity, transaction cost, or public equity markets, where your credit spread's widening. Is there any thought or plan to expose more of the balance sheet to sort of equities, everyone [ph] had called sort of equities or higher bonds or corporate credit to the opportunistic?

[Philip A. Garcia:]

Well, we have a pretty conservative portfolio, particularly in the fixed maturities, but we balance that with the higher yield on our equity portfolio and our alternatives. We're comfortable with our asset allocation as it is. We'll be talking about that with our investment committee going forward at the Board, but we're happy with our asset allocation. We think it has like I said the fixed maturities are very conservatively allocated. We don't have a lot of that high yielding stuff, we don't have a lot of junk there, but it is balanced with our equities, our equity exposure which is really substantial and our alternatives.

[Ron Bobman:]

I guess you experienced like all portfolios do, sort of the old fashion effective rebalancing, the equity suffering at this portion it's more of the hit than and the fixed income, the conservative income side of the house and so just by the share movements, there has been sort of a shifting I would think.

[Philip A. Garcia:]

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

[Ron Bobman:]

You are not putting more money back into equity, so as to return it to the what I called the pre-correction relationship?

[Philip A. Garcia:]

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

[Ron Bobman:]

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

[Philip A. Garcia:]

Well, first of all, let me, C&P is being affected here in a quarter and for the year by storms. So the C&P line is really been affected along with the homeowners line during the quarter by Ike. We had about $60 million of losses.

[Ron Bobman:]

Also, even in 114, by the end of C&P accident year combined excluding cat is 114.

[Terrence W. Cavanaugh:]

Make the second last --

[Philip A. Garcia:]

Yes, I think we've been affected in the C&P line by a couple of large claims in the year and also in the workers comp line by several large claims. Okay, so that's was going on in those lines.

[Terrence W. Cavanaugh:]

Ron, I wouldn't... it has my eyes on it, believe me. Commercial insurances is more frustrating in some ways than personnel because in many cases personnel that has been created today's is more systemized machined underwriting and pricing capability work even today, underwriting of commercial business is usually distributed throughout a field system and there is one over one underwriting judgments being done everyday by the competitors and ourselves. I am very excited about our capability as it improves, because one we don't have distributed underwriting, all of our underwriters sit in under one in this building and we are going to be focusing on making sure that they have the discipline to price the effectively. Obviously, we are in a comparative market. Our results I think are indicative of what the market looks like and it is obviously, market that needs to have some correction to it. So I look forward to having discussions in the future that would indicate that we are on top of this issue and improving those results.

[Ron Bobman:]

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

[Philip A. Garcia:]

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

[Ron Bobman:]

Okay. Thanks a lot and best of luck and Phil I am sorry that you are going. Pleasure to follow the company all these years, you did a great job.

[Terrence W. Cavanaugh:]

You've got at least one more time. Alright?

[Ron Bobman:]

That's right. Hopefully, I wouldn't mind if you do rise longer. Best of luck in the year.

[Operator:]

[Operator Instructions]. And we'll go next for Michael Phillips with Stifel, Nicolaus

[Michael Phillips:]

Okay, thanks. Just two quick follow ups. The, I think I just missed this, the share repurchase suspension is July, did you say that suspension was going to effect?

[Philip A. Garcia:]

No. We remained cautious during the quarter taking a look at the market conditions and making sure we have the right look.

[Michael Phillips:]

Okay.

[Terrence W. Cavanaugh:]

We didn't suspend the repurchase.

[Michael Phillips:]

It was, I think it was suspended after July because it was block up for something.

[Terrence W. Cavanaugh:]

No, no, no.

[Philip A. Garcia:]

No, we suspended it for a month after the end of the quarter until we were released.

[Michael Phillips:]

Okay, that's all that was.

[Terrence W. Cavanaugh:]

We're just informing you that that's the practice, where we are going to be utilizing going forward.

[Michael Phillips:]

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

[Philip A. Garcia:]

Yes you want to use about 33%, 34%.

[Michael Phillips:]

Okay.

[Philip A. Garcia:]

There is a... because of this big loss, Michael that's in there from Erie Family Life. It distorts the tax rate because the tax rate we use for that income is 7%. Okay, it's 20% or 35%. Okay.

[Michael Phillips:]

Yup.

[Philip A. Garcia:]

I can explain that to you off line, but so when you have a large $10 million number that comes in, normally you don't even notice that number. But its an outsized number in our financial statements, the Erie Family Life loss. So that's what just distorting that a little bit.

[Michael Phillips:]

Okay.

[Philip A. Garcia:]

Remember at 7% of the EFL line is the tax rate we use.

[Michael Phillips:]

Okay, thanks, Phil.

[Philip A. Garcia:]

I am just following up on the impairment that we talked about earlier. I think it's important to note that we had a underlying our impairment strategy as a tax strategy on investments. So we realized significant before active risk [ph] realized significant capital losses. Because we have significant capital gain, capital loss carries by us in '05, '06 '07 as we've recognized significant capital gains during those periods of time. So our investment people are pro-actively managing the portfolio to generate capital losses so we can monetize our deferred tax assets. Now that translates into when you are looking at impairments is we no longer have the intent to hold some of these securities that because of tax selling that we would normally have the intent to hold and would not have impaired. So I think it's very important to our shareholders to know that both of the Exchange and the Erie Indemnity Company, that that is an underlying strategy that did affect our impairment numbers.

[Michael Phillips:]

Thank you.

[Philip A. Garcia:]

Sure.

[Operator:]

And we'll take a follow up from Ron Bobman with Capital Returns.

[Ron Bobman:]

Phil, my question was answered.

[Karen Kraus Phillips:]

Okay.

[Philip A. Garcia:]

Okay. Good

[Operator:]

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

[Karen Kraus Phillips:]

Just a reminder that the recording of the call will be posted on the website erieinsurance.com after 12

[Operator:]

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

[Karen Kraus Phillips:]

Thank you. .