Amy Jordan - Assistant VP, Investor Relations
James Gober – Chairman, President, and CEO
Roger Smith –CFO
Joseph DiMarino – Piper Jaffray
Alison Jacobowitz - Merrill Lynch
Infinity Property and Casualty Corporation (IPCC) Q3 2008 Earnings Call October 30, 2008 11:00 AM ET
Good day, ladies and gentlemen and welcome to the quarter 3 2008 Infinity Property and Casualty Corporation earning conference call. My name is Michelle and I will be your operator for today.
At this time all participants are in a listen only mode. We will conduct a question and answer session toward the end of this conference. (Operator Insructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Ms Amy Jordan, Assistant Vice President of Investor Relations.
Thank you. Good morning and thank you for joining us in Infinity’s third quarter conference call. The live event link on our website does contain the slide presentation for this morning’s call if you would like to follow along. We also have an Excel spreadsheet on our website under the quarterly reports tab that provides more detailed quarterly financial data. Page 10 of this report does contain the definition and reconciliation of any non-GAAP items that we discuss this morning.
Certain statements made during this call may be deemed to be forward looking statements and anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the Safe Harbor provisions of the Private Security Litigation Reform Act of 1995. All statements in this call not dealing with historical results for current facts are forward looking and are based on estimates, assumptions and projections. Statements that include the words believe, seeks, expects, may, should, intend, likely, targets, plan, anticipates, estimates or the negative version of those words and statements that are future or forward looking nature identify forward looking statements.
Examples of such forward looking statements include statements relating to expectations concerning marketing decisions, premium, growth, earnings, investment performance, expected losses, rate changes and loss experience. Actual results could differ materially from those expected by Infinity depending on changes in economic conditions and financial markets including interest rate, adequacy or accuracy of Infinity’s pricing methodology, actions of competitors, the approval of requested form and rate changes, judicial and regulatory developments affecting the automobile insurance industry, the outcome of pending litigation against Infinity, weather conditions including the severity and frequency of storms, hurricanes, snowfall, hail and winter conditions and changes in driving patterns and loss trends.
Infinity undertakes no obligation to publicly update or revise any of the forward looking statements. For more detailed discussion from the risks and uncertainties which could cause actual results to differ from those contained in the forward looking statements, please see the Infinity filings with the SEC.
With that, let me turn the presentation over to James Gober, our Chairman, President and CEO.
Good morning and thanks for joining us this morning for the conference call. Roger Smith, our CFO is also with us this morning and as usual we’ll open the lines for questions after our comments.
Let’s kick it off by beginning on slide 3 and taking a look at our highlights. Operating EPS for the quarter is $1.03 up from the $1.00 we reported in this same period last year and better than expected. Underwriting income fell about $2.2 million pretax for the quarter as a result of lower earned premiums and a slide up tick in combined ratio. Most of this difference was attributable to a decrease in favorable reserve development from the third quarter of last year to the third quarter of this year.
Reserve releases in the third quarter of 2008 were $1.3 million pretax or about $0.05 per share. We had about $5.4 million favorable development in the third quarter of 2007 for about $0.19 per share. In addition we had about $2.8 million of pretax expense accrual releases in the third quarter of this year. If you exclude these items, our 2008 accident year combined ratio is running about 96.5% which is up about a point of that in 2007 but down about a point from a quarter ago.
Net EPS for the quarter were $0.28 as compared to $0.91 in the third quarter of last year. The big difference between operating and net EPS was the losses from other than temporary impairments on investments. During the third quarter of 2008, we booked capital losses of $11.6 million or about $0.75 per share which included $13.8 million of OTTI charges. This compares with capital losses of $1.8 million in the third quarter of 2007 for about $0.09 per share which included $600,000 of OTTI charges. While $13.9 million of OTTI charges is a big number, keep in mind that this represents only 1.2% of our quarter end portfolio and 2.5% of our GAAP book value. Roger will give you more detail of these charges in the overall investment portfolio a little later.
Regarding capital management actions, we purchased 1,084,600 shares for an average price of $43.74 during the third quarter. That represents about 6.7% of the outstanding shares at the beginning of the quarter. We still have approximately $75.4 million of repurchase authority under our current program which expires at the end of 2009.
Let’s move on and take a deeper dive into our operating results. On slide 4, overall premiums were down 6% in the third quarter and down 11.7% versus the first three quarters of 2007. We had expected premiums in the third quarter of this year to grow slightly, however general economic conditions have worsened in many of our targeted urban zones which certainly have dampened demand for new cars whch in turn lessens the demand for auto insurance.
We also observed continuing increases in unemployment along with higher gas and food prices and greater levels the consumer uncertainty in many of our major markets. All of these factors combined reduced demand for our products. I’ll give you some more details and our thoughts regarding the premium trends a little later.
For the third quarter, premiums in our focus states fell 5.8% as compared with the third quarter of last year. Within these states, business in our target urban zones fell 4.5% for the quarter. During the third quarter 7 of our 22 targeted urban zones grew as did our commercial vehicle and classic auto programs. Although this is one fewer urban zone that grew versus last quarter, we are still finding opportunites for our business.
As for the bottom line, after tax operating income for the quarter was down $2.7 million from the third quarter of 2007. The decline was the result of a $2.2 million drop in pretax underwrtiting income that I mentioned earlier and a drop of $3 million in pretax investment income resulting from lower book yields in a portfolio that has been reduced to fund share repurchases.
Without a doubt, the impact of a slowing economy has had a negative effect on our top line revenue growth. Economic conditions in all of our focus states other than Texas turned noticeably worse in the third quarter. Example, September 2007, unemployment increased over one point in each of our focus states except for Texas. Another dynamic that is negatively affecting our business is the steep decline in auto sales. In the third quarter auto sales failed by double digits.
According to the beureau of economic analysis, seasonally adjusted auto sales had falled 8.8% from those in the second quarter this year and 19.1% from those in the third quarter of last year. The effects of this in our business are apparent. Our agents and brochures continue to report that their overall business was done between 20% to 50% with many attributing a fall off to the weakened economy.
We ourselves are seeing policy holders opting for higher deductibles and reduced coverages. As a result, our overall premiums and new application counts have declined. Regarding overall industry market conditions, the market remains very competitive but we are seeing more and more competitors raising rates. Of course there are some smaller more disciplined competitors that have not taken actions to address the poor underwriting results. However, we are getting the sense that even these smaller companies are feeling the financial strain of writing business at inadequate rates. We think it’s just a matter of time before they too will have to take rate increases to address their unfavorable underwriting result.
Overall for the industry according both the consumer finance index and insurance.com and their latest rate watch analysis, auto insurance rates country wide are up around 3%. According to rate watch, auto rates appear to be going up in several of our focus states including California, Florida, Georgia, Pennsylvania, and Texas. Generally this is consistent with what we are seeing in the market place. At this point, overall rate increases are coming close to covering the average inflation rate for medical costs and auto repairs.
When we look at the rolling fourth quarter’s data from PCI fast track through the second quarter of this year, the data on all coverages excluding comp, we see slightly negative claim frequencies more than offset by positive average severities versus the same in the same period a year ago. These combined trends give you loss cost trending upward at a rate of about 1.3%.
While the average pay frequency for the industry has been negative for the first and second quarters for this year, perhaps impacted by higher gasoline prices, this trend may reverse itself now that we’re seeing gas prices fall. Overall the positive loss cost trends for the last six quarters appear to be the encouragement the industry needed to begin implementing meaningful rate increases. We also believe the recent decline in the equity and fixed income markets while require many competitors to focus and improve operating results as one way to rebuild their weakened balance sheets. This also bodes well for continued rate increases by the industry.
On slide 5 I’ll begin with an update on our personal auto business. Overall personal auto premiums were down 7.5% for the quarter; however, during the quarter we continued to see positive growth in focus states such as Texas, Nevada, and Illinois. Our maintenance state shrank 30.9% in the quarter. As we continue to concentrate on growing our focus states by while reducing underperforming business in these maintenance only areas. As we mentioned, for the last several quarters, we expect that this culling process will continue throughout 2008 and probably into 2009.
Premiums in non focus states for the quarter fell to $567,000. Today these states represent only about 0.03% of our private passenger auto book. We will continue to reduce our writings in these difficult unprofitable states throughout this and next year as well.
As for the detail on each of our top markets, let’s start with California. In this state, gross written premiums were down 7.1% for the quarter and down 13.5% year to date. The economic slow down in California is a major region for this drop in premium. California’s overall economy continues in recession. Certain key structures, such as construction continue to lose jobs. Between July and September, construction employment fell by 8,600 jobs.
In the past 12 months construction employment has fell by almost 77,000 or almost 9%. A loss of jobs in this sector hits our Hispanic customers especially hard since many work in this industry. In addition, many irresponsible competitors continue to aggressively pursue business in this day. However, the more responsible companies have actually filed for rate increases. Unfortunately many of our direct competitors continue to relax on writing standards and/or reduce rates to levels below cost. These irresponsible actions will continue to put downward pressure on our premium growth.
Industry loss cost trends are modestly positive year over year in California with small negative pay loss, paid claim frequency trends and offsetting most single digit increases in average paid claim severities. Average earned premiums per car year are down modestly for the industry. Our own calendar year data reflects flat year over year loss cost trends with single digit increases in frequency and negative trends in average severities. We continue to experience modest declines in our own average premiums per car year on a year over year basis given our rate reductions earlier this year. As compared with the second quarter average earned premiums are down about 2.5%.
On an ultimate accident year basis, our California combined ratio is down a couple of points from the first quarter. The accident year loss ratio is slightly lower than what was estimated in the second quarter of this year; however the overall combined ratio has increased about 4 points versus that of 2007 as a result of declines in the average earned premiums from a lower rate. The outlook for all of 2008 for California is for written premiums to be about 10% to 13% below that of 2007 but still with a very good accident year combined ratio.
In Florida gross written premiums were down 9.1% for the quarter and 15% year to date. Some of this decrease is by design. In order to improve the profitablility of this state, we implemented 5 rate increases in 2007 totalling 13.5% along with rate increases in two programs in January of this year and smaller rate increases in two programs in April of 2008. We also have taken actions to slow our new business actions in Miami given the high combined ratio there. These actions included requiring policy holders to pay their premiums in full or monthly on EFT along with terminating some underperforming agents.
As a result of an improving risk profile, year to date average earned premiums in Florida are down slightly through the third quarter versus those in all of 2007, but actually up slightly though versus those year to date through June of this year. Loss costs are down slightly for the first 9 months of this year with ultimate claim frequencies falling offset by slide increases in ultimate average severities. There has only been a slight improvement in the accident year results since June.
If Florida’s economy continues to falter it will create an additional drag on our premiums. The states unemployment rate was 6.6% in September up from 4.2% a year earlier. Many customers are opting to purchase only this statutorily required PIP and PD coverages. We suspect that many of the drivers are simply letting their coverages lapse or are not renewing their policies.
Lastly, effective October 1, 2008 state DMV became requiring proof of a valid social security number when issuing new or renewal licenses. This action could adversely affect our premium buying from Hispanic communities in the future. As for trends, loss cost for the industry are fairly moderate with increases in severity, somewhat offset by decline in frequency. Overall loss costs are still positive in Florida.
In response to these rising trends, competitors for the most part are beginning to tighten up on rates or underwriting. We’ve recently filed for additional rate increases effective in October and November for our three auto products in order to improve our profitablilty as well. This also underscores our commitment to achieving underwriting results that will meet or exceed our return target for this state. Regarding out outlook for all of 2008 for Florida as a result of a faltering economy and aggressive rate increases, we expect our premiums to be down 12% to 13% for the year versus those in 2007.
In Georgia, our gross written premiums were down 10% for the quarter and 18.7% year to date. The accident year to date combined ratio for this state remains unacceptably high. As you will recall our book of business in Georgia has changed fairly dramatically over the past 18 months from one that was primarily outside Atlanta to business more heavily concentrated in that city.
However, in Atlanta as we have discussed, we’re in the process of repositioning our programs to focus on our core Hispanic customers in the North East section of the city as well as in Dalton and Gainesville. In order to affect this shift this month, we hired a very experienced and talented product manager from a major competitor. In addition to repositioning the book to focus on Hispanic customers, our new PM is planning to file for rate increases in early 2009 in order to return this business to an acceptable profit margin.
Competitively, one of the larger more disciplined carriers have made more modest rate changes. Less disciplined smaller players are lowering down payement requirements, raising agency incentives and reducing rates.
I’m off script here, but I don’t know what these guys are thinking. They must think they can sprinkle fairy dust on their programs. I guess their PMs would be better. Excuse me for digressing.
We believe that these undisciplined competitors are currently writing business at unacceptably high combined ratios so these actions are unsustainable in the long term. Furthermore, much like California and Florida, Georgia’s economy is currently in recession. Unemployment rates have increased to 6.5% in September 2008, up from 4.5% a year earlier. Industry loss cost trends are flat down slightly in the second quarter with negative frequencies offsetting single digit increases in average claim severity.
For the third quarter, while counter to quarter earned premiums per car year for all coverages were up, counter to quarter loss costs were up even more. On a fully developed basis from June to September year to date, ultimate loss costs for earned exposure were up slightly more than average earned premiums resulting in a slight increase in the loss ratio in this state.
Given the rate increases and repositioning of the book, actions were taken to improve the profitability. We expect 2008 premiums for this state to be down 22% to 23%. We expect the 2008 accident year combined ratio to end above our targets, but certainly expect it to improve next year.
In Pennsylvania, the gross written premiums were down 7.7% for the quarter and down 1.4% for the year to date period. The combined ratio is up slightly from what we experienced at end of the second quarter. Its ultimate claim frequency in average severity has moved up slightly. For the second quarter, industry loss costs were up modestly in the low single digits with modest decreases in claims frequency more than offset by increases in average claim severity.
Consequently we’re seeing more established competitors taking low to mid-single digit rate increases to this day. However, a large regional player that is very competitive in Philadelphia appears to be experiencing combined ratios over 100, but has yet to take actions on its raise. Based on our estimates of this company’s results, it’s only a matter of time before it too must take rate increases to restore underwriting profitability.
We ourselves plan to take two modest rate increases in two of our programs in December followed by our third program in February. We are seeing an economic headwind in the fourth quarter as Pennsylvania’s economy heads into recession. Pennsylvania’s unemployment rate in September of 5.7% rose 1.3 points from the 4.4% rate experienced a year ago. Given the overall weakness here, we expect the written premiums in 2008 to be 1% to 2% below those in 2007 although we expect the underwriting results to remain solid for the year.
In Texas, our gross written premiums were up 16.6% for the quarter and 21.4% year to date. This state has provided us the best chance to grow this year. Competition has also been relatively well behaved. We do not see the more responsible players doing crazy things in this state but rather taking measured modest rate increases.
In the Texas economy while having experienced increases in its unemployment rates this year, it has managed to avoid the recession that has hit other states. As for trends, industry loss costs for the second quarter are increasing at single digit rates with modest increases in both frequency and severity. Finally the state is rolling out electronic enforcement of the automatic auto insurance laws. Sspecifically, the state has completed the testing of the test assure electronic enforcement program in Austin is now rolling it downstate at the beginning of this month. The state is permitting local government to determine the degree to punish drivers who are caught without auto insurance.
In several counties including Dallas, we are expecting to see an aggressive enforcement. We ourselves are poised to execute a marketing strategy later this year and into next year to take advantage of the electronic enforcement initiative. Furthermore, in order to capitalize on the roll out we began offering a new monthly policy to a limited number of agents back in July. Current new business application accounts for this program are exceeding our initial expectation.
As for trends, our own counter to quarter loss cost for the third quarter have fallen along with our average earned premiums as policy holders are attracted to our monthly low cost product. As a result, our latest accident year analysis is showing more than a point improvement in the ultimate loss ratio for this business. Nevertheless, our business in Texas continues to run at a slight temperature of the combined ratio. To improve the underwriting results in late October, we implemented rate increases on three of our programs. As a result of these rate increases, we expect premium growth in Texas to slow to 18% to 20% for all of 2008 as compared to 2007.
For Arizona, our gross written premiums were down 15.4 % for the quarter and 12.3% year to date. Companies were aggressively pricing business here but competitor rate actions seem to settle down. However, in lieu of rate decreases, competitors are lowering downpayment requirements and fees. Also some competitors in Arizona are offering commissions as high as 20% new and 20% renewal.
And some fall off continues in the Hispanic business in this state due in part to an exodus of Mexican immigrants as a result of legislation enacted earlier this year. This recent legislation permits law enforcement agencies to suspend business licenses to anyone found employing illegal immigrants. Economic conditions including higher food and fuel costs along with a decline in construction employment have also dampened the growth in the Hispanic population. Overall unemployment rates are up. This September’s unemployment rate was 5.9% which is 2.1 points higher than it was a year ago.
Industry loss costs trends for the second quarter are actually falling although average earned premiums per car year are falling even faster. Our own accident year results year to date are very silent and continue to improve as claim frequencies have now turned negative in the third quarter. For the year we will expect to write about $29 million to $30 million of premiums in this state which is down about 15% to 18% from that in 2007.
In Nevada which is a relatively new state for us, we’ve been there for only two years now, so far this year, we’ve written $17.8 million in Nevada up from about $12.8 million through September of last year. We are seeing competitors take rate increases in this state as we will late this year or early next year. As I mentioned, Nevada is a relatively new state for us that holds much promise given it’s proximaty to California where the Infinity brand is very strong throughout the Hispanic population.
As for Connecticut, our gross written premiums were down 39.1% for the quarter and almost 50% year to date. This state has performed poorly from an underwriting standpoint. The combined ratio is well over 100. We continue to trim unprofitable business. We will continue to take aggressive actions here to address profit underperformance which will most likely lead to continued decline in premiums in this state.
Lastly, Illinois is the newest focus state for us. We began writing business there in the first quarter of this year. In year to date through September, we’ve written almost $2 million in premiums. That includes almost $1 million in the third quarter alone as we continue to gain momentum throughout the year.
Chicago is our single targeted urban zone where it’s estimated over 800,000 Hispanics live. With our expertise within this demography, Chicago is an ideal urban zone for us. We’ll continue to give you a progress report on this very promising state in our upcoming earnings call.
As for our commercial vehicle and classic auto businesses, both showed solid growth in the third quarter. The commercial vehicle premiums rose 24% overall for the third quarter as compared to the third quarter of 2007. We’ve posted a very good accident year combined ratio as well. Even with a challenging economic environment we continue to find opportunites to grow this business in focus states such as California where our products and services have been very well received by our agents and brochures. We would expect this business to finish 2008 up about 15% from last year. In classic auto we enjoyed 6.1% premium growth in the third quarter. This business also showed a single digit growth for this year with very strong underwriting results.
So far I’ve given you a feel for our expectations for all of 2008 by focus state. What I’d like to do now is just really take a moment and summarize my comments. Overall as we have experienced over the past 4.5 years, we expect the auto insurance market to remain competitive as many companies will continue to pursue growth with increased agency incentives and advertising. However, we expect to see responsible competitors continue to file for modest rate increases as combined ratios exceed targeted thresholds. Even if some companies take increases, those increases will not be sufficient to offset rising loss costs. Consequently, we expect the industry loss ratio will continue to worsen throughout 2008 and into 2009.
In short, we do not expect a significant hardening of the market until perhaps later next year. In addition, as we discussed last quarter, we expect consumers will continue to be under financial pressure throughout the remainder of this year given weakening if not negative real growth in job creation and GDP. Consumers in the working and lower middle class including our core Hispanic customers are likely to suffer disproportionately from the economic down turn.
As this strata of a consumer typically suffers more in times of recession yet in spite of this difficult environment, we still think there are many opportunities to maintain or maybe even grow premium levels, particularly in our urban zones. In California over the next several months, the DOI is expected to improve and our competitors are expected to implement a currently pending 200 or so rate filings. Research has shown that when insurance rates are changed whether up or down, shopping behavior goes up. Given the strength of our brand and our brochure relationships in this state, we’re likely to get a crack at this business.
In Texas, as municipalities roll out electronic enforcement we have an opportunity with our marking efforts and new monthly policies to grow our monthly shares.
In new focus states such as Nevada and Illinois we continue to grow as well. On the negative side of the ledger as discussed earlier premiums in Florida, Georgia and Connecticut will be down as we take corrective actions to improve underwriting profitability. Net net for the full year of 2008 for all of our focus states we’re expecting premiums to be down 9% to 11%.
In addition, we expect a continued decline in our maintenance state premium volume this year as we seek to retain only profitable pockets of business in these areas. As for our other products, we expect commercial vehicle and classic auto to continue to grow. For the year we anticipate overall growth of 15% for CV and 5% to 6% for classic auto.
In total for the company, we’re expecting premiums to be down 9% to 11% for the year. If I continue to be less optimistic about the remainder of 2008 given the lack of opportunities to grow the business and the significant worsening of the economy in the third quarter, it is likely to last into the fourth quarter of this year and into the first quarter of 2009.
However, on a brighter note, from underwriting standpoint, we expect our overall 2008 accident year combined ratio to be 96% to 97% which is a 100 basis point improvement over last quarter’s guidance. Other key assumptions include a 4.5% book return on investments, an effective tax rate of 32%, and about $250,000 of remaining charges for the completion of our call center consolidation.
We also assume that approximately $20 million to $30 million of share repurchases will take place in the fourth quarter of 2008. All these should generate an operating EPS of $3.40 to $3.60 for this year. With that I’ll turn the presentation over to Roger for our financial performance review.
Thanks, Jim and good morning. I’m going to discuss the financial results for the third quarter of 2008. Slide 6 summarizes Infinity’s financial performance for the quarter. My discussion of the results are summarized on slide 7 and 8. Let’s first turn to slide 7.
Infinity’s quarterly revenues were down 15.3% primarily as a result of the 11.3% decline in earned premiums as well as a $9.9 million increase in real life capital losses in the quarter resulting from a $13.8 million OTTI charges. Earned premiums were down as a result of decreases in written premiums in the last quarter of 2007 and the first quarters of 2008.
As Jim has discussed, gross written premiums were down for the quarter, falling 6%. Investment income for the quarter was down $3 million over that of the quarter in 2007 or about 17.6% decline. The average investment balances have decreased $127 million or about 8.8% as a result of the $100 million stock repurchases, a program executed in September 2007 share repurchases in the second and third quarters and a decline in overall business since 2007.
Pretax returns for the fixed income portfolio were down ab out 50 basis points as compared to those of the third quarter of 2007. On September 30, 2008 book and market yields on the fixed income profolios were 4.83% and 5.50% respectively. Duration on the fixed income portfolio was 3.6 years slightly lower than the 3.7 years at the end of the third quarter of 2007.
On slide 8, regarding the investment portfolio our subprime and [all day exposure run in were] modest. Our investment portfolio contains 13 securities or about $21.2 million of subprime in all case securities. Of these securities, all but two are AAA rated. We have two rated AA. Rhese are the same 13 securities we held last quarter. Market value on these 13 fell about $1.1 million since June 30. These 13 securities represent only 1.8% of our total fixed income portfolio so our exposure is very small.
In general, our fixed income portfolio is a high quality portfolio with an average credit quality of AA plus. During the third quarter we incurred about $13.8 million of OTTI charges. Where GAAP accounting is you know, companies are required to take a P&L charge for securities that are deemed to have impaired values that are other than temporary. The accounting guidance does not define bright line tests for what is other than temoporary but the SEC has clarified in one of the staff accounting bulletins that the magnitude and length of time as well as the company’s ability and intent to hold the security until its market value fully recovers should be considerations.
Significant down turn in the bond and equity markets over the past 15 months have resulted in unrealized losses on several of our securities making them candidates for impairment. Approximately $5 million of the dollars of the OTTI charges for the quarter was related to Lehman Brothers Bond. Of course when Lehman filed for bankruptcy it was obvious that these bonds were not going to recover to original book value so we impaired them.
For the other investments, we evaluated the individual circumstances of each investment was below book value being especially mindful given the SEC guiadance of the magnitude and the length of time the issue had been under water. Those that were materially underwater have say by more than 5% to 10% and have been under water for a significant length of time we viewed particularly skeptically and had to have fairly compelling reasons not to impair them.
Keep in mind that the $13 million of OTTI losses represent only 1.2% of market value of our bonds at September 30, so it’s relatively small. For those securities that did not warrant impairment as these market values were below book value, the unrealized losses at September 30 were only $26.7 million as shown here on slide 8 in this aging of unrealized losses. This represents only about 2.3% of market value in the investment portfolio at September or about 4.8% of the GAAP equity.
So you can see why the current market situation is an issue for all financial services companies and is not a material one for us at this point. Certainly our policy investing in high quality well diversified fixed income security served us well. By the way, on the aging of unrealized losses, the largest single unrealized loss in the schedule is an investment in the Wilshire 5000 exchange traded fund and now has an unrealized loss of about $8.5 million.
Should it remain at these levels for any great length of time, it will surely be a candidate for impairment in future quarters, but we’ll discuss that in future quarters should it come to that. In order to assist your analysis and in the spirit of transparency of disclosure of this morning, we posted on our IR website a list of our entire considated portfolio.
Turning to slide 9 in regards to profitability as Jim has discussed, operating profits are solid in the third quarter. Operating income per share was $1.03 for the quarter, this compares to $1.00 for the third quarter of 2007. Underwriting income for the quarter fell $2.2 million as a result of the decline in earned premiums and the slight increase in counter quarter combined ratios. As Jim mentioned, we are currently booking the action year to date at about 96.5%.
Offsetting the slight increase in our action year combined ratio was $1.3 million pretax release of redundant reserve of prior quarters and a $2.5 million pretax release of redundant reserves from the first and second quarters of this year. Mostly our loss adjustments have been consistent as compared with the $5.4 million release in the third quarter of last year. By the way, the $1.3 million redundance release is net of the $5.5 million litigation settlement we announced in the August 13 8-K.
The 96.5 % accident combined ratio is up about 1.1 points from the 2007 tax year combined ratio developed through year end 2007 of 95.4%. The accident quarter ended September 30, 2008 performed better than the year to date period as the result of lower expense ratio and better loss ratio.
Expenses are down in the quarter as a result of a reduction of advertising spending, a reduction of bonus accrual for first and second quarters as well as other reductions. By the way the overall expense ratio year to date has been above our target, primarily as a result of our premium writings. Consequently, we are undertaking a top to bottom review of our operating expenses in order to reduce them.
At the beginning of this month, we identified at least $11.5 million pretax of annualized expenses with claims and underwriting expense related that we could reduce. About half of these expense reductions are from reduction in personnel, primarily in claims. Those reductions were affected a few weeks ago. While it is never easy to reduce staff in order to reduce expenses, we are commited to doing whatever it takes to keep our expense ratio low so our rates can be affordable to our customers and our company can grow and strive for the sake of our employees and all of our shareholders.
Our review of expenses is ongoing and we will continue to give you updates each quarter of our progress. Third quarter and year to date figures in 2008 include approximately $1.1 million pretaxed losses from hurricane Ike, which passed through Houston, one of our targeted urban zones. Total cap losses for the quarter year to date in 2008 has been $1.3 million and $1.8 million pretax respectively or about $0.06 and $0.07 per share as compared to $53,000 and $529,000 in the same periods in 2007 respectively.
We incurred less thank $100,000 in pretax charges for our service center consolidation efforts which began late last year. We would expect another $250,000 pretax charges in late 2008 or early 2009 for the completion of this. These future charges for the most part represent sublease losses we are expecting to incur when the remaining excess space is freed up in Alpharetta. When these charges will occur will depend on when we can free this excess space up for subletting.
The overall effective tax rate for the quarter was 63.7% which is up substantially of couse as compared to the prior period as result of $11.6 million in capital losses for which we set up 100% valuation allowance on the tax benefit of those losses. On an operating income basis excluding capital gains and losses the effective operating tax rate for the quarter was about 32%. I would expect the effective tax rate for all of 2008 to be about 31.5% to 32.5%. This rate is down from 33.3% in 2007 since a greater portion of our investments are now invested in tax exempt municipal bond and in turn a greater portion of our operating income will be sheltered from federal income taxes.
Regarding share repurchases, Jim mentioned that Infinity repurchased 1,084,600 shares for an average price of $43.74 from the third quarter 2008. This does represent about 6.7% of our outstanding shares in the beginning of the quarter. Through September 30, 2008 year to date repurchases have totaled $53.7 million leaving $75.4 million of repurchase capacity on the 2006 share repurchase program as amended.
We continue to have adequate capital to support either future growth in the business or to fund additional share repurchases. Our debt to capital ratio is 26.4% which is below the 30% required rating agencies to maintain our current debt ratings. Our adjusted debt to capital which includes an adjustment for operating lease payments is about 30% which is within the 30% to 35% ratio required by rating agencies to maintain trend debt ratings.
With their current statutory levels our insurance companies are currently writing business at 1:1 premium surplus ratio which is below the 2.25 to 2.50 times surplus, premium to surplus needed to maintain our current A&M best rating as an A. The holding company has $155.7 million of cash investments which is certainly available to fuse into the insurance companies should they need additional capital.
By the way we did pay a dividend up from the insurance companies on September 29 of $17.5 million to the holding company. Our year to date dividends from the insurance companies would have been about $52.5 million. Also the full year 2008 ordinary dividend capacity for the insurance companies was about $79 million. We also on August 31 renewed our $50 million line of credit for another three years at essentially the same terms. Our operations continue to have positive operation cash flows. In short, we are well positioned with liquidity and capital to weather the severe current economic down turn for future growth of the business. This concludes our formal presentation so at this time we’d like to open it up for questions.
(Operator Instructions) Your first question comes from Joseph DiMarino - Piper Jaffray.
Joseph DiMarino – Piper Jaffray
My question relates to pricing. Obviously it seems like you’re seeing a lot more rate increases this quarter. If you could just give us some commentary on how much more optimistic you are this quarter incrementally versus last quarter on some of the rate increases you’ve seen and I guess whether or not that’s more an impact of storm activities or investment activity or both.
Sure, Joseph, this is Jim. As we mentioned for the past 6 quarters the trends have been positive overall. I think that is certainly what the companies are certainly looking at considering future lost costs in terms of making decisions to raise rates. We’re actually seeing it in the standard preferred markets in states like Texas. You’ve got Allstate and State Farm that are going up on rates here recently and that state has been terribly competitive. I don’t think that has anything to do with the recent hurricane, those rate changes were filed prior to that. We’re seeing some of our competitors, the more responsible competitors, take rates up in a number of states, practically all of our states quite honestly.
There are however a small number of irresponsible companies, sniped at them a little bit with my comment about fairy dust, and getting their programs profitable that seem to be hanging on and doing the usual rate cutting and paying 20% commissions that we don’t think is sustainable and that has to change. Our look from the second quarter to the third quarter I think has changed fairly significantly in that there are more and more companies taking rates up certainly than taking them down or leaving them revenue neutral. We think that goes well, that’s great news.
We’ve been waiting for this hardy market for some time now. Now, on the other side of the coin, with the economic conditions, it’s putting a little bit of a damper in terms of top line growth and being able to take advantage of the market hardening the way it is. We’ve got a little bit of a good news/bad news scenario but again overall I would say that rates certainly are trending up from all companies; the standard preferred and non-standard carriers.
Joseph DiMarino – Piper Jaffray
Back to unemployment for a second; I realize you don’t have a crystal ball or anything but at what point, where does unemployment have to get to to where you might materially see a real impact on pricing and even possibly on reserve methodology if at all?
Well, the unemployment issues typically hit the coverages that deal more with medical payment, wage loss type of things. For instance, PIP in Florida, if you look at the third quarter and you look at fast track data to the second quarter of this year, PIP premiums are going through the roof; triple digits over 30%, bodily injury premiums probably trending upwards as well so it typically hits those two coverages, Joseph, early on in this type of cycle that we’re in; primarily because you’ve got people with the first part of coverage in a state like Florida that can file a claim pretty much if they’re entering into, alighting from a vehicle.
I jokingly said if they’re within 50 feet of a vehicle and have an accident they can file a PIP claim but those type coverages are going to be hit first. Your bodily injury coverages, where you may have individuals that would exaggerate perhaps injuries moreso than they would do under different economic circumstances; you typically see it there as well. The third coverage would be comprehensive which we’re seeing that a little bit in our numbers as well. Our SIU staff were probably busier today than they were 3-4 months ago because you got people that have loans on their automobiles and if they’re unemployed and unable to make the payments, those vehicles are sometimes stolen or I refer to it as spontaneous combustion, they catch fire and you have a comp claim. Those are the typical coverages that you have to be atuned to, you have to be on top of in terms of where unemployment may affect the business.
Joseph DiMarino – Piper Jaffray
One other question, just a numbers related question; you might have even said this, but from what accident years did the favorable development occur in?
It was in 2006 and prior; 2006 and 2005.
Joseph DiMarino – Piper Jaffray
One more question actually, on the tax evaluation allowance, can you repeat how that was calculated again?
We, for any capital losses, we put up a reserve 100% given we have about $51.6 million in capital carry-forwards if you include the $23.6 million of OTTI charges and rather than being overly optimistic that we can utilize those in full, we put up 100% evaluational loans and then if we can sell securities at that point for a loss and offset it against capital gain, we’ll take the benefit at that point, so it’s a relatively conservative approach but we’d rather do that than have to take a charge later for not being able to utilize the capital loss carry forwards.
Your next question comes from Alison Jacobowitz - Merrill Lynch.
Alison Jacobowitz - Merrill Lynch
I’m sorry I’m going to make you repeat yourself a little bit but I’m slow this morning. On the expense ratio, I just want to make sure I have all the pieces. How you get into the accident year. I get the reserve and the reserve [catch] but did you also say there was an expense accrual reversal in the quarter and it was 2.8?
Yes, it was $2.8 million of primarily bonus accruals.
Alison Jacobowitz - Merrill Lynch
Ok, so basically then it’s for the expense ratio. As it is I’m getting 22% so just simply add the $2.8 million would have been like an underlying run rate, right?
Alison Jacobowitz - Merrill Lynch
But I’m still, maybe I’ll call you back, I’m still not getting to that, you said that accident year was 96.5% in the quarter? Okay, I’m going to call you after, I’m just not getting there. I’m a little slower than usual this morning.
That’s accusing us of sandbagging.
Alison Jacobowitz - Merrill Lynch
No, no, no, I’m accusing myself of just not getting it.
This concludes the question and answer session for today’s call. I would like to now turn the presentation over back to Mr. Jim Gober for any closing remarks.
Again thanks for participating in the conference call. We appreciate it and certainly look forward to our conference call early in 2009. Have a good day.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.
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