Employers Holdings, Inc. (EIG) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2015 Employers Holdings, Inc. Earnings Conference Call. My name is Joyce and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today Vicki Mills, Vice President, Investor Relations. Please proceed.

Thank you, Joyce. Good morning and welcome everyone to the second quarter 2015 earnings call for Employers. Yesterday, we announced our earnings results. And today, we expect to file our Form 10-Q with the Securities and Exchange Commission. These materials may be accessed on the company’s website at employers.com and are accessible through the Investors link. Today’s call is being recorded and webcast from the Investor Relations section of our website, where a replay will be available following the call. With me today on the call are Doug Dirks, our Chief Executive Officer; Steve Festa, our Chief Operating Officer; and our Chief Financial Officer, Terry Eleftheriou. Statements made during this conference call that are not based on historical facts are considered forward-looking statements. These statements are made in reliance on the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent developments. We use non-GAAP metrics that exclude the impact of the 1999 Loss Portfolio Transfer, or LPT. These metrics are defined in our earnings press release available on our website. Now, I will turn the call over to Doug.

Thank you Vicki and thank you all for joining us on our call today. Our second quarter results were very strong. Operating income increased $0.24 per diluted share relative to last year’s second quarter. Our operating return on equity increased over 70% to 8.2%. Our adjusted book value for outstanding share increased 2.4% since the end of last year. I’m very pleased to report that as the result of our underwriting initiatives. Our underwriting results now show a profit. Our combined ratio, measured before the impact of the LPT improved 7.2 points relative to the second quarter of last year and stands at 98.8%. In the second quarter, we again recognized favorable development in the loss portfolio transfer reserves, which includes claims data prior to July 1, 1995. This resulted in a reduction in the deferred reinsurance gain, which impacted our net income for the period. Our strong second quarter results following a solid first quarter, provide clear evidence of our success in containing and largely mitigating the adverse loss experience, which occurred in Southern California in late 2013 and which continues to be a problem for the industry in that geographic location. Our second quarter results reflect a number of continuing trends in our business. Many of which are favorable and stem directly from the strategic underwriting and pricing initiatives we implemented last year. First, our net rate was 10.1% higher in California and 0.7% higher overall in the past 12 months. The double-digit increase in the California net rate was driven by our strong pricing actions in the Los Angeles basin, which flowed through earned premium this year. In addition, territorial multiplier adjustments in California were effective in mid June. In many of our other states, pricing is flat or down as loss costs decline. Second our year-over-year payroll exposure was 13.7% lower in California and 1.7% lower overall. We continue to get more rates for comparatively less exposure, particularly in California. Third, we continue to diversify our business within and outside of California as we decreased business concentration in Southern California and increased policies and premium in other states. This month we entered Michigan as we continued to execute our Strategic State Expansion Program. Our longer-term goal is to be writing business in all of the continental United States, with the exception of the monopolistic states. Four, our policy count retention of 86% in the second quarter continues to increase. And fifth, rate increases continue to outpace increases in loss costs. In consideration of this and the continued underwriting improvements, we again lowered our provision rate for the current accident year losses at the end of the second quarter. This, in turn, drove the ongoing improvements in our underwriting results and reduces our reliance on investment income, which has been pressured due to low yields. We have continued our longstanding conservative approach in reserving for both our current and prior period losses. The decline in our top line experienced in the first quarter of this year flattened in the second quarter. Overall, in-force premium was largely influenced by a 5% year-over-year premium decline in California, resulting from our non-renewal of certain accounts in the Los Angeles area, and higher rate actions resulting in lower new business growth. In California, our year-to-date decreases in both premium and policies have begun to slow and we are driving continued growth in areas outside of the Los Angeles Basin. We continue to experience an increasingly competitive operating environment this year as multiline carriers target workers’ compensation in all of our states. For the remainder of the year, we will also continue our focus on technology, which includes the implementation of predictive analytics, a multiyear modernization of our core policy administration system and recently we announced the launch of our online policy holder portal, which offers more convenience and functionality for our small business owners. With that I’ll turn the call over to Terry.

Thank you Doug and good morning everyone. We delivered solid operating earnings in the second quarter as our pricing and underwriting initiatives implemented over the past year continue to drive improved results, in line with our expectations. Our second quarter combined ratio before the LPT improved 7.2 percentage points year-over-year to 98.8%. We lowered our provision rate for current accident year losses by 7.7 percentage points year-over-year as rate increases continue to outpace increases in loss costs and our underwriting initiatives gain traction. The provision rate for the current accident year was 66.5%. The decline in our provision rate was driven by a number of factors include – including filed rate changes, loss trends, changes in business mix by territory and class, our strategic underwriting initiatives, and the non-renewal of higher loss ratio business, particularly in Southern California. About two thirds of the reduction in loss pick was the result of improved pricing. The remaining third was mostly attributable to non-renewals of poorly performing business in Southern California. It is difficult to project loss trends base slowly upon historical results reflected in the loss triangles in our statutory filings and annual Form 10-K. Recent case reserve strengthening and accelerated client settlement activity, particularly in California, has resulted in increases in paid and incurred loss data when compared to prior years. These elevated loss development data are not expected to manifest in subsequent accident years We’re providing additional information how we select our current accident year loss provision rate in our investor presentation for the second quarter. This presentation will be posted to our website in the next few days. In the second quarter, our comprehensive reserve analysis by accident year resulted in the reallocation of $19.4 million of reserves from non-taxable years prior to 2000 to taxable accident years post our privatization. As in the past, this reallocation was a cumulative adjustment and was largely the result of changes in absorbed loss trends by year. This reallocation had no impact on total net reserves. While our indemnity claims frequency decreased year-over-year, our loss experience indicated a slight upward movement in medical and indemnity costs per claim which are reflected in the current accident year loss estimate. Excluding impacts related to the LPT, our calendar year loss ratio declined 8.7 percentage points year-over-year largely due to the lower provision rate for losses compared with the second quarter of 2014. The 1.2% decline in net earned premium was a direct result of our underwriting actions in Southern California. Despite this slightly lower earned premium, our underwriting and other operating expense ratio remained flat at 19.1% when compared to the prior year quarter. We continue to manage our expenses prudently. Our second-quarter commission expense ratio increased 1.6 percentage points as commission expense increased 12.3% compared with the second quarter of 2014. The increase in commission expense was primarily due to high commission rates for certain preferred classes and partner business as well as the higher accrual for commissions on our assigned risk business. In the second quarter, we changed our accounting for our assigned risk business from a quarter in arrears to a current-quarter accrual basis, which resulted in a one-time increase in commission expense. Net investment income in the second quarter remained essentially flat year-on-year at $18.4 million. The average pre-tax book yield on invested assets decreased to 3.2% compared to 3.3% for the second quarter of 2014. The tax equivalent yield on invested assets decreased to 3.8% at June 30, 2015 compared to 3.9% at June 30, 2014. Income tax expense increased $2.1 million in the quarter, primarily due to a year-on-year increase in projected annual net income before taxes. Our effective tax rate increased 8.1 percentage points which reflects the improvement in our combined ratio. The reallocation of reserves from nontaxable to taxable years resulted in the second quarter tax benefit of $2.5 million, which reduced our effective tax rate by 4.9 percentage points for the first six months of the year. We continue to actively manage our capital, and our balance sheet remains strong. There were no changes to prior accident year reserves to our voluntary business. Once again, there was no adverse development in our prior period reserves. The market value of our investment portfolio was $2.5 billion at the end of the quarter, an increase of 2.8% since December 31 of 2014. During the quarter, nearly two-thirds of purchases were in taxable sectors. Our equity allocation was increased to 8.7% of the total portfolio. Portfolio exposure to municipals held steady at approximately 30%. Portfolio duration increased slightly to 4.2. High-dividend equity portfolio rebalancing drove $7.7 million of purchase and sale activity that generated $1.7 million in gains, accounting for nearly all of the realized gains in the quarter. At the Holding Company at the end of the second quarter, we had $85.3 million in cash and securities, net of restricted cash and securities. And now I will turn the call over to Steve Festa, our Chief Operating Officer.

Thank you Terry and good morning. Our results in the second quarter continue the trends exhibited over the past four quarters. We continued to improve our operating results and, as indicated previously, we have achieved a combined ratio before the LPT of 98.8% for the quarter. Since last year, we have spoken often about the actions we were taking in order to improve our operating results. The results over the past four quarters bear out the success we have had in accomplishing those objectives. We have also emphasized in the past that the trade-off for improved profitability would be a decline in our top line in the short term as we raised rates in underperforming classes of business and non-renewed underperforming accounts specifically in the Southern California market. This decline narrowed in the second quarter of this year compared to the first quarter. It should be noted that outside of California we have increased in-force premium by 5.1% on a year-over-year basis, and policy count has increased by 6.2%. In the second quarter, our new bound estimated annual premium, excluding the Southern California market, increased by more than 13% over the comparable period in 2014. This has occurred despite a highly competitive market with softening rates. Since the end of the first quarter we have seen an increase in competition and rate softening nationwide that has accelerated. And it is important to emphasize that we will not sacrifice the significant improvement we have achieved in our combined ratio by chasing rate in this environment. Much of our improvement in our bottom-line can be attributed to reducing our exposure in certain classes, specifically in the Southern California market. Since June of 2014 we have non-renewed 13% of our premium available to renew in this market because of poor individual risk characteristics. In addition, we walked away from an additional 17.1% of our renewal book in this market, because we were unable to receive appropriate price based on our profit expectations. This loss of revenue has been offset to some degree by our initiative to target other classes of business with historically low, ultimate loss ratios outside of California, as well as in specific regions within California. But then these classes of business we have seen double-digit growth in new business this year. We expect this growth trend to continue as we expand our targeted class of business to generate these profitable results. Our improved operating results are due to our diversification strategy of growing revenue outside of California and lessening our dependence on the Southern California market. Our results this quarter reflect the outcomes we indicated previously that we expected to see, based on actions taken since the second quarter of last year. Earlier Doug mentioned our entrance into Michigan this month. This is part of our longer-term strategy to write business in all of the continental United States, with the exception of the monopolistic states. This is in line with our diversification strategy mentioned earlier. Now, I will turn the call back to Doug.

Thanks, Dave. We continue make significant progress in executing our initiatives, and we are pleased with our solid results for the second quarter. And with that operator, that operator, we will turn the call over to questions please.

[Operator Instructions] The first question comes from the line of Mark Hughes with SunTrust. Please proceedpf.

Thank you very much. Good morning.

Good morning.

Good morning.

The process of repricing those policies in Southern California, by making sure you are getting adequate rate – where do you stand in that cycle? I think you had suggested that the decline narrowed in the second quarter; your new business, or the total premium was largely flat after declining in Q1. How should we think about that as we look at 2Q? Should those dynamics get even better – I’m sorry, 3Q. Should those dynamics get even better? And we should expect that improvement to continue?

Mark, this is Steve. I’ll respond to that question. As you know, in June of last year we started the process of evaluating our existing book of business within California, specifically Southern California and non-renewed a substantial amount of that business; and at renewal repriced other books of or other aspects of that book which as I said earlier about 17% of that we walked away from we’ve gone through that renewal cycle, it’s been a year. So the impact with respect to the renewal book, we expect that to mitigate on a go forward basis. However, in June of this year June 15 specifically we raised our rates in the Los Angeles territory. So we expect that clearly to have an impact on our ability to write some new business in Los Angeles. At the same time, we decreased our rates in other parts of this state of California in June. So it still to be determined what impact those rate adjustments will have in the second half of this year. But we have to move through the renewal book over the past year, which will have some positive impact on a go-forward basis.

Right. The significance of that increase in mid-June – I hear what you are saying. But the fact that you have lapped the one initiative, but then you sort of started another in mid-June to raise rates, where does that leave us, net-net, when we think about Q3? Is Q3 going to be up? I will say it more directly.

Yes. That’s really unclear at this point, it’s so early in the process of the rate increase and the rate decrease in the rest of the state. That was June 15. We’ve got less than a month, since then. So it is premature to really evaluate that. We will have a better handle on that obviously over the next couple of months.

Okay. The higher commissions in the quarter – you said there was a one-timer, Terry. How much was that? And then what should we think – is it going to return to more normalized levels next quarter? Or is it still going to be a little elevated?

Yes, Mark the one-timer was relating to the change in the accounting pool and the senior allowance that gets booked to commission. So the impact of that was about 0.3 percentage points. The other element reflect, as we said, high commissions on certain class of the business and as some pharma that we have – part of that is temporary in nature, part of it is likely to continue. I think if we look forward, we would expect over time for our commission ratio to move back down to its historical range, which is between to 12 percentage to 12.5 percentage points.

Okay. And how about the investment income this quarter? At $18.4 million, it was pretty strong relative to the recent quarters. Is that trendable? Should we – is $18.4 million a good number going forward? Or is that maybe a little high?

I think it was – if I look at the investment income, it was probably just a tad higher than we expected. There were a couple of things that happened in there relating to our treasury inflation-protected securities. The first quarter there was deflation, and they were marked down. And this quarter it reversed. We also had a slight change in prepayment speeds on MBS securities, which had a negative impact in the first quarter and came back again in the second quarter. I think all of that is probably about $800,000 a barrel, if I recall correctly. But with the exception of those items, I think, we are in line with our expectations.

Right, okay. How about the tax rate? Ditto? You described kind of some one-time benefit perhaps this quarter. What would be a good tax rate going forward?

So Mark, you and I discuss this every quarter, I think. And I have talked about how challenging it is to project our effective tax rate for the full year. I think our current estimate is around 16% of our pretax income. So I’ll again refer you to note 6 in our consolidated financial statements, which will be included in our Form-10Q which will be filed later today, which provides a full reconciliation of our statutory marginal 35% rate to our effective tax rate. The thing that I had mentioned in the past, and I will reiterate again today – the thing that makes it challenging are certain elements of what is our pretax income on a GAAP basis that we really can’t predict. And the two items that I would reference are changes in our LPT reserves which obviously we can’t project and they happen from time to time. And they happened again in the second quarter and that accounted for 4.9 percentage point reduction in our effective rate. And then the sorry – sorry – that accounted for 3.1 reduction in effective rate. And then the other one is the reallocation of reserves from nontaxable to taxable years, which had an impact of 4.9 percentage points in the current quarter, sorry for the half year. So our best estimate right now is what we disclosing at 16%

Okay. And then one final question. Doug, you have highlighted in some of your presentations in the past how your claims costs in California were below peers’. I think you were not giving those full credibility in terms of setting your reserves. Do I understand that correctly? And where does that issue stand today?

Mark, with the data we see, and in making that comment, we are relying on the CWCI data, which we believe is a very good snapshot of the entire market and very solid data. Everything we see tells us that we continue to outperform. I will just throw out one that we talked about from a couple of years ago that caused us concern was the litigation rate. If you look at the litigation rate, as big of a problem as litigation is in California, we continue to substantially have better results than the balance of the industry, just on that one metric alone. So everything we see tells us that we are continuing to outperform on the loss side. And that’s paid loss data in California.

Thank you.

The next question comes from the line of Amit Kumar with Macquarie Capital. Please proceed.

Hi, thanks. Can you hear me?

Yes.

Yes thanks. Just a few follow-up questions. Going back to the discussion on Southern California, do you get the sense that the culling of the business is within sight?

I’m sorry. I didn’t hear that question.

The reduction of business in Southern California. Do you get the sense that – you know, are we getting close to the point where the culling, or the cutting, or non-renewing is done? Or should we anticipate more going forward?

I’ll take that question Amit. If you look at the actions we’ve taken over the last 12 months, there were really two areas to focus on. One was the non-renewal business where we said these were accounts that we – because of the loss characteristics, we didn’t believe they could be fixed through pricing actions, and those were non-renewed. So we’ve made it through that initiative over a 12-month period of time. Now some of that always occurs. I mean you are constantly going through your book looking for those. But that was specifically directed at that geography at that period of time. So that particular initiative has made it all the way through the book. As Steve referenced the increase in the overall rate level in Southern California – we just increased that again June 15. So depending on how the market reacts to that, we’ve got another 12 months now of an additional price increase that will have to be absorbed in the LA market. It’s very difficult to project what the impact of that will be. What we have seen is that our retention rates do reasonably well. Raising rates has a significant impact on our ability to produce new business. And that’s an acceptable outcome to us. As Steve has indicated multiple times, we do not plan on chasing this rate down. And we’ve taken strong actions. They are generating very positive results. We’re going to see this through.

Got it. That’s helpful. The second question is – when you talked about Michigan, and – can you sort of – I’m not sure – talk about that opportunity? How should we think about that? Is that a decent-sized opportunity for you to grow and make a dent in the marketplace? Or are you testing the waters, and we should expect a modest ramp-up? How should we, being on the other side, think about the impact on your top line from that?

First, I want to startup by saying that since we previously have not had a presence in Michigan, we wouldn’t want to and don’t plan on going into that state aggressively from the start. We’ve been very selective with respect to the distribution channel that we’re using, we’re using distribution channel that we’ve had an existing relationship with. Our intention is to not aggressively start off in Michigan. But Michigan is a very good state from a loss environment standpoint Michigan is a very large comp market. And one of the benefits that we have by going into Michigan and some of the other states that we will goes into the future is we now have the ability to write business that crosses borders that previously we didn’t have the ability to do. So, for example, obviously Wisconsin is a border state to Michigan that we’ve done business in for several years. Historically, we’ve lost some opportunities with the accounts that had operations in both Wisconsin and Michigan because we couldn’t write the Michigan business. So this gets back to our diversification strategy that we alluded to earlier and it gives us an opportunity to leverage some of the opportunities that in the past we could not leverage because we didn’t have a presence in a state like Michigan.

Got it. Thanks for color. But I guess maybe the final question is: we saw the press release on the EACCESS, and I think Doug talked about it for a bit. And you had that before; it’s sort of the new version which came out. I’m curious: internally, do you have some sort of projections which you build in your numbers, which you say – this would be the impact on loss ratio reduction by points, or maybe a reduction in admin costs? How as analysts should we view that development when you are talking about small business owners using that portal?

No, we don’t expect that that have implications on the loss ratio. We certainly expect over time, it will have a favorable impact on the expense ratio. The ability to have policy holders access a portal so that they can self-serve instead of having to generate every change to their policy or any questions coming to a customer service center – so it will drive efficiency. It won’t be immediate, it’s incremental, but I think it’s part of our broader, longer-term strategy which allows us to provide access to our – to all of our stakeholders. Eventually we envision an environment, whether it’s a medical provider, or a claimant, or a policyholder, or an agent, that we enable them to transact business with us more efficiently in a 24/7, 365 manner. That’s the business objective. I can’t quantify you for specifically what impact that will have on the expense ratio. But clearly, over time it will incrementally improve the expense ratio and make us more efficient.

And have you tracked any sort of usage statistics on that as to what percent?

Yes. We’ve just rolled this out. I will tell you that we have state-of-the-art analytics capabilities so that we can monitor at a very granular level usage, type of usage, time of usage. All of the things, I think you would expect to see with this type of technology.

Got it. And then final question – this is somewhat of an interesting question. Based on the past challenges, if you will, last night some investor questions centered on the fact whether Employers was being too early in reducing its – I guess lowering its current accident-year loss provision rate. And I know you addressed that a bit. I mean, is this – clearly, you should have a great degree of comfort that this is the new normal. And the AYLR loss pecks remain stable from here. What could possibly change which could surprise you in either direction?

Obviously, we have those same discussions internally – which is – have a high degree of confidence in our reserving, both – as I have referenced earlier – both in terms of prior period and the current period provision. As Terry indicated is in his just comments, through the first six months of the year, our results are as we expected them to be. And we have recorded them as such. What could change it? One of the things that we routinely look at is what will be the impact of changes in the yield environment? If that accelerates, it probably takes some pressure off the industry, because it increases investment income and consequently decreases the reliance on underwriting income. I think we have a long way to go there, so I don’t think that’s anything that would happened quickly. If we continue to be in this low-yield environment would naturally maturing portfolios, I expect there will be continuing pressure on improving underwriting results to offset what would be an inevitable decline in investment income. On the other side, you’ve got an industry that’s fully capitalized. And that provides an environment where some players maybe willing to sacrifice profitability because of their access capital position. So that’s just a handful of things that we would consider. In terms of single of that, you always have to think about catastrophes. And from a workers’ compensation standpoint, the two catastrophes you would need to think about would be, likely earthquake – that would be the California exposure; and then any type of terrorism attacks that might be of a scale that would severely impact the industry. But outside of that comp really doesn’t have large catastrophe loss.

Got it. That was very helpful. Thanks for the answers and good luck for the future.

[Operator Instructions] The next question comes from the line of Brian Rohman [Robeco Investment Management]. Please proceed.

Hello, good morning.

Good morning.

Good morning.

Thanks for taking my question. A couple of questions. The investment portfolio – portfolio was up $100 million-plus, but returns were flat. So obviously there’s still some pressure on the yield. But yields are starting to move up a little bit. Where/when is the inflection point such that investment income will start to go up naturally?

That’s a challenging question, Brain. I would say, in terms of China anticipate the yield environment that’s very, very challenging as you know for an institutional portfolio. Its not just yields, it’s the slope of the curve that’s very, very important and been able to predict that I think everybody is trying to do that. And it’s difficult to do so.

Terry, what’s the duration of the portfolio?

4.2.

4.2? Okay.

4.2, so we extended it slightly, Brian. I think it went from 4.1 to 4.2 slight extension of duration. And clearly, we have a mature fixed income, securities that coming off that rates that are higher than the reinvestment yield. We are very, very focused on that. In particular, I mean, I would point you to my comments in the prepared remarks where we have increased in response to that. We have increased our allocation to securities, to equity securities. So we made a $50 million investment in an MLP strategy that in June that it had a yield at the time of investment of around 4.9% so we are trying to address it through that. But we are constantly reevaluating our portfolio allocation and trying to maximize, as you know, that the risk we’re trade off.

If yields don’t change in the next six to nine months, does the overall – are new money yields coming on at higher than the current average?

I think if it doesn’t – if we are unable to reinvest, it will have some impact. I couldn’t give you – I wouldn’t say it will be significant. I don’t expect it to be significant, because the things that are coming off in terms of the portfolio were invested short. So there is some difference I couldn’t quantify for you, Brian.

Okay. Fine.

You don’t anticipate to be substantial. We don’t anticipate that.

All right. Next question: Southern California – you have taken significant rate increase; you are non-renewing the last 12 months. Have you told us in the past what policy count has done? And with the rate increases, the next round of rate increases, any discussion about policy count going forward? And with the second half of the question, I’m really asking about retention rate in Southern California versus Northern versus elsewhere.

Yes. Brian, this is Steve, I will response to your question. With respect to historically since we undertook these initiatives we have seen in Southern California it decrease in our policy count which we expected. As I said earlier, it’s a little premature to opine on the impact of the rate increase that we took in Los Angeles on June 15. However, I will tell you that in Southern California, we have had and we expect to continue to have very good retention rates on the business that we want to keep. Obviously, we said earlier that there was business that we got off of on our own; there was business that we walked away from because we didn’t get the price that we needed. But the business that we wanted to keep within Southern California – we have had very good results from a retention standpoint. In particular on the small business accounts. At the end of the day as you know our business model is most of our insurance are small business owners, small premium amounts. As long as we are serving those accounts in appropriate way quite often our distribution channel doesn’t want to go through the pain of moving those accounts and we’ve got a strong reputation with in the Southern California distribution community of very good service. So our retention rates have been positive within Southern California as in the rest of the state.

But this is the second round of rate increase. Are you expecting policy count to be lower a year from now?

Yes, I said it’s been less than a month.

I know that, yes.

So I don’t – I’ll have a better opinion on that after we’ve got a couple of months down the road.

All right, fine. Last question is about capital. It continues to build in the Company. The stock is way below book value. Premium growth is – I never thought I’d say this. Premium growth is actually below your return on equity, which means it’s building. And I know you have said in the past that you readily – that your strategy is to continue to grow outside of California. And I think that’s a good strategy. But you are still going to build capital. Any discussion about dividends, share repurchase, especially with the stock below book value?

So, Brian, I think I would respond to that question by saying obviously it’s a consideration. We I would say that our capital use strategy has not changed and we have no plan to change. It is continues to remain focused on investing in our operating businesses. Preserving and maintaining our A- A.M. Best credit rating; maintaining our current level of dividends to stockholders; and, importantly providing a level of financial flexibility that we believe is necessary to prudently manage the business through insurance and economic cycles whilst allowing us the opportunity to seize any strategic opportunities should they arise.

That last comment – I was going to follow with a question. Strategic opportunities. Interest in acquisitions, acquisitions that you are seeing in the marketplace? Anything interest you? Comments?

I can’t provide you any guidance on that specifically. I will say we have always viewed acquisitions as being opportunistic. We are focused on building out our business organically. To the extent that we saw an acquisition that might allow us to accelerate that, certainly we would be interested in it.

Just my comment is that if you do the math, six months from now you are going to have a lot of capital if the premium continues along the direction it’s going. But anyway, great quarter. Thanks for taking my questions.

Thank you, Brian

Thank you, Brian.

The next question comes from the line of Vad Yazvinski with Jordan Capital. Please proceed.

Yes. Good morning, great quarter. But I would actually – I think my questions have been answered. But I would like to add my two cents, as somebody who is a shareholder, not an analyst, that we believe as shareholders that you guys – you know, we understand what has been going on for the last several years. There are issues you had in California. But since now that would appear to be – the majority of it would appear to be past, we believe that the capital allocation – it becomes a lot more important for us as shareholders and everybody else. And I hear you loud and clear that you guys think that you can – you know, you don’t see any changes. But I believe that the share count increasing by 0.5 million shares over the last several quarters and shareholders getting a few pennies in dividends – it just doesn’t seem to be, at least, not in shareholder interest.

Can I respond to that? This is Terry Eleftheriou. I certainly appreciate the comment, and we want to acknowledge it as an important consideration. As an organization we are obviously focussed on growing our operating return on equity. And as part of doing that clearly affect taking this question capital management of the denominator is an essential component of that. So I want to show you it is not something we don’t think about it. We do think about it a lot. I think in terms of our capital plan, just to add on to the commentary that – I provided in response to Brian’s question. Over the near-term we do have a couple of priorities and it relates to our rating, our A- rating with A.M. Best. So our priority is obviously to move to a stable outlook with A.M. Best and the next opportunity that discussion with A.M. Best will be in the fourth quarter as part of the annual rating cycle. In addition, the A.M. Best are introducing a new stochastic capital adequacy methodology that we need to evaluate the implications of that on our required capital, and we will be doing that over the next couple of months.

Understood. I appreciate your answering. As I said, all I wanted to do is just raise that once again. But you guys had a great quarter, and it appears that business has definitely turned the corner in California. And we are glad to finally see the profitable underwriting to come back. So I appreciate it. Thank you.

Thank you.

Thank you.

[Operator Instructions] There are no further questions in the queue at this time. I will now turn the call back over to Doug.

Thank you, operator. Thank you, everyone, for joining us today. We appreciate your questions and your commentary. It’s very helpful and useful for us. We had a very solid quarter. We look forward to speaking with you again as we reveal our third quarter results later this fall. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.