Selective Insurance Group Inc (SIGIP) 2002 Q1 法說會逐字稿

Please stand by. Good day everyone. Welcome to the selective insurance group first quarter's earnings release call. At this time for opening remarks and introduction, I would like to turn the call over to the assistant vice president and corporate secretary, Ms. Michelle Schumacher [phonetic]. Please go ahead. MICHELL SCHUMACHER [phonetic]: Thank you. Good morning. Before I turn the call over to Dale Thatcher, chief financial officer, selective insurance group and Greg Murphy, our chairman and C.E.O., I want to remind you that some of the statements made during this conference call are not historical facts and are forward looking statements as defined in the private securities litigation reform act of 1995. These statements use words such as believe, expects, may, will, should, anticipates, benefit, the negatives thereof and other similar words an mopping other things, describe our current strategies, opinions, expectations, the future results, and other forward looking information. We derive forward looking information from information we currently have and numerous assumptions that we make. We cannot assure that results we anticipate will be achieved since he results may differ materially because of both known and unknown risks and uncertainties that we face. These risks and uncertainties are identified in filings we make from time to time with the securities and exchange commission, including but not limited to our annual report on form 10-K and our quarterly reports on form 10-Q. Although we do not promise to update such forward looking statements to reflect actual results or changes in assumptions or other factors that could affect these statements.

Management will make every effort to disclose all material information in prepared remarks, by are supplemented by the materials available on our website at W.W.W..selective.com. After the prepared remarks, we'll have a question and answer period. The following corporate executives are on this call along with our speakers. Thornton Land, executive vice president and general counsel, Jim Ochiltree, executive vice president insurance operations, Jim Coleman executive vice president, diversified insurance services and chairman and president of selective H.R. solutions. Kerry Guthrie, vice president and senior investment officers, Ron Zaleski, senior vice president and Sharon Cooper, vice president, director of communications and Don Marciano [phonetic], assistant vice president, government affairs. As a remainder, this call is being simulcast over the Internet at W.W.W. selective.com. A relay will be available at the same site through June 7, 2002. With that, I'll turn the call over to Mr. Thatcher.

Good morning. Welcome to our conference call. Today we'll talk about first quarter results as well as the progress we are making in m me mentation of our long term strategy. We'll focus on our core commercial lines operations, personal lines, our diversified insurance certificates advices and agency relationships. Our financial results. This morning we released our first quarter 2002 results. Net income was $10.3 million for the quarter, or 39 cents per diluted share, compared to $8.3 million or 32 cents per diluted share in the first quarter of 2001. Operating income from continuing operations for the quarter were $10.2 million or 39 cents per diluted share, an increase of 31 percent over the prior years, $7.8 million or 30 cents per diluted share. Results for the quarter were about 6 cents above average street concensus. Net premiums written increased 17 percent to $281 million for the period. Our overall statutory combined ratio was 102.7 percent, down from 105 for the first quarter last year. That was one of our strongest premium quarter, led by significant net premiums growth of 22 percent in our core commercial lines business, which represented over 82 percent of our total net premiums written. The strong growth included commercial renewal price increases that reached 18 percent. And $67 million of new commercial lines business written. In April, renewal price increases were 18 percent. An indicator of ongoing price opportunities in the market. While at the same time retention at point of renewal moved higher to 85% for the quarter, up from 81% for the full year, 2001. In addition, selective risk managers, all our alternative market operation, has been receiving a tremendous number of new business opportunities. With net premiums written of $25 million for the first quarter, about double the amount written for that period last year. Overall, our company's commercial line statutory combined ratio improved to a 100.8 percent for the first quarter, down from 104.2 percent for the same period last year. With increased profitability driven by price increases and substantially improved results in property lines of insurance. We saw market improvement in our property lines due to ongoing underwriting improvements that we've implemented over the last two years, as well as reasonably good weather for the quarter. Our earned premium increases continue to outpace loss trends by almost six points. The one challenge air I can't in commercial lines was our bond operations with a statutory combined ratio was 136.1 percent, compared to 97.8 percent for the same period last year. This is due to one large loss in our Chesapeake region and higher reinsurance costs. In response, the significant reinsurance challenges facing the bond market in the wake of industry losses from Enron and Kmart, we have implemented price increases averaging 18% and reduced commissions by five points. In addition to improving loss ratios, we are seeing excellent progress on our expense initiatives. We have trimmed 1.6 points off our commercial lines statutory expense ratio down to 28.9 percent for the quarter. In addition, our agencies entered 57 percent of new commercial policies, directly from their offices this quarter using the new technology we have developed for them. As a result of initiatives like these, our productivity measure of northwest premiums written per insurance employee now stands at $553,000 for the fiscal year ended March 31, 2002, up 14 percent over the same period last year. In our personal lines operations, net premiums written decreased 2 percent for the quarter, compared to the same period last year. The change reflect our ongoing strategy to focus on commercial lines as our core operation while maintaining a smaller but profitable personal lines segment. Personal lines net premium written in our seven expansion states were up 5% while dropping 16% in all other states as we continued to control exposurein New Jersey, South Carolina and the troubled New York personal lines market.

Although it's been less than six months since we began implementing revised personal rates for our book of rates, we are already seeing positive changes that will move this business closer to targeted profit levels over the next three year period. For the quarter, about one-third of our renewal business moved to the new tier structure at renewal, generating additional premium of almost $3 million. We generated commission savings of $1 million after bringing our commission schedule more in line with competitors and we continue to retain our best business, including policies with full coverage, high limits, multicars, and adult drivers. So far this year, the number of insured vehicles has declined 3.5 percent from the end of 2001 to 116,800 cars at the end of April. For the quarter, our New Jersey personal automobile statutory combined ratio was 108.7%, compared to 113% in the first quarter last year. The state's overall personal lines ratio came in at 106.6 percent for the quarter, two points lower than the same quarter last year. In our nine other personal line states, we continue to implement price increases, tier changes and other underwriting actions to improve results. As I mentioned before, we are controlling exposure in New York by ceasing to write new personal lines business. We have been unable to generate an underwriting profit in New York due to the challenging state regulatory environment and we do not foresee an improvement any time soon. This line represents approximately $1.9 million in net premiums written with a statutory combined ratio of 147.7% for the quarter. For the nine personal lines states, 2001 price and tier changes of 15% for auto and 8% for home owners are just beginning to work their way through our book of business. We continue to pursue additional rate and tier changes in 2002. As an industry wide personal line prices are beginning to be pushed upward. The overall personal lines combined ratio for the quarter was 109.8 percent, compared to 107.7 percent for last year. Higher capacity losses this year accounted for approximately one point of this increase. The other point was a result of with a one time reduction in our seating commission for our New Jersey quarter homes treaty. In our diversified insurance services business, quarterly revenues from continued operations was $19 million, up 11 percent over first quarter 2001. EBITDA return for the quarter was 9.6 percent, compared to 14.9% last year, while return on revenue was 5% for the first quarter, compared with 6.2 percent last year. We posted net income from continuing operations of .9 million for the quarter, compared to 1.1 million for the same quarter in 2001. Revenue at our flood operation rose 28 percent to $4 million for the quarter. Northwest income was .4 million, up from 2 million from the same time last year. Managed carry revenue increased 15% to $5 million. Net income was .5 million, compared to .7 million in the first quarter of 2001. During the quarter we expanded our provider network by 30% to 78,000 providers with a purchase of northeast health direct, a well established, preferred provider organization in New England. Revenues for selective H.R. Solutions, our professional employer organization, or P.E.O., was $9.1 million for the quarter, compared to $8.9 million last year. We recorded a modest loss for the quarter as we continued to implement new pricing and cost reductions initiatives at the P.E.O. We reduced expenses by $200,000 at the quarter. Currently 100 selective agents are selling the P.E.O. product and they generated approximately 1300 new work sidelines for the quarter. One other item to note is we have eliminated all underwriting risk from S.H.R.S. and we are managing that risk from our insurance operations. As a result of that change and to take advantage of certain tax benefits, this quarter we moved all workers' comp loss reserves out of S.H.R.S. into the insurance companies. This lost portfolio transaction has been eliminated from all consolidated numbers disclosed here and in the fiscal supplement available on our website. It does however appear on statutory based filings we make with various states. If you're calculating reserve ratio for the quarter base on statutory filings, you would need to exclude this transaction for an 8.6 reserve ratio for the quarter. We continue to pursue the sale of our software business, P.D.S. software services incorporated, which is classified as a discontinued operation. After tax net investment income for the quarter was $18.5 million, compared to $18.3 million for the same period last year. The after tax portfolio yield is 4.1 percent. Invested assets as of March 31, 2002 were up $47 million from last March to 1.8 billion, reflecting improved operating cash flow in the quarter of $38 million. Our strongest first quarter cash flow ever. Premium growth from pricing increases has improved our cash flow, which is translating into growth of our invested assets. At the end of March 2002, we rebalanced our bond portfolio as part of our our ongoing tax strategy. Taxable bonds now represent approximately 62 percent of our bond portfolio, compared to 55% at year end. This will bring our marginal tax rate on investment income to 26%, compared to the historic 24%. After tax investment income will remain unchanged from its reallocation. Now I'll turn the call over to Greg Murphy.

Good morning. There are five areas that I'd like to focus my comments on. Our core commercial lines operations, New Jersey automobile, other personal lines states, our fee based diversified insurance services and our strong agency relationships. Commercial lines. As we enter the third year of our three year pricing strategy and it started in 2000. The news is good. For the past nine quarters we have increased renewal prices in our core commercial lines from a low of 9% for the first quarter of 2000 to a record level of 18% this quarter. The price increases coupled with various underwriting initiatives, flow of our commercial lines statutory combined ratio down 3.4 points to 100.8. In addition to pricing, another key part of our strategy is the elimination of frictional costs that cyst in the independent company agency distribution model. Last year we began an initiative that allows our agents to directly input pigs from our offices through both our one and done business processing system and our commercial lines automated system. Business from both one and done totalled $1.5 million for the quarter, while policies that kicked out of the system for minor items, which we call two and done, generated 3-point $5 million of revenue written. 57% of the new commercial business was entered directly from our agents' offices in the first quarter. Agents entered business reached 67% in April, and we expect this trend to continue. Another important part of our strategy going forward is our new web based commercial line system, which makes it even easier for our agents to do business with us, enabling them to self service a significant portion of their commercial lines business, including endorsements, renewal and new line business. Our diversification strategy has also claimed benefits in our newest region. Combined statute toe ratio of 110 for the quarter. The he improvement was led by commercial lines price increases averaging 20% for all of 2001 and 2020% through April of -- 22% for April of 2002. Higher price coupled with underwrite and a strong management team now in place at mid America will result in this region con contributing to our perform pans as a premiere regional carrier. We expect continued growth in the commercial lines segment as a result of strong pricing trends enhanced by technology deliverbles to our agencies, which should generate more cost effective new business opportunities for us. In our commercial lines, we expect to generate a statutory combined ratio between 102 and 103 for 2002. New Jersey automobile. Our pricing strategy for New Jersey automobile currently being implemented and includes, one, a rate increase effective March 1, 2002, of just under 3 percent, that will generate annualized net premiums written of $4 million, and, two, a new tier plan effective January 1, 2002, for renewal business, that is expected to generate an 8% increase or $10 million of net premiums written this year. We believe the new rating plan will be fully implemented in four to five years and produce an overall in crease of 18%. We anticipate narrowing the losses in our New Jersey automobile book of business as these rate and tier changes become earned. For the year our current forecast indicates an overall New Jersey personal lines statutory ratio of 104 to 105 for 2002, with automobile at about 108. Other personal line states. Just as we developed our three-year commercial lines pricing strategy, we are now entering our second year of improved pricing and rating changes for our personal line states. For these nine states, personal automobile rate increases of 15 percent in 2001 are now beginning to impact net premiums earned. Rate increases totaling 3% have already been approved in 2002, with an additional 4% pending with various insurance departments. In our homeowners line, 2001 price increases averaging 8% will also be reflected in net premiums earned over the course of the year. Rate filings are planned in 2002 for increases of more than 10%. As rate increases are more fully reflected in our net premium earned, we should see improvement throughout the year an even more so in 2003. Our current forecast for 2002 indicates a statutory combined ratio of 113 for other personal line states. Turning to our diversified insurance services operations, as we reported to you in our year end conference call, we expect to grow these businesses by at least 12 percent in 2002, and produce a return on revenue of about 6%. We are on track to achieve these results with total revenue growth for the first quarter of 11%, and a return on revenue of 5%. Agency relationships. We recently returned from three weeks of sales and strategy meetings with our agency force and are extremely pleased with their view of our market position and franchise value. Agencies express support for our pricing initiative, including our flexibility and underwriting pricing their business one risk at a time and repeatedly spoke of our technology and how it's helping them grow and stay competitive. Ultimately, what's important to agents is the company's financial strength. We have to be there to pay claims as promised. Our invest rating was recently reaffirmed as A. plus superior for the 41st straight year. Citing our strong balance sheet and gains from our diversification, yield strategy and leveraging of our agency relationships. These powerful relationships also resulted in selective being named company partner of the year by the certified professional insurance agent's association. We received the honor after several agents nominated us for easy of doing business through our one and done system. In addition, the Goldman Sachs 2002 national survey named select the number 2 regional carrier for service and commercial appetite, while the central New Jersey C.P.C.U. chapter had honored us with the employers excellence award for 2002. We have invested to create a 20-state footprint and now we have to establish our market position and -- and now that we have established our market position, excuse me, we're begin to harvest the growth opportunities we have available to us. As follows. One, new commercial lines business from 67 million for the quarter, up 52% over the same period last year. Two, commercial lines renewal price increases still have traction in the marketplace. And three, our ongoing plans to improve performance including significant technology roll outs that will not only increase our ability to provide the best possible services, but will also enhance our productivity. Our overall forecast for 2002 includes approximately 10 to 12% growth in net premiums written and an overall statutory combined ratio of up to 104, which allows for 1.5 points of catastrophe losses. We are comfortable with this combined ratio forecast, despite the claims we anticipate from CAD 61 [Phonetic] that includes the Maryland tornado, which we estimate property losses of between 4 and $5 million pretax from this event. Although catastrophe losses may be higher than normal for the second quarter, we still estimate operating earnings per share of between $1.55 and $1.65 for the full year. Now I'll turn the call over to the operate tore for your questions.

Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit 1 on your touch tone telephone. Once again, it is star 1 if you would like to ask a question. We'll take our first question from Charlie Gates [phonetic], Credit Suites First Boston.

Hi, good morning. I have a couple questions. Question number one, I applaud you for your more comprehensive review of your financials. What were auto sales in the quarter in jersey this year versus last year?

I've got that right here. Overall, Charlie, I'm sure you saw that, our personal lines were down 2% for the quarter. For the month, our total automobile premium in New Jersey was relatively flat. It was down about -- less than 500,000, so it's flat. You've got to remember, Charles, that we are -- we are dropping units, the number of cars we've written is down, which obviously the -- but the average premium per unit is up. So we're down in terms of ex pros you're.

Do you break out what the actual sales were in personal auto in jersey.

For the quarter, the net premium written was 32 million, up 30 -- 31.8 million this year versus 32.2 million a year ago.

My second question, I didn't understand the -- the comment that Dale offered with regard to the workers' compensation reserves.

All we have done, Charlie, is workers' compensation reserves that existed on the books of Selective H.R. solution, that they sell as a part of the bundled product for the professional organization now, we've taken the reserve and that exposure and put it on the books of selective insurance group and that was about.

10 million.

10 million of reserves that moved off of, in theory, that moved off of the selective H.R. solutions books and on to the insurance operations books. It's always been there. It's not an increase. It's just a switching of where those reserves reside.

What did that mean from an analytical standpoint?

From your standpoint, what it means to you and from Jim Coleman's side is it takes all that workers' compensation risk off his books, so it makes his companies more a fee based business. It puts the workers' compensation exposure on to the bigger books of selective insurance group, where it really better, more appropriately resides, because we're writing -- today, Charles, in all the new states that we're going in to, these are accounts that we're writing, we'd be writing the workers compensation exposure anyway, so it's gone on to selective's book.

At a more basic.

At a more basic level, you don't have to make any modifications to your model to reflect this.

This is business that formerly would have been written by C.N.A.?

It involves the self-insured retention of S.H.R.S. So C.N.A. is above that.

Oh, okay. I guess my third question, I think you indicated that you saw -- maybe I misunderstood this, a combined ratio for your personal lines business outside of jersey approaching 113 for this year. Given that kind of result, is it possible that selective with regard to that book of business at some point might elect to do what Kemper is doing with regard to their personal lines operations?

Yeah. We have [inaudible] states that we have that number includes that 113. I think it's important to understand that the. The most difficult state in there now is the New York, and we are, you know, just basically getting out of New York over a three year time period, so we're going to lessen that exposure on a year by year basis. South Carolina is a situation where, you know, we're still in there on a -- more on a maintenance basis, we're not actively growing that market share, but all the other states we feel that fit well into the footprint with selective, we are continuing to write business for our agents, and understand that our strategy for personal lines is a very concentrated strategy. Not every one of our agents in each state that we elect to write business in really has a personal lines appointment with us, so we're concentrating our business on fewer agents where we feel we have a relationship and, you know, a good opportunity to have a profitable book of business, and I think what you're seeing now in personal lines overall, when you look at the price increases we got for automobile last year, what's on the table for this year, should significantly turn around a performance in that segment, but in the end, personal lines has become a much smaller segmentation of our overall company.

Thank you.

We'll take our next question from Nick Persow [Phonetic] Sandler [Phonetic] partners.

A couple of questions. First, what were the cats in the quarter.

The tax in the quarter were .7 points. It's mild. That's just your normal, you know, nothing extraordinary in there. And traditionally, our higher cat. quarters are first quarter and third quarter, first quarter more noreaster time storm related and third quarter obviously more wind sensitive.

It was $1.7 million compared to $.8 million last year.

Okay. And just help me. I'm just curious why, both last year and this year's quarters were kind of on the lighter side and yet the combined ratio on home owners is up pretty drastically quarter over quarter, so it was not cats.

The cats this year are more concentrated in the homeowners line of business, so you have about a point on the personal lines overall combined ratio as a result of increased cats, even though both quarters were light quarters, you had a little heavier in personal lines. You also in the homeowners share have the new quarter share treat at this for the New Jersey share which we're now booking at a reduced seating commission rate and we had to apply that rate to the unearned premium balance for the New Jersey share so that has a 1 point overall impact for the personal lines, so those are two points of increase in personal lines combined ratio.

Combined ratio. To follow on that, for the quarter, although Dale mentioned the one point on the personal lines, the homeowners is almost eight points, so we look at the year to year swing in that line, a substantial portion of it is [inaudible] related, but they happen to be concentrated in the H.O. line.

And also, was there anything unusual I guess in the business owners line, too, again, just looking at the combined ratio, you had a pretty nice improvement quarter over quarter from about 125 down to 102, so is that all rate or is there anything else?

I would say that that line improvement goes back two or three years to a very concentrated underwriting review of that segmentation of our business, particularly what types of accounts are allowed in that and as we, you know, and also very intensive reunderwriting of our property exposure and then a lot of price as well. It's a combination of things. I think you're starting to see the improvements in both the property line and the bop line, as we refer to it, just some of the things that we've done on the fund -- up on the fundamental underwriting side coupled with the higher prices.

Great, thanks.

We'll take our next question from Beth Malone with AdVest.

Thank you, congratulationss on the quarter and just a couple of questions. One is as you continue no implement the technologies that you've already put in place, do you anticipate that your expense ratio will continue to go down?

Yes.

Or do you get a -- you can't get much more out of it?

No, I think there is -- our biggest opportunity is in the expense ratio side. When we talk about eliminating the frictional cost in the traditional company model, what we're talking about are substantial improvements in the company side, because the model that we're building with our technologies that our agents will be allowed to do most endorse months in their office, will be able to do what we call conditional renewals that they'll be able to underwrite in their office as well as new business, and I guess the best leading indicator of that is how agents are entering the business and using our systems and the expense of 67% of our new business that was generated in the month of April was originated by agents, so that kind of gives you have the -- how agents are receiving our technology and how they're using it, so as we start to push more functionality to them in terms of endorse months, in terms of self service, in terms of conditional renewals, that business will be done right at the agents source, one and done, entered right through our system and then down loaded back right into their agency management systems and there will be tremendous productivity improvements there, there will be a lot of scale improvements because, as we launch this technology, I think that's going to allow us to drive more market share and every one of our agent's offices, so we're going to be a bigger player and it's going to be easy to do business with us.

One followup question, as it regards your independent agents relationship, how critical do you think the fact that you maintain those relationships has been to your ability to raise these rates and get the agents to get their customers to accept the higher rates and still maintain the quality of the book of business? How important is the agent in that process, and also, your commitment to the agent? How critical was that to your getting these rate increases and having them stick?

Well, you know, I'll let Jim Ochiltree add some comments to this, but agents want to have -- first of all, an agency company relationship needs to be a win-win relationship. They need strong profitable companies and we need to have strong successful agencies. I think a what we're seeing universally in the marketplace is an uptake in pricing overall and that I feel is a positive, but I think in our relationship aspect, growing market share and being that bright go-to company is why we've been so successful recently and it hasn't happened overnight. It's happened for years -- through years of technology initiatives, years of how we've planned our strategies with our agents in terms of deployment of our new service center, our new one and done service center, but I think the relationship and where they put their business is important to them, and I think part of the ongoing family that we've created with them, and Jim, I don't know what you want to add.

Jim okay he will tree. I think probably, as much as anything, our agents appreciate the way we're going about getting the price increases, which we know our agencies well enough because we have few enough of them and large enough books of business for them that we get to know them and we can work with them one at a time on these risk, instead of doing them as many of our competitors have done, saying bracket this line is going up 20%, this line is going up 25% and the relationships factors help us be able to operate that way.

Okay. Well, thank you.

Once again, it is star 1 for questions.

Very good quarter. I have a couple of questions. First on your property, your excess of loss property and casualty treatise renew on July 1. Can you talk about those? And my second question would have to do with the large loss, the large surety loss in Chesapeake. Could you expand on that and expand on surety going forward.

In terms of the reinsurance, two big reinsurance contracts renew on 7/1. We now have provided the market with tremendous amount of information, for the two contracts that renewed. The other one are property and casualty, excess of loss contract, an we are in right now the information exchange process today and I think, you know, we'll see -- have more information on that in the as the next two months unfold, so we really don't have anything to report on those contracts today at this meeting. In terms of our bond situation, and what's happened in bond reinsurance, I mean, our bond reinsurance premium went from one million to 3 million and it really wasn't anything specific to selective. I think it was more industry capacity dried up, pricing went -- as capacity dried up, demand was still there for the product and obviously pricing spiked higher. And I think you've seen what's happened universally to other companies reinsurance programs with respect to surety business. But what we've done internally is we're increasing our pricing, an then reduced our commissions, so we can get back that higher reinsurance cost. And that's how we're moving forward. We're still out there, we still want to write business and I think how our higher reinsurance costs have affected us, they've affected the entire industry. I guess they will come on line at different points, depending on when people's reinsurance contracts renew, so we are out there with a one-one contract, so I think we might have been out a little bit earlier in the marketplace with higher prices, so the market is still assimilating those increases today, but our sense is our competitors will be there with higher prices as well, because we will have the same problem and we all buy reinsurance products.

This is Jim, to put it in a little more context, remember that our surety book is only about $16 million, so a loss of 3 or 4 million, which is what this one can turn out to be, does have an out size impact on that segment, but not so much on our overall results.

That's very good. Thank you. Once again, great quarter.

Mr. Murphy, there appear to be no further questions, I will like to turn the call back over to you for any additional or closing remarks.

Thanks very much. Dale will be available. We have our annual meeting today from 11:00 o'clock to about 12:30, so we will be out of pocket for a short period of time, but thank you very much.

This concludes today's conference. Thank you for your participation. You may now disconnect.