Infinity Property and Casualty Q1 2009 Earnings Call Transcript

Infinity Property and Casualty Corp (IPCC)

Q1 2009 Earnings Call

April 30, 2009 11:00 AM ET

Executives

Amy Jordan - Vice President of Investor Relations

James R. Gober - Chairman, President and Chief Executive Officer

Roger Smith - Chief Financial Officer, Executive Vice President and Treasurer

Presentation

Operator

Good day, ladies sand gentlemen. And welcome to the Infinity Property and Casualty Corporation First Quarter Earnings Conference Call. My name is Mary and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Amy Jordan, Assistant Vice President of Investor Relations. Please proceed.

Amy Jordan

Thank you. Good morning and thank you for joining us for Infinity's first quarter earnings conference call. The live event link on our website does contain a 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 and page 10 of this report does contain the definition and reconciliation of any non-GAAP items we discuss this morning.

Certain statements made during this call maybe deemed to be forward-looking statements that 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 Securities Litigation Reform Act of 1995. All statements in this call not dealing with historical results or current facts are forward-looking and are based on estimates, assumptions and projections.

Statements that include the words; believes, seeks, expects, may, should, intend, likely, targets, plans, anticipates, estimates or the negative version of those words and similar statements of a future or forward-looking nature identify forward-looking statements.

Examples of such forward-looking statements includes statements relating to expectations concerning market conditions, 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 the economic conditions and financial markets including interest rate, the adequacy or accuracy of Infinity's pricing methodologies, 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, snowfalls, 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 a more detailed discussion of some of the risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, please see Infinity's filings with the SEC.

And with that let me turn the presentation over to Jim Gober, our Chairman, President and CEO.

James R. Gober

Good morning everyone. Welcome to our conference call and webcast for the first quarter of 2009. 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 start off with the highlights on slide three. Operating EPS for the quarter were $1.19 up from the $0.92 we reported for the same period last year and better than expected. Underwriting income climbed about $3.3 million pre-tax for the quarter, as a result of reserve redundancy releases from prior accident years.

Reserve releases in the first quarter of '09 were $9.8 million pre-tax or about $0.45 per share. If you exclude this adjustment, our 2009 accident year-to-date combined ratio is running about 97%, which is up about 100 basis points from the entire 2008 accident year, but about the same as that reported for the first quarter of '08.

We attribute this increase in the first quarter combined ratio to seasonality of our business for our policyholders must deal with winter weather and fewer daylight driving hours. We have seen this seasonal uptick and the combined ratio before in previous years, whereas in the second and third quarters a loss ratio typically settles that down.

Continuing on, our net income per share was $0.76 for the quarter as compared to $0.86 in the first quarter of last year. The big difference between operating and net EPS was the losses from other than temporary impairments on investments.

During the first quarter of '09 we booked capital loses of $6.1 million or about $0.43 per share which included $7.5 million of OTTI charges. Roger will give you details on these charges and the overall investment portfolio a little later.

Regarding capital management actions, we repurchased 293,900 shares for an average price of $35.37 during the quarter. Those purchases represent about 2.1% of the outstanding shares at the beginning of this year.

We also have approximately $31 million of repurchase authority remaining under our current program which expires at the end of this year. And we plan to continue to use this authority to repurchase shares opportunistically throughout the remainder of '09.

As for our capital strength, our position remains very strong. In fact Fitch in February and Standard & Poor's just last week both affirmed our financial strength ratings of A and our debt ratings of BBB. In this economic environment, that is quite an accomplishment and it speaks to our prudent management to capital approach rather than capital management.

Now let's take a deeper dive into our operating results on slide four. Overall, gross written premiums were down 8% in the first quarter. We had anticipated that premiums would be down 5 to 10 %, so this is in line with our expectations.

General economic conditions worsened in the first quarter which helped drive this downturn. In most of our markets, unemployment rates are rising and consumer confidence is still falling. Consumers are postponing purchases of big ticket items including new automobiles.

This of course reduces the level of insurance buying, as evidenced in a decline in our new business application counts. The good news for us is that we are seeing policyholders drive fewer miles, as a result of the economic recession and higher gas prices.

This should result in lower claim frequencies which should help reduce our loss ratio. And the good news is that while our application count is down, we have not experienced a drop in policy retention.

I'll give you more details on our thoughts regarding the premium trends a little later. For the first quarter, premiums in our focus states failed 7.8% as compared with the first quarter last year. Within these states, business in our targeted urban zones failed 5.7% for the quarter.

However, during the first quarter, five of our 21 targeted urban zones grew as did our commercial vehicle program. These five included two of our most profitable zones, Los Angeles and Philadelphia.

Just a sign, the impact of the economic recession continues to present a headwind to our growth prospects. Economic conditions in all of our focus states which had worsened in the second half of last year, continued to decline in the first quarter of this year.

Nevertheless, we are still finding opportunities to grow profitably in select territories. As for the bottom-line, after-tax operating income for the quarter was $16.8 million, which is up $1.8 million from the first quarter of '08.

In regarding overall industry market conditions, I have to say that the market remains competitive, although competitors are raising debt rates by low single digits. Overall, for the industry according to the consumer price index, auto insurance rate increases in the first quarter, were 1% country wide, slightly less than we experienced in last year's fourth quarter.

According to RateWatch, the industry's personal auto rates are up in three of our focus states namely Florida, Illinois, and Pennsylvanian.

With inflation moderating, overall rate increases for auto insurance are now approximately the same as the average inflation rates for medical cost and auto repairs. As for frequency trends, we continue to see improvement for the industry.

Should the economy continue to slow and claim frequencies continue to trim favorably, competitors may feel emboldened to slow rate increases or possibly reduce rates. However, we believe that given the capital that has been depleted by the decline in equity and fixed income values, a number of competitors may want to bolster underwriting profits to offset falling investment returns.

In short, we continue to believe that disciplined companies will likely pursue rate adequacy in lieu of market share expansion over the next 12 to 24 months. Rather than compete by reducing rate, they are likely to continue offering more and more attractive incentives for agents and brokers or increase advertising spend.

For undisciplined companies that are currently under pricing business, poor underwriting and investment results will compel them to take rate increases or face some dire financial consequences.

On slide five, I'll begin with an update on our personal auto business. Overall, personal auto premiums were down 9.3% for the quarter, however, during the quarter, we experienced positive growth in Nevada and Illinois. In California our most profitable state was down only 1.3%.

Our maintenance states rank about 30% in the quarter as we continue to reduce underperforming business in these maintenance only areas. We expect that this calling process will continue throughout 2009.

Premiums in non-focused states for the quarter fell to $422,000 or less than two-tenths of a percent of our product passenger auto book. We'll continue to reduce these writings in these difficult and in unprofitable states as well.

As for the detailed earnings of our top markets, take a look at the exhibit on this slide which shows by state the premium growth of shrinkage for the first quarter versus the first quarter of last year. It also illustrates the loss constant movement by state. And it includes the comparison of our fully developed or ultimate accident year-to-date combined ratio through March of '09 to the ultimate accident year combined ratio for the first quarter of '08.

The green arrow point down means decline ratio improved and a red arrow point up means decline ratio for that state increased. For us, this metric the ultimate accident year combined ratio is a very good measure of how we're doing from an underwriting and pricing standpoint.

However, we are cautious in the interpretation of these figures, given the fact that these results come early in the year. With only one quarter's worth of data, we take the results with a grain of salt and use the information as directional indicators rather than the final rate for the business for that period.

The last two columns reflect trends in calendar quarter loss costs versus the same period for the prior year. Infinity's information is for the first quarter of '09 versus the first quarter of '08. The industry's information is for the fourth quarter of '08, the most recent quarter available versus the same quarter a year ago. While these counter quarter figures for Infinity can sometimes give conflicting messages when compared to the ultimate combined ratio metric it does give us an apples-to-apples comparison with the industry.

Now onto the discussion of our focus state results and let's start with California. As previously mentioned, gross written premiums here were down 1.3% for the quarter, the economic slowdown in California has certainly created a drag on premiums. The state's overall economy rather continues in recession with unemployment now at 11.2%. Furthermore, some irresponsible competitors in this marketplace continue to compete based on inadequate rates.

As for claim trends, industry loss cost in California are down about 3.1% year-over-year as reported by PCI through the fourth quarter of '08, although average earned premiums for current year are down almost 3.6% which points to a slightly higher loss ratios for the industry.

Until the recent economic slowdown loss cost trends outpaced changes in average earned premiums by upwards of five points. However, until recently, the insurance department in this state approved very few rate increases. But, in the past two or three months the DOI has begun to approve modest, low to mid single-digit rate increases which maybe an indication that the Department is now ready to acknowledge the longer term upward trend on loss cost.

Our own data reflects flat year-over-year loss cost trends with flat changes in frequency and average severities. However, we continue to experience modest declines in our own average earned premiums per car year as compared with the fourth quarter of '08 average earned premiums are down about 1.1% compared with the first quarter of '08 the average earned premium per car year is down 7.7%. As a result of the rate decreases taken a year ago, along with some claim seasonality to our California book our overall loss ratio here is up slightly but it is offset by a lower underwriting expense ratio.

We expect the combined ratio to improve over the remainder of the year, given more favorable driving conditions in the second and third quarters. And the fact that the rate decreases taken last year well have fully worked away into the numbers by the second quarter.

And by the way California remains our largest and most profitable state and we continue to expect that in the future.

In Florida gross written premiums were down 26.2% for the quarter, Florida's weak economy and tough claims environment have not made it easy to build a business in this state. Many competitors are taking actions to improve attention or bolster growth even though some of these companies are lawfully enterprising their business.

However, what has had the most significant effect on our premium volume, or the actions we took to improve the profitability of this state. For example, we implemented several rate increases over the past two quarters which certainly had a negative impact on premiums this quarter.

We also implemented measures throughout '08 and into '09 to slow the new business volume in Miami given the high combined ratio there. As a result of these efforts, the business has shrunk but the risk profile on the remaining business has improved dramatically.

Specifically, the ultimate accident quarter combined ratio for Q1 '09 improved by almost five points. The primary driver of the improvement is a lower PIP loss ratio.

The accident year loss ratio for PIP fell 11.5 points. The loss ratios for collision comp and property damage coverages also improved by more modest demands.

With one quarter of good underwriting results in Florida it's still too early to declare victory. But these early indications are very promising. Just as a side note I do want to thank Jason Blaylock (ph), Steve Hansman (ph), Joe Sloppy (ph) and Vince Star (ph) and the entire Florida team for their tireless effort. I'm really proud of all of them. They keep up the good work.

Moving to trends loss cost for the industry are fairly moderate with increases in severity more than offset by decline in frequency. Overall loss costs are down about 3% but average earned premiums are down about 4% suggesting a slight increase in the industry loss ratio in the state.

Our own calendar quarter data reflect a slight increase in loss cost which is moving in a direction opposite to our ultimate projections. So we'll keep a closer watch to see how the action here develops.

In Texas, our third largest state, gross written premiums were down 3.9% for the quarter. Our Texas business slowed from last year as a result of the recession in the state and rate increases we implemented to improve underwriting profitability.

I know in past years Texas has had some pretty crazy rate decreases by competitors, but so far this year competition has been relatively well behaved.

As for loss trends, industry loss costs for the fourth quarter of last year are down about 2.2% compared with that of the prior year, with modest decreases in frequency, more than offsetting modest increases in severity.

However, average earned premiums are down slightly, more than this, suggesting the industry loss ratio is up. As for our own trends as compared with the first quarter of '08, our calendar quarter loss cost have fallen with our average earned premiums, as policyholders are attracted to our new monthly low cost product.

However, on an ultimate accident year basis, loss cost as compared with all of '08 are actually up slightly, also the underwriting expense ratio was up in Texas from additional marketing and advertising expenses for the quarter.

As a result the 2009 accident year is up for the quarter as compared with the accident year of 2008. Our rate increases we implemented late last year should help us push the combined ratio down this year and we'll continue to monitor trends and results to determine whether additional actions are needed to achieve our overall target.

In Pennsylvania, gross written premiums were down 12.8% for the quarter. The combined ratio in the state is up slightly, from what we experienced in 2008. As the loss and underwriting expense ratios increased, we do however expect the increase in the expense ratio to moderate throughout the year.

On the claim side, our loss ratio was up, as a result of seasonality and elevated average severities, as well as an exceptionally low loss ratio in the first quarter of '08. In the fourth quarter of '08 industry loss costs were down modestly in the low single digits, with modest decreases in claims frequency not completely offset by increases in average claim severity.

However, average earned premiums for the industry are down slightly more than loss cost, indicating a slight increase in the industry loss ratio in the state. From a competitive standpoint, we expect to see several regional players file for much needed rate increases, given the poor underwriting results. At this point at least one major player in Philadelphia has implemented a rate increase of 6.5% in December.

And we expect more increases from this and other companies will follow. We ourselves have filed a low single-digit rate increase in our value added program this month.

We're also monitoring a new development in the marketplace which is the reemergence of the use of comparative raters of our agents. In Pennsylvania historically agents have not used comparative rating software to compare premiums across insurance companies, but rather have used the insurance carrier's proprietary rating software to price risk one company at a time.

We are now beginning to see agents use comparative raters in the state which makes it easier for them to compare rates across a wider array of carriers. Some agents will choose lowest price carrier with all the rates to consideration such as the quality of a carrier's claim service, and it's financial strength.

And while our rates are competitive in the state, there are smaller financially weak regional carriers who offer nothing more than a cheap product. So for us there is some risk that we might lose some business to these companies. However, we do have a good relationship with all of our agents and they are aware of our competitive features, our financial strength and stability and our good claim service, so the impact should be marginal.

In order to grow our business in this state, we have plans to expand outside Philadelphia and Allentown to places like York, Lancaster, and Harrisburg which would give us some lift in premiums later this year and into 2010. We'll keep you up to speed on how these initiatives are going in the future.

Turning to Georgia, our gross written premiums were down 24.3% for the quarter. Certainly, the recession has affected our growth here as have aggressive competitor actions. For example, we continue to see the less discipline, smaller companies with very high combined ratios reducing rates.

But, beyond the effects of the recession and whacky competitor actions, we have also taken actions in this state that have reduced our premium writings, but are designed to improve an unacceptably high combined ratio. And while we appear to be making progress there is still much more work left to be done. And it will take several quarters to correct these problems.

Our new product manger has begun to reposition our rating plans to focus on our co-Hispanic customers in the Northeast section of the city as well as in Dolphin and Gainesville. Additionally he's looking to expand the business outside of Atlanta, rolling out our products to more non-urban agents. Our business outside the Atlanta Urban Zone has a solid combined ratio and there are fewer competitors vying for business in these areas.

Other Georgia actions include the introduction of a new credit product this month that has been a right segmentation in its design to more effectively compete with the more responsible companies. As for trends in the fourth quarter of '08 industry loss costs were down modestly in the low single digits, with modest decreases in claims frequency and even lower increases in average claim severity.

Our own trends show elevated loss cost on a calendar and accident year basis. So we clearly have not turned the corner here but recent actions described earlier should move us in the right direction.

For Arizona, our gross written premiums were down 33.2% for the quarter as was the case in the second half of 2008 competitive rate decreases, worsening economic conditions and anti-immigrant actions have cumulatively put downward pressure on our efforts to grow in the state.

As for trends industry loss cost for the fourth quarter of '08 are falling faster than average earned premiums per car year. So we are likely to see continued aggressive competitive actions this year. Our own loss costs trends are also favorable. We will continue to monitor profitability and take necessary actions to maintain what a currently very good underwriting results.

Over to Nevada, where we wrote $6.6 million of premiums in the first quarter of '09 which is up almost 26% from the first quarter of '08. The state's accident year combined ratio was above our target and trending the wrong way. So our product manager implemented low to mid single-digit rate increases this month for our value added and low cost programs.

We are also expanding our Las Vegas urban zone to include targeted suburbs as well as expanding into new areas of the state including Henderson and Reno, but we expect the underwriting results to be better.

And lastly, Illinois is the newest focus type for us, we began writing business down in the first quarter of 2008 with Chicago being our single urban zone. As for premium, we wrote 1.6 million in the first quarter of '09 that compares with $1.2 million in the fourth quarter of last year.

In Cleveland, Illinois (ph) that the inter-city Chicago market was served by several well entrenched local companies that write business through a number of large brokers. Given those circumstances, we also knew that it would take some time to build a sizeable book of business in this area. Even considering all this, we continue to see a lot of potential for us in Chicago given a population of over 800,000 Hispanics which is our core target segment. So we'll continue to make progress and give you updates on this important state throughout the year.

As for our commercial vehicle business which represents about 5.5% of our total writings, they continue to show robust growth in the first quarter. Our premiums rose 18.1% overall as compared with the first quarter of '08. The combined ratio ticked up slightly in the first quarter which we attribute mostly to seasonality.

We continue to find opportunities to grow this business and focus states such as California where our products and services are being well received by agents and brokers. During the remainder of 2009, we'll continue to rollout the commercial programs to several other focus states which should allow us to keep our growth in this important book of business, keep up our growth excuse me.

And in Classic Auto which represents only 1.9% of our written premiums, the business shrink $0.04 of a 1% in the first quarter. This business continues to produce a very good combined ratio.

Now turning to slide six for a discussion of the remainder of the year, we expect the current economic recession, it'll last throughout 2009, already in states such as California the unemployment rate exceeds 10%.We ourselves expect the national unemployment rate to go 10% by year-end up from the current 8.5.

We expect new car sales will continue to suffer, as unemployment rises and consumers pull back from making such significant financial commitments. There's no surprise that people are looking for ways to reduce their household expenses. These measures include everything from reducing coverages to eliminating auto insurance all together.

This new consumer fragility is not all bad news for us however. We have been specialist offering low cost insurance products for over 50 years. And I believe we are currently well positioned to serve these consumers.

For example, our low cost product is structured and priced to provide a convenient solution to these low -- to these cost conscious buyers.

And our monthly policy in Texas provides ultimate flexibility to the driver who won't see option to ensure their vehicles month-to-month. And most importantly, our low expense infrastructure allows us to offer competitively priced products while not materially sacrificing underwriting margins.

And while our new sales are down we are seeing signs that used car sales maybe improving. This will create some shopping behavior which can benefit us in our focus state.

More good news is that auto insurance rates appear to be stable with no general downward trend. We expect this to continue as insurers work to rebuild their balance sheets that were depleted by the loss just taken in their investment portfolios.

We believe the more disciplined competitors will maintain adequate freights, while the many less disciplined, irresponsible competitors will likely not follow suit in the short-term, will there by jeopardize their long-term financial viability.

As I mentioned in February, I wouldn't be surprised to see an insolvency or two this year, and we've already seen a best downgrade several smaller regional players who have hurt themselves with poor investment and pricing decisions.

For us throughout the soft insurance market and collapsing investment markets, we have remained steadfast to our core principles of adequate pricing, low expense structure, effective claims handling and conservative investment and capital management, all of which serve our customers and shareholders quite well.

These core principles will certainly help to weather the current economic storm. For example, our insurance products offer affordable coverages to our Hispanic and urban non-standard auto insurance customers who are more susceptible to the economic downturn.

In our disciplined expense management will help us maintain our margins, by keeping our operating expenses in line with premium volume. And the key investments we made in customer service and claims technology, will allow us to better serve our customers at the same or lower expense levels.

And as for growth opportunities, our expanded product offerings in the second half of this year will include a viable personal auto insurance product for the second generation more acculturated Hispanic customers, who seek standard auto insurance with higher limits involve a coverage.

So overall, given the continuing recessionary headwinds, as well as the efforts we're making in states such as Georgia and Florida to improve underwriting results, we expect top-line premiums in our focus states to be down between 4 and 8% for the year.

Maintenance states should continue to decline in premium, as well given actions we'll take to retain only profitable business. As for our other products, we expect commercial vehicle to grow about 5 to 10% this year. And Classic Auto is expected to decline slightly in volume in 2009.

In total for the company, we expect premiums to be down 5 to 10% for the year. As I mentioned in February we view 2009 as a year to build on our strengths of pricing accuracy, efficient operations, improved customer and claim services, as well as launch our new standard personal auto insurance product. All these actions should position us for growth in 2010 when we expect the economy to recover from recession.

From an underwriting standpoint, we expect our overall 2009 accident year combined ratio to be between 95.5% and 97%. 2009 guidance we gave in the fourth quarter earnings call anticipated some release of reserve redundancies in 2009, which we experienced in the first quarter, the guidance we are providing today assumes no additional favorable development for the remainder of the year.

Other key assumptions include a 4.5% book return on investments and an effective tax rate of 33 to 34%. We also expect to buyback between 20 to $41 million of share repurchases during all of '09. All this should generate an operating EPS of $3.25 to $3.75 for this year.

With that I'll turn the presentation over to Roger.

Roger Smith

Thanks Jim. And good morning, I'm going to discuss the financial results for the first quarter of 2009. Slide seven summarizes Infinity's financial performance for the quarter. My discussion of the results is summarized on slides eight, nine and ten.

So let's first turn to slide eight. Infinity's quarterly revenues were down 10.8%, primarily as a result of the 8.7% decline in earned premiums as well as a lower investment income and $4.7 million increase in realized capital losses.

Earned premiums were down for the quarter as a result of decreases in written premiums in 2008 and then to 2009. As Jim discussed, gross written premiums were down for the quarter falling 8%.

For the first quarter, investment income for the quarter was down $1.7 million over that of the first quarter of 2008 we were about 11%, decline. The average investment balances have decreased to $157.6 million or about 11.7% as a result, of our $98.1 million share repurchases since the first quarter of 2008 and a decline in their overall business since 2007.

The first quarter of 2009, pre-tax current returns on the investment portfolio of 4.7% were about the same as those during the first quarter of 2008. On a pre-tax total return basis, our fixed income, equity and short-term investment portfolio earned 1.1% from current income and a gain of six tence of 1% for realized and unrealized capital gains and losses including OTTI charges which netted to a total return of a positive 1.8%. These figures are not annualized.

At March 31, 2009, booking in market yields on a fixed income portfolio were 4.5% and 4.8% respectively. Duration on the fixed income portfolio was approximately 3.1 years lower than the 3.6 years that we reported at the end of the first quarter of 2008.

On to slide nine, regarding the investment portfolio, our fixed income portfolio is a high quality portfolio with an average credit quality of AA. During the first quarter, we incurred $7.5 million of OTTI losses, this amount was determined using the old GAAP guidance. We will adopt the new GAAP guidance for OTTI that was released earlier this month in the second quarter of 2009.

For those securities that did not want impairment this quarter but whose market value was below book value, the pre-tax unrealized losses at March 31st were only $13.3 million as shown here on slide nine in this aging report, which represents only about 1.2% of market value of the investment portfolio at March or about 2.5% of our GAAP equity. By the way 70% of this unrealized loss are nine months old or less.

Offsetting these unrealized losses is $31.4 million of unrealized gains on the portfolio. So as of March 31, 2009, the portfolio had a net unrealized gain of $18.1 million or about 1.5% of the portfolio's market value.

In order to assist your analysis and in the spirit of transparency of disclosure, this morning we posted to our IR website a list by inclusive of our entire consolidated portfolio. Those securities with book value is exactly equal to market value is all in all probability of those that we took impairment charges on in the first quarter.

Turning to slide 10. In regards profitability as Jim has discussed operating profit were solid in the first quarter, operating income was $1.19 for the quarter as it compares to $0.92 for the first quarter of 2008.

Underwriting income for the quarter increased by $3.3 million to $16.3 million as a result of a decrease in calendar quarter combined ratios. As Jim has discussed, we're currently booking the accident year at about 97% this is slightly up from the reported, for the full year of 2008 fourth quarter earnings call, but is in line with what we reported in the first quarter of last year.

Much of this increase in combined ratio compared to full year 2008 first quarter seasonality. In addition, we had $9.8 million of pre-tax release for redundant reserves from prior accident years as compared to $5.9 million of release in the first quarter of 2008. About a third of this $9.8 million redundancy came from California property damage inclusion in comp coverages for accident year 2008 and the remainder comes from primarily from 2007 and prior accident year bodily injury and the UMBI coverages in several states.

Total cat losses for the first quarter of 2009 were only $6000 pre-tax really inconsequential to the earnings per share for the quarter as compared to a $174,000 in the first quarter of last year.

The overall effective tax rate for the quarter was 42.4% for the quarter as compared to 32.5% for the first quarter of last year. This increase is a result of the 6.1 million of capital losses for which we set up a 100% valuation allowance on the tax benefit for these losses.

On an operating income tax basis, which excludes capital gains, loss, the effective operating tax rate for the quarter was about 32.4% and I would expect the effective tax rate on operating income for all of 2009 to be around 33 to 34%.

Regarding share repurchases, as Jim mentioned we repurchased 293,900 shares for an average price of $35.37 during the first quarter of 2009. By the way since we went public six years ago, we've repurchased 35% of shares issued since then. And we have about $31 million of remaining authority under the current share repurchase program, which expires at the end of this year.

So even with our aggressive share repurchases over the last several years, we continue to have adequate capital to support either future growth in the business or fund additional share repurchases.

For example, our debt-to-capital ratio is 27.4% below the 30% target to maintain our current ratings. With the current statutory capital levers, our insurance companies are currently writing business at a 2.1 premium to surplus ratio, which is below the 2.5 to 2 in a quarter times surplus needed to maintain our current investment ratings M&A.

The holding company has $127.5 million of cash and investments, which is available to infuse into the insurance company should they need for additional growth or for future share repurchases and we have an untapped line of credit of $50 million available to us.

And lastly, our operations continue to have positive operating cash flow. So in short we are well positioned with current liquidity and capital to weather the current severe economic downturn and to support future growth of the business in 2009 and forward.

So this concludes our formal presentation. So at this time we'd like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Joe DeMarino (ph) from Piper Jaffray.

Unidentified Analyst

Thank you, good afternoon. My first question, it seems like your rates are pretty stable, the economy is having a bigger impact. I'm wondering if you can kind of explain the divergence between California and Florida. I think it seems to me both sates have been hit hard by the economy. So what do you attribute I guess the relative difference there in terms of top-line?

James Gober

Yeah, I think Joe in Florida I mentioned that we've taken a number of rate increases really over the past 18 to 24 months and have -- those increases have really impacted our business, shifted our business in a number of ways. But again the good news is that the first quarter results I think are paying off.

We were looking for an improvement in frequency just on our own book of business given the shift that was taking place in Florida given these rate adjustments and we are seeing it now which is very, very encouraging. So I think just our own rate actions certainly impacted Florida much, much more so top-line versus California where we've had relative stability in California.

If you look at the changes that we made in 2008, there were rate decreases so while we've experienced, there is really a solid policy retention ratio. We have not seen that decline even given the economic conditions, given the rate adjustments that were taken. The issue for us in California has been more and more of new business just trying to generate new business. And that's more of an economic issue than anything. Although some kind of competitors are still under pricing their business out there. But, really the difference was Florida we were taking rates up aggressively and California actually rates went down.

Unidentified Analyst

Okay, thank you, that's helpful. My next question, maybe, difficult to grasp or to be able to put a number on, but with everything that's going in Mexico right now, have you noticed any change in the wire behavior within your Hispanic market that you target?

James Gober

Yeah, it's been more of a state specific situation, Arizona, for instance, was more heavily impacted, I think you have more of a exodus of Mexican immigrants from Arizona, some perhaps back in Mexico, others, to tell you the truth, the Texas -- the Texas economy is still fairly strong relative to the other states here in the U.S.

So we saw a pretty good mix of business coming from Houston, for instance, where that Hispanic population was still doing quite well. But it's really more of a state specific type matter and Arizona is really the only state I can think of off the top of my head that was really impacted that adversely.

Certainly, the economic conditions with the downturn in the construction industry had an impact across all of our focused states. I mean, if you are thinking about California, Arizona, Nevada those states were hit especially hard I think. But outside of Arizona, I really can't point to another state where I think it's been material.

Unidentified Analyst

Thank you. And then on the risk to capital ratio, you mentioned, I think you said, right now to 2.1 it could go to 2.4 or 2.5. Is that something the rate agencies have said to you or is that where it was in the last time the market experienced this type of, I guess, rate action; if you can provide us some color on that, please?

Roger Smith

I mean if you're aware where they invest, they actually have a capital adequacy model and in using that with the parameters they provide pro-rating, they give you some bands within which to work to maintain the ratings. And the derivative of that is the premium surplus ratios that I quoted from, 2 in a quarter to 1 or 2.5 to 1. So it's kind of backing into a number using the capital models. But that's the long and the short of it.

Arguably, with the short tail book of business and low limits, some people in the industry make an argument that it could be higher, but at this point it's 2 in a quarter to 2.5 to 1 for us to maintain current rates.

Unidentified Analyst

All right, thank you. That's all my questions. Congrats on the quarter.

James Gober

Thanks.

Operator

Thank you. (Operator Instructions). There are no other questions at this time. I would like to hand the call to Jim Gober -- excuse me; we do have a follow-up from Joe DeMarino. Joe, you have a follow-up?

Unidentified Analyst

Thank you. I guess I'll ask you a couple of more questions. Did you -- do you have an outlook for your operating expenses for the rest of the year? Do you expect them to go higher? Are you going to be spending more on advertising et cetera? Can you give us an outlook on that?

Roger Smith

Our objective -- we took some actions late last year and early this year. We mentioned in the fourth quarter earnings call regarding not only looking at operating expenses beyond head count but we've also reduced head count too. We've had our volumes fall for the last year and now into this year, but really an anticipation of a difficult year in 2009.

So our objective is to try to maintain, I'll call it overhead ratios, it's certainly opportunities in certain markets to increase advertising as long as the cost per sale, cost per lead make sense. But our objective is to try to maintain our expense ratio as best we can because we think it does give us a competitive advantage from pricing our business.

Unidentified Analyst

Okay, thank you. And then I just have one another question. On the investment portfolio, any change in the strategy going forward. What is your outlook for interest rates and where do you expect your yield to be and any change there?

Roger Smith

That's a difficult question. In terms of our approach, it will remain investing conservatively primarily in fixed income with a good diversification across sectors. It's not a big trading portfolio, we don't take big bets on duration for example, and we have a very low exposure to high yield.

The money managers will invest opportunistically, but again within very reasonable conservative bands. In terms of outlook for interest rates, who knows -- I don't think the treasury rates can go much lower, but we'll just play it by years as the year goes on.

Unidentified Analyst

Okay, thank you. All right, that's it.

James Gober

Okay.

Operator

Thank you. There are no other questions. I would now like to hand the call to Jim Gober for closing remarks.

James Gober

Well, thanks to everyone for listening in and certainly the questions from Joe in the conference call we appreciate. Look forward to the second quarter. Have a good day.

Operator

Thank your for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a good day.

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