Employers Holdings, Inc. (EIG) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2012 Employers Holdings Incorporated Earnings Conference Call. My name is Jeff, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Vicki Erickson Mills, Vice President of Investor Relations. And you have the floor, ma'am.

Thank you, Jeff, and welcome, everyone, to the second quarter 2012 earnings call for Employers Holdings, Inc. Yesterday, we announced our earnings results, and after the call, we will file our Form 10-Q with the Securities and Exchange Commission. Our press release and Form 10-Q 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 the website, where a replay will be available following the call. With me today are Doug Dirks, our Chief Executive Officer; and Ric Yocke, our Chief Financial Officer. Statements made during this conference call that are not based on historical fact are considered forward-looking statements. These statements are made in reliance on the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent developments. We use the non-GAAP metric that excludes the impact of the deferred gain from the 1999 Loss Portfolio Transfer or LPT. This metric is defined in our earnings press release available on our website. Additionally, the Financial Accounting Standards Board issued guidance that beginning in 2012, changed the definition of policy acquisition costs, which may be capitalized. During the second quarter of 2012, we recorded a $2.2 million increase to underwriting and other operating expense as a result of our prospective adoption of the FASB change in accounting methods for deferred acquisition costs or FASB change -- I'm sorry, or DAC. Please excuse the -- please see the earnings announcement for reconciliations of results, which illustrate the impact of the change in DAC accounting. As has been our practice, a list of our portfolio securities by CUSIP is available in the Investors Section of our website under calendar of events, second quarter earnings call. Now I will turn the call over to Doug.

Thank you, Vicki. Welcome, and thank you for joining us today. We are pleased with our performance in the second quarter, in which we increased revenue, decreased our combined ratio, increased book value per share, and returned capital to shareholders through accretive repurchases. Yesterday, we reported second quarter net income, excluding the DAC accounting change and before the LPT, of $3.5 million or $0.11 per diluted share, an increase of $0.01 per share over the same period in 2011. In terms of operating results, we reported an adjusted second quarter combined ratio, excluding the DAC accounting change and before the LPT, of $114.7 million compared with $121 million last year, an improvement of 6.3 percentage points. Our book value per share, including the LPT deferred gain grew 3% year-to-date, to $25.85 at June 30. We again reported strong revenue, up 26%, compared to the second quarter of 2011. We added over 19,900 policies year-over-year on June 30, increasing policy count 38%, and in force premium, 37%. Additionally, payroll audits and related premium adjustments for policies written in previous periods increased premiums, $2.5 million in the second quarter and $5.6 million in the 6 months ended June 30, 2012. In 2011, these premium readjustments increased premium, $4.1 million in the second quarter and $7.6 million for the 6 months ended June 30. Our substantial growth in premium is largely a result of the growth initiatives we implemented in 2010 and pricing improvements in our markets. Our direct written premium increased 30% last year. This growth rate significantly outpaced the total U.S. P&C industry direct written premium growth of 10% in 2011 compared with 2010. This is based on A.M. Best data. Our premium growth, over 2 years, 2010 and 2011, was 10%. This data reflects price strengthening in a number of states in which we do business, particularly in California. Again, based on the A.M. Best data, our 3- and 4-year decline in premium, 13% over the past 3 years and 27% over the past 4 years, reflected the softest part of the workers' compensation cycle, and the appropriate reduction in our exposure during those more challenging years. Retention of existing policies remains strong in the second quarter of this year. Overall retention was 86% compared with 87% in the second quarter of 2011. Our strategic partner business, which represents approximately 1/4 of our book, demonstrated improved policy retention of 91% in the second quarter, an increase of 2 percentage points over the same period last year. While we are seeing more new business opportunities and have experienced impressive growth, our pricing remains disciplined, and thus our hit ratio has remained relatively flat over the last 18 months. We are striving to remain competitive in the marketplace, but still take full advantage of an improving rate environment. As we test how much additional rate we may be able to obtain, we may see periods where both our hit ratio and retention rates fall. These are both good indicators of the strength and durability of the improving pricing environment. Our overall net rate at the end of the second quarter increased 3.8% year-over-year, up significantly from the first quarter year-over-year change in net rate of 0.6%. The improvement was led by California, with a positive year-over-year net rate change of 14.4%. This is the second consecutive quarter in which overall net rate has increased year-over-year, evidencing the continuing improvement of pricing in our markets. Keep in mind that the net rate we report is the rate out the door, premium divided by payroll. If we consider average net rate changes by policy year or average net rate change for the first 6 months of policy year 2012, compared to the first 6 months of policy year 2011, was an increase of 6.1%. We filed year-over-year rate increases in a number of our states, notably California, Florida and Illinois. We increased average rates in California 6% in June of this year. With this change, we have increased our filed pure premium California rates more than 41% since early 2009. We also filed rate increases in 3 of our other top 5 states this year. Because of our recent growth in premium, improvement in rates and the actions we took 2 years ago to reduce costs, we have been successful in regaining much of the business scale we lost during the last recession. Consequently, the underwriting expense ratio component of our combined ratio has improved substantially. We have aggressively moved capital out of the operating companies into the holding company during the soft part of the cycle. We did this because it provided the greatest flexibility for deployment of capital, either back into the business, into a strategic opportunity or to return to shareholders through share repurchases and dividends. At June 30 of this year, we had approximately $304 million in cash and securities at the holding company. Of this, approximately $114 million was collateral for the $90 million Wells Fargo line of credit. For the past several years, we have modestly invested capital internally in technology and efficiency improvements, as lower levels of organic growth did not require additional operating capital for our subsidiaries. We also completed an acquisition in 2008. Over the last 5 years, we returned nearly $360 million in capital to our shareholders, through share repurchases, and paid over $50 million in dividends. As we continue to expand our business and grow into an improving pricing environment, our operating companies will require additional capital. We now expect to contribute back down to the operating subsidiaries, up to $70 million of capital that we moved through ordinary and extraordinary dividends to the holding company in recent years. The ultimate amount of capital contributed back to the operating companies will be governed by our expectations relative to growth and internal capital generation, as well as through regulatory and rating agency considerations. We expect that the contribution will be made prior to the close of the third quarter. Our philosophies concerning uses of capital and the flexibility of that capital remain unchanged. In the last quarter, we repurchased approximately 1.1 million common shares at a cost of $18.6 million. Approximately $55 million of the current repurchase authorization remained at the end of the second quarter. The timing and actual number of additional shares repurchased under this authorization will depend on a variety of factors, including the share price, corporate and regulatory capital requirements and other market and economic conditions. Now I'll turn the call over to Rick for a further discussion of our financial results.

Thank you, Doug. As Doug mentioned, in the second quarter, we continued to report strong growth in written premiums and revenue. GAAP net income was impacted by a $2.2 million accounting expense for deferred acquisition costs, which dropped pretax earnings per share approximately $0.07. Excluding the accounting change for deferred acquisition costs, our combined ratio before the LPT was 114.7, more than a 6-point improvement compared to last year's second quarter. The decrease was primarily related to substantial improvement in the underwriting and other operating and expense ratio. The GAAP underwriting and other operating expense ratio declined 5 points year-over-year, largely driven by the increase in net premiums earned, and cost controls enacted by management. Excluding the change in DAC accounting methods, the expense ratio improved 6.8 points. The loss ratio before the LPT was stable year-over-year. Our provision rate for current accident year losses in the second quarter of this year was 77%. You may remember that we increased our provision rate beginning in the fourth quarter of 2010 and the first quarter of 2011 based upon development information that we saw at that time. Consequently, we have not been required to strengthen our prior period reserves. Once again, we had no adverse development in overall reserves in the second quarter related to our voluntary business. There is and always will be movement in prior accident year estimates. Our prior period reserves, in the aggregate, continue to be adequate and our current year provision rate appropriately reflects our expectation for ultimate losses at this time. Total reserves for prior periods showed some adverse development for accident years 2008 to 2011, which was completely offset by aggregate favorable development in accident years preceding 2008. As in past quarters, all unfavorable development was entirely attributable to our assigned risk business. As a reminder, assigned risk business is coverage for businesses that cannot obtain policies in the voluntary market. We do not establish a reserve until the coverage is assigned to us through mechanisms adopted by state regulators. Therefore, such amounts are prior period by definition. Our commission expense ratio was 13.6% and was 1 percentage point higher than last year's second quarter. This increase was related to higher incentives for those agents who produced qualifying premium. Incentive commissions are paid to select agents who generate greater than targeted production that meets specific loss experience levels. While such incentives increase commission expense, these increases are designed to be more than offset by improvement in long-term underwriting profitability. Excluding the impact of the incentives, the commission ratio increased by 1/2 of 1 percentage point year-over-year. Our second quarter net investment income declined to $18.3 million from $20.3 million in the second quarter of 2011 due to a slight decrease in yield. Our investment portfolio continues to perform well, despite historically low yields in continuing volatile markets. The average book yield of the portfolio was 3.7%, and the tax equivalent yield was 4.8% at the end of this year's second quarter. The duration of the fixed maturities in the portfolio was relatively short at 4.1%. The portfolio was weighted towards short- and intermediate-term bonds to minimize interest rate risk. However, our investment strategy balances consideration of duration, yield and credit risk. Equity securities represented over -- just over 6% of our portfolio at the end of the second quarter. With that, I'll turn it back to Doug.

Thanks, Rick. Over the past year, we have been highly successful in rebuilding scale and thus substantially lowering our expense ratio. We also succeeded in building a pipeline that continues to produce more new business opportunities that are well within our underwriting appetite. We raised our loss provision rate substantially in the fourth quarter of 2010 and the first quarter of 2011, in anticipation of an expected difficult pricing and loss environment. We believe that we correctly provided for ultimate results and appropriately adjusted our pricing. Consequently, we have not had to strengthen reserves for prior periods. Current challenges however, include continuing low investment yields and historically high loss ratios. And these are industry issues, these are not just issues for us. We are carefully managing our invested assets to enhance yield and reduce risk by maintaining a bias toward higher quality securities with shorter durations. This approach negatively impacts current earnings, but represents what we believe is appropriate prudence in a highly volatile environment. The focus in 2012 and beyond is to grow our business into an improving market, and to incrementally obtain more rate on new and existing business, thereby improving our loss ratio, achieving more scale on our expense ratio and driving a better operating margin. Jeff, with that, we'll now take questions, please.

[Operator Instructions] Up first, we have Mark Hughes with SunTrust.

It seemed like this quarter, you had faster growth in gross written premium and you had a nice increase in pricing. I'm sort of curious, I've asked before how you're balancing new business versus price discipline. Is it fair to say the market was more accommodating for you this quarter? And how do you look at that going forward? Obviously, you're growing much faster than most other PNC companies, when do you start to favor pricing even more over the top line?

Mark, I think the way to look at it is, the market as a whole and then specifically at our hit ratio. We are finding the market more accommodating to rate increases, not only are we getting them, but others in the market are as well. But if you look at our hit ratio, we are not seeing significant or substantial change there, it's been relatively stable as they indicated over the last 18 months. And so that's telling us that we're not growing at a rate that exceeds what we should in a market that's now giving more rate. So that's an encouraging sign for us and one of the things that we'll very closely monitor. The other thing I think we've seen in the market is, as it's become more unsettled as carriers have either pulled back or have withdrawn from markets, we're finding that agents are gravitating back to markets that they formerly wrote business in, such as us. Where, perhaps in the past, we weren't able to compete on price, but now that we can get our price, we're willing to write the business, and I think that explains some of the growth you've seen in the quarter.

How about Doug, in new distribution channels, I know you've made an effort to broaden up the number of brokers that you're dealing with. If we look at the growth, say, this quarter, how much of that has to do with better distribution, wider distribution as opposed to these other factors we've been talking about?

It has very little to do with the broader distribution sources. We had an objective of increasing the number of appointed agents over a 24-month period of time that we started back in July of 2010 and we achieved that goal in less than 18 months. Now I would view our plant management as being more stable and more normal. So we're not looking to necessarily expand that footprint, but to now manage it, drive production within the sources we have. Now having said that, there is always turn, as you have opportunities to appoint new agents and current agents may fail to live up to the expectations. But I would describe what we're seeing now as fairly normal and nothing exceptional.

How about if you look at through the quarter, does it feel like the pricing and the competitive dynamics continued to improve as you went through the quarter? And I guess, I don't know if you have any early read on July, was it reasonably stable through the quarter?

It was improving through the quarter. It started really in December of last year, and has continued strong through June 30. And we're still reviewing and analyzing the July numbers, and so I can't give you a point of view on that yet, but through June 30 it continued to be strong.

Our next question comes from the line of Matt Carletti with JMP Securities.

Mark covered most of my higher level questions, but I do have a couple of numbers questions, probably for Rick. First is, how much money is at the holding company, and how much of that is held as collateral for the Wells line of credit?

We have a total of $304 million at the holding company. The current collateral requirement against the $90 million outstanding debt with Wells Fargo is $114 million.

Okay, great. And then the other one is just on the, the acquisition ratio in the quarter is a little high. You mentioned kind of covering about half of it, but that if you stripped it out, it would still be about an increase of 0.5 point x the volume incentives. Is there a mix shift going on there? Is there more strategic partner business? I know that can ran a little higher or there were any -- higher commission promotions with some of the new agencies?

Yes, it's a combination of things, Matt, as you've correctly identified, the substantial amount is related to the annual incentive program. There are, also, smaller incentive programs that are made available to newer agents. Because of the, some of the affinity programs, we -- the NFIB for an example, there are some additional costs associated for that, so as those programs grow and drive business, there is a cost associated with it. Also, some of it has to do with the mix of business and how much is attributable to partners, and as the partner business is growing, that will drive a slight increase in that ratio.

[Operator Instructions] Our next question comes from the line of Amit Kumar with Macquarie.

Most of my questions have been asked. I guess just 2 quick follow-ups to the prior questions. First of all, just on the level of rate increases, and you have gotten, successive -- you've had successive quarters of rate increases now. I'm just sort of wondering, as you look towards 2013, do you probably think that by the end of 2013, you could probably get to a combined ratio below 100? I'm not looking for a specific guidance. Just out of your thought process as you look forward.

Well just, let me draw some broad numbers in that, and I'll use just a rough number, of 115, I'm saying, assume that's an accident combined. If you want to get that to 100 in a year, you need 15 points. You want to do that in 10 years, you need about 7.5, and if you want to do it in 3 years, you need about 4.5 on the compound annual rate. So that's what it would take. So if you take those numbers and compare them to what we're seeing in the current market, if it continues, yes there's an ability to get there, say in 2 years, if it slows, it'll take longer, if it accelerates, it'll be quicker.

I guess, what I was wondering was that, several other competitors are talking about renewed interest in this line. And I'm, just sort of wondering, does that create a pricing pressure because people who had pulled back, suddenly everyone is out there trying to grow this line. I mean, are you seeing indications of that, where you are saying to yourself, that well, I hadn't seen this person or this company and now they're back. Are you seeing those signs already? Or we're still not at that point?

We're not at that point yet, although that is certainly something that you always have concerns about. As the press reports improving results in workers' compensation and the fact that the line is getting the largest rate increases of any, you always worry about naive capital, reading the headlines and coming into the market, not knowing the dynamics and how to price and consequently, upsetting what is -- what we think is a necessary strengthening in pricing. You always have those concerns, but at this point, we're not seeing it.

Got it. And will -- the only other question and maybe I'm seeing too much into this, I noticed a shift in your language surrounding capital, I was looking at the transcript, in the press release and on the call, you mentioned regulatory and ratings agency. I'm just wondering, did you meet with them recently? Or was there any indication from them regarding the downstreaming? Or was this more proactive?

We routinely meet with the rating agency, so there's nothing exceptional there. When we started our growth plan back in July of 2010, we were fully cognizant of what the capital requirements would be, if we were successful. So there is no surprise in this for us, and we are perfectly well aware of how the rating agency views capital requirements and how their model works. So the numbers we have provided today are our views of what are necessary to support the rating that we think is required, given the business we write.

And I guess related to that, does the buyback slow down a bit? Or maybe just -- maybe I missed that in the opening comments regarding what you thought about buying back, going forward. Could you just address that?

Sure. The buyback had a remaining $55 million in the authorization, which will be in place until June 30 of 2013. It is an open market program, so it is dependent on a number of factors, one of which is share price. Though I can't forecast for you how many shares may or may not be purchased between now and then, but we don't view the uses of capital being, in this case, either being share purchases or contributions down to the operating subsidiaries as being mutually exclusive.

Our next question comes from line of Robert Roell with Surveyor Capital.

Two questions. The first one, I just wanted to dig a little bit deeper into -- we talked about the rate side of the combined ratio or loss ratio equation. But I was curious on the loss trend side. You've been at, I guess, 77% for 18 months, you said in the release. What -- over that period of time, what have you seen in terms of a loss trend, frequency severity in the book? And then also, if, as a second part to that question, could you give us the moving pieces behind the development in the quarter, so there was no aggregate development, but what were the -- what was the dollar figure on the adverse from the 2008 to '11 period? And then also, the favorable development from prior years, and which years did that come from?

Well, what we've said in the past, is that the more recent years have seen some upward development, but that's been more than offset by the positive development of years 2008 and prior. And it hasn't been material, we haven't adjusted as a result of that. In terms of our observations, they're more or less in line with, I think what you've heard from the industry in terms of frequency and severity observations. We're not seeing anything that's unique on our part that sets us apart from those industry observations. Our overall provision rate of 77% is flat, stable. We don't foresee that changing dramatically or at all, going forward.

And let me jump in on there. If you think about what's changed, it is a, somewhat a change in mix, whereas, a few periods ago, what we were seeing in the industry was increased -- increases in severity and continuing decline in frequency. More recently, we've seen an increase in frequency and a decline in severity. Again, that's not limited to us, that's been true across the industry, that's been just more recently observed by the bureau in California. And that's likely related to some of the economic trends. We'll know more about that as we get a little further out in the development of the more recent years, but that seems to be one of the causes of this change, upward tick in frequency and now it's stability and severity.

I'm sorry, I'm a little confused, what specifically do you think is behind the uptick in frequency?

Well, some of what we saw, and you've seen it, not only in workers' compensation, but in Social Security disability as well. That is, as unemployment benefits have run out, seems to be impacting the frequency of workers' compensation claims and the number of Social Security disability claims. I think those are linked, and I think they're tied to the recession, and the lengthy period of unemployment as people's benefits have run out. And that's something that, in time, the studies will be able to tell us how much of this increase in frequency is related to that. But that's the current best thinking on why we've seen this change in trend.

And severity has dropped?

Yes, severity was stable in a lot of places around the country. A lot of the severity pressure we saw in more recent periods was in California. And now it appears to be stabilizing.

Let me ask the question another way. Do you think the 4% rate is enough to more than cover loss trends such that accident in your loss ratio should go down? Or do you not think that they're -- do not think it's covering the loss trend?

Well, we believe, given what we are getting in the markets today, that the rate trend is exceeding the loss trend. So if that were to continue, yes, we would expect that would allow us to bring down the provision rate and the loss ratio would improve.

Okay. Regarding the cash and the buyback. So excluding the $114 million that's set aside as collateral, that brings you to $190 million, and then less $70 million, which you're down streaming, is $120 million, what -- available. What is the minimum level of cash you would need to hold, on hand at all times?

We haven't established a hard amount as to what the minimum must be. But as we consider what's appropriate to hold at the holding company, we are looking out to what the operating cost will be for several years, and try to manage the cash flow in that respect. So that it -- it isn't dependent on the payment of a dividend up from the operating companies.

So roughly, what do you think that number is?

We have not established a hard number for what the minimum capital or cash must be at the holding company.

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

Just had one broader question on the underwriting and risk selection process. Earlier this year, you talked about the written premium growth coming from lower classes of risk and maybe there could be some opportunities there. Can you give some more color on what you're doing from a risk selection process? And is the growth still mostly coming from hazard groups A and B?

We continue to see strong growth in our -- and let me broaden it up a little bit. In the hazard group, A to D, $25,000 and under. And specifically, we have seen that risk to A and B in the smaller size. And we're good with that because that generates the better loss result for the company. But we are now seeing our opportunities and having an ability to quote larger accounts, and that's because the market has been disrupted as carriers have been trimming their appetite or pulling back. And also because it now satisfies our pricing requirements, this is business that perhaps we lost several years ago, or that we knew we wouldn't be in the market because we simply couldn't get the price that was necessary. That's changed this year. And so we're seeing strong growth in the small account business, and new opportunity in the larger accounts.

[Operator Instructions] Up next, we have Gregory Macosko with Lord, Abbett.

Just with regard to capital movement, I assume it's a foregone conclusion that you don't expect within the various subsidiaries, any of -- any cash to move up stream?

It will depend on what the cycle looks like. We don't currently model it that way, because our expectations are that we're going to continue to grow into a strengthening environment. But that can change, and so that's not a decision that once it's made, it never needs to be revisited. But what we try to model is based on our growth assumptions, what is the capital that's necessary, not only to support it today, but to support it several years out. And a factor that we consider there is whether or not there will be capital moving up from the operating companies. Again, at this point it’s -- given the strength in the market, and if it continues going forward, that capital could be used in the operating companies for future growth.

But the point is, at this point, you really don't see, at least right now, in terms of that allocation of the $70 million going down, you don't see any of the subsidiaries, at least in the near-term, allocating capital up?

Yes, it wouldn't be our intent to contribute it down and then turn around and pay it back up as a dividend.

How do you determine $70 million's the right number to do by year-end?

It's not only what we see immediately, but also our plan going out multiple years. The idea is not to have to do this serially, that we contribute an amount that's sufficient to support our expected growth in the future, how much capital generation we anticipate in the operating companies going forward, and then also to support regulatory and rating agency needs.

Okay. And with regard to the -- you reached your target in 18 months to get to the 20,000 policies, I believe. Is -- and your statements regarding the footprint, et cetera, is that -- imply therefore, that you have no additional goals with regard to added policies?

No. We expect the business to continue to grow, given current market conditions. So this -- the objective of the 20,000 policies and the $160 million of premium over the 24-month period of time was primarily to recapture scale that was lost during the recession. We have now successfully done that. But having done that, and built out the platform into additional states, we do now, expect to continue to grow going forward. I wouldn't expect to grow at the rate we did over the last 24 months. But again, that's somewhat dependent on what the market conditions look like, going forward.

But again, as I think I heard you say, you said, you don't expect maybe to grow or add the policies, quite at the rate you have, but you will -- to continue to grow?

Correct.

Okay. And then with regard to the 77% loss ratio, I know, I understand that depends, going forward, on rate increases, et cetera. But if I look at your existing subsidiaries et cetera, what's the range of that? How -- what breadth across the different locations does that range?

Are you referring to geographies or...

Well, give me both. Give me -- I mean, how do you look at it. How -- what's the, yes, geographies, yes for sure, but if there is any other way, of just getting a feeling for what the variation within that 77% is.

Well, it, our actuaries, look at it on a state basis. Those are also aggregated into company buckets. Without going into a lot of specifics, I would say that in some cases, where we have small books of business in states, those loss ratio are -- I'm sorry, provision rates, can be in the 80s at times, they can be lower in large states such as California, which then is aggregated into what you're referring to as our overall provision rate, which is 77%.

Okay. But in the period just completed, is the range 60% to 100%? I mean, is it very...

It is not that broad. No, it's -- the range is roughly 8 to 10 points, from highs to low.

Plus or minus 8 to 10. Okay.

Our next question is a follow-up that comes from the line of Robert Roell with Surveyor Capital.

I think you just answered my question, but just to be clear, I was going to ask at what rate of growth, or how long would the $70 million last? And when would be the next downstream?

Yes, at this point, we model it out multiple years, and we expect to put down a sufficient amount to support our business plan, but that can change if market conditions change. So it doesn't mean that we will never put more down, or we won't be able to pay dividends up. But the $70 million, up to $70 million that we're looking at today, covers multiple years.

Got it. And then on the frequency again, what you said is well taken, but we have seen disability companies increase their reserve rate, and their benefit ratio on this very phenomenon. Why shouldn't we be worried that, that would happen to the Worker's Comp business, and your business, specifically?

It's appropriate to worry about it, that if you were to see both an increase in severity and frequency, that would drive loss costs up. What we're seeing right now is that the frequency is going up, but the severity is offsetting it. And so what you're observing perhaps with the disability carriers is not what we're seeing in the comp industry today.

Ladies and gentlemen, since there are no further questions in queue, I'd now like to turn the call over to Mr. Dirks for closing remarks.

Very Good. Thank you. We appreciate your participation in today's call and we look forward to speaking with you again at the end of our third quarter. Thank you, everyone.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.