SeaBright Insurance Holdings, Inc. Q2 2008 Earnings Call Transcript

SeaBright Insurance Holdings, Inc. (SEAB)

Q2 2008 Earnings Call Transcript

July 22, 2008 4:30 pm ET

Executives

Phil Romney – VP, Finance and Principal Accounting Officer

John Pasqualetto – Chairman, President and CEO

Rich Gergasko – EVP

Analysts

Mike Grasher – Piper Jaffray

Matt Carletti – Fox-Pitt Kelton

Bijan Moazami – Friedman, Billings, Ramsey & Co.

Presentation

Operator

Good day and welcome everyone to the SeaBright Insurance Holdings second quarter 2008 earnings conference. (Operator instructions) It is now my pleasure to introduce the host for today's call, Mr. Phil Romney, Vice President of Finance, for SeaBright Insurance Holdings. Please go ahead, sir.

Phil Romney

Thank you, Melisa [ph] and welcome to SeaBright's second quarter 2008 conference call. Joining me on the call today are John Pasqualetto, Chairman, President and Chief Executive Officer, and Richard Gergasko, Executive Vice President.

Before I turn the call over to John for opening remarks, I'd like to remind you that statements made during this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks.

SeaBright's future results may differ materially from those anticipated and discussed in forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the press release issued today and in SeaBright's filings with the SEC. We refer you to these sources for additional information.

I’d also like to point out that remarks made during the conference call are based on information and understandings that are believed to be accurate as of today's date, July 22nd, 2008. This call is the property of SeaBright Insurance Holdings, Inc. Any distribution, transmission, broadcast or rebroadcast in any form without the express written consent of the company is prohibited.

With those announcements complete, I give you John Pasqualetto. John?

John Pasqualetto

Thanks, everyone, for joining us for today’s earnings conference call. You know there’s quite a bit of noise in the second quarter, so we want to make sure that the investor community understands our results. So, we hope, we’ll explain that in some more detail. Having said that, for the second quarter SeaBright reported total revenues of $61.8 million, an increase of 1.8% over the same period in 2007. During the quarter, we posted net written premiums of $63 million, compared to $63.6 million in the same period last year, a very slight decrease. Also during the quarter, we achieved a gap net combined ratio of 88.6.

The environment that shaped SeaBright’s second quarter and not too similar to previous three quarters was marked by a softening market, more aggressive competitor pricing and unfavorable general economic conditions. Clearly SeaBright continues to be impacted by the soft market and the competitive pricing pressure. Adding to these challenges is the continual decline in growing uncertainty surrounding the U.S. economy. Prime example of this has been a general slowdown in construction, which as you know is an important customer segment for us.

More so than in any other quarter, we witnessed an increasing number of our existing competitors pricing business at levels we deem inadequate and ultimately unprofitable. In many instances, SeaBright has chosen to simply walk away from the potential business opportunities when a reasonable profit cannot be expected, and we are prepared to continue this in the future. This pricing behavior tends to dampen our new business results more so than renewals where our service model can compensate for some price differences. From this backdrop, the natural questions include, how long can we expect the soft market conditions to exist, and where, what is SeaBright’s long-term prospects? While it would not be prudent for me to predict the tiring of the end of the current market cycle, I’m fully prepared to address SeaBright’s prospects.

First and foremost, SeaBright’s operating (inaudible) to make an underwriting profit regardless of where we are in the underwriting cycle. To do so, we must adhere to tenants cemented in sound insurance business practices, those that we believe in. These are disciplined underwriting, superior customer service, and customer specialization. I’m proud to say that we continue to excel in each of these areas. As evidenced in the past few quarters, we have demonstrated the necessary restraint to avoid bidding on unprofitable business. We have not, and will not get caught up in the pricing game, even if it means sacrificing top line growth. While we perhaps don’t speak enough about this area of our business, SeaBright’s forte is customer service. Our medical management services provide highly effective care with this cause. Our loss control and claims services are specifically tailored to our individual customers needs and produce superior results both in terms of helping to avoid accidents and minimizing the financial and human impacts of those that occur.

This extraordinary level and quality of service gives SeaBright the ability to offer real value to perspective customers and in (inaudible) to loyalty in renewal. And finally, we continue to invest in our future. Over the past quarters, we made subsitive investments in enlarging our operating platform including the hiring of seasoned professionals and expanding our product offering in geographic reach. We consider each of these calculated investments necessary to ensure our future success. Our most recent achievements in this expansion efforts was a fully staffed launches of our dedicated energy division in June 2008 as well as maritime Wrap-Up divisions in late 2007. In July 2008, we began offering a limited general liability coverage program. We offered only in conjunction with our Wrap-Up product and only in connection with the sale of Workers’ Compensation line.

Our geo facility is not available to our flow business. Written on SeaBright paper, this enables the Wrap-Up construction project to owner and contractor to ensure both lines of business with SeaBright general liability and workers’ compensation maximizing the savings potential our broadening our available market for these risks. Also late in the second quarter, we launched the alternative markets division, our newest division to carry our niche focused model to the next level. Unlike our existing product division, Maritime, Warp-Up and Energy, alternative markets active seeks opportunities to part in with select managing general agents, who write program business or large numbers of similar risks in a given industry group. This approach further brought us our underwriting appetite, while preserving our ability to focus on how margin is, niches that will offer us opportunities for profitable growth, and add materially to our expanding addressable market. Unlike some other players in this niche, we do not grant underwriting authority to the MGA, and thus we maintain underwriting control.

This new division is headed by Michael Transfaglia [ph], a Fellow of the Casualty Actuarial Society, who is very experienced in the profitable underwriting of these programs. We’ve also hired a proven underwriting manager to assist Mike, as he ramp this new operation. Initial production from this new division is encouraging, and I look forward to providing you updates on these activities over time. In addition, our wholly owned subsidiary PointSure Insurance services recently completed the small acquisition of Black/White & Associates of Nevada and related entities, a managing general agency and insurance wholesaler. Remember in addition to producing 17% of SeaBright’s premiums at 630 [ph] PointSure acts a typical wholesaler for other insurers. Currently, wholesale activity for other insurance company represents only 11% of PointSure’s revenues.

We have strong interest in growing this wholesales segment both organically and by acquisition. We expect that with this acquisition, PointSure will be able to significantly increase commission fee revenues, both through the ongoing operations of Black/White and from cross marketing opportunities between the two entities. Also with consolidation of the two firms, PointSure will have much stronger platform, more markets and an enhanced talent base. We do not expect immediate major growth impact on SeaBright writings since the Black/White book does not include significant workers’ compensation premiums today. Sure, we find ourselves in a soft cycle. We’ve all seen this before. However, this management team is relentless in its pursuit of responsible and appropriate strategies, which serve to continually add the shareholder value. We are built for the long term, irrespective of the cycle. We remain confident that these investments will pay off in the future. You will note that our expense ratio was uncharacteristically high during the second quarter.

I want to provide insight into this development. First, this quarter reflects a typical level of recruitment cost related to the staffing of our newest divisions, which added approximately $900,000 to our usual run rate in this area. That said, we expect this cost to decline dramatically through the remainder of the year. Also, due to the unexpected passing of our former Chief Financial Officer, Joseph De Vita, during the quarter, we incurred a non-recurring charge of approximately $1 million related to the accelerated vesting of stock options and restricted stock. Later in the call, Phil will provide an analysis of these expenses on an earnings per share basis. Finally, our investment portfolio, which has held up fairly well during these tumultuous times, remained strong and sensibly configured to ensure that we have sufficient capital to meet our future claims and other obligations.

At June 30, 2008, our portfolio included $8 million of preferred stock issued by Fannie Mae and Freddie Mac. As a result of the continued deterioration of these securities, we recorded a pre-tax other than temporary impairment charge of $1.9 million or $0.06 per diluted share for the second quarter. First, I would like to point out that this is only 1.5% of our portfolio, a very small portion and two, these investments were typical among insurers at the time when purchased and generally considered at the time secure. I’ll now turn the call over to Rich to provide more information about our operations, Rich?

Rich Gergasko

Thanks John. From our prior conference calls, you'll remember that we measure growth in three ways, premium, number of customers, and amount of in-force payrolls.

For the second quarter 2008, these measurements reflect the reduced rate of growth that John discussed earlier. However, year over year, comparing second quarter 2008 to second quarter 2007, you'll see that our growth rate by most measures exceeded 10%. As of June 30, 2008, SeaBright had in-force premium of $275.2 million with 1032 customers. In-force premium at the end of the second quarter was essentially flat compared to the prior quarter, and up 13.7% compared to the same period last year. The number of customers increased by 5.1% over the first quarter 2008, and 24.2% compared to one year prior.

During the second quarter, our country-wide in-force payroll increased 3.1% compared to March 31st, 2008, and was up 10.3% compared to the same period in 2007. Our California-only in-force payroll was essentially flat compared to Q1 2008, and was up 5.9% compared to the same period last year. Also during the second quarter, our in-force payroll excluding California was up 5.6% compared to the first quarter 2008, and was up 15.3% compared to the second quarter last year. In the second quarter 2008, we renewed 84% of the accounts quoted. This compares to 85% in the first quarter 2008, and 90% in the second quarter 2007. The renewal results for the first two quarters in 2008 are below the 2007 results for the comparable quarters but are in line with our renewal expectations under the current pricing conditions. If a customer did not renew in the quarter, it was most likely result of pricing that did not meet our profitability standards.

Our new business hit ratio for the second quarter was 36%, which was slightly above the first quarter 2008 result of 33%. While the 2008 results are in line with our historical hit ratio of 34%, they are below the 2007 results for the comparable quarters. Year to date through June 30, the 2008 hit ratio was 35%, compared to 43% in 2007. The 2008 results are in line with our expectations and reflect our underwriting discipline in the phase of increased pricing competition in the marketplace.

At June 30, 2008 the average customer size for our in-force book decreased slightly to 267,000 compared to 274,000 at the end of the first quarter of 2008, and 294,000 at June 30, 2007. This reduction is in line with our expectations and is result of the premium decreases experienced in the quarter along with our growth in the states outside of California. This does not reflect a decrease in the amount of covered payrolls, or the number of employees covered for a typical SeaBright customer.

We continue to see premium decreases in virtually all jurisdictions. In the second quarter, our average renewal rate change for State Act business, excluding California was minus 12.1%. For the Maritime jurisdiction, the average renewal rate change was minus 9.3%. We monitor the renewal rate change data very closely and are confident that we can achieve acceptable margins at these premium levels.

In California, the effects of the July 1^st, 2007 rate decrease of minus 14.2% continue to impact our renewal book of business in the quarter. There was no rate filing effective July 1^st, 2008. This is the first time since July 1, 2004 that there was not a mid-year rate decrease in the state. We expect that the WCIRB will file a rate increase affective January 1^st, 2009. SeaBright remains well-positioned in California and we continue to write business that meets our ROE objectives. Competition trends that are similar to what we've seen in other regions with increased pricing pressure during the second quarter and limited new competition.

At June 30, 2008, California represented 39.1% of our overall in-force book of business, a slight decrease as compared to 40.6% at the end of Q1 2008.

The in-force premium rankings of the next top five states were Illinois at 12.5%, Louisiana at 8.6%, Alaska 6.3%, Texas at 4.8% and Hawaii at 4.5%. Our in-force writings grew by 6.7% in these five states during the first quarter of 2008. Of note by individual state, during the second quarter 2008, Illinois grew by 17% and Florida by 10% over the first quarter 2008.

At the conclusion of the second quarter, the in-force mix of business in our current specialty niche products was as follows, Maritime 20%, ADR 19.4%, and State Act 60.6%; basically at par with Q1 results.

SeaBright currently writes approximately 11% of our total in-force premiums in energy-related business, including both Maritime and State Act coverage. As previously discussed, in the second quarter, we created a dedicated energy division to increase SeaBright's presence in the national energy sector. The division has been fully staffed with seasoned insurance professionals who are beginning to expand our presence in this market segment.

This concludes my remarks. I'll now turn the call over to Phil Romney for a review of our financials.

Phil Romney

Thank you, Rich. For the second quarter 2008, net income was $6.4 million or $0.30 per diluted share, compared to $10.2 million or $0.49 per diluted share for the same period in 2007. Of the $0.30 per diluted share, $0.26 was the result of favorable development on prior accident years ultimate loss estimates, compared to $0.25 for the same period in 2007. Although profits were down in the quarter, our operating fundamentals remained strong. As John mentioned, we incurred several non-recurring and uncharacteristically high charges in the quarter, which accounted for approximately $4 million or $0.13 per diluted share.

During the second quarter 2008, we continued to experience growth in customer account and covered payrolls, which offset price reductions in several jurisdictions. As a result, total revenue increased 1.8% to $61.8 million versus $60.7 million in the year earlier period. Net premiums earned increased to $55.7 million, compared to $54.8 million for the same period in 2007. The net loss in loss adjustment expense ratio for the second quarter 2008 was 57%, versus 52.4% for the same period in 2007. As in past quarters, we completed an auctorial review of our ultimate incurred losses. As a result of this review for the second quarter 2008 on a pre-tax basis, the company recognized $7.9 million of favorable development in prior accident year’s ultimate loss estimates, compared to $7.8 million for the second quarter of 2007. Of the $7.9 million, $6.6 million was for accident year 2007, $1.2 million was for accident year 2006, and $0.1 million was for accident years 2005 and 2004.

The decision to adjust prior accident years’ ultimate loss estimates was due to the continuation of lower-than-anticipated patterns of indemnity in medical payments. Approximately 52% of the second quarter 2008 reserve release related to our California business. The loss and loss adjustment expense ratio including the USLNH 8F assessment for accident year 2008 was 63.8% for the second quarter and 64.1% year to date. The net earned premium for the calendar year includes negative premium adjustments relating primarily to retrospectively rated policies from prior years such that accident year 2008 net earned premium is greater than the corresponding calendar year premium.

Total underwriting expenses for the second quarter of 2008 were $17.7 million compared to $14.7 million in the prior year period, and the net underwriting expense ratio was 31.6% compared to 26.8% in the same period in 2007.

As discussed in previous calls, our underwriting expense ratio, which has ranged from a low of 25.3% to a high of 31.6% over the last four quarters, has trended up as we've made strategic investments in human capital necessary to support our geographic expansion and entry into additional Workers' Compensation niches. Also included in the second quarter 2008 was $1 million charge related to the acceleration of stock options and restricted stock held by our former CFO at the time of his passing. These charges accounted for 3.7 points of our underwriting expense ratio in the quarter.

As John discussed, we will continue to make future investments in our business, including talent, geographic expansion, and new product introductions. We believe these investments are fundamental to SeaBright’s long-term success and will require time to gain traction and generate income in excess of the cost that we incur in the short term. Over time, we expect our expansion investments to become meaningful contributors to our success.

The net combined ratio for the first quarter of 2008 was 88.6%, compared to 79.2% for the similar period in 2007, still a very strong result. The increase over 2007 was primarily the result of our elevated underwriting expense levels, and the reclassification of calendar year 2008 negative premium adjustments to prior accident years.

Net investment income for the second quarter was $5.6 million, up $703,000 or 14.3%, compared to $4.9 million for the same period in 2007. The increase over 2007 was primarily due to the increase in invested assets of $89.2 million or 19.8% from June 30, 2007.

As of June 30, 2008, approximately $276 million or 56.4% of our fixed income portfolio was invested in municipal bonds, of which $273 million were tax exempt. The effective duration of the fixed income portfolio was 5.13 years with a weighted average life of 5.92 years, and a tax equivalent book yield of 5.42%. For the quarter, we invested new money at an average pre-tax book yield of 3.79%, consistent with our conservative approach.

The fixed income portfolio had an average credit rating of AA at June 30, 2008.

Similar to the first quarter of 2008, we have no direct exposure to subprime mortgages and approximately $1.4 million or 0.3% of our total investment portfolio in indirect subprime exposure.

At June 30, 2008, we had $497.6 million in fixed income securities and preferred stocks. We regularly review our investment portfolio for other than temporary impairment declines in fair value, considering among other things, the underlying credit quality of any insured or uninsured bonds. Net realized losses in the second quarter of 2008 included a pre-tax charge of $1.9 million or $0.06 per diluted share related to other than temporary impairments of the company’s $8 million investment in preferred stock issued by Fannie Mae and Freddie Mac.

As of June 30, 2008, the overall credit quality of our $276 million fixed income municipal portfolio, including secondary insurance stood at AA/AA-. With secondary insurance removed, the average rating of the municipal portfolio would be AA-.

As of June 30, 2008, the company had $205.5 million in insured municipal bonds with a weighted average credit rating of AA/AA- and an underwriting rating of AA-. We also had $70.6 million in uninsured municipal bonds with a weighted average credit rating of AA/AA-.

At June 30, 2008, the company had $2.8 million invested in collateralized mortgage obligations, $2.2 million in adjustable rate mortgages, $13.1 million in asset-backed securities, none of which were subprime and $8 million in preferred stock and $9.8 million in debt securities issued by Fannie Mae and Freddie Mac.

At June 30, 2008, book value per share was $14.61, up 1.2% from $14.44 at March 31, 2007. Tangible book value per share at June 30, 2008 was $14.42, up from $14.24 at March 31, 2008.

Our statutory surplus at June 30, 2008 was $269.8 million.

I'll now turn the call back to John for some closing comments.

John Pasqualetto

Thank you, Phil. Before opening the call to questions, I'd like to leave you with the following thoughts. First and foremost, I’m pleased with our performance in our results particularly in light of the difficult market and the economic environment. While the top line didn’t grow at the rate that investors had come to expect from SeaBright, the growth that we achieved was accomplished due to sound profitable underwriting discipline. I can assure that SeaBright will not chase top line growth, that it means risking underwriting profits. Second, we will continue to invest in our future, prudent [ph] investments in people, products and infrastructure are strategic and necessary to bolster our overall market opportunities in the long term. And finally, despite competitive pressures, the consistently superior quality of our customer service continues to ensure strong customer retention and enhances our reputation in the business communities we serve. Smart insurance buyers know that cheap insurances no bargain in one’s safety and vigilant claim in medical managements are compromised. We believe that SeaBright’s reputation for service excellence will continue to enhance our prospects during the current soft market and ensure long-term success.

With these remarks complete, I would like to remind you that the company will not be providing forward-looking earnings guidance, and thus will be unable to address questions pertaining to the subject.

Operator, please open the conference call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We take our first question from Mike Grasher with Piper Jaffray.

Mike Grasher – Piper Jaffray

All right, good afternoon gentlemen.

Phil Romney

Hi, Mike.

Mike Grasher – Piper Jaffray

First question I wanted to go back to Phil was when you were addressing retrospective premiums, could you go over that with us again? I was just looking over model and that didn’t look like the premium earned was just like bit – and I just wanted to know that was part of it?

Phil Romney

Yes, we had about – are you referring to the adjustment to prior accident years?

Mike Grasher – Piper Jaffray

Yes.

Phil Romney

Yes. We had about $4 million roughly in calendar year 2008 earned premium that related to prior accident years. So, in our analysis by accident year, we carried that premium, these were negative adjustments to earned premium. We carried those adjustments back to the prior accident years, so that they could properly be reflected in those years. It’s really the noise [ph] if you will that’s introduced by primarily the retrospective adjustments.

Mike Grasher – Piper Jaffray

Okay.

John Pasqualetto

Those adjustments, Mike, tend to be negative because the experience has been so good we have tended to return premiums rather than bill additional premiums.

Mike Grasher – Piper Jaffray

Yes, understood. I just was curious if there was any in that number for this quarter, so that’s helpful. Thank you. And then second question John, and just wondering if you could give us, I guess any comments around your latest discussions with AMBS [ph]?

John Pasqualetto

Well, Richard, I made my trip to overlook New Jersey in June and sat down and asked frankly if the reason was twofold, one typically of where we are and what we are doing both practically and strategically, and that went very well, I think. Second was to explore with them their rating approach, specifically with respect to the 160 B card score that they tend to hold this to qualify for A- rating, which as you know in most instances if you look at their rating models would suggest that rating should be like an A or A+. That exploration frankly didn’t end up with much of a different position than we currently had before and that is they will tend to continue to hold us at 160, at least over the foreseeable future, and find that perhaps being something like a year or two. But again we continue to look at that from the standpoint of future meetings and developing and understanding on their part, so that we can eventually get some relief from that higher standard.

Mike Grasher – Piper Jaffray

Okay. And I guess the reason I bring it up is because we have ventured in a little deeper in the soft market and we do have this shares down here around book value, I’m wondering if we might see any sort of share repurchase authorization coming forward or if the agency itself maybe holding you back from exploring that option?

John Pasqualetto

Well, the agency per se hasn’t directed us. So, that’s a fact, and each quarters of the Board and its responsibility for capital allocation does reveal that matter, and that’ll be a continuing review on part of the Board.

Mike Grasher – Piper Jaffray

Okay. Thank you very much.

Operator

And our next question will come from Matt Carletti with Fox-Pitt Kelton

Matt Carletti – Fox-Pitt Kelton

I have something – it looks just by the calculation if you back of the prior accident year that the current accident year loss ratio bumped up a little. Is that reflecting essentially the retro premium from prior years?

Phil Romney

Yes, it is.

Matt Carletti – Fox-Pitt Kelton

The normal rate [ph] for that I guess, do the math it comes out pretty even with the 1Q loss pick [ph] was, is that correct?

Phil Romney

Yes, our loss pick is the same. It’s simply the affect of pushing those negative premium adjustments back to the loss here that they relate to. So, that resulted in increasing the premium in 2008.

Matt Carletti – Fox-Pitt Kelton

Okay. And then secondly on the construction Wrap product specifically the GL, could you talk a little about what reinsurance structure any you will build in around that GL portion?

John Pasqualetto

I’ll ask Rich to handle that for you, Matt.

Matt Carletti – Fox-Pitt Kelton

Thanks.

Rich Gergasko

Hi, Matt, this is Rich. What we are looking at is the couple of different areas. We will be rolling it under our treaty with renews on October 1^st of 2008, so that will be part of the $1 million retention that we have. In addition, we are looking at some coded share options to potentially coded share portions of the first $1 million to reduce our exposure to the GL or potentially we could buy down to $1 million retention to a lower retention if the pricing is favorable.

Matt Carletti – Fox-Pitt Kelton

Thanks. Great. Thanks very much.

Operator

(Operator instructions)We’ll take a follow-up from Mike Grasher with Piper Jaffray.

Mike Grasher – Piper Jaffray

Okay. Thanks. Just wanted to check in the acceleration of fee revenues if you could over that in the quarter here, and is this a new run rate that we can look forward to?

John Pasqualetto

Well, it reflects the fundamental of strategy we’ve adopted to balance our revenues with non-underwriting, non-risk bearing revenues, and these translate for us in terms of two things. One, fees from our managed care operation which we bought as well as these our commissions from our wholesaler. Then we’ve taken small amount of fee that we’ve developed at the insurance company as a result the work that we do for assigned riskful for, the ones they decide riskful and combine those. And we look to grow that as a proportion of the revenue, and then indeed you could see that growth has taken place in the first quarter, those fees represented 2.3% of revenues and in the second quarter they represented 3.2% of revenues. And if you wanted to look at the six-month total, it’s represents about 2.7% for the first six months. We’ll continue to report on that, and eventually when it becomes significant, we’ll begin to provide greater and greater detail around that. As you recall, we did a small acquisition at the end of last year and we completed a small on the wholesale at this time around. We’ve also been willing to express to the market that we are interested in growing that fee business responsibly, and they are likely to be small both [ph] on kinds of things rather than anything of any significance size. But I want to rule it out under the right sort of circumstances.

Mike Grasher – Piper Jaffray

Okay. And then I wanted to just ask a bit about the marketplace in general in terms of the soft part of the market, if you can share with us the lines of business which may be your most competitive or the flip side, the strongest, and then if there was any particular region of the country?

John Pasqualetto

Well, I’ll let Rich handle that again because of our very limited yield offering tat this point. And frankly, it meant that we are really not in the broad GL markets to begin with. I’ll let Rich comment to the Workers’ Compensation competition.

Rich Gergasko

Thank you. On the word comp side, what we are basically seeing is pretty much the same competitors. We may have added one or two new ones in one or so of the regions but it’s really a matter of the company is working pretty hard to maintain their renewals, and pricing their renewals to the point where from a new business standpoint we are not willing to go down to those levels to meet our ROE objectives. So, definitely an increase in the competition for renewals. We’ve also seen that in our own renewal retention where people would come in after our business a little bit harder, but eventually as we said the same players just trying to maintain market share and in some cases increased a little bit and we’ve managed this to a price or business where we needed to continue to head our objectives.

Mike Grasher – Piper Jaffray

Okay. And so then in the first part of your answer there talking about not meeting your ROE objectives, and in a business that goes that way, you are talking about perhaps competitors or policies that were a with a competitor and you are competing on price and end up walking away because perhaps that competitor cut the prices?

Rich Gergasko

Correct.

Mike Grasher – Piper Jaffray

Okay.

Rich Gergasko

For new business that would be the dynamic.

Mike Grasher – Piper Jaffray

Okay. Thank you very much.

Operator

Our next question will come from Bijan Moazami with FBR.

Bijan Moazami – Friedman, Billings, Ramsey & Co.

Good afternoon everyone. Couple of questions, first of all, you alluded in your prepared remarks that you got no price change recommendation from the state of California. In the – for the mid year, and you actually expect the price at the end of the year, would that suggest that the state believes that the business is not producing adequate level of returns state wide, and hence why are they recommending a price increase or might be recommending a price increase?

John Pasqualetto

Well, there’s a couple of things going there Bijan. One part of that increase that the actuarial committee looked at was directly related to a proposal that’s pending with the regular that would increase certain of the permanent disability ratings. And my guess is of – I think they were talking about 10% or 11%. I think of that, 2 or 3 points related purely to that proposed change. The remainder is related to some changes in experience where some of the actual did deteriorate, went up over time but understand those acts (inaudible) were abnormally low to begin with. So, the reality of that is we still believe that California represents a very good market to hit our ROE, but I want to ensure what the Commissioner is going to do in connection with the proposal. But we think there is a increase that is wanted in that. We are going to watch that very closely.

Bijan Moazami – Friedman, Billings, Ramsey & Co

And also recently especially not the economies are slowing down, have you guys seen any change in the frequency of accidents at all specially with larger cases, and I know that your account and the number of accidents you get is relatively limited. But have you seen any kind of significant movement on that relatively small statistical data base in terms of increase in frequency –?

John Pasqualetto

Bijan, I’ll put that question over to Rich because he watches that almost on a daily basis.

Rich Gergasko

Yes, Bijan we look at that sort of on an accident year and a policy year basis at multiple points of development separately for California, states that’s excluding California and then our long shore market. And I can say all three of those different categories we’ve not seen in any type of a significant increase in the frequency over the past two quarters. For the most part, it’s been fairly flat with some minor changes either up or down. But we do watch it very closely because we are so much concerned about that. We’ve not seen an increase there.

Bijan Moazami – Friedman, Billings, Ramsey & Co

Yes. But for most of ’04, ’05, ’06 you’ve seen a big decrease in frequency. Now it’s more like flattish right?

Rich Gergasko

Yes. Right. We are not seeing the same level of decrease that we would have seen in those areas.

John Pasqualetto

The rate of decrease has definitely changed.

Bijan Moazami – Friedman, Billings, Ramsey & Co

Yes. Okay, great. Thank you so much.

Operator

And with no further questions remaining, I would like to turn the call back to Mr. Pasqualetto for closing remarks.

John Pasqualetto

Thank you. Well, in summary, our operating fundamentals has not changed and it remains strong. We continue to build in, invest in our long-term success while recognizing there may be some short-term cause that was evident in our second quarter. We are building for succession in all stages of the insurance cycle, a little natural capital about the insurance business has never been greater, and will serve us well. And finally, (inaudible) insurance company from making an underwriting profit prevails all that we do, and we search for profitable growth opportunities in our chosen markets. Thank you for you time and attention. Look forward to next quarter.

Operator

Thank you for your participation in today’s conference and you may disconnect at this time.

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