Employers Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Employers Holdings, Inc. (EIG)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Employers Holdings, Inc. Earnings Conference Call. My name is Lacy, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Vicki Mills, Vice President Investor Relations. Please proceed.

Vicki Erickson Mills

Thank you, Lacy, and welcome, everyone, to the fourth quarter and full year 2013 earnings call for Employers.

Yesterday, we announced our earnings results, and today we expect to file our Form 10-K with the Securities and Exchange Commission. These materials may be accessed on the company's website at employers.com and are accessible through the Investors link. Today's call is being recorded and webcast from the Investor Relations section of our website, where a replay will be available following the call.

With me today on the call are Doug Dirks, our Chief Executive Officer; and Rick Yocke, our Chief Financial Officer.

Statements made during this conference call that are not based on historical fact are considered forward-looking statements. These statements are made in reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent developments.

We use a non-GAAP metric that excludes the impact of the 1999 Loss Portfolio Transfer, or LPT. This metric is defined in our earnings press release available on our website.

Now I will turn the call over to Doug.

Douglas D. Dirks

Thank you, Vicki. Welcome, and thank you for joining us today. We believe we have much-improved performance throughout 2013 but we did see some claims development in the fourth quarter that was unexpected and I will address that in a few moments.

For the full year 2013, we outperformed our 2012 results in many areas. Net premiums earned increased 28% year-over-year. We increased policy counts by 5% as planned and policy size grew 9%. Our net rate increased 9% compared to 2012 with our largest one-year increases in net rate in California, Nevada and Illinois.

While our revenues grew 25% in 2013 compared to 2012, our expenses increased 40%, primarily attributable to a 61% increase in loss adjustment expense, which was largely driven by LPT adjustments in 2012 and premium growth in 2013. We have been able to contain increases in underwriting and other operating expenses to less than 1% despite our 19% growth in net premiums written. Our 2013 net income before the LPT more than tripled to $0.81 per diluted share in 2013, compared to $0.22 per diluted share in 2012. And our combined ratio improved more than 5 percentage points year-over-year.

Our indemnity claims frequency was relatively unchanged for the first 3 quarters of 2013 compared to the same periods of 2012, and our loss experience indicated downward trends in medical and indemnity cost per claim that were reflected in our current accident year loss estimate. Also in the first 3 quarters of 2013, we continued to see modest increases in frequency and severity in California that were offset by improving loss trends elsewhere. Our results in the fourth quarter, and to a much lesser extent, the full year, reflect a conscious approach in providing for losses related to our most recent accident year, 2013.

In the fourth quarter, our actuarial analysis of ultimate losses indicated upticks in the frequency and severity of indemnity claims for accident year, 2013. The fourth quarter revealed a significant increase in attorney involvement in indemnity claims in the Los Angeles area. Normally, we would wait more than one quarter for a loss trend to develop more fully before taking any action. In this case, the spikes were significant enough that we chose to increase our loss provision rate for the accident year, 2013, as a cautionary measure. From January 1 to September 30, 2013, our open litigated indemnity claims, as a percent of total indemnity claims in Southern California, increased 6 percentage points, or an average of 2 points per quarter. From September 30 to December 31, the increase was 8 points. The rate of increase in open litigated indemnity claims in the fourth quarter was significantly higher than expected. We also observed a change in reporting patterns in 2013 as applicant attorneys were more often involved at the outset of the claim than they have been, historically. Industry data available to the California Workers' Compensation Institute suggests that the cost of litigated claims is more than 7x the cost of indemnity claims that are not litigated.

Overall, our California business is also influenced by ongoing loss trends we have observed, which are similar to what the Workers' Compensation Insurance Rating Bureau has reported. The WCIRB has reported that since 2010, and through preliminary data for 2012, the increases in the number and size of indemnity claims in California are largely the result of late reported claims, cumulative trauma, shifts in business mix as more hazardous industries such as construction recover from the economic recession, perhaps, increased benefit associated with SB 863, geographical and socioeconomic differences with higher claims rates in the Los Angeles area and other claim demographics including less experienced workers in the workforce. We believe these trends are an issue for us and for any Workers' Compensation Insurance company doing business in California.

Recent benefit changes in California related to SB 863, may be contributing to the increase in litigation in California. As increased utilization often accompanies increased benefits. Whatever the cause, we know there was a fourth quarter spike in litigated claims and we know where it occurred. We have taken the following actions to address the more general loss trends, which have been reported by the California rating agency, the WCIRB, and we believe these will also address what we saw on the fourth quarter. First, we have slowed our policy count growth in California as a function of our concentration of business in that state. Our year-over-year increase in policy counts was just 2.6% in California, compared with 9.2% for states other than California. At the same time, our risk selection was stable as the percent of our total policies and hazard groups A through D remain unchanged in California from 2012 to 2013. Second, we have adjusted pricing in California to our use of filed rates and scheduled credits and debits. We see these adjustments reflected in the 12.9% year-over-year net rate increase in California at the end of 2013. And third, effective June 1, we will be utilizing 2 additional operating companies in California with a separate pure premium rate filings. Our 3 subsidiaries in California now have approved pure premium rates effective June 1, which are on average, 7% above the current rate from Employers Compensation Insurance Company. The new rates, combined with territorial multipliers for each operating company, will provide us with greater flexibility in pricing our California business. We will begin quoting in all 3 insurance companies later this month with policy effective dates of June 1.

We don't see anything on the immediate horizon that suggests a reversal of trends in the Los Angeles area. While we are cautious about these loss trends, we are optimistic about the actions we have taken and will take throughout 2014 in responding to those trends. On the whole, California continues to be an attractive market for us. We will either get pricing where needed in California or we will not take the business.

In states other than California, we continue to write new business at attractive rates as the in-force premium grew 13.7% while we increased policies, 9.2% year-over-year. Our policy size in states other than California grew 4.1% in 2013, compared to 2012. At the end of January of this year, we increased in-force policies in California, 3% and 10% year-over-year in all of our other states.

In 2014, we are continuing our focus on pricing, cost containment and service improvement. As we announced in the third quarter, we are conducting a comprehensive review of our operations in order to generate further reductions in our expense ratio, increased efficiencies and continue to improve service to our customers. We will have more news concerning these initiatives in our first quarter report in May.

Now I'll turn the call over to Rick for more details about the quarter and the year.

William E. Yocke

Thank you, Doug. In the fourth quarter, we had earnings before the LPT of negative $0.03 per diluted share. In the quarter, our positive trends in premium growth and expense control were offset by our loss trends for the current accident year. While our results in the quarter were not what we, or the market had anticipated, we believe the increase in our annual provision rate was prudent.

In addition to raising our annual loss provision rate, in the fourth quarter, we modestly increased California loss reserves by $5 million for accident years 2009 to 2011. This is the first time we have strengthened our overall reserves for older accident years. The strengthening represents less than 1/2 of 1% of our total reserves. We remain confident in our deliberate and cautious reserving practices.

In the fourth quarter, we continued to see favorable development in our ceded reserves related to the LPT Agreement. Such development has resulted in reserve reductions of $27.5 million in 2013 and $100 million in 2012. In the fourth quarter, our combined ratio before the LPT was 118.2, which is 5.7 points higher than the same period in 2012, resulting from the 12.3 point increase in our loss ratio. The increase in the loss provision rate resulted in losses in LAE expenses that were $21.5 million higher year-over-year and in 12.6% increase in the loss ratio in the quarter. For the full year, our loss ratio before the LPT was relatively flat year-over-year despite a 28% increase in net earned premiums.

Our underwriting expense ratio improved 4.9 points in the fourth quarter as we continued to build scale in the business and manage costs effectively. Fourth quarter underwriting and other operating expenses declined 7% as compensation expenses decreased relative to the fourth quarter of 2012. Underwriting expenses for the full year increased just 1/2 of 1% as the underwriting expense ratio dropped 5.3 points. For the full year, our combined ratio before the LPT improved 5.5 points due to improvements in our underwriting and in commission expense ratios.

Net investment income decreased in the fourth quarter and the year compared to 2012 as average book yields on invested assets declined. At December 31, book yields decreased to 3.4% from 3.7% on a pretax basis and to 4% from 4.4% on a tax equivalent basis. Net realized gains on investments were $3.8 million in the fourth quarter and $9.5 million in the full year.

Our income tax benefit was $8.4 million in the fourth quarter of 2013, compared with a benefit of $1.4 million in the fourth quarter last year. Our full year 2013 tax benefit was $10.7 million, compared with $9.3 million in 2012. Taxes in the fourth quarter of 2013 were driven by annual pretax net income, which was lower than projected. Our full year 2013 taxes were also impacted by the rebalancing between nontaxable years and taxable years, which occurred in the third quarter. The effective tax rate was negative 59% in the fourth quarter and a negative 20% for the full year.

The estimated fair value of our portfolio increased 9% since December 31, 2012. Approximately 93% is fixed maturity securities with the duration of 4.2. To minimize interest risk, our portfolio is weighted towards short-term and intermediate-term bonds. Equities represented 7% of our total portfolio at the end of the fourth quarter.

Our operating capital strategy has not changed. Our focus in 2013 was on investing in the business as we contributed $40 million to our operating subsidiaries in September to support future growth and our financial ratings.

We have approximately $174 million in cash and securities at the holding company at the end of the fourth quarter. We expect that we will continue to meet our liquidity needs over the next 24 months with cash generated from operations, investment income and maturing investments.

In conclusion, we continue to be confident with our underwriting actions, our reserving practices and the availability of capital for operations.

With that, I'll turn it back to Doug.

Douglas D. Dirks

Thanks, Rick. We delivered a strong year but experienced some loss volatility in the fourth quarter, which we have proactively addressed. Management of our investment portfolio continues to be strong as the year-over-year fair market value of our invested assets increased 9% to $2.3 billion. Throughout the year 2013, we achieved solid, targeted organic growth and we retained customers within our appetite while increasing net rates and improving our underwriting expense margins.

With that, operator, we'll now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Mark Hughes with SunTrust.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Doug, with all the puts and takes, where do you think the loss pick for 2014 is going to start out?

Douglas D. Dirks

I won't provide you any guidance on that, specifically. We do continue to see strengthening in the rate environment in California. Obviously, we expect, with the actions we'll be taking in terms of setting up the 3 companies, doing territorial modifiers, will allow us to be far more precise in our pricing. So we have much better tools going forward in California and we expect that, that should allow the rate trend to, once again, exceed the loss trend. If you look at the rest of the country, the upward trend in rates continues but certainly it's not going to be as aggressive going forward as it's been the last couple of years. The market's catching up, the market's a bit more competitive right now. But overall, we believe we've taken the actions that are necessary to address current pricing in the book and believe that the prospective actions should improve the result.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Right. Is the pricing now adequate to compensate or more than offset the increase in claims, the frequency and severities you saw in the fourth quarter?

Douglas D. Dirks

Yes. Let me deal, specifically, since that issue is principally a California issue, let me deal with that. As we stand up the 3 companies and have the territorial multipliers, the objective there is that there is some very good business in other parts of the state that we're going to have to be a little bit more competitive on and where the margins will be attractive. There are other parts of the state where we're going to use the multi-company strategy and the territorial multipliers to push the rate up and if we don't get the rate on that business, we're going to lose it and we're fine with that. So it's -- I can't answer it globally, we're approaching it through a number of different strategies. Some places we'll be conceding rate because of the attractiveness in the business and other places we'll be willing to walk away from it.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

All right. And then, maybe approaching it from a different direction, the -- you had this acceleration in the fourth quarter, the full year number was flat year-over-year but, obviously, most of the year incorporated a lower level of frequency. As we contemplate where we sit here at the beginning of 2014, if the fourth quarter run rate persists, then one would think that the losses would be higher on a run rate basis than what you have for the full year 2013. Comments on that? And then your point about that you think the rate should be able to exceed the loss trends, given that kind of run rate where we stand now. Is that true today? Is it going to be true midyear? Could you comment on that?

Douglas D. Dirks

So let me address a couple of points of that. We started moving rates several years ago and we've had very good rate strength. And so that continues to earn its way through the book. So you do have some lift from that. All of the comments I made about the actions we're going to be taking in 2014, some of which have already been taken. When I talk about our expectation of where the rate trend is and where the loss trend is, that's reflective of what happened in the fourth quarter.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

So which is to say that the -- if we're looking at loss picks for 2014, you're not giving precise guidance. But if rate trends are exceeding loss trends, than that loss pick should be steady at worse, then maybe better?

Douglas D. Dirks

Yes. Our pricing and our provision for 2014 as it stands today incorporates the trend we've observed in 2013.

Operator

Our next question will come from the line of Robert Paun with Sidoti & Company.

Robert Paun - Sidoti & Company, LLC

I know it's early but based on your comments, Doug, can we assume that the trend in open indemnity claims with an attorney involvement continued in the first several weeks of this year in 2014 similar to what we saw in 4Q?

Douglas D. Dirks

I will answer that question. I'm going to preface it with: it's 1 month. There's a lot of volatility in claims. That being said, we didn't see it in January.

Robert Paun - Sidoti & Company, LLC

Okay. And you mentioned that you usually wait 2 quarters to recognize a trend. So if the number of litigated claims were to stabilize in the next few months, and taking into account other loss trends and rate increases, is it fair to say that the loss estimate could come down to the 73% to 74% range that you reported in the first 9 months of the year?

Douglas D. Dirks

I would say that possibility exists. What I would also add to that is, we'll be much slower in taking it down than we were in taking it up.

Robert Paun - Sidoti & Company, LLC

Okay, that's helpful. And finally, just what percentage of your California policies are located in that southern region?

Douglas D. Dirks

So if you look at the southern region, it represents, of total company policies, 27% of the policies and 29% of the premium. As a percent of California, it's 48% of the premium, 48% of the policies. So very equal there.

Operator

And our next question will come from the line of Amit Kumar with Macquarie Capital.

Amit Kumar - Macquarie Research

Just going back to the last question on, I guess, the initial trends for 2014. And I guess you understand that there is volatility. But generally, just -- whenever, as we've seen in the past, the attorney involvement volatility, all else being equal, will that generally taper down over the next few months as the impact of sort of SB 863 gets more and more intertwined with the California comp market?

Douglas D. Dirks

Well, I guess one way to look at that is that at some point, every claim will have an attorney involved so I guess you do plateau. What's concerning is that we were seeing increases of about 2 points a quarter and then suddenly it spiked up by 8 in the fourth quarter. And we suspect that there will be some relationship to 863 and the increase in benefits. But the things that bureau observed, we've seen and we've been commenting on for some time, there was late reporting of claims, there was cumulative trauma, there was more attorney involvement. Those things where there, we were seeing them. The fourth quarter was unexpected and unexpected relative to what the trend had been prior to that. I can't project where that stops. There are a lot of issues with what's happening in the claims environment in California and we've got some wonderful anecdotes, if you ever want to spend the time to hear the anecdotes. This isn't the problem with risks selection. There's an environmental issue with claims in parts of California right now. We know where it is, we know what it is and we're taking the actions to address it. And in time, things change and our view of it may change and pricing may change and we'll step back in and take advantage of the opportunity. But right now, there's a pretty big hurdle to clear to write some of these classes of business in parts of the state where there's a lot of volatility.

Amit Kumar - Macquarie Research

Got it, that's helpful. The second question, and it relates to this point is -- the stock is down roughly 18%. You apply that to the book value. I guess what the market is saying is, the market is factoring in a much bigger reserve charge going forward, right? What would you say to the investors to give us comfort that the majority of the issues have been addressed?

Douglas D. Dirks

I think you know our reserving practices well. Our methodologies, our approach is unchanged. Our general conservatism is unchanged. I think what you saw in this quarter is when we see something that requires us to react, we're going to react. And we're not going to wait and allow losses to accumulate. We'll make the adjustments when they're necessary. And given what we saw in the fourth quarter, we appropriately reacted. I view this as clearly unfortunate and unexpected. But in the end, it's not a capital event for us. We have a very strong balance sheet. We know what happened here. We have a plan to deal with it and we'll move forward. If you look at the prior years, there was a $5-million adjustment in the prior years. It's a very small adjustment and given what we saw, we decided to take that adjustment. But it's -- that's not a capital event. And the provision rate moving up in the fourth quarter of 2013, I think it's a very prudent thing to do, given what we saw. I think we all hoped that, in fact, what we observed was a blip and things reverse and go the other direction. But we're not going to set reserves based on hope. And what we saw, we reacted to.

Amit Kumar - Macquarie Research

Yes, overall a very good strategy. The only other question I have is, I guess 2 questions. Have you been in touch with the ratings agency, or I guess vice versa? Any update on that front?

William E. Yocke

This is Ric. We continue to have our routine periodic conversations with A.M. Best. They're aware of our recent developments. I would just say that by our own calculations, our year-end, Doug has said, our capital is adequate. Our own computation of the BCAR is actually higher than what was contemplated and projected when A.M. Best confirmed our rating back in September. So we continue to view our capital as adequate and the recent events don't change it.

Amit Kumar - Macquarie Research

Got it. That's helpful. And then, what's the stat surplus as of year end, did you -- did I miss that in opening remarks?

Douglas D. Dirks

It's $581 million.

Operator

And our next question will come from the line of Matt Carletti with JMP Securities.

Matthew J. Carletti - JMP Securities LLC, Research Division

Two questions. First is on the accident year loss ratio front for 2013. Doug, can you tell us what you moved the loss pick to for the California book as opposed to the entire company?

Douglas D. Dirks

Off the top of my head, Matt, I don't have that number. We'll have to give -- I don't know if Ric's got that off the top of his head, either.

William E. Yocke

The loss pick for?

Douglas D. Dirks

California, only.

William E. Yocke

Future?

Douglas D. Dirks

No, 2013.

William E. Yocke

I don't have that off the top -- bear with me a second, maybe I can pull it up.

Matthew J. Carletti - JMP Securities LLC, Research Division

Sure. I could ask another question and then maybe circle back. The other question just relates to the prior period development and I know $5 million is a fairly insignificant number, I wanted first to confirm something. If I recall, in recent quarters for a number of quarters now, we've seen similar small numbers of adverse development in more recent years and offset by favorable in older years. Were those the same years? Are we talking about the same years, the '09 through '11, that had seen the -- even though it wasn't net adverse but it was adverse in those specific accident years in recent periods? And if that is the case, what makes us, gives us comfort that this $5 million takes care of it as opposed to what's been a little bit of a trickle on recent quarters?

Douglas D. Dirks

It is 2009 through '11. As to the comfort level you have, and some of it is just the natural maturing of those losses. Over time, claims close, so there becomes more certainty in the reserves. You think about 2009, that's giving up pretty good in terms of maturity. What you're seeing, and I kind of described it as drip-drip development, really is what we're observing in California. That claims environment -- this isn't so much volatility given those levels, but there's been a lot of change in California and 863 has probably, likely, had some unintended consequences. I can't assure you that there won't be more of this. The number we have put on the balance sheet is what we expect it to be. We've not held anything back. We've not set additional amounts aside. It is what we believe it is, at the time of the balance sheet date. I described the pressures and the trends we're seeing in California and open claims are subject to those pressures and so the objective is get claims closed out as quickly as you can to bring as much certainty as you can to the reserves. But I can't assure that there won't be more of this, but as we sit here today, we booked what we think is necessary.

Matthew J. Carletti - JMP Securities LLC, Research Division

Understood. And then, any color you can provide on '12? I only asked on '12 because '09 to '11 have had some upwards movement. Clearly we kind of reset '13 to kind of where '12 ended, '12 is the year that, I might be mistaken, but really has held thus far. What about that year kind of leads to that?

Douglas D. Dirks

Yes, we made no adjustment in the quarter for '12.

Matthew J. Carletti - JMP Securities LLC, Research Division

Okay. All right, great. Kudos for getting out in front of it and taking the accident year movement now as opposed to down the road. I think that's -- I know that's not an easy decision and hopefully people realize that.

Operator

And our next question is a follow-up question from the line of Mark Hughes with SunTrust.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Is there any distinction on the claims frequency, whether it be new accounts versus older policies?

Douglas D. Dirks

Yes. We, Mark, we really don't attribute what we're seeing to new versus old. It really tends to be more geographically focused.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

And then, is there any -- you've talked about how January was -- you didn't see the same activity. Is there anything else you can point to why you think this wouldn't get worse? I mean, are all of the attorneys all booked-up with clients now and so they're not looking for more? As we look around the environment in Southern California, what can give us confidence this thing is contained?

Douglas D. Dirks

Well, let me give you an anecdote. This was something -- we were recently involved in some litigation that wasn't exclusive to us, there were a number of other carriers involved. But there was a Department of Homeland Security audit, that resulted in the termination of about 18 or so employees. 11 of them subsequently on the same day with the same attorney, filed a workers' compensation claim alleging cumulative trauma. That's an environmental problem. And the only way to avoid that is to say there are particular classes of business in particular areas that are simply too dangerous to do business in, too volatile. And that's what's happening in that environment. I expect that at some point, things change. But as indicated in my opening comments, we don't see anything on the immediate horizon that says things are going to suddenly start getting better. And so we're pursuing, as a pricing strategy and a risk-selection strategy that assumes that things don't get any better. And when we think that's changed, our strategy will change. But at this point, I don't think there's any reason to believe that suddenly, things are going to reverse and go the other way. Again, we all hope that's the case but we're not building strategy based on that hope either.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

So you may have touched on this but these are issues, as you say, had been in the marketplace for some time and the state's writing reports about it. You had been mostly untouched by it. Why the fourth quarter? I mean, what -- was it something in the broader environment, that's when the attorneys concentrate their advertising, or what do you think?

Douglas D. Dirks

We don't know. We speculate about the same things you're speculating about, is it as simple as there's a billboard at the end of the street that says, comes see me and file a claim. I suspect it's far more involved than that. But nobody knows. There are a number of things that are causing this. Perhaps it will plateau and reverse but we can't, again, assume that until we see it. And the trends just were so severe in the fourth quarter that we were unwilling to ignore them.

William E. Yocke

Mark, backing up to your very first question about new versus old. At the risk of hammering an old point, the adjustments that we made were a current period to the current period provision rate. So in the broadest sense, they're new versus old, we didn't adjust old accident years.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

I was thinking of the new clients that you might have -- or knew of, new employers that you might have signed up recently within the last year or 2 years versus 1 you might have had for some...

William E. Yocke

Understood.

Douglas D. Dirks

And Mark, my response was to your -- to the question as you intended.

Operator

And our next question will come from the line of Jay Willadsen with Lee Munder.

Jay C. Willadsen - Lee Munder Capital Group, LLC

Yes. Question, do you guys have a buyback in place? And how much excess capital do you think you have? And I guess, doing what the stock's doing today, why not push price even harder and shrink and use the excess capital for a buyback? Because I would think the returns on buying back stock today would be better than writing a new policy at the combined you're able to do today?

Douglas D. Dirks

So let me address a couple of pieces of that and then I'll hand it off to Rick. We do not, currently, have a share authorization program in place. That being said, as you all well know, we are not reluctant to use share repurchases as a form of capital management. I'll let Rick answer as to what's available at the holding company in terms of cash and securities.

William E. Yocke

Yes. At year end, December 31, we had approximately $175 million available to us at the holding company.

Jay C. Willadsen - Lee Munder Capital Group, LLC

And is there any restrictions on that?

William E. Yocke

We have collateral against the Wells Fargo loan, which is currently at $70 million.

Jay C. Willadsen - Lee Munder Capital Group, LLC

And how about just from a rating agency standpoint? Obviously, they like to see it there as well. But any risk, if you did do a large buyback that aggravates them even more?

William E. Yocke

I can't speak to that. All I can say is what we said earlier and that is by our own computations, our BCAR is stronger than was contemplated when A.M. Best reaffirmed our ratings most recently. We've had no conversations beyond that.

Jay C. Willadsen - Lee Munder Capital Group, LLC

Okay. How about the point on the push in price and shrinking versus -- you're not really getting paid for the growth, and the returns on capital aren't that strong. So why not push price even harder and shrink the premiums and use that excess capital to buy back stock?

Douglas D. Dirks

So here's what the strategy is, and then I'll provide a little bit more color around what we're doing with the 3 companies. There is very good business that we are losing today because with one company, with one rate filing, with no territorial modifiers, what we have is a fairly blunt object. And we've been reticent to drive off our best business solely to get rid of the worst business. With the 3 companies and the territorial modifiers, we believe that we can continue to retain our best business and improve those margins and at the same time, either get better price on the poorer performing business or get off from it. And implicit in that is that if we can't get the price on that business, we will shrink and it will free up capital. But it's more of a scalpel now and much less of a blunt object and I think that's an appropriate approach.

Jay C. Willadsen - Lee Munder Capital Group, LLC

Is there any issues with starting the 3 other companies or is that already done?

Douglas D. Dirks

It's done. It's -- we're going to start quoting out of those companies before the end of this month. That, unfortunately, is a very long process of getting companies licensed, rate filings approved and stood up. But it's done and we are ready to go there in the next several days.

Jay C. Willadsen - Lee Munder Capital Group, LLC

How much do you think you need to push price in some of those areas?

Douglas D. Dirks

Well, I'd just as soon not share that with the entire market but we'll be aggressive in pushing price and willing to lose it if that's what it takes.

Operator

[Operator Instructions] And our next question comes from the line of Heather Takahashi said with Three Bridges Capital.

Heather Takahashi

I have a few questions. I was just wondering why you thought there was increased attorney involvement last year, what was driving that? And then another question. What do you expect the impact of this development to be on your loss development factors going forward? I mean, how much of a pick up do you see there? And then finally, I just wanted to clarify your comments about the cash at the holding company. I think you said there was $175 million of cash and investments and then a $70 million Wells Fargo loan. So are you saying that the net I guess free cash, if you want to call it that, is $105 million? I just wanted to make sure that I understood that correctly.

Douglas D. Dirks

So let me start, I'll take those in order. The first one being, what's driving the increased attorney involvement in claims. The permanent disability awards increase in California as a result of SB 863. So that increases the potential payday and I think it's just simple economics, it's what's driving more involvement. Now if you look at SB 863, there were parts of it that were good and there were parts of it that we weren't so certain on. What we were certain on was that permanent disability awards were going to go up. And when they go up, awards increase and if you're representing somebody on that claim on a contingency basis, you're going to get more also. I think that's what drives it. There were other parts of 863 that, I would say, we were hopeful on and I suspect we may, in the end, be somewhat disappointed. If you look at what happened on leans, we thought there was a lot of potential coming out of lean reform in California, that's been staid. So whether or not in the end we'll get that benefit remains to be seen, but that was one that should have driven an improving environment in California and to date, we've been disappointed. The other is independent medical review. That's something that's being done in a number of other states quite successfully. It's too early to tell in California whether or not that's going to be helpful. I'd say the jury is still out on that. We would, again, hope that, that will be beneficial but we're not seeing that yet and that doesn't mean we're not going to see it but we're not seeing it yet. And we are not building any of that into our reserves. We have not built into our reserving credits for the benefits of reform that we've not seen. We think that's inappropriate, we don't do that. In terms of loss development factors, as we develop our reserves at the end of the year, our loss development factors are reflective of the trends we're seeing in more recent periods. And then I'll let Rick address the capital issue.

William E. Yocke

Your conclusion about the net available from the holding company total of $175 million, the collateral requirements against the loan of $70 million, so there's a net, $105 million.

Operator

[Operator Instructions] And our next question is a follow-up question from the line of Heather Takahashi with Three Bridge Capital.

Heather Takahashi

Another question. I'm wondering what impact you've seen from the changes in migration trends in the last few years? We've heard from some consulting groups that net migration of illegal immigrants has switched around so the flows are -- have now been going out of the U.S. rather than into the U.S. since the financial crisis? I'm just wondering how that's impacted your business and whether you've taken account of that, I guess, in your loss picks or your reserving practices.

Douglas D. Dirks

Yes, we don't specifically address that. We've done no independent studies on our own. So I can't provide you any additional information or better information than you might be getting from other sources. What I suspect we're seeing in California is still a continuation of a fallout from the recession. And that's -- I don't think that's done yet. What some of the things we've observed in the past is lengthening duration of claims because people lost jobs, they didn't have a job to go back to. We've seen a need to supplement income, perhaps, with disability awards. That's not unique to us and, in fact, that's not even unique to California, that's occurred in other parts of the country as well. But again, I think that has much less to do with migration patterns and probably has much more to do with what happened to the economy in 2008 and subsequent years.

Operator

And our next question will come from the line of Ron Bobman with Capital Returns.

Ronald David Bobman - Capital Returns Management, LLC

I just want to make sure, wanted a clarification if I understood, the $70-some odd million of the cash at the holding company that's currently being used as collateral, I guess per the requirements of the bank. Is it a bank order or is it your notes payable? Could you just explain the linkage of the 2?

William E. Yocke

The notes payable that, the $30-plus million of notes payable are actually surplus notes connected to the operating subsidiaries. The Wells Fargo loan of $70 million sits at the holding company level and is collateralized. The notes are not collateralized.

Ronald David Bobman - Capital Returns Management, LLC

Okay. And so I guess, but can we -- should we make it a foregone conclusion given the size of the subsidiaries that, that may or may not be a permanent requirement, the $70 million of collateral in the Wells Fargo? I mean could you even pursue an amendment or an alternative facility that didn't require cash at the hold co effectively being sort of segregated for that purpose or is that standard market practice and probably not going to change as far as you're concerned?

William E. Yocke

That instrument isn't likely to change in terms of its collateral requirements.

Operator

And our next question is a follow-up question from the line of Amit Kumar with Macquarie Capital.

Amit Kumar - Macquarie Research

Just one quick follow-up. I'm just wondering what your thoughts might be based on the current market environment, based on you being a monoline company and your size? What would you settle if you knew -- say to a question, would you be better served being part of a larger multiline company? What do you think of that?

Douglas D. Dirks

I look at where we're situated. I believe our strategy is sound. I think there's still plenty of runway for this strategy. I believe that over time, this strategy does produce superior results. But make no mistake, workers' compensation can be volatile. You all know that very well, we just observed some in the fourth quarter of 2013. There are times in the market when we are sold against because we're not multiline. There are times in the cycle when we benefit from being multiline. And so I don't think there's a clear yes or no in today or tomorrow answer to that question. But we have confidence in our strategy, we have confidence in our approach and we expect that over time, the strategy does outperform the market.

Amit Kumar - Macquarie Research

The reason I was asking is -- there has been meaningful consolidation in the space and you've seen, I guess, the relatively smaller players being taken out. And that just makes me wonder, would it perhaps be better? Is bigger better? Or you think your size in the current hazard groups serves the market well?

Douglas D. Dirks

I think scale is an important consideration. I think you need to maintain enough scale that you can be competitive. But I don't think being competitive is entirely a scale issue. And I think we have sufficient size to achieve some benefit from that scale and to be competitive in the market. Where we outperform is that we know the markets better. We're closer to the market than many of our multiline competitors. We provide a higher level of service both on the policy and the claims side. And I think we add value there and I think over, again, over the course of the cycle it generates superior results.

Operator

At this time, we have no further questions in queue. I would like to turn the call back to Doug Dirks for any closing comments.

Douglas D. Dirks

Very good. Thank you, all, for joining us today. We look forward to speaking to you again in a couple of months to update you on the initiatives that we have implemented, where we are in terms of our pricing strategy and to give you a little bit more clarity as to what's happening in these loss trends. Again, thank you, all, very much for joining us today.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may all disconnect. Good day, everyone.

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