Infinity Property and Casualty Corporation (IPCC)
Q1 2008 Earnings Call Transcript
April 24, 2008 11:00 am ET
Executives
Amy Jordan – Assistant VP of IR
Jim Gober – Chairman, President and CEO
Roger Smith – CFO
Analysts
Charles Gates – Credit Suisse
Mike Grasher – Piper Jaffray
Doug Mewhirter – Ferris, Baker Watts
John Gwynn – Morgan Keegan
Operator
Good day ladies and gentlemen, and welcome to the First Quarter 2008 Infinity Property and Casualty Corporation earnings conference call. My name is Anita and I will be your operator for today. At this time, all attendees are in listen-only mode. We will conduct a question-and-answer session towards the end today's conference. (Operator instructions)
I would now like to turn the presentation over to your host for today's conference, 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 web site 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 web site under the Quarterly Reports tab that provides more detailed quarterly financial data, and page 10 of the report does contain the definition and reconciliation of any non-GAAP items that we discuss this morning.
Certain statements made during this call may be deemed to be forward-looking statements 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, target, plans, anticipates, estimates or the negative version of those words and similar statements of a future or forward-looking nature are identified forward-looking statements. Examples of such forward-looking statements include statements relating to expectations concerning market conditions, premiums, growth, earnings, investment performance, expected losses, rate changes and loss experience.
Actual results could differ materially from those expected by Infinity, depending on the changes in economic conditions in financial markets including interest rates; 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 foregoing 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 it over to Jim Gober, our Chairman, President and CEO.
Jim Gober
Good morning everyone and welcome to our Conference Call and Webcast for the First Quarter of 2008. Roger Smith, our CFO, is also with us this morning and as usual we'll open the lines for questions after our comments.
Now let's begin with the highlights on slide three. Overall, premiums were down 16.8% in the first quarter but that marginally is compared with our internal plans. Of course last year's first quarter was huge for us with a big bump in our premiums from the continued rollout of electronic enforcement of mandatory auto insurance laws in California. You may recall during last quarter's earnings call, we said that we expected premiums in the first quarter of this year to fall about the same rate as those in the fourth quarter of 2007, but to grow in a range from zero to 5% for the year. So our first-quarter expectations came to fruition. I'll provide some more details on the premium trends a little later.
For the first quarter, premiums in our focus states fell 16% as compared with the very strong first quarter in '07. Within these states, business in our target urban zones fell 12.9% for the quarter, but was in line with our first-quarter plan and expectations. As a matter of fact, during the first quarter, nine of our 22 targeted urban zones grew as did our commercial vehicle and classic auto businesses. Nine of the 22 urban zones, commercial vehicle and classic auto, are also running ahead of our premium plans in the first quarter of this year. As for the bottom line, operating income for the quarter was $15.1 million, down from a very strong first quarter of '07.
Regarding overall market conditions in most of our states, many of our competitors continue to raise commissions, enhance agency incentives and adjust rates in order to maintain at low premium levels. However, in several states such as Texas, competitors seem to be taking a pause with these types of actions to assess what the industry is experiencing in overall loss costs, which are now on the rise. In fact, in some states such as Florida, a few competitors are taking rates up and tightening underwriting standards. However, we are still seeing smaller, undisciplined competitors who have not taken actions to address their poor, deteriorating underwriting results. In my opinion, this is a train wreck waiting to happen. I'm not going to name companies, but it will be problems for them.
As for the industry, countrywide loss cost trends, they are positive and increasing but are still at modest, low single digits. When we look PCI fast track data through the fourth quarter of '07, the most recent quarter available; we see positive and rising claim frequencies and positive average severities in both the fourth quarter and the full-year 2007 versus the periods a year ago. Those combined trends give you loss costs trending upward at a rate of about 2%.
We'll get into the state detail in a few minutes.
On slide four, operating EPS for the quarter were $0.92, down from $1.05 in the first quarter of '07. Reserve releases in the first quarter of '08 were $5.9 million pre-tax or about $0.24 per share. We had about $1.1 million of favorable development in the first quarter of 2007 or about $0.03 per share.
Operating income for the first quarter of '07 benefited from what was in hindsight too low in accident quarter combined ratio of 92.9. That quarter's results were about 2.5 points too low, which we corrected in the second quarter of last year. That understated combined ratio contributed about $0.21 per share to the operating income of that quarter.
Our net EPS for the quarter were $0.86, compared with $1.10 in the first quarter of '07. And the last bullet point on slide four is our GAAP combined ratio of the quarter at 94.5. Excluding the effect of redundancy releases for the year, our business is currently running at a 2008 accident year combined ratio of about a 97. This is about 1.6 points increase over our 2007 accident year combined ratio of 95.4 as reported for the full year.
On slide five, I'll begin with an update of our personal auto business. Overall, auto premiums were down 17.9% for the quarter. As I mentioned earlier, a slowdown in premiums in the quarter was expected, given our very strong first quarter of '07, as well as the deliberate steps we've taken in certain states such as Connecticut and Florida, to re-price our business to improve our underwriting results. However, during the quarter we did see positive growth in states such as Texas, Pennsylvania, Nevada, Illinois, Colorado and Tennessee. Our maintenance states shrank 37.2% in the quarter as we concentrated on growing our focus states while reducing underperforming business in these maintenance-only areas. As we mentioned last quarter, we expect that this culling process will continue throughout 2008.
Premiums in non-focus states for the quarter fell about $2.5 million to $600,000. Today these states represent only about two tenths of a percent of our private passenger auto book. And we'll continue to reduce our writings of these difficult and unprofitable states throughout 2008 as well. As for the detail on each of our top markets, let's start out with California. Premiums for the quarter fell 18.7% from a very strong first quarter of '07. This is a slightly larger decline versus our forecast and our key one plan.
Our premium volume was off somewhat in the state for a number of reasons. First of all, there's an economic slowdown that's affecting buying behavior. Budgets are tight. Gasoline prices are still climbing and more people are forgoing the purchase of auto insurance. Also during '07 and into '08, our premium volume fell off as some drivers who let their auto insurance lapse are now ignoring DMV notices that were implemented with electronic enforcement. These drivers are deciding to forgo paying for insurance and instead are taking their chances of not being pulled over. Effectively, the $14 reinstatement fee imposed by the DMV for such violators has become an ineffective deterrent to driving without coverage and police officers seem reluctant to impound the vehicle of the violating driver. Lapses from these drivers are likely to continue. For instance in March, under political pressure from consumer groups, Commissioner Poizner withdrew his proposed November 2008 ballot initiative that among other penalties would have permitted police officers to pull license tags from chronic offenders.
Lastly from a competitive standpoint, several key competitors lowered rates and lowered minimum mileage requirements in advance of our January 2008 rate reduction for the larger of our two programs in the state of California. One company in particular that I referenced last quarter, has grossly miss-priced their product, often times by several hundred dollars below responsible competition. Thank goodness, in early 2008 a few of these companies have realized that they've gone too far and have reversed some of their actions by raising their mileage requirements. But there is still a lot of rate activity ahead. The Department of Insurance is expecting roughly 200 more filings by the July 14, 2008 final deadline for compliance with the new territory regs.
From a loss cost standpoint in California, industry fast track data shows modest increases in average severities with slightly favorable frequency trends for the first three quarters of 2007, but a slight increase in frequency in the fourth quarter. Overall, loss costs are up slightly. Our own developed loss costs in this state are also up at very low single digits. Some of this uptick is weather related, as we saw historical rainfalls in California during the first quarter of '08. In addition, there may be some impact from fraudulent comprehensive claims, given the economic slowdown. This uptick in loss cost, in addition to some rate segmentation adjustments, has resulted in a modest increase in the combined ratio. However, we are taking actions to improve the results in this state.
In Florida, our premiums were down 18.3% for the quarter which is marginally under our Q1 premium plan. The decrease was consistent with what we saw in the fourth quarter of last year. In order to improve the profitability of this state, we implemented double-digit rate increases on two programs in January of this year. This follows five rate increases totaling 13.5% that we implemented in 2007. These rate increases have slowed our premium growth in all areas of the state except Miami, our newest urban zone. Our willingness to take such aggressive rate actions demonstrates our commitment to underwriting profitability, even if it means the sacrifice of top-line growth. The good news is that many competitors are beginning to file for rate increases in the state as well. In fact, we find very few companies in the state of Florida that are currently making an underwriting profit, so these rate increases are long overdue.
In Miami, our premium growth has been significant and well ahead of plan but the business there is generating an unacceptably high combined ratio. While it's not unusual to run somewhat high combined ratios in a new state or urban zone; based on trends, we recognized in the fourth quarter and early first quarter, we began to take aggressive actions to improve underwriting results. For instance, we've terminated contracts with agents who failed maintained strict underwriting guidelines. We are increasing territory factors in this urban zone. Given the propensity of fraud in Miami, we've bolstered our claims and SIU staff there. We've tightened payment plans for certain underperforming segments such as insureds with no credit history or no prior insurance. And we've increased tier factors for insureds who are choosing to purchase PIP/PD coverage only policies. For the industry, overall loss costs in Florida rose 5.4% for the quarter versus the fourth quarter a year ago. For all of 2007, loss costs for the industry were up a half a point. Frequency trends have turned positive for the fourth quarter of last year. For the year, claim frequencies were down slightly, but were inadequate to offset modest rises in average severities. Rising PIP frequencies seem to be a major contributing factor.
As for our own experience, incurred frequencies were slightly positive so incurred loss costs ticked up for the first quarter. This was due almost exclusively by increased frequencies in PIP and PD, most likely in our Miami urban zone. We are confident that the aggressive actions we're taking in Miami and throughout this state will result in improving combined ratios later this year and certainly into 2009.
As for Georgia, gross written premiums were down 25.3% for the quarter which was not unexpected. In order to improve the profitability of this state, we implemented nine rate changes in 2007 totaling 6.2% and have plans for mid single-digit rate increases averaging 5% in two programs in May of this year. In addition, business outside the state's single urban zone continues to decline as marketing resources are focused on Atlanta. Our focus on Atlanta is paying off. For the first quarter, our premium volume there was down only 6.4%. Albeit at more modest levels than we saw last quarter, industry loss costs trends for Georgia continue to be favorable in the fourth quarter of '07 as compared with that of the prior year as well as the four quarters ending in December. In this state, our own data continue to show elevated loss cost not quite offset by higher average earned premiums. As a result of this and the fact that underwriting results are not currently achieving our return targets, we plan to raise rates in May.
Premiums in Pennsylvania, our second-most profitable state; were up 8.9% for the quarter and we're running ahead of our first-quarter premium plan. Increased commission rates and contingent commission agreements to select agents in 2007, as well as increased advertising and sales incentives, have resulted in an increase in business in this state.
Allentown, a new targeted urban zone for us; has started strong as a result of solid agency relationships along with new contingent commission arrangements for key producers. Premium growth in this state's other urban zone, Philadelphia; was up 2.5%.
Industry claims frequencies and overall loss costs for the state have been rising now for four consecutive quarters. Our own calendar quarter loss cost trends remain favorable. BI trends continue to look favorable for us with PD and collision loss costs ticking up at modest single digits. More good news is that our loss costs for undeveloped accident quarter data now has turned favorable. They had been trending higher in the past few quarters. All told, our business in Pennsylvania seems to be hitting on all cylinders at this time.
In Texas, another state that shows great promise; written premiums were up 20.3% for the quarter. New agent appointments and advertising in Dallas, Houston and El Paso have fueled a lot of the new business growth and growth is expected to continue given these ongoing efforts. Also we are poised to begin a marketing campaign in June to take advantage of the electronic enforcement of the mandatory auto insurance laws. As for competition in Texas, it's been relatively well-behaved. There has been a lot of rate activity among companies who offer statutory minimum liability limits as the state has increased the limits from 20/40/15 to 25/50/25; that's effective April 1. These types of changes usually put up some level of shopping activity which should give us a decent shot at the business. Industry loss costs increased about 4.5% in the fourth quarter of '07 as compared with that of the prior year's fourth quarter. The increase was the result of a 5.4% increase in frequencies offset only partially by nine-tenths of a percent decline in average severities. Claim frequencies in the state have now been increasing for five consecutive quarters. Our own data reflect an improving loss costs trend with flat to slightly positive frequencies and modest decreases in average severities. Average earned premiums per car have fallen for us, but to a lesser degree than loss costs, given an improvement in our mix of business. The net effect is an improving combined ratio in this important state.
In Arizona, written premiums for the quarter were down 8.4% but still ahead of our Q1 premium plan. Premiums in Phoenix fell 15% for the quarter and in Tucson, our second urban zone, premiums were down more modestly, falling 12.3%. Competitors continue to aggressively price business here. Also as discussed last quarter, there has been a significant fall off in Hispanic business in the state due in part to an exodus of Mexican immigrants as a result of a newly enacted legislation. This legislation permits law enforcement agencies to suspend business licenses of anyone found employing illegal immigrants. Surveys of our agents in target Hispanic neighborhoods report a fall off in overall business ranging anywhere from 20% to 50%. As a matter of fact, premiums may have fallen more had it not been for a modest 2% rate decrease we implemented in February. Keep in mind that our strategy is not only to focus on Hispanic markets, but urban markets as well. Given the change in legislation regarding illegal immigrants, we do have an opportunity to grow our book by getting more competitive within the general market in Phoenix and we're in the process of doing just that. Industry loss cost trends fell in the fourth quarter of '07, having increased for prior four quarters. While claims frequencies were slightly positive for the quarter, average severities fell 5.2% in what appears to be a temporary hiatus from a historical trend of low single-digit increases. Loss costs for the full-year 2007 were up 2.1%. We ourselves experienced a 2-point increase in our own developed accident year loss cost trends in the first quarter of '08, exacerbated by a lower average earned premium per car year. Net net, results have slipped a bit here so we'll have to keep our eye on the business and take swift action if these trends are other than temporary or seasonal.
In Connecticut, our first quarter written premiums were down 59.5% which was not unexpected. This state has performed poorly for us from an underwriting standpoint. So we continue to reduce unprofitable business by raising rates and tightening underwriting standards. We expect continued aggressive actions here to address profit underperformance, which will lead to continued declines in premiums in this state.
Looking at our commercial vehicle and classic auto businesses; both showed solid growth in the first quarter. I'm especially excited about the potential growth opportunities for our commercial vehicle program. This line of business is priced significant for the industry. In our focus states it’s a $10-plus billion line of business. During 2007, we retooled the entire CV program, filing new product forms and rates in most of key target states, including California and Texas. We then began to reintroduce our programs to our agency plan. This included a first ever advertising campaign in key markets. And our efforts have begun to pay off. We enjoyed premium growth for the first time in over two years, in the first quarter. I'll give you periodic updates of our progress on CV in future conference calls. As for classic auto, we enjoyed 8.3% premium growth in the first quarter; certainly a good start to 2008.
Now let's talk about our outlook for the remainder of this year. Overall, I believe as we had experienced in the first quarter of '08, we expect many competitors to continue to aggressively pursue growth with increased agency incentives and advertising along with liberal underwriting standards and select rate reductions. This is really nothing new. We've seen these types of actions throughout 2007. We have, however, seen some rate increases by certain competitors in selective states, but nothing widespread that would indicate an overall hardening of the market, not yet. I say not yet because the consumer price index component for auto insurance was up a half a point for the first quarter of '08, while the cost of medical services and auto maintenance and repair indicators of loss cost trends for the industries- were up a full point. The combination of the two suggests continuant deterioration in loss ratios for the industry.
Conning & Company, in its recent property casualty forecast and analysis by line of business, predicts a slow one point deterioration in the combined ratio for the personal auto line over the next two years from a 98.2 to a 99.2; while GAAP returns on equity for the industry will drop to 7%, well below its cost of capital for most carriers. But until industry (inaudible) reach this paying [ph] phase of the cycle, which we do not anticipate until late '08 or even '09; the marketplace will continue to be difficult. Yet in spite of this difficult environment, we still think there are many, many opportunities to maintain or even grow premium levels, particularly in our urban zones. For example, in California we've received approval of our rate and class trend filings for our second program, so we're now 100% compliant with the territory and fair rate of return regs and we'll commence writing business in this program in mid May. It's important for us to have a second competitively-priced program in this important market. We also continue to fortify our sales efforts in this state, including more book and frequent broker visits, reenergize cooperative marketing efforts; all of which should help us grow our book of business. Of course as we mentioned last quarter when projecting growth for our business in California.
The wild card this year will be the competitive impact of rate actions of our competitors. Many have rate and class planned filings still pending with the DOI, with many more to come. As I mentioned earlier, the DOI stated this week that it expects roughly 200 more filings by the July 14, 2008 final deadline. So while we're bullish on our prospects in this state, given all the uncertainty, we continue to expect growth in California of about 3.5% for this year with a wide confidence interval around that number. We expect this growth will occur in the second half of the year, with the second quarter's premium growth that is still negative in the low to mid-single digits.
In Florida, in Georgia with the actions we've taken to improve underwriting results; we expect premiums to be flat to down this year. In Pennsylvania, with relatively low market shares in our targeted urban zones and a strong showing in the first quarter; we expect mid single-digit growth. In Texas, we're building momentum with our programs and brand and with a strong first quarter, along with an extra boost from electronic enforcement beginning of the summer; we look to grow low double digits this year. Connecticut, as mentioned, will be down in '08 as we continue to address poorly performing business with upward rate adjustments. Growth in Arizona premiums is another difficult guess, given all of the anti-immigration sentiment there. At this point, we're targeting 0% to 3% growth. For all of our urban zones, we're expecting premium growth of 3% to 5% for 2008. This is down slightly from the 5% to 7% growth expectation we discussed last quarter.
Another area of potential growth in 2008 is our commercial vehicle business. Last year, we wrote $37 million of CV at a very attractive combined ratio. But we shrank the book last year as we retooled the program. The first quarter premium growth was up 6.5%, so we're now building a little momentum. So in 2008, we plan to grow this book about 10% to 15% to $40 million to $45 million. Offsetting the growth in target urban zones in commercial vehicle will be a decline in business in the non-urban areas. Personal auto premiums in non-urban zones in focus states are expected to decline in 2008, although we are taking tangible actions to retain profitable business there. In addition, as mentioned earlier, we expect a continued decline in our maintenance state premium volume in 2008 as we seek to retain only profitable pockets of business in these areas.
In total, we're expecting premium growth in 2008 to be in a range from minus 2.5% up to plus 2.5%. As we mentioned last quarter, most of this growth is expected to occur in the second half of the year. In fact, the second quarter is likely to be down low to mid single digits for some of the same reasons I described earlier. Our annual premium projection is down slightly from our forecast last quarter, even though we actually beat our premium plan for the first quarter of this year. I'm simply less optimistic about our overall growth prospects, given the weakness in the economy in general, and California in particular.
From an underwriting standpoint, we expect our overall accident year combined ratio to be 96.5 to 97.5. This is up from the 2007 accident year combined ratio, but consistent with what we experienced in the first quarter. This is up also a half a point above the guidance we gave you last quarter. Other key assumptions include a 4.7% book return on investments and effective rate of 32% and about 250,000 of remaining charges for the completion of our cost under consolidation. Investment yield assumption is lower than the 5% we discussed last quarter, given the recent decline in market rates for high quality balance [ph]. And the effective tax rate is lower than 2007, given a greater portion of our earnings now comes from tax-sheltered municipal bond interest. All this should generate operating EPS of $3.05 to $3.35 for 2008.
I will now 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 2008; slide six summarizes Infinity's financial performance for the quarter. My discussion of the results is summarized on slide seven and eight, so let's first turn to slide seven.
Infinity's quarterly revenues were down 9.3%, primarily as a result of the 8.2% decline in earned premiums. Earned premiums were down as a result of the decreases in written premiums in the second half of 2007 and the first quarter of 2008. As Jim has discussed, gross written premiums were down for quarter, falling 16.8%. Investment income for the quarter was down $1.6 million over that of the first quarter of 2007. The average investment balances have decreased about $68 million or about 5% as a result of the $100 million ASR executed in September of 2008. Book yields of the fixed income portfolio were down 13 basis points, as compared with those of the first quarter of 2007 as a result of the general decline in market interest rates for high-quality bonds. At March 31, 2008, book and market yields on the fixed income portfolio were 4.86% and 4.58% respectively.
Duration on the fixed income portfolio was 3.6 years; slightly higher than the 3.3 years at the end of the first quarter of 2007. Regarding the investment portfolio, our sub-prime and Alt-A exposure remains modest. Our investment portfolio contains 13 securities or about $24.2 million of sub prime and Alt-A securities. Of these securities, all but one are AAA rated and the one that isn't is AA rated. These are the same 13 securities we held last quarter. Market values on these 13 securities fell about $1.7 million since December 31, 2007. These 13 securities represent only 2% of our total fixed income portfolio, so exposure is very, very small.
In general, our fixed income portfolio is a high quality portfolio with an average credit quality rating of a AA plus. Less than 10% of our total portfolio is categorized in the FAS 157 as level 3 securities. But you don't have to take our word for the quality of the portfolio. Beginning this quarter, when we file our 10Q, we will post to our IR web site a list by QCIP of our entire consolidated portfolio. This way you could see exactly which securities we own so there are no secrets.
Turning to slide eight, in regards to profitability as Jim has discussed, operating profits were solid in the first quarter. Operating income was $0.92 per share for the quarter. This compares to $1.05 for the first quarter of 2007. Underwriting results for the quarter fell $6.2 million as a result of a decline in earned premiums and an increase in the booked accident and period combined ratio.
As Jim mentioned, we are currently booking the accident period, a combined ratio to a 97%. We booked last year's first quarter at a 92.9% accident and year combined ratio for the quarter. As Jim pointed out, that turned out to be about 2.5 points too low or $6.4 million of underwriting profit which was adjusted in the second quarter of last year. Offsetting this was a $5.9 million release of redundant reserves on the old Great American assumed book of business in the first quarter of this year, as compared with the $1.1 million release of redundant reserves on the non-standard book in the first quarter of 2007. Excluding these items, the accident year combined ratio through March is running at about a 97, which is about 1.6 points above the 2007 accident year combined ratio developed through year end 2007 of the 95.4%.
Catastrophe losses for the first quarter of 2008 were only $174,000 as compared to $226,000 in the first quarter of 2007; so very, very little catastrophe losses. Also included in this quarter’s figure is about $333,000 of pre-tax charges for our service center consolidation efforts which began late last year. We would expect another $250,000 of pre-tax charges in late 2008 or early 2009 for the completion of this. These future charges, for the most part, represent the sub-lease losses we are expecting to incur when the remaining excess space is freed up and Alpharetta. When these charges will occur will depend on when we can free the excess space up for sub-let. The overall effective tax rate for the quarter was about 32.5%. The effective operating tax rate for the quarter was 31.9%. I would expect the effective tax rate on operating income for 2008 to be around 32% to 32.5%. This rate is down from the 33.5% in 2007, since a greater portion of our investments are now invested in tax-exempt municipal bonds and in turn a greater portion of our operating income will be sheltered from federal income taxes.
Regarding share repurchases, in October 2007 we announced a new $100 million accelerated repurchase plan with the intent of executing within 90 days. Again this is no news. We talked about this last quarter, so this is an update on that. So we executed on the ASR in September 7 with the purchase of 2.55 million shares of Infinity common stock under an accelerated share repurchase plan.
Mechanically, the way the ASR works is that our broker Lehman Brothers, borrows 2.55 million shares from the marketplace and on September 7 of last year, we purchased those shares for $100 million on an average price of $39.14. Then from October 2008 until June 16 of this year at the latest, using this $100 million; Lehman will repurchase in the open market 2.55 million shares to replace those borrowed. At the end of that period, Infinity will true up, if you will, the price per share paid for the 2.55 million shares based on the market volume weighted price or VWAP Infinity's stock traded for over the six to eight month period of time. If that market volume weighted price is higher than the $39.14, we will pay the difference, if lower we will receive the difference, whether in shares or in cash at our election. We were able to buy a caller [ph] on a portion of the 2.55 million shares in order to limit our exposure to a run up in the price. To date, through April 18 of this year, Lehman has repurchased 2.02 million shares at an average VWAP of $39.77; so they're slightly above the initial amount settled.
During the time Lehman is in the market to purchase the 2.55 million shares in total, so as not to disrupt Lehman's efforts, Infinity is permitted under very limited circumstances, but it is permitted to execute on the October 2007 repurchase plan. Once Lehman has completed their purchases under the ASR we and Board will evaluate additional share repurchases at that time. In fact, under the 2006 repurchase plan, we still had $55 million of unused capacity to repurchase shares through the end of this year.
Regarding capital adequacy, we continue to have adequate capital to support either future growth in the business or to fund additional share repurchases. A little bit of good news, on April 18, we received an affirmation of our ratings from Standard and Poor's rating agency and in their report they describe us as strongly capitalized.
Our debt-to-capital ratio is 24.6% below the 30% required by rating agencies to maintain our current debt ratings. Our adjusted debt-to-capital ratio, which includes an adjustment for operating leases is 30%, or below the 35% ratio required by the rating agencies to maintain [ph] current debt ratings.
With our current statutory capital levels, insurance companies are currently writing the business at 2.1 premium-to-surplus ratio; below the 2.25/2.5 times surplus needed to maintain the current AM Best rating of an A. The holding company has $185.1 million of cash in investments which is available to infuse into the insurance company, should they need additional capital or to do additional share repurchases in the future.
By the way, we paid a dividend from Infinity Insurance Company in March 31 of this year of $17.5 million to the holding company. So that contributed to the $185 million that I described earlier. Also the full year 2008 ordinary dividend capacity for the insurance operation is about $79 million. In short, we are well-positioned with current capital to support future growth of the business or share repurchases, depending on the need.
So this concludes our formal presentation. So, at this time, we'd like to open it up for questions.
Questions-and-Answer Session
Operator
(Operator instructions). And your first question comes from the line of Mr. Charles Gates with Credit Suisse. Please proceed.
Charles Gates – Credit Suisse
Hi, good morning. I have two questions. My first question; I'm looking at the announcement, your news release of February 11 where basically you have claimed that you had this $9.5 million liability that had come up. What is the likelihood of more claims of that character?
Jim Gober
Charlie that was a 1994 claim that had been sort of an ongoing litigation process that had taken place for a number of years. It was an old claim that was handled by one the companies that were part of the IPO from the American Financial Group. So, while there are never any guarantees that it won't happen again, I can't tell you that in terms of extra contractual exposures, we have a group of individuals that are extremely experienced and certainly on top of any issues of that nature. We take special care in terms of claims training of all of our staff in terms of responding to any things plaintiffs’ attorneys may do to try to set a company up, such as time limit demands, our coverage things that they may try. So we feel like we're in pretty good shape. We don't share specific numbers publicly, but we have downsized those cases, those problematic type cases quite a bit over the past five years and feel pretty good about where we are at today. But again Charlie, there are never any guarantees, certainly not in the state of Florida for that matter.
Charles Gates – Credit Suisse
And there is no specific number you can share with us, specific to the magnitude of possible further liability there?
Roger Smith
On that particular case?
Charles Gates – Credit Suisse
No, on those types of cases. I'm worried about the one tomorrow as opposed to the one yesterday.
Roger Smith
We don't share the numbers publicly, but we review these, actually monthly with a group of not only the accounting folks and legal folks, but Jim and the claims folks are involved, and we over the last – even before five years but certainly over the last five years as a public company, we have strengthened significantly the controls around these processes, including the monthly meetings. But in event of a case becoming bad, say we have an alert system for any case that looks problematic, whether it be from a severity standpoint or from a claims handling standpoint. So again, you never say never – no guarantees; but we feel very, very good about the process. So, we continue to look for ways to improve it but we feel very good about the controls we have in place.
Charles Gates – Credit Suisse
My second question, and this is my last one. On page two of your news release it says, as a result of our higher than expected combined ratio in the first quarter, we have reduced guidance. If you were to speak as to what was the principal reason for higher than expected combined ratio in the first quarter, how would you answer it?
Jim Gober
Yes, Charlie, I think it's a combination of several things; California more than half of our book of business there. If you look at the first six weeks, historic rainfall that I mentioned I think in my prepared remarks. We've even seen more comp claims, the spontaneous-combustion type claims, mysterious disappearance, thefts, a rise in those claims; again even some vandalism when a car is repossessed. We've seen a rise in those types of losses, not just in California, but other areas. I think it's economically related. I mean people are strapped in terms of their budgets. I said that again in my remarks. And as a result of that, you're seeing some of that as well. And when you look at the trends, certainly we mentioned in great detail, we do this every quarter, but we mentioned in great detail the PCI fast track trends. Certainly they're on the rise. Overall loss costs are on the rise and we compare that with the Infinity trends in the first quarter and we're seeing a rise in the overall costs as well and it's all related. All of those things have an impact on it. And when you look at rates and what happened to rates, again a state like California we implemented that rate reduction that was effective January 1 of this year; and you combine all of that together, I think it certainly explains the combined ratio for the first quarter of this year.
Charles Gates – Credit Suisse
On the spontaneous combustion, what is that? Somebody torches their car?
Jim Gober
Yes, we joke about it Charlie, but someone is behind on their payments and the car either has mysterious disappearance, it's stolen, they have someone steal it or they set the car on fire. And we check with our claims operation after every quarter, but we have seen a rise on those types of losses. Again, we have a very experienced SIU staff and people that know these urban zones where we write business. But you still having to deal with it. The vandalism is something else, I mean the vandalism, you pay the claim. You're dealing with the leanholder at that point; they repossess the car and you have an obligation to them legally, contractually to make that car whole again. So those you can't do anything about.
Charles Gates – Credit Suisse
Do you think you would have more of these spontaneous combustion-type claims then say in Allstate because you [ph] work with people who have lesser income?
Jim Gober
Well Charlie, if you look at southern California for instance, and if you look at what's happening there in terms of the economy and if you look at our book of business; we write a lot of service people. We write a lot of people that are in the construction industry. And when you do that, and when times are tough and people lose their jobs, certainly in terms of our book of business; I think we probably experience a little bit more than the state of preferred companies. I think people there are more affluent, can certainly continue to make their payments on their automobiles and mortgages. Although with gas prices continuing to climb, I may change my mind about that. But I think for our share [ph] overall; in all honesty, we probably get a little bit more of it than standard preferred markets.
Charles Gates – Credit Suisse
Thank you.
Jim Gober
You're welcome.
Operator
Your next question comes from the line of Mr. Mike Grasher with Piper Jaffray. Please proceed.
Mike Grasher – Piper Jaffray
Good morning, everyone. Jim, it sounds like, just following up on Charlie's question that I guess the change in paid losses and year over year and the increase in the loss ratio from the urban zones, there is no any specific zone or any specific event or events that occurred, it's more spread across geographies as well as events. Is that fair?
Jim Gober
I think that's a fair statement. But again, it's not something that we're ignoring. I know we adjusted guidance in the first quarter, but we also talked extensively in our prepared remarks about all the rate adjustments we're making. If you look at Connecticut, Florida, Georgia; pick a state, regardless of which one, including California where we're doing some things to try to tighten up and improve our results there. We're very proactive in terms of aggressively raising rates or tweaking underwriting standards, telephone class checks; those types of things to help improve results. But I don't know that you can point to one specific urban zone and say, it's different here versus some other urban zone.
Mike Grasher – Piper Jaffray
Okay. And then with loss costs you went into great detail as you mentioned on the loss costs rising here. Have you adjusted your multipliers or assumptions on reserving?
Roger Smith
Yes, we have and we review the reserves every quarter and so yes, we have.
Mike Grasher – Piper Jaffray
Okay. So it's safe to assume that those are going higher than in terms of your generally conservative nature?
Roger Smith
We consider those as we reserve for them, and certainly reserves will go higher depending on where the volume of the business goes. But (inaudible) factors, yes.
Mike Grasher – Piper Jaffray
Okay. I think Jim, in your opening remarks you mentioned, it sounds like you're going to put more people on the ground in Florida in terms of looking or fighting claims. Does this imply the DLAE [ph] may go a bit higher here as we go forward in 2008 or is there that much of a difference?
Jim Gober
Not really. I think that the bolstering of claims is really in the Miami urban zone. We really kicked Miami off last year and we had a staff, a small field staff in Miami; but as we learned as we wrote more and more business, we found out very quickly that as a new market, these fraudsters will try to take advantage of you. And you need to have a solid SIU fraudent staff. We've added a very, very capable attorney, house counsel for Infinity in Miami; and we added to our other field staff as well. So we feel good about it, and given the average premiums in Miami, that helps offset certainly the higher costs associated with this type of field operation, as well. But it's primarily might been a Miami issue for us, not something that was a problem in the other urban zones of Orlando, Tampa and Jacksonville.
Mike Grasher – Piper Jaffray
Okay. And then switching gears here over to the CV, you mentioned California and Texas. How is the competition in those states, in particular Texas; and how have your changes on your program been accepted? I mean you've certainly seen some fair growth here, but it is something as you look longer term that you would expect to really grow this book of business?
Jim Gober
Yes, I think for Infinity, traditionally we have been an underwriting company on CV versus other companies out there that we compete against. That primarily had software for the independent agents such that they could rate the risk right on their desktop. So for Infinity for us, for a number of years, on many risks you had to call up and get approval before you could bind the risk and often times if it was a small fleet you have to go through an underwriting process and review. And who knows? It could take from three days to 30 days. And what we've done is, when I mentioned that we’ve retooled the program. Our CV staff basically changed the rating plan for commercial vehicle for us to make it a rating pricing plan, not an underwriting plan. What that means is just about any risk within our acceptability range, we've got a price for it and you can get that price at your fingertips from the independent agent such you can bind it right there on the spot.
Roger Smith
Keep in mind that this is the target business here is pretty straightforward. It's susceptible to that kind of approach. It's not heavy machinery, it's not dump trucks; stuff that would probably need a heavier underwriting look, but it's certainly more this type of business that we're talking about very small fleets; maybe one to two vehicles in a fleet on average, maybe three or four; but no more than 12. And you can get very susceptible to that kind of approach.
Mike Grasher – Piper Jaffray
And it's primarily short haul, right?
Roger Smith
Yes.
Jim Gober
Yes, we're very optimistic about it Mike. We think it's got some great potential and we think our staff has done a great job in getting that program retooled. And again when you look at California or Texas, those are two states with a lot of opportunity, we think.
Roger Smith
You look at small business owners and often time you'll – in places like southern California you'll see Hispanic-owned businesses, which dovetails very nicely into what we're doing in nonstandard personal auto side.
Mike Grasher – Piper Jaffray
Okay. Thank you very much.
Jim Gober
You're welcome.
Operator
Your next question comes from the line of Mr. Doug Mewhirter with Ferris Baker. Please proceed.
Doug Mewhirter – Ferris, Baker Watts
Hi, good morning. A question about the combined ratio. First of all, I noticed that while the loss ratio might have ticked up a bit, the expense ratio seemed relatively low. I was wondering if there was any conscious change or was it a structural change to commissions or have you made some cost cutting in that line?
Roger Smith
The call center consolidation going into the soft market, it probably couldn't have happened at a better time. Just from an expense standpoint and it's always difficult to consolidate and to have to let folks go, but from an expense standpoint it certainly benefited us. In addition, one of the things that hurt us in California was that given the state of the economy, we tightened up our payment plans and in that expense ratio, on a GAAP basis are also charge offs. And our charge offs are not going up materially because we've taken those kinds of actions. So the combination of those and as you know, we continue to look for ways, little ambit ways to maintain or reduce expenses.
But this quarter I think you're seeing the fruits of our labors regarding the call center consolidation.
Doug Mewhirter – Ferris, Baker Watts
Okay. Thank for that. With regard to the loss ratio in California in particular, how much do you think that mandated or rate decrease in California that 10% decrease has been really priced in or earned in? I realize that you have some a lot of policies written prior to January that are still earning out. I was wondering how much you think you have to get in terms of distance from the target, are you 50% of the way or 75%?
Roger Smith
Keep in mind, the rate decrease was effective January 1. Now the first quarter is disproportionately larger than the other three quarters of the year, but again because the rate impact was only January 1, 2008, only a portion of that is earned in. So we still have the remaining impact of that over probably the next three quarters.
Doug Mewhirter – Ferris, Baker Watts
Okay. And just– I'm sorry, refresh my memory; I know you've mentioned this before, do you primarily write 6 or 12-month policies in California?
Roger Smith
12 month.
Doug Mewhirter – Ferris, Baker Watts
12 months, okay. And then my last question is regarding maintenance states. I noticed you had restated some of your results for your maintenance states and it looks like you had shuffled around, you had removed – it appeared you had removed states from one category and put them in another. Could you name that state or say how much of that magnitude whether they came from a focus state to a maintenance state or vise versa?
Roger Smith
Virginia was an example of one we moved from a focus to a maintenance state. The volume was not very significant, and Missouri is another one; again it does not mean that these will not come back to a focus state, but what we have going in the other states in terms of 20 urban zones – we've got 22 urban zones. We certainly have our hands full there. So while we're trying to maintain that book, and as Jim mentioned, retain profitable business; the focus is in the focused urban zones.
Doug Mewhirter – Ferris, Baker Watts
And just a follow up with that last question. I realize that personal auto policies are very – it’s a very quantitatively driven, price-driven business. And a lot of the – there are very few things left to chance when underwriting one of these policies. But are you concerned about, in your maintenance states and in your other states where you might be getting some adverse selection where whatever marginal amount of underwriting information an agent might have, he may go the wrong way because maybe you're not paying as much attention to that agent as before and he's trying to maybe favor his better companies that are I guess giving him more business?
Roger Smith
These states actually perform probably a little bit better given new business typically runs a higher combined ratio than renewal business. But we have a dedicated group managing these states and that includes agency management. So we get reports, even on these maintenance states to make sure that no agent is running a temperature, if so we'll address it immediately.
Doug Mewhirter – Ferris, Baker Watts
Okay, thanks; that's very helpful. That's all my questions.
Jim Gober
Thank you.
Operator
Your next question comes from the line of Mr. John Gwynn of Morgan Keegan. Please proceed.
John Gwynn – Morgan Keegan
Thanks. Jim, Florida was down as a state for the quarter. Was the Miami book up though?
Roger Smith
Let's see John, I think we've got that. I think it was up, yes.
John Gwynn – Morgan Keegan
Okay. Just roughly, what is the size of that book?
Roger Smith
First quarter it's about $6.5 million.
John Gwynn – Morgan Keegan
Okay. And Jim, can you just give a few comments on San Diego, one of your new relatively new urban focus markets?
Jim Gober
Yes, we had San Diego as a target with a January 1 revision and we've improved I think in terms of our market share in San Diego versus 2007, although we haven't had the positive impact that we would like to see there. Now having said that, our second program that's effective May 15 next month in California, based on some of the market basket comparisons that I've looked at, will help us a little bit in San Diego and allow us to get more market share there, especially in the Hispanic market. We've got claim infrastructure, we've got marketing business development staff there today, so we want to take advantage of it. So, I think the second program is going to help us quite a bit. And as I mentioned earlier John, finally a few companies in California; certainly San Diego included in that, have started to raise the minimum mileage requirements and do some things that will permit us to be more competitive in areas like San Diego and other urban zones that I think are going to help us out quite a bit.
John Gwynn – Morgan Keegan
Okay. And also Jim, this is my last question. In your annual report, not the K, but that shareholder report that you put out; you briefly mentioned an experiment I believe it's in Arizona with a direct platform.
Jim Gober
Yes.
John Gwynn – Morgan Keegan
Number one, have you heard from your agents on that?
Jim Gober
Actually we have heard from agents on that, John. We are writing some business on a direct basis in the Internet in Phoenix. We've had some pretty good results so far. But we've also talked to agents about helping them expand our operation and write on the Internet as well. So what we're doing on a direct basis is something that we think is going to give us some knowledge that we can transfer to the independent agent, help him compete at that same level because we've got certainly in Phoenix quite a few agencies that do a lot of TV advertising and in the process of doing that advertising, they would like to reference a web site where someone that sees the ad can go and get a quote and we've got a pretty good project going on where we're going to help independent agents do just that and it will be rolling out this summer. So again, the experiment for us has been just that. It's been an experiment to learn more about that business and again to use that information to help our agents be more competitive.
John Gwynn – Morgan Keegan
Right. So you’d view this or characterize it more as coop program than a Progressive direct, for instance?
Jim Gober
Well, at this point it's just peanuts. We certainly couldn't – yes I mean I would characterize it that way, sure.
John Gwynn – Morgan Keegan
Is this minimum limits business?
Jim Gober
Actually, no. It's more of a standard play. What we're finding out is that people that purchase over the Internet are certainly price driven, there's no doubt about that. But often times they'll purchase limits maybe a step or two above the minimum limits. A lot often times, they're younger, they're probably 25 to 35 on average as well. So, just a little bit of a different client than what we would probably write to the independent agency channel. But again, for the independent agent it could open up some avenues for him to tap into that market as well.
John Gwynn – Morgan Keegan
Good. Thanks. I appreciate it.
Jim Gober
Sure.
Operator
Your next question comes from the line of Mr. Mike Grasher with Piper Jaffray. Please proceed.
Mike Grasher – Piper Jaffray
Okay, just a couple of follow ups here. Yesterday there was a pretty big transaction that occurred in the M&A environment within the insurance industry, just wanted to get some perspective from you in terms of what you're seeing or if you're out looking and what areas you might actually look to enhance, whether it be geography or just even thinking about the commercial vehicle question earlier; I mean would you like to see more scale there?
Jim Gober
I would certainly like to write more CV business, Mike. That's been something on my mind for the past couple of years. Honesty, we've actually ignored the CV product until we got a staff pulled together that's focusing on it. So, that's a particular product line that is of interest to me. I mean there's no doubt about that. In terms of geographic expansion areas where we're not today; I mean if we're going into an area in Chicago; is a good case in point, where we could acquire some expertise, especially claims expertise and that's something that we've been open-minded about. As a matter of fact, before we opened up Chicago, we looked at a couple of opportunities there to try to acquire maybe a small book of business with claim expertise that could help us be more effective earlier on. So those types opportunities are things that we are certainly open-minded about.
Mike Grasher – Piper Jaffray
And just given yesterday's valuation on that; does that – is it a case where you are seeing some opportunities but the bid ask spread is such that you just can't get close?
Roger Smith
It certainly doesn't help when you look at an acquisition that Liberty Mutual announces they're going to pay 1.8 times book value. And coming off of five years of fairly decent results, folks typically want a full price, even though you know the soft market is here and continuing. So it does make it challenging.
Mike Grasher – Piper Jaffray
Okay. Thank you very much.
Jim Gober
Welcome.
Operator
I'd now like to turn the presentation over to Mr. Jim Gober for closing remarks.
Jim Gober
Well, thank you very much, everyone for joining us today and we look forward to the second quarter. Have a good day.
Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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