Harleysville Group Inc. Q3 2008 Earnings Call Transcript

Harleysville Group Inc. (HGIC)

F3Q08 Earnings Call

November 4, 2008 8:00 am ET

Executives

Mark Cummins - Chief Investment Officer

Michael Browne - President and CEO

Art Chandler - Chief Financial Officer

Bob Whitlock - Chief Underwriting Officer

Tom Clark - Senior Vice President of Field Operations

Allan Becker - Chief Actuary

Analysts

Bob Glasspiegel - Langen McAlenney

Edin Imsirovic - KeyBanc Capital Markets

Mark Dwelle – RBC Capital Markets

Presentation

Operator

(Operator Instructions) Welcome to the Harleysville Group Third Quarter 2008 Earnings Conference Call. I would now like to turn the meeting over to Harleysville Group Mr. Mark Cummins, Chief Investment Officer.

Mark Cummins

I’d like to welcome everyone today to our third quarter 2008 conference call. Our complete news release and financial supplement are posted in the investor section of our website at www.HarleysvilleGroup.com. A replay of this morning’s presentation will be available on our website later today.

During this call Harleysville Group, Inc. may make remarks about future expectations, plans and prospects. These remarks constitute forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from those indicated by these forward looking statements and our third quarter earnings release as a result of various important factors including those discussed in the 2007 Form 10-K and the second quarter Form 10-Q which have been filed with the Securities & Exchange Commission.

You will hear us talk about operating results. Operating income is a non-GAAP financial measure defined by the company as net income excluding after tax realized gains and losses on investments. For further definition we’ve included a chart titled reconciliation to operating income on the financial highlights page of our earnings release.

Leading off the call today will be our President and CEO Michael Browne, Art Chandler our Chief Financial Officer will follow with some highlights of our financial results, Bob Whitlock, our Chief Underwriting Officer will follow with some comments on line of business results. I’ll return to provide some remarks on investments and Michael will then offer his closing comments. Tom Clark our Senior Vice President of Field Operations and Allan Becker our Chief Actuary are also here to help address your questions at the end of our planned remarks.

With that I’ll turn it over to Michael Browne.

Michael Browne

I’m pleased to report that Harleysville continues to differentiate itself favorably from much of our competition with the results we’re reporting today. Despite the challenges presented by the turbulent economic conditions and numerous catastrophes that have significantly impacted many of our peers in the insurance industry our combined ratio for the quarter was a profitable 98.8% and our operating return on equity for the trailing 12 months stands at 11.9%.

In the third quarter we reported operating earnings of $0.80 per share including a charge of $0.08 for catastrophes, $0.05 of which was from claims caused by storms stemming from the downgraded remnants of Hurricane Ike. In non-coastal states where we actively write business in this case that was primarily Indiana, Ohio and Pennsylvania.

It’s important to note I think that excluding the impact of the cat losses from this year and last year our underlying operating earnings per share improved compared to 2007 which indicates that we continue to perform well in the fundamental areas of our business.

In a few minutes Art Chandler our Chief Financial Officer will walk you through additional details on our financial results followed by Bob Whitlock our Chief Underwriting Officer who will summarize our underwriting results.

Before I turn the call over to him I want to touch on a few items you’ve heard us discuss in past calls which have particular relevance in light of the events we’ve seen in the third quarter. I mentioned a moment ago that Hurricane Ike cost us $0.05 of our operating earnings per share. Based on industry and peer company’s reports to date this event was much more significant for many of our competitors than it was for us.

We credit our success at least in part in avoiding more significant catastrophe loss from Hurricane Ike as well as from Hurricane Gustav earlier in the quarter to our ongoing cat management strategy which includes not taking on property exposure in Florida or on the gulf coast. Having said that we recognize that for those of our policy holders who have sustained losses these are significant events in their lives. I’m proud of the outstanding service our people, particularly our claims staff, have provided to our policy holders in their time of need during the past few months.

Obviously the other big story during the past quarter has been the turmoil in the financial markets. In the third quarter we recorded other than temporary impairment losses of $19.7 million after tax in our investment portfolio. These losses represent approximately 1% of our total investment portfolio. Mark will provide further details in moment but I want to emphasize that we’ve built our investment portfolio to weather the type of difficult economic environment we currently face.

Our investments are managed to support our insurance operations by providing after tax net investment income while maintaining a conservative, high quality portfolio that provides the necessary cash flow to avoid selling in illiquid markets. That supports the strong capital position we maintain to fulfill the commitments we’ve made to our agency partners and to our policy holders.

While we are successfully navigating through the latest round of cats and ongoing turbulence in the financial markets we have remained focused on the fundamentals of our business. That includes maintaining our underwriting discipline in a very competitive environment. We can’t afford to compromise on underwriting qualities so we are certainly willing to walk away from under priced business when necessary.

To that end we have increased the intensity of our focus on protecting the quality and long term profitability of our business, an effort that benefits greatly from our use of predictive modeling. It enables us to effectively assess risk quality and better match price to risk with the bottom line goal of retaining our most profitable business.

I would remind you that we were one of the first regional companies to use predictive modeling. We now model more than 80% of our commercial business both new and renewal and our use of predictive modeling is embedded in our underwriting process all in which we believe makes us the leader among our peers in this regard.

As we focus on our long term profitability we are pleased to have the support of our agency partners. As you’ve heard me say before agency relationships are a true differentiator for Harleysville in the marketplace. Evidence of the strength of those relationships and the trust our agents place in us is the commitment to bring us quality business which is clearly reflected in the strong retention rates we continue to see in both commercial and personal life.

As we look to further strengthen those relationships we have developed technology that makes it easy for them to do business with us. In that regard during the quarter we continue to roll out access Harleysville our new commercial and personalized policy administration systems to replace a dozen existing legacy systems.

In New Jersey and in Pennsylvania where our systems are fully up and running we’ve seen a greater than 24% increase in both premium and policy count of new small commercial lines of business written in those two states during the first nine months of the year.

As we’ve noted in the past much of our strategy revolves around small business because it is less price sensitive with better loss ratios and retentions. Not only are these new systems making it easier for our agents to write this type of business with us but going forward this also gives us greater flexibility to expand into new products, new geographies and services quickly and effectively.

The impact of the new system is already being felt. As we experienced a 15% increase overall in our new small commercial premium during the third quarter while middle market premium was down by 17% this quarter.

Our technology efforts also continue to garner attention for our company in the media. For example Information Weekly recently named us one of the top 100 IT innovators in the United States. This award is for innovation among all companies not just insurance companies and we’ll find very few property and casualty insurance companies on this list. At number 30 we’re proud to know this marks the third consecutive year that Harleysville has been named to the list.

At the same time we were named a winner of a 2008 innovators award a special designation from Insurance Networking News magazine recognizing our efforts to advance the spread of business technology acumen in the insurance industry.

Our Chief Information Officer, Akhil Tripathi recently was named one of 2008 elite eight by Insurance and Technology magazine. We are pleased that we continue to be recognized for the efforts of our talented professionals. These accolades validate the course we’ve taken to implement innovative technology and we are achieving our goal to make it as easy as possible for our agency partners to do business with us.

Let me conclude my opening remarks by making just a few comments on our financial position. We continue to maintain our solid capital base, a strong balance sheet and reserve position. A modest debt to capital ratio of 15% and a high quality investment portfolio. We had a premium to surplus ratio of 1.6:1, all of which provides a sound financial position for us to write our agents business.

I would also note that on a consolidated basis which includes Harleysville Mutual our premium to surplus ratio is 1:1. As you likely saw in Friday’s news release we paid our regular quarterly cash dividend which you recall we increased by 20% in August and now amounts to a quarterly payout of $0.30 per share or $1.20 per share on an annual basis. That’s a significant increase which in fact is up nearly 60% over the last two years.

We’re proud of the fact that during our 22 years as a public company we’ve paid our shareholders a dividend every quarter and our dividend has increased every year. The dividend payout is indicative of our strong position and it also reflects the confidence we have in our future including our potential for future earnings growth.

With that I’m going to ask Art Chandler our CFO to provide some remarks on our second quarter financial results and then I’ll come back later to offer some closing comments and answer your questions.

Art Chandler

My comments will relate to the four page financial supplement included with the press release. Starting with the first page you will note that we had operating income of $0.80 per share in the third quarter of 2008 compared to $0.83 per share in the prior years third quarter. During the third quarter we had catastrophe losses of $0.08 per share which included $0.05 per share from Hurricane Ike compared to catastrophe losses of $0.03 per share for the third quarter 2007.

Year to date operating earnings per share were $1.91 which included cat losses of $0.70 per share compared to $2.34 per share for the first nine months of 2007 when cat losses were $0.16 per share. In addition, we recorded net realized investment losses equal to $0.65 per share in the quarter which included other than temporary impairment charges of $0.68 per share. Mark Cummins will provide more information on investments later in the call.

Including the realized net investment losses, net income was $0.15 per share in the third quarter and $1.27 per share in the first nine months of the year. The statutory combined ratio for the third quarter was 98.8 and it included about 1.6 points of catastrophe losses. The year to date combined ratio was 101 and it included about 4.6 points of catastrophe losses.

As a reminder I would note that the change in the pooling percentage at about half point favorable impact on the year to date expense ratio and combined ratio. There is no impact on the third quarter ratios. Again, this impact will continue to diminish throughout the course of the year. Adjusting for this re-pooling impact the combined ratio was 101.5 this compares to a 2007 nine months combined ratio of 96.7 that included 1.3 points of catastrophe losses.

Favorable prior year development of about 3 points was noted in the quarter as compared to 2.1 points noted in the third quarter 2007. The underlying year to date current accident year loss ratio excluding catastrophies is up about 1 point from the result posted in 2007 due primarily to elevated non-catastrophe property experience. Bob Whitlock will comment on line of business results in more detail in a few minutes.

The year to date statutory expense ratio of 33.3 was again favorably impacted by about half a point as a result of the re-pooling transaction. Adjusting for the re-pooling the expense ratio of 33.8 is essentially flat with the result noted in the first nine months of 2007.

Internal expenses were flat with last year and staffing levels declined by approximately 4% over the last 12 months. Year to date operating cash flow was $163 million including $83 million associated with the pooling change. Excluding the impact of the pool share change paid losses did increase about 11% compared to the first nine months of last year. However, the ratio paid losses to incurred losses remained at a solid level of 93% on flat earned premiums.

Pre-tax investment income increased $2.5 million or 3% versus the first nine months of last year. The pooling change is the principle driver of the higher investment income.

Turning to premium production, net written premiums increased about 9% in the first nine months of this year. Excluding the pool share change net written premiums declined about 5% in the quarter and 2% year to date. For commercial lines where renewal pricing was down 3.4% year to date written premiums in the first nine months were up about 8% including the pool share change and down 3% excluding the renewal unit retentions have remained relatively steady.

For personal lines renewal pricing was up about 1.5% year to date. Premium volume was up about 12% including the pool share change and flat excluding the change. Growth was largely price driven in the homeowner’s line as a result of insurance to value actions.

Our balance sheet remains strong with a consolidated statutory surplus including Harleysville Mutual of $1.1 billion, a consolidated premium surplus ratio of 1:1 and a consistently increasing AM Best Capital score which now stands at 263. We have a capital position above our current rating and we are well positioned to write quality business.

In addition, our investment portfolio is of high quality and provides powerful liquidity over and above our consistent positive operating cash flows. Our GAAP book value is $23.20 per share down 3% from September of last year. Our premium surplus ratio remained at 1.6:1 and debt to total capital is a conservative 15%.

During the quarter we repurchased approximately 1.3 million shares at an average price of $35.35. We have approximately 146,000 shares remaining under the current authorization.

With that I’ll turn the call over to Bob Whitlock

Bob Whitlock

I’ll be discussing the line of business results that are on the last page of the financial supplement. When discussing year to date figures I’ll be referring to the results excluding the impact of the pooling change and I’ll start with commercial lines.

Commercial lines produced a combined ratio of 100.3% in the third quarter. That number includes 1.9 points from catastrophe losses so excluding catastrophes our commercial lines combined ratio was 98.4%. For the first nine months of 2008 the commercial lines combined ratio excluding the impact of the pooling change was 101.7% which includes 3.6 points of catastrophe losses. Excluding the impact of weather catastrophes our commercial lines continue to produce an underwriting profit.

Market conditions remain competitive in all commercial lines and that continues to put pressure on our underwriting results. In this environment we are using all the means we have at our disposal to protect that profitability. One of course is predictive modeling which is a powerful tool that helps us assess risk quality and place an appropriate price on that risk. We have continued to use predictive modeling diligently in our underwriting process. We are unwilling to put business on the books that is clearly inadequately priced because profit is our top priority.

The commercial auto line continues to perform well with combined ratio for the quarter of 93.1%. That brings the nine month combined ratio excluding the pooling change to a profitable 94.9%. Both bodily injury and property damage liability frequency shows and ongoing improving trend and severity continues to be better than expected leading to favorable prior year development. Pricing for commercial auto remains very competitive and our decline in premium excluding the pooling change reflects our focus on maintaining our underwriting discipline.

Our commercial multi-peril combined ratio for the quarter was 103.3% which includes 3.4 points of catastrophe losses. The year to date combined ratio for CMP was 104.3% including 5 points from catastrophe. Again, without the impact from cats our CMP combined ratio was under 100% for both the quarter and for the first nine months. Non-catastrophe property loss frequency remains stable however severity in 2008 is higher than anticipated.

As reported on last quarter’s conference call larger property losses have been elevated this year partly due to catastrophes, partly due to non-catastrophe weather activity and also party due to the reign of nature of larger property claims. CMP liability frequency remains stable and the long term severity trend is in line with our expectations.

Our workers compensation combined ratio was 116.9% in the quarter and 113.2% for the first nine months. The higher combined ratio in the third quarter primarily reflects the impact of a decline in premium in the quarter. That premium decline resulted in an increase in the underwriting expense ratio of about 3 points in the quarter. Since our allocation of expenses the lines of business lags, changes in premium volume we expect the impact of the premium reductions to lessen over the course of the rest of the year.

More importantly our workers compensation loss ratio remained flat in the third quarter 2007. Given the current price environment and loss trends we see that as an indication of our improving quality of our book. Loss frequency in both medical and indemnity has shown a significant downward trend over an extended period of time. That’s another indication to the improving quality of our risk. Paid medical severity has increased while indemnity severity has been stable.

Personal lines returned to underwriting profitability in the third quarter. Our combined ratio for personal lines in the quarter was 92.2% for the first nine months our personal lines combined ratio was 100.5% which includes 9.2 points of cat loss.

Personal auto produced a combined ratio of 94.1% which brings the nine month results to 94%. Prior year losses have developed more favorable than expected which has contributed to that result. Both bodily injury and property damage liability frequency have continued to improve continuing a trend we’ve seen over the past several accident years. Hast severity has increased in line with our expectations.

Physical damage coverage remains profitable for the quarter and year to date and in fact have improved during the year as the impact of winter weather from the first quarter becomes less of a factor. The homeowners combined ratio for the third quarter was a very profitable 87.6% that includes a benefit of 1.1 points from catastrophe losses in prior quarters that have developed favorably.

For the first nine months of 2008 cats contributed 18.8 points to the 107.4% combined ratio. For both the quarter and year to date our underlying results in homeowners remain very profitable. Non-catastrophe frequency is elevated due primarily from bid losses while severity trends in homeowners have been stable. Finally we continue to benefit from our insurance to value program which we’ve had in place for some time.

At this time I’ll turn the call over to Mark Cummins to comment on investments.

Mark Cummins

The turmoil in the financial markets that occurred in the first half of 2008 accelerated during the third quarter. Financial markets continue to be hampered by extreme volatility and illiquidity. The good news for our investors is we’ve built our investment portfolio to withstand this type of unpredictable worst case environment. It takes years to build a quality portfolio so when the tough times arrive it’s too late to reallocate your holdings.

We have no need to reallocate ours. We’ve always managed our investments to support our insurance operations and that means providing after tax investment income while maintaining a conservative high quality portfolio and providing cash flow to avoid selling in illiquid markets. We are extremely well positioned.

Before I provide my typical overview of the investment portfolio I’ll discuss several important topics that occurred during the third quarter. First, as you may have noticed from looking at our financial supplement we terminated our outsource securities lending program. We felt that was a prudent course of action that allowed us to eliminate the counter party risk that was involved with the program. Securities lending investments totaling $33.2 million are now included in our investment portfolio.

Secondly I’d like to provide some detail on impairment losses. In the third quarter our impairment losses totaled $19.7 million after tax or $0.68 per share. These losses represent approximately 1% of our total investment portfolio. Two problem fixed maturity holdings comprise nearly $8 million of the total impairment, $3.4 million related to our Lehman Brothers fixed maturity holdings and $4.5 million from Sigma Finance Corp a fixed maturity holding from our outsourced securities lending program that we disclosed previously in our 10-Q.

In addition, responding to the significant decline in the equity markets $11.6 million of after tax impairments were recorded on equity index funds. If you’ll recall about two years ago we began restructuring our equity portfolio going from active to passive equity management. At that time we sold equities with significant realized gains and reinvested those proceeds primarily in equity index funds. Therefore, we increased the cost basis in our equity portfolio.

We also added to equities in 2008 in conjunction with our pooling change. The overall drop in the equity markets caused these unrealized losses. The company plans to sell these equity index funds and carry back the losses offsetting them against previous realized gains. To summarize, these are tax strategies available as the result of declines in the equity markets. We do not look at the decline in the equities as a long term problem.

Also I’ll note that we do not have any exposure to Washington Mutual and do not own any Freddie Mac or Fannie Mae common or preferred stock. Our investment portfolio remains very high quality with 96% of our fixed maturities rated A or better and 80% rated AA or better. Our average credit ratings are AA1 by Moody’s and AA+ by S&P.

After tax investment income was up 3.1% in the quarter and increased 5.3% year to date. This increase was impacted by the $156 million of cash used for share repurchases during 2007 and the first nine months of 2008 but benefited from our pooling change that we previously discussed. Pre-tax yield excluding short term investments was 4.8% down from 4.97% a year ago. Our after tax yield was 3.52% versus 3.56%. We expect after tax investment income to increase in the low to mid single digit range in 2008.

Due to our tax position we will continue to purchase primarily tax exempt securities. This is one of the most attractive times in history to buy tax exempts. We like them not only due to yield but also because of the strong credit quality.

Our market value to amortized value on the fixed maturity portfolio was 98.7% at September 30, 2008, down from 100.1% a year ago. The drop primarily was due to spread widening. Our duration of 4.0 years at September 30, 2008 was unchanged from a year ago. Our equity exposure is a conservative 17% of stockholders equity as of September 30, 2008.

We run a sensitivity analysis on our portfolio to simulate a 50% market correction to make sure we can afford the risk of owning equities. We do expect to add $25 million to our equity portfolio utilizing equity index funds. This addition will move our exposure to between 20% to 25% of stockholders equity.

We have a very strong liquidity position. The maturity ladder on our fixed maturity portfolio including investment income amounts to approximately $350 million per year over the next five years and predictable cash flow no matter what the environment. This is a great liquidity position to have during these unprecedented times.

As a final note the key factors in this environment continue to be liquidity, asset quality and capital. We’ve positioned our investment portfolios to provide for all three in order to support our insurance operations.

With that I’ll turn it back to Michael.

Michael Browne

Before we open the call to your questions let me summarize this portion of the call with just a few key points. First, despite the financial turmoil and the numerous catastrophes that have impacted many of our peers during the quarter we reported solid operating results which included operating earnings of $0.80 per share and a combined ratio of 98.8%. We also produced an operating return on equity for the trailing 12 months of 11.9% which compares favorably with much of our competition.

Another highlight from the third quarter is the fact that we continue to retain a high percentage of our quality commercial and personal lines of business which as we noted before speaks highly of the strong support and outstanding relationships we have with our agents which really differentiates us in the marketplace.

In addition, as we announced Friday we have now paid a dividend to our shareholders in 90 consecutive quarters. That follows a 20% increase in our dividend in August which pushed up the quarterly payout to $0.30 per share or $1.20 on an annual basis. With that we’ve now increased our dividend every year during our 22 years as a public company.

Obviously the marketplace has seen its share of troubles in recent months and we certainly have not been immune to them. We feel we are favorably positioned for success going forward based on the steps we’ve taken in recent years to differentiate ourselves, efforts that are a direct result of the hard work and dedication of our employees and agency partners.

These include our use of predictive modeling to enhance the quality of our underwriting which we are applying to the overwhelming majority of our commercial business both new and renewal. The ongoing rollout of our new commercial line and personalized technology and enhanced product platforms enable us to compete more effectively for our agent’s quality business.

Our regional field structure which enables us to be even more responsive to our agents. Our commercial and personalized territory managers who are in our agent’s offices on a consistent basis to strengthen our business partnerships to attain the most profitable business. A strong balance sheet to support our future growth.

As we near the end of the year and we look ahead to the future we’re going to remain focused on the basics of our business as we said to you in the past, as we seek to consistently produce quality results, improving earnings, profitable underwriting and an operating return on equity of at least 12% while always maintaining that healthy balance sheet.

We’re going to remain disciplined as we focus on our goal of maintaining a long term underwriting profit and ongoing improvement in our performance that will continue to differentiate us favorably from the competition.

With that let’s open the call to your questions. We’re ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Glasspiegel - Langen McAlenney

Bob Glasspiegel - Langen McAlenney

How big is the equity index portfolio that you’re liquidating today and I assume you’re repositioning given that you’re saying you’re increasing your commitment to equities?

Mark Cummins

We’re going to sell a big part of that portfolio it’s about $110 million at the end of September so it’s probably going to be, we’re just going to be selling the loss lots.

Bob Glasspiegel - Langen McAlenney

Some of the $110 million is down 17% or so.

Mark Cummins

It’s down about actually 9% in the quarter, another $10 million on top of that. When we execute that program depending on when exactly we do it if the markets stay at these levels we will be taking some realized losses in the fourth quarter. At this juncture as we just commented 9% is about $10 million. It’s a good part of that $110 million it might be 80% to 90% of it depending when we execute.

Bob Glasspiegel - Langen McAlenney

You said you’re repositioning because you’re going to increase equities.

Mark Cummins

We’re going to take the tax losses and reposition that portfolio but also increase our total exposure to equities. At the end of the day we’re going to be increasing by $25 million.

Bob Glasspiegel - Langen McAlenney

Are you going to actively manage it or do you have to wait 31 days?

Mark Cummins

We’re going to have to manage through that wash sell period. Our intent is to try to move into another product so we stay fully invested. We’re going to stay in index funds.

Bob Glasspiegel - Langen McAlenney

Could you give us the reserve development by line for the quarter?

Bob Whitlock

For personal lines in total for the quarter is 1.2 points and that breaks down into auto at 7.2 points and homeowners at 0.7 points. Commercial total for the quarter is 3.4 points most of that coming from commercial auto at about 11 points and the other lines are about flat. Overall its 3 points for quarter.

Bob Glasspiegel - Langen McAlenney

Three points favorable?

Bob Whitlock

Yes.

Bob Glasspiegel - Langen McAlenney

There’s been a lot of stress to the system as you say while you dodge bullets many of your competitors did. Most of the managements on the calls are giving a crystal ball what they think the implications are going to be to ’09. I would characterize your company’s commentary both Michael and Bob as being sober, soft cycle strategy in through it. Some of your competitors have been a little bit more optimistic on what the environmental changes imply to the company. Is that a correct characterization that you’re in soft market strategy and not expecting any change for the foreseeable future?

Michael Browne

What I would say is that I think the market should harden given the cat losses and the investment impairments that we’ve seen in this quarter. We didn’t see very many companies with combined ratios under 100 in the quarter. We saw investment impairments for companies in the hundreds of millions and billions of dollars. With that much capital coming out of the industry it should harden. That assumes that companies will act rationally. I think we have to wait and see whether they act rationally.

There are certainly, as you mentioned, when you listen to some other companies talk they are being optimistic about the fact that the market will harden. We certainly hope that it will. There is still anecdotal evidence out there that not everybody’s following that tune and there are still some competitors, one in particular, I’m not going to mention their name that is very, very aggressive on price. If people are rational the market will firm but it remains to be seen whether people are going to be rational.

Bob Glasspiegel - Langen McAlenney

As you’re rolling out your ’09 business plan you’re employing the soft market strategy as far as expense management is that a fair.

Michael Browne

I would say from an expense management standpoint absolutely. We are going to be very, very careful about our expenses until. We’re going to be very careful about our expenses even when the market turns. We’re going to be very careful about our expenses in 2009.

Operator

Your next question comes from Edin Imsirovic - KeyBanc Capital Markets

Edin Imsirovic - KeyBanc Capital Markets

I had a question on acquisitions and if you’re seeing any opportunities in the marketplace and what sort of opportunities you may be targeting?

Michael Browne

We have been looking for appropriate M&A opportunities for quite a while. It takes a lot of time. As you may have seen recently we actually have hired a John Keefe as our Head of Corporate Development to help us focus on M&A activity. We are looking for companies or books of business that provide geographic or product diversification for us or allow us to leverage the new platform that we have built and are also accretive.

We’re going to be very disciplined with respect to balance sheet risk, integration risk and valuation. I would say that right now there still appear to be more buyers than sellers. In valuations in many instances of potential acquisition targets that we talk to are still not realistic. We’re not going to overpay. I do think if the markets stay soft and stock prices remain depressed that there will be opportunities to do acquisitions in the future. We’re going to stay very disciplined about this.

Edin Imsirovic - KeyBanc Capital Markets

On your access Harleysville technology platform, I believe on the last conference call you mentioned the platform has been rolled out to eight out of 32 states and that you were anticipating to cover all of the states by year end. I was wondering is this still the case?

Michael Browne

We are still on track to get the new commercial line platform rolled out and in use in all of our 32 states by the end of this year.

Operator

Your next question comes from Mark Dwelle – RBC Capital Markets

Mark Dwelle – RBC Capital Markets

Amongst the $45 million of unearned premiums that transferred with the pooling how much of that is left and will it all come through in the fourth quarter?

Art Chandler

I’m not sure I understand the nature of the question. It was a one time impact that affected the first quarter.

Mark Dwelle – RBC Capital Markets

It doesn’t roll through quarter by quarter?

Art Chandler

No it was a fully written, fully earned impact in the first quarter. That’s behind us.

Mark Dwelle – RBC Capital Markets

Within the investment portfolio obviously there was a lot of spread widening in the quarter. In looking at your portfolio in specific, did you experience that mainly in your corporates or were there other investment categories that also had the same phenomenon?

Mark Cummins

Really everything widened out. Mortgage backed, corporates, immunity, everything got cheaper. Actually I think ours held up pretty well. I quoted the price of the portfolio of 98.7 and if you look at the financials that we hold those actually were probably the lowest price on aggregate about $0.90 on the dollar which looking at some other reports we thought were pretty good. It was pretty much across the board. The credit markets just froze up and everything widened out. It was really across the board. Certainly corporates and financials widened more than anything.

Mark Dwelle – RBC Capital Markets

Considering the high investment grade that you have across most of that it would be plausible that over the average four year duration of your portfolio we would see most of that spread effectively reverse as those securities mature and continue to perform.

Mark Cummins

As things calm down you’re going to start to see spread tightening as we march through time here. We’ve seen the short markets starting to behave a little bit better. I think you’re going to see it gradually improve as time marches on provided the markets keep stabilizing. It’s still pretty awful out there. I think you know that.

Mark Dwelle – RBC Capital Markets

Remind me again when does your catastrophe treaty next renew?

Michael Browne

It renews on July 1.

Operator

At this time there are no further questions. I’d like to turn the call back to Mark Cummins for closing remarks.

Mark Cummins

Michael do you want to?

Michael Browne

I don’t have any closing remarks but I’d like to thank everybody for calling in and we look forward to talking to you at the end of the fourth quarter. Go vote.

Operator

This concludes today’s conference you may disconnect at this time.

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