Harleysville Group Q4 2007 Earnings Call Transcript

Harleysville Group (HGIC)

Q4 2007 Earnings Call

Feb 22, 2008, 8:00am ET

Executive

Michael Browne – President, Chief Executive Officer

Mark Cummins – Executive Vice President, Chief Investment Officer

Bob Whitlock – Senior Vice President, Chief Underwriting Officer

Analysts

Bob Glasspiegel - Langen McAlenney

Scott Heleniak – Ferris, Baker Watts

Presentation

Operator

(Operator Instructions). I would now like to turn the meeting over to Mr. Mark Cummins, Chief Investment Officer. Sir, you may begin.

Mark Cummins

Thank you, Jeanette. I would like to welcome everyone today to our fourth quarter 2007 conference call. Our complete news release and financial supplement are posted in the investors section of our website at HarleysvilleGroup.com and 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 in our fourth quarter earnings release as a result of various important factors, including those discussed in the 2006 Form 10-K and the third quarter Form 10-Q, which have been filed with the Securities and Exchange Commission.

You will hear us talk about operating results. Operating income is a non-GAAP financial measure defined by the company’s net income excluding after-tax realized gains or losses on investments and the cumulative effect of an accounting change net of tax. For further definition, we have 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. Our CFO, Art Chandler, normally would follow Michael with his comments about our financial results, but he can’t be with us today, so I will be delivering his prepared remarks. Bob Whitlock, our Chief Underwriting Officer, will follow with some comments on line of business results. I will return to provide some remarks on investments and Michael Browne will then offer his closing comments. Tom Clark, Head 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

Thanks Mark. Good morning, everyone. Before I comment on our fourth quarter results, I would like to spend just a few minutes reflecting on some of the key accomplishments of our company. This month marks the fourth anniversary since I became CEO of Harleysville. And I am very proud of the fact that over the last four years, we have fundamentally reinvented our company and we have reestablished it as one of the leading regional insurers in the marketplace.

In 2004, we set some challenging goals for ourselves and in the time since, I am pleased to say that we accomplished what we said we would accomplish and then some. Ironically, it was almost four years ago to this day that AM Best downgraded our rating to A minus but as you probably saw recently, AM Best not only recognized us for our ongoing, steady improvement by again affirming our current rating in January, but also this time they sent a very important signal by changing their outlook on all our ratings to positive. That is very good news because it means AM Best publicly recognizing the progress we have made over the last four years and also represents a key milestone that we’ve passed as we progress toward our goal regaining an A rating from AM Best.

With the continuing support of our agency partners as our foundation, something that’s been an important strength throughout our 90-year history, I am pleased that our relentless focus on the fundamentals of our business during the past few years has placed us in a much more enviable position competitively than we were four years ago. In fact, we can now point to a number of factors that we believe differentiate us from our competitors.

First and foremost is the efforts of our management team: experienced, creative, aggressive group of leaders that has demonstrated that it can compete effectively with anyone in the property and casualty industry as evidenced by the consistently steady improvement in our operating results. We have now reported 12 consecutive quarters of double-digit percentage growth in our operating income. In 2007, we also generated a return on equity of 13.8%, surpassing last years 13% ROE, and marking the second consecutive year we exceeded our ongoing goal of an ROE of 12% and better.

Our capital management activities have also, I think, served to differentiate us. We put our strong cash flow and excess capital to work for our shareholders in the form of not only two stock repurchase programs initiated in 2007 but also a significant 32% increase in our dividend. We also amended our inter-company pooling arrangement to increase the aggregate share of approval for the insurance subsidiaries of Harleysville Group to 80%. That reflects the confidence we have in our underwriting results and our prospects for continuing success.

We have returned to underwriting profitability in both commercial lines and personal lines. We’ve achieved meaningful improvement in our commercial lines combined ratio each of the past three years, which is a cumulative result of our underwriting approach and that approach now incorporates the use of predictive modeling that has resulted in improving efficiency.

Predictive modeling is a very important tool, particularly in a soft market, and it enables us to effectively assess risk quality and compete aggressively for our agency partners best business. As one of the first regional companies to use it, as you know we now model more than 80% of our commercial business, both new and renewal, which we believe makes us a leader among our peers.

The ability to offer a competitive personal lines market to our agents sets Harleysville apart from many of our competitors and further strengthens our relationships. In personal lines, we have now generated 11 straight quarters of underwriting profit, a significant turnaround from our previous performance. We are confident that our profitability in personal lines is sustainable over the long-term and we are working closely with our agents to increase growth in our targeted states.

Having excellent technology is something that is extremely important to independent agents because it enhances the ease with which they can transact business. To that end, we introduced a new web-based agency portal, accessHarleysville, in 2006 and in 2007 we began rolling out our new commercial and personal lines policy administration system. These new systems are replacing a dozen legacy systems that have been in existence for many years. After we complete the full rollout of these systems, and these systems were developed with significant input from our agents, they will benefit from some of the industry’s easiest systems to use for writing business.

In addition, this technology will position us one of the few insurance companies who are free of legacy system constraints and that will afford us enhanced flexibility to expand into new products, new geographies and new services quickly and effectively.

But to fully leverage these and do the business that technology offers, you need to have the right people in the right places and we do. We have developed a regional field structure that further strengthens our partnerships with our agents by pushing resources and decision making closer to the point of sale. And this structure gives us greater access to our agency partner’s quality business, in conjunction with our new systems and tools like predictive modeling enables us to efficiently underwrite and really compete for that business.

You’ve heard me say this before and you are going to hear me say it again: but there is nothing in this business that is more important than claims. That’s not something you hear everyday from CEOs, but our agents have told that the quality of a carrier’s claims service is a key differentiator and one of the most important factors in choosing a company for their customers.

Our focus on quality claim service and prompt and fair claims handling has reduced our annual paid loss run rate by 12%, or $66 million over the last three years, while premiums have remained steady and our reserves have been increasing. All of these things together with the ongoing dedication of our employees and agents, have reestablished Harleysville as a formidable franchise that can compete with anyone in the industry. I want to personally thank all of our employees and our agents who have contributed to our turnaround and to our shareholders who have supported us during that process.

Now for a quick overview of our fourth quarter results. Our operating earnings per share grew 17%, matching the record of $0.83 per share we reported in the previous quarter. Through the full year, we reported record operating earnings of $3.17 per share which is a 20% increase compared to the $2.65 we reported in 2006.

The fourth quarter also was marked by further progress in our statutory combined ratio as it improved by 1.6 points to 96.4%. For the full year, our combined ratio was 96.7%, which is nearly 2 points better than in 2006 and we produced an operating return on equity of 13.8% in 2007.

Throughout the ongoing soft market, we have been able to consistently retain a high percentage of our quality business, and retention again improved in both commercial and personal lines during the fourth quarter. It is a striking testimony of our agents continuing support and the relationships we continue to nurture with them.

Personal lines continued its string of profitability, 11 straight quarters to be exact, as we reported a combined ratio of 91.5%, which is a direct result of superior execution of our strategic business plan in personal lines. With nearly three years of profitability behind us now we are working hard to grow that business in a deliberate fashion. In the fourth quarter, personal lines grew by 2% and 1% for the year. With that as a backup, we expect to build upon that momentum in 2008.

Rounding out the quarter, we paid our regular quarterly cash dividend of $0.25 per share and we also have approximately $37 million remaining under the second of the two 5% share repurchase programs we initiated in the last year.

Finally, we announced last month that we received all of the approvals needed from the various state departments in order to amend our inter-company pooling agreement, effective January 1, 2008. This change, which increases the aggregate share of the pool for the insurance subsidiaries of Harleysville to 80%, reflects the strength of our company’s financial condition, the confidence we have in our underwriting results and our prospects for continuing success and our desire to have our shareholders, including Harleysville Mutual, benefit more from our improved operating performance. We were pleased that we were able to complete the regulatory review and approval process in a timely manner, due in large part to the attention and support we received from the respective departments of insurance.

Now normally at this time, I would turn the call over to Art Chandler, our CFO for his comments on our financial results but as Mark noted, Art could not be on this call and he is currently undergoing treatment for a medical condition. Respecting Art’s privacy, I won’t go into the specifics of the issues I did want to make you aware of the situation. Art’s treatment schedule has required some flexibility in his work arrangements, which have been easy to accommodate, and we expect this to be the case for the next few months. But as everyone in the finance department can attest, he has remained fully engaged in the day-to-day operations of our organization and although he will need some time off in March for treatment, we expect that Art is going to be fully on the job. I am sure you all will join us at Harleysville in wishing Art the best.

With that, I’ll ask Mark Cummins to provide some remarks on our fourth quarter financial results, and I will be back later to offer some closing comments. Mark.

Mark Cummins

Okay. Thanks, Michael. My comments will relate to the four page financial supplement included in the press release.

Starting with the first page as Michael noted, we had operating income of $0.83 per share in the fourth quarter of 2007, which represents a 17% improvement from the $0.71 per share posted in the prior year’s fourth quarter and our 12^th consecutive quarter of double digit growth in operating earnings per share. The fourth quarter benefited from lower catastrophe losses of $0.03 per share compared to cat losses of $0.06 per share in the fourth quarter of 2006.

For the full year, operating earnings per share stood at $3.17, a 20% increase over the $2.65 per share posted in 2006. Full year cat losses were $0.19 per share and compared favorably to the cat losses of $0.29 per share for 2006. The statutory combined ratio for the fourth quarter improved by 1.6 points to 96.4% from the 98.0% posted for the fourth quarter of 2006.

This year’s results benefited from both light cat loss experience as well as favorable loss experience in property lines. Favorable prior year development of 1.3 points was noted in the fourth quarter of this year compared to favorable development of 1.4 points in the fourth quarter of 2006. Cat losses for all accident years contributed 0.7 points to the fourth quarter combined ratio this year compared to 1.3 points during the fourth quarter of 2006. The current accident year combined ratio excluding cats, improved by about a point in the fourth quarter of this year versus the prior year fourth quarter.

The statutory combined ratio for 2007 was 96.7%, a 1.9 point improvement from the 98.6% posted in 2006. For the full year, favorable prior year development was 2.6 points compared to favorable prior year development of 2.2 points noted in 2006. Full year cat losses contributed 1.1 points to the combined ratio of 2007 compared to 1.7 points in 2006. The current accident year combined ratio, ex-cats of 98.1% improved by about a point from the results posted in 2006. Bob Whitlock will comment on line of business results in more detail in a few minutes.

The full-year statutory expense ratio of 33.8% improved by about a half a point from the results posted in 2006. Internal expenses were flat year-over-year and P&C staffing levels declined by approximately 6% from the beginning of 2007.

Full-year operating cash flow was $171.5 million, up 3% from 2006. Paid losses did increase 5% compared to 2006 with that increase partially driven by elevated property experience observed in the first quarter of this year and some claims department efforts to settle some larger workers compensation cases. However, that’s off a base that saw our cumulative paid loss levels declined by double-digits during the previous two years. In addition, the ratio of paid losses to incurred losses remains solid at 90%.

Investment income increased $8.2 million, or 8%, during 2007. Strong operating cash flow and a greater proportion of assets invested in fixed income with the principal drivers of the higher investment income.

Turning to premium production, net written premiums were essentially flat in the quarter and for the full year. The decline in premiums from involuntary market mechanisms reduced overall premium growth by about 1% to the flat level.

Our balance sheet remains strong. Our GAAP book value of $25.03 per share, up 11% from one year ago. During the quarter, we repurchased 108,000 shares at an average price of $31 per share and we have about 1.3 million shares remaining under the existing repurchase authorization.

With that, I’ll turn it over to Bob Whitlock.

Bob Whitlock

Thanks Mark. Good morning, everyone. I will be discussing the line of business results that are on the last page of the financial supplement starting with commercial lines. The total commercial lines combined ratio for the fourth quarter improved 2.5 points to 97.5%. For the full year, our commercial lines combined ratio was also 97.5%, which compares to the 100.3% at year end 2006.

Renewal pricing in commercial lines was down 2.5% for the quarter and 1.4% for the full year. While price reductions continued in the quarter, our predictive models allow us to direct price changes to risks based on quality and expected profitability.

Written premiums were flat for the quarter and the full year. Again, growth was negatively impacted by about 1% as the result of lower involuntary premiums. Policy retention improved throughout the course of 2007.

Commercial auto continued to perform well throughout 2007. The fourth quarter combined ratio improved a point to 97.5% while the full year result was 94.7% or 4.6 points better than the 99.3% combined ratio we posted in 2006.

Paid bodily injury liability frequency trends continued the steady decline that we began several years ago. Similarly, property damage liability frequency has also declined over time, suggesting our book of business has maintained its quality. Price declines have made growth in commercial auto challenging. However, favorable frequency results I discussed before and better than expected severity has allowed us to remain profitable. Again, predictive modeling has allowed us to direct our best prices to the highest quality businesses.

Our commercial multiperil combined ratio finished the fourth quarter at 95.9%, 0.4 of a point better than the fourth quarter of 2006. For the 12 months of 2007, the CMP combined ratio was 97.8%, more than a point better than 2006. Catastrophe losses had been lower for CMP in both the quarter and for the full year in the comparable periods in 2006. They contributed 1.1 points to the CMP combined ratio for the full year compared to 1.9 points through 12 months of 2006.

Loss development for the line was comparable in 2007 and 2006. So adjusting the 2007 and 2006 results for both catastrophe and loss development shows the CMP accident year combined ratio improved by over half a point this year. Both property and liability frequency trends are stable.

Our workers compensation experience continued to show significant improvement over 2006 results. In the fourth quarter, our workers comp combined ratio was 112.2% or 4.7 points better than what we posted in the fourth quarter of 2006. For the full year, we improved the combined ratio five whole points since 2006 and 11.8 points since 2005. Prior year development is negligible in both periods.

During past calls, I have outlined a multifaceted strategy that is having a positive impact on our workers comp results. Medical cost inflation remains an issue for the industry, but for us, ongoing improvements in frequency and stable indemnity severity has essentially offset medical cost increases. Premium growth is flat for the year although we have seen direct premium growth this year, that’s been offset by lower assumed premiums as compared to 2006.

Once again, predictive modeling fully deployed in workers compensation for new and renewal business and with that we have the necessary tools in place to execute our strategy and drive further improvement in workers compensation.

I would like to make note of our growth in other commercial lines. That line item is the combination of several miscellaneous commercial products including commercial inland marine. We are placing more emphasis on inland marine because of its historical profitability. Not surprisingly then, much of the 8% premium growth in other commercial in 2007 can be attributed to inland marine. We see this as an opportunity for us to broaden and diversify our commercial portfolio in a line that it has performed well over time.

Personal lines premium grew 2% as compared to last year’s fourth quarter and 1% for the full year. That growth was driven by states that we have targeted. In those states, premium was up 5% and policy counts were up 3%. New business units increased about 8% versus 2006 and policy retention, which has been consistently strong, continue to improve.

Personal lines continued to perform well with a combined ratio of 91.5% in the quarter. For the 12 months of 2007 the personal lines combined ratio was a profitable 92.7%. Losses from prior accident years have developed favorably in both auto and homeowners. That development contributed 6.6 points to the full year result.

Catastrophe losses were relatively low for personal lines in 2007. They added 1.2 points in the quarter and 2.9 points for the full year.

The personal auto combined ratio for the fourth quarter was influenced by a single claim that is valued at $1.5 million. Just to give you a sense of the impact, based on the level of personal auto earned premium, each million dollars of loss adds more than six points to the combined ratio for the quarter and about 1.5 points for the full year. On a year-to-date basis the combined ratio was essentially flat from prior year at 99.7%. Underlying trends remain favorable with improving loss frequency reflecting the quality of our book.

The homeowner’s line was very profitable in the fourth quarter with a combined ratio of 76.3%. For the 12 months of 2007, the combined ratio was a profitable 86.8%; that compares to 82.6% in 2006 with the difference attributed to the level of large loss activity that occurred early in the year. The difference in year-over-year combined ratio has improved consistently throughout the year.

Catastrophe losses contributed 5.8 points to the homeowners combined ratio in 2007 while non-cat frequency trends were stable. Our premium inline was up 6% in 2007 with policy counts about flat indicating our strong insurance to value program continues to add value. Overall, our underlying underwriting results have continued to improve. We believe we have a quality book of business as evidenced by our frequency trends. That’s critical in a competitive environment. We are committed to maintaining underwriting discipline and with predictive modeling to guide both risk selection and pricing, we believe we have the tools to be successful.

At this point, I’ll turn the presentation back to Mark Cummins to comment on investments.

Mark Cummins

Great. Thanks Bob. As the result of the reduction in the Fed’s funds rate and a flight to quality the yield curve shifted significantly downward during the fourth quarter. This had a favorable impact on our fixed maturities portfolio as our market value to amortized value increased from 100.1% at the end of September to 101.4% at the end of December.

Again, you can see from our supplement, our total investment portfolio, amounting to $2.4 billion, had a market value in excess of cost of $40.3 million at the end of December 31, 2007. Actually, that net unrealized gain increased to about $72.5 million at the end of January due to the continued shifting of the yield curve. I do want to emphasize that our investments of about $2.4 billion as reported on our balance sheet are managed in-house and are of high quality. 98% of the fixed maturity portfolio is rated A or better and 81% AA or better.

On average our average credit ratings are AA1 by Moody’s and AA+ plus by S&P. We have zero direct exposure to sub-prime loans, CDOs, CLOs, Alt-A, home equity loans and CMBs. Also worth noting in this environment that $276 million, or 36% of our $760 million municipal bond portfolio are insured municipal bonds. Those bonds have an underlying rating of AA3 by Moody’s while our non-insured bonds have a rating of AA1 on average. We also had zero exposure to the option rate mini market. Our portfolio has been and has been managed for quality overtime and after tax investment income and its very well positioned for this difficult environment.

Separately, we have the securities lending program reflected on our balance sheet that is managed externally by a third party. Cash collateral received for securities on loan in this program have been reinvested in fixed income securities. At 12/31/07, included in the securities lending investments are structured investment vehicles in the amount of $30.4 million on a cost basis with an unrealized loss of $350,000. The $0.01 per share of losses for the quarter is a result of an impairment loss on one of the structured investment vehicles.

Our fixed maturities portfolio duration was up slightly to four years at the end of 2007, compared to 3.8 years a year ago. Our after tax investment income was up 2.1% in the fourth quarter and was up 5.2% for the full year. This increase was impacted by the $63 million of cash used for share repurchases during 2007. Pretax yield excluding short-term investments was 4.94%, down slightly compared to the 5.03% a year ago. Our after tax yield was 3.56% versus 3.62% a year ago.

At the time of our pooling change in early January of 2008, we shifted about $190 million in assets and liabilities from Harleysville Mutual and subsidiaries over the Harleysville Group. About $36 million of these assets were equities. This resulted in an increase in our equity to 16.5% of surplus from 10.4% at December 31, 2007. We expect to add an additional $25 million in the first quarter of 2008, bringing the equity to surplus ratio to 19.4%. We find this an opportune time to add equities to our portfolios. Due to our tax position, we continue to purchase primarily tax exempt securities and with the shifting of assets due to the pooling change, we expect investment income to increase in the mid single digit range in 2008.

And with that, I will turn it back to Michael.

Michael Browne

Thanks Mark. We just completed another excellent quarter in a string of 12 straight quarters of double digit percentage growth in our operating income, a performance that is a direct result of our relentless pursuit of the fundamentals. And as I noted earlier we, this was recognized recently by AM Best when they changed our ratings outlook to positive. These results continue to demonstrate how fundamentally different we are now compared to just a few years ago. And as I explained at the beginning of this call and as I said when I took this job four years ago, we have differentiated ourselves from the competition with our consistent and relentless execution of the basics of the business. A proactive capital management strategy; our sophisticated commercial lines underwriting approach, which features predictive modeling; demonstrated success in personal lines; innovative technology that supports ease of doing business for our agents; an extensive regional field structure that puts resources and decision makers close to the point of sale; high quality claims service and ongoing strong relationships with our agency partners. All supported by the good people to know at Harleysville.

With the people and initiatives we have in place, we’re well positioned to compete in any type of market environment. But, as I have often said, financial results are a lagging indicator with improved performance. I am confident we have the foundation in place that will lead to continued success.

Finally, I will conclude my remarks with a familiar refrain: we will not compromise underwriting quality to chase a near term growth goal. Instead, we will remain disciplined as we focus on our goal of maintaining a long-term underwriting profit and continued improvement in our performance in 2008 and beyond.

And with that, let’s open the call to your questions. We are ready to take questions.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions). Our first question comes from Mr. Bob Glasspiegel of Langen McAlenney. Your line is open.

Bob Glasspiegel - Langen McAlenney

Please pass on to Art best wishes for him to get back quickly so we can give him heck again on these conference calls.

Michael Browne

I am sure he will be eager to get back.

Bob Glasspiegel - Langen McAlenney

Mark, you mentioned taking away some equities. With yield spreads widening -- I mean congratulations on having such a high quality portfolio. It’s positioned well for what’s happened, but are you tempted to take advantage of the wider spreads and dip into a little bit lower quality assets on the fixed income side?

Mark Cummins

I mean the reason our portfolio is such high quality is we haven’t been tempted in the past to overextend for yield and sometimes that can get you into trouble. What we are doing is, as I mentioned, we are buying a lot of munis, and munis are very attractive in this environment. We are buying them at historically cheap levels at high 90% of treasury. So, they are very conservative, good credit quality and good after tax yield in this environment. So, you know we are doing some of that and we think the equity markets look attractive also. So that’s what we are doing in this environment.

Bob Glasspiegel - Langen McAlenney

So, our tax rate on investment income on the margin should be going down and you were giving guidance on pretax investment income growth, right?

Mark Cummins

I mean the after-tax is going to be in the mid single digit also, but you’re right. As we shift that mix, which actually started to shift at the end of the year and moving into January, you will start to see that effective tax rate move down. It didn’t shake much last year because we used some of our cash for the buyback, so it didn’t change the mix that much.

Bob Glasspiegel - Langen McAlenney

On the underwriting side, you are one of the few companies to still be showing underlying accident year improvement ex-cats. Do you have a feel for how much longer you think that can continue or are we close to the inflection point where you start deteriorating along with other companies?

Michael Browne

I will let Bob Whitlock, our Chief Underwriting Officer, respond to that one.

Bob Whitlock

Well, first of all, thanks for noticing that, Bob. You know one of the things that we have done and we’ve talked a lot about is our predictive modeling that allows us to really select the highest quality risks that are out there and compete for that.

The other side of that is to avoid the lesser quality business, and that’s what we are seeing both in new business and in our renewals. We are shedding the worst quality business that we really don’t want to keep on the books. So keep in mind that this is still being rolled out in one of our largest lines, commercial multiperil. We started that in the fourth quarter of last year. So, I don’t think we’ve really seen the full effect of that on our CMP book of business. So, I think that gives us some leverage. It’s really going to be tougher in a declining pricing environment to do that. You sort of swim upstream with that but I think we have some tools to continue some improvement.

Bob Glasspiegel - Langen McAlenney

The last question, I really hear your name in the marketplace as being increasingly competitive and I guess that could be a positive or negative, but the one line that I am hearing your name pop up is in the contractor GL market in New York. That can be sort of a dicey line of business particularly going into a recession. Are you doing that with reinsurance or maybe you could go on what you see there?

Bob Whitlock

Well, our reinsurance program hasn’t really changed. I don’t really believe that we are increasing our exposure to contractors in New York. We’ve done that business in the past, but I think overall our mix in contracting has actually declined.

Bob Glasspiegel - Langen McAlenney

I will maybe catch you offline on that because I am hearing some things on a pretty aggressive commission program there.

Operator

Our next question comes from Scott Heleniak of Ferris, Baker Watts. Your line open.

Scott Heleniak - Ferris, Baker Watts

First question, reserve releases, could you give accident years for those? Where most of those came from?

Bob Whitlock

The accident years where the releases are coming from are the more recent years, really ‘03 through ‘07. That is where the bulk of it is coming from.

Scott Heleniak - Ferris, Baker Watts

Do you have an IBNR reserve number at the end of the year?

Bob Whitlock

I don’t have that at my fingertips, I don’t.

Scott Heleniak - Ferris, Baker Watts

Okay. That’s fine.

Michael Browne

I will say this, that we will see this when we do our filings that our Chief Actuary has indicated that our overall reserves are at the 76^th percentile of the range, so we think that they are strong.

Scott Heleniak - Ferris, Baker Watts

Okay. And you mentioned on workers comp, you mentioned the rising medical inflation rate. What medical inflation rate are you guys assuming now, any change over the past couple of years?

Bob Whitlock

No, it’s been pretty consistent. I think we are sort of high single-digit medical inflation in our book and that’s been pretty consistent overtime. But again, that’s being offset pretty substantially by the frequency declines we are seeing.

Scott Heleniak - Ferris, Baker Watts

Any change in the average premium size overall? I know you guys always been focused on small business, but has that become even more pronounced this year with the market softening and pricing obviously a lot worse for bid and large account business? What’s the change there?

Michael Browne

No, it’s been pretty stable. At the end of 2007, our average policy size was $4,900 and our average account size was $7,600. So, you know it’s been pretty stable.

Scott Heleniak - Ferris, Baker Watts

Do you have an agency count at yearend?

Michael Browne

We do. The number of agents at year end was 1,487.

Scott Heleniak - Ferris, Baker Watts

And then plans for ‘08? Is that just kind of consistent with historical levels?

Michael Browne

No. I think overall, you know we are satisfied with the number. We are always trying to upgrade the quality. You know every year we add some agents, every year, we terminate some agents. There are a number of companies that, in this soft market, talk about adding agents and that is part of their strategy. I don’t think that’s a particularly good strategy quite frankly. I think the better strategy is to, with your better agents and your high performing agents, to get more of their good business. Quite frankly agents who have been our partner for a long time, they like that strategy, too. They like us sticking with them, writing more business with them and sort of going off and finding new agents when things get a little tough, and so we think our agency relationships are strong, they are getting stronger and we like the number we have got.

Scott Heleniak - Ferris, Baker Watts

Okay, that makes sense. Thanks.

Operator

(Operator Instructions). At this time, we are showing no further questions.

Michael Browne

Okay, thanks to everybody. We appreciate your calling in. Talk to you soon. Bye, bye.

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