Selective Insurance Group Inc (SIGIP) 2002 Q3 法說會逐字稿

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Good day, everyone.

Welcome to the Selective Insurance Group third-quarter earnings release conference call.

At this time for opening remarks and introductions I would like to turn the call over to the Assistant Vice President and Corporate Secretary, Michelle Schumacher, please go ahead.

Good morning.

Before I turn the call over to Dale Thatcher, Chief Financial Officer of Selective Insurance Group and Greg Murphy our CEO, I want to remind that some of the statements made during this call are not historical facts and are forward-looking statements as described in the reform act of 1995.

These statements use words such as believe, expect, may, will, should and participate, benefits and the negative thereof and other similar words and among other things, describe our current strategies, opinions, expectations of 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 achieve.

Since results may differ materially because of both known and unknown risks and uncertainties that we face.

These risks and uncertainties are identified in filings that we make from time to time with the Securities and Exchange Commission including but not limited to our annual report and Form 10-K for the year end December 31st, 2001 and our quarterly reports on form 10-Q we do not promise to update to reef actual results or changes and assumptions or other factors that could affect the statements.

Management will make every effort to disclose all material information in prepared remarks that are supplemented by materials available at our website at www.selective.com.

After the prepared remarks we'll have a question-and-answer period period.

The following corporate executives are on the call.

Thornton Land, Executive Vice President and General Counsel, Jamie Ochiltree, Insurance Operations, Jim Coleman, Executive Vice President Diversified Insurance Services, Kerry Guthrie, Vice President and Senior Investment Officer, Ron Zaleski, Senior Vice President and Chief Actuary, Sharon Cooper, Vice President, Director of Communications and John [ indiscernible ] I'd also like to introduce Richard Bernstein, Executive Vice President in our Legal Department.

Richard will assume the role of our General Counsel.

As a reminder, this call is being simulcast over the Internet at www.selective.com.

A replay will be available at that same site through December 6, 2002, with that I'll turn the call over to Dale.

Thanks, Michelle.

Good morning, and welcome to our conference call.

Today we'll discuss third-quarter results and update you on the progress of our long-term strategy.

We'll focus on our four commercial lines of operations, percentage lines, diversified insurance services, investments and our agency relationships.

I'll begin with the financial results.

This morning we released our third-quarter 2002 results.

Net income was $11.1 million for the quarter or 41 cents per diluted share compared to $2.1 million or eight cents per diluted share for this period of last year.

Operation income from continuing operations was $10.1 million or 38 cents per diluted share up from $0.4 million or two cents per diluted share in the third third quarter of 2001.

Charges taken in the third quarter of last year represent a 3.6 points on our overall statutory combined ratio or 29 cents per diluted share of net income and operating income.

The strong operating income for the quarter was attributed to ongoing operation despite weather-related can a at that time physical that were pre-tax for the third quarter compared to .$2 million pre-tax for the same period last year.

On an amortized basis these losses amounted to six cents per diluted share for the third quarter compared to 1 cent for the same period 2001.

Overall earned premium increases are satisfied loss trends by 7 points.

Net premiums written increased 13% to $267 million for the period.

Our overall statutory combined ratio approved to 102.9% for the quarter down from 108.9% of the third quarter last year.

With this quarter's performance our year-to-date overall statutory bind ratio was reduced to 103.3%.

In line with our estimate of up to 104% for the full year.

Our agency's entered a record high 73% of new commercial policies directly from their offices in September using the enhanced technology tools we've developed for them.

As a result of pricing and expense initiatives our productivity measure of net premiums written for insurance employees now stands at $580,000 for the fiscal year ended September 30th, 2002, up 15% over the same period last year.

Commercial lines net premiums which represent over 80% of our total reflect continued strong growth and were up 15% for the quarter.

The quarter's high premiums were driven by commercial renewal price increases of 19% and $45 million of new business.

October price increases were also 19%.

Retention at points of renewal was up slightly to 82% for the quarter versus 81% for the full year 2001.

Our company's commercial lines statutory combined ratio dropped to 102.4% for the third quarter.

Down from 103.9% for the same period last year.

With improving results reflecting the ongoing impact of pricing increases and various underwriting initiatives.

Our commercial lines earned premium increases outpace had lost trends by about 7 points.

Issued also point out that while some our competitors have announced increased reserves for asbestos related claims we maintain a conservative reserve position.

Substantially better than the industry average.

Turning to the New Jersey personal automobile line of business we continue to see the positive impact of rate and tier changes implemented over the last 12 months.

Our average premium per vehicle was up more than 10% for the quarter reflecting reflecting various pricing initiatives after bringing our commission schedule more in line with competitors our commission savings were about $1 million for the quarter, and total of $3.5 million year-to-date.

So far this year the number of insured vehicles has declined 6.4% from the end of 2001 to 113,300 vehicles due to fewer few business submissions.

This brings our market share down to 2.3% from a high of 4.1% in 1997.

For the quarter our New Jersey personal automobile statutory combined ratio approved to 106.9% while some of the improvement reflects the reserve charge taken for this business last year it's also indicative of actions we've taken on this book of business which is started to demonstrate themselves with improving underwriting results.

To date we have seen minimal impact from the state farm, New Jersey automobile withdrawal action.

Under the state's market assistance program or map, our two year requirement is to quote policies until we either write 3400 vehicles or the map pool is empty.

Our new tier rating plan positions us well to manage this process.

New Jersey's over all personal lines ratio came in at a 102.2% for the quarter and 104.1% for the first nine months of this year compared to our forecast of 10 a percent for the full are a year 2002.

In our nine other personal line states, net premiums written were up 9% for the quarter as we continue you are continue to implement price increases tier changes and other underwriting actions to improve results.

Efforts to control our exposure in New York due to the challenging state regulatory environment are underway.

Through the first nine months of 2002, we have decreased the number of vehicles written by 12% while average premium per vehicle increased 11%.

New York personal auto represents less than 1% of our overall net premiums written.

In these nine states 2002 price and tier changes of 15% for auto and 18% for homeowners are continuing to favorably impact net premiums earned.

Automobile rate increases totaling almost 7% have already been approved in 2002 and our homeowners line rate increases totaling 9% have been approved so far this year with an additional 4% pending with various insurance departments.

Credit scoring is has already been instituted as a September ability requirement.

With two more states to be added by year end.

We are aggressively pursuing additional double-digit rate increases in tier changes in 2003, as personal lines prices push upward industry wide.

Although we have had limited mold activity and do not write business in the most exposed states we will be adding the ice so mold coverage limit takes endorsement to all homeowners renewals start in the fourth quarter.

We will take this action in all states where the endorsement was approved.

This includes New Jersey and seven of other personal line states.

For the quarter our personal line statutory combined ratio was 117.3% compared to 111.5% for this period last year and in line with our full year of 118%.

Excluding New York, the third quarter ratio was a 109.1%.

Overall, personal lines net premiums written were up 6% and the statutory combined ratio for the quarter dropped to 104.8%.

In our diversified insurance services businesses, quarterly revenue from continuing operations was $21 million, up 17% over third quarter 2001.

Return on revenue from continuing operations was a point 9% for the third quarter, compared with negative 11.3% for the same period one year ago.

These businesses contributed $1.3 million in net income from continuing operations for the quarter.

During the quarter revenue at our flood operation rose more than 20% to $5.3 million, net income up from .5 million for the same period last year.

We currently service more than 133,000 flood insurance policies representing about $51 million in premium. a 32% increase over this time last year.

In our managed care businesses revenue increased 14% to $6 million for the quarter.

Net income was .$4 million compared to.$7 million in the third quarter of 2001.

Expense reduction initiatives are currently underway as part of the ongoing integration of this operation including lower staff, duplicates functions are eliminated.

Revenue for hr solutions or PEO was $10 million for the quarter compared to $8 million for the third quarter 2001.

Net income was break even for the quarter.

We continue to implement new pricing and cost reduction initiatives of PEO.

At he of the third quarter labor related expenses were down 20% over this period last year, as of September 30, our price increases reached 8.2% for workers' compensation and 2.4 for client administration fees.

Total work site stands at 26,000, we expect to see a drop in work site lives in January as price increases are implemented and as the PEO continues to apply selective's underwriting guidelines and re-under writes its client base.

Strong operating cash flow for the nine months of $130 million driven by higher cash from underwriting activities together with the proceeds from the company's $100 million convertible bond offering puts assets up 17% to $2.1 billion.

Additional net proceeds of $15 million were recorded on October 22 from the exercise of the 15% over allot.

Option which brought the overall bond offering to $116 million.

The proceeds were invested in double a corporate credits at about a 90 basis point positive spread to our 4 and 1/4% borrowing rate.

The offering covers liquidity needs over the next three years with all the advantages of a public deal.

We expect the bonds to ultimately convert at a time when additional equity will be appropriate to fund growth.

In addition they'll convert $29 stock price compared to the average share buy-back price of $19 per share.

Rating agencies viewed our convert offering as a conservative and proactive effort to repay debt obligations and preserve capital to fund growth.

Although lower interest rates have put pressure on our investment returns we still generated after tax investment income of $18.1 million for the quarter.

Consistent with the third quarter last year.

The after tax portfolio yield was 3.9%.

We continue to follow the conservative diversified investment strategy with our bond portfolio representing 86% of our $2.1 billion in invested assets. 57% of our debt securities portfolio is rated AAA.

Our portfolio has an average rating of AA with only 1% rated below investment grade.

Now I'll turn the call over to Greg Murphy.

Good morning.

Our strong operating income for the quarter was driven by ongoing improvements in the core commercial lines operations.

Clearly the three year commercialized pricing strategy initiated in 2000 is having a positive impact on results.

For the 10 straight quarter we achieved double-digit pricing increases coming in at 19%.

These are sizable increases given our small to mid-size market segments.

We see hard market pricing trends continuing into 2003 to continue to counsel lower investment returns offset loss trends, and further improve the margins in our business.

We continue to leverage selective's market position to our agents to write a larger share of their small business.

Technology initiatives give them direct web access to our commercial line system and more importantly, the ability to issue small business seamlessly.

For the nine months, agents directly entered about two-thirds of the new business policies.

These initiatives have been major factors in generating new business which for the nine months was up 27% to $15 million including about $15 million through our one and Dunn system.

One and done policies are written at be a marginal expense ratio at 22% and generate a lower loss ratio than our traditional book.

Selective's underwriting service center has gained much recognition with agents as they found it more economical to place their small clients in the center.

For 2% less can commission we provide outstanding customer service, thus allowing the agent to focus on selling and servicing its top accounts.

During the third quarter, we added our00 agent to the service center and are now servicing about $20 million in premium volume.

Early indications show retention levels of about 90% about four points better than our historical business owner policies.

We anticipate continued growth in the commercial lines segment as a result of strong pricing trends coupled with higher levels of new business.

For 2002, we expect our core business to generate a statutory combined ratio of between 102 and 103.

The New Jersey personal automobile also showed solid improvement for the quarter with higher average premiums and improved underwriting that resulted in the statutory combined ratio show slightly ahead of expectations.

Progress is also being made in our nine other personal line states where net premiums written grew 9% for the quarter.

Improved improvement should progress as pricing increases become earned and we dine too decrease exposures in New Jersey or New York.

In 2003, we will aggressively pursue additional rate increases.

Diversified insurance services posted 17% revenue growth for the five.9% return.

Revenue was strong in each of the three businesses led by 20% growth in the flood operation.

Overall, these operations are expected to grow 12% in 2002 and produce a return on revenue of about 6%.

We see long term opportunity in the professional employees sector as many PEO competitors have closed their operations or curtailed new business growth due to extremely tight workers compensation market.

Pricing Norad straif fees have moved higher and small business owners are looking for a PEO with a strong financial.

Selective's financial strength together with your underwriting speaker and customer service have created competitive advantage that differentiate ourselves in a difficult market. a PEO appeals to small businesses because it enables their management to focus on running the business, while avoiding the can you cost and distractions of paper related and regulations.

It also provides additional revenue streams for agents who choose to offer the P/E o product.

Agency relationships.

About 60 of our top performing agents recently joined the senior management team for a three-day strategy session.

The agents spoke highly of our technology initiatives including the ability to maximize our high touch high-tech approach through the implementation of Internet and straight-through processing.

We also discussed agency compensation that reflects rewards based on utilization of selective's self-serve technology initiatives.

This is a sensitive issue, however, our agents understand the importance of compensation align it's.

Perhaps most importantly our agents say they value being part of the planning process which does not happen at most companies they represent.

They rate selective's technology platform at the top on par with several national companies and agree with our long-term technology strategy, and that our personal lines personalized claims and underwriting services enable them to compete on terms other than price which is an absolute necessity in today's marketplace.

The strategies we've developed over the past several years are the driving factors in selective being ranked the number one regional carrier for the quality of service provided agents and their customers in a recent national survey of agents by Goldman, Sachs.

And remember, we write in only 20 markets.

The level and type of services offered combined with selective's technology platform provide a clear competitive advantage to grow our commercial lines market share.

In addition, a 2002 accounting research report supports a business theory we believe in for a long time that regional carriers with a tight focus differentiate themselves by growing faster and achieving better underwriting results than larger competitors because they know their markets well and respond to change quicker.

In the end what truly differ rates selective as unwavering commitment to its independent agency channel.

Agencies everywhere are aligning with care carriers that recognize them as well as the customer instead of competing with them.

We rely on all of selective's 815 agencies to provide trusted personalized service and speaker their customers.

Our agents and the valuable relationships we've cult aggravated with them are the foundation of our ongoing competitive advantage and the reason why we have out performed the p and c industry for the last eight years.

In closing for the full year 2002, we continue to expect overall premium growth of 13 to 16%, a statutory combined ratio of up to 104 and operating earnings per share of between $1.45 and $1.60.

These projections are consistent joint on a normal level of weather activity for the remainder of the year.

Now I'll turn the call back to the operator for your questions.

Thank you.

The question-and-answer session will be conducted electronically.

If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your touch tone testimony of.

If you are using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again to ask your question please press star followed by the digit 1.

And we'll pause for just a moment.

We'll take our first question from Nick Pieros with Sandler O'Neill and Partners.

Couple questions.

Do you have the pre-tax caps for the quarter?

I didn't see that in the press release.

The pre-tax what --

The cap losses.

They were about one point, two points for the quarter.

Okay.

$3.1 million.

Yeah.

Okay.

And I'm just curious a couple things.

One, you referenced efficient efficiencies that you're generating but the expense was up and I'm trying to recognize exile those two items.

The gap expense ratio that's up for the quarter and that's because of we decreased the percentage of acquisition that we're deferring, you get a better picture for the nine months, and we're down for the nine months.

And that was help if you will.

Why do you think the improvement in the personal lines book, you know, such a drastic improvement from the second quarter to the third quarter.

Was there anything happening that we should be aware of?

I think, Nick, when you look at our premium on level they put all the all of our current pricing, put all our indications at current pricing and what you're seeing is a tremendous increase in price in the New Jersey book and in the non-New Jersey areas coupled with a new rating and tiering plan that's gotten us a lot of additional rate increases and you're going to start to see some traction in those sector as those price increases become earned as we more and more of our policies at the current rate level.

Remember, we increased the -- put the new tiering plan in New Jersey effective 1-1, a lot of the changes we put it in the non-New Jersey area started in the middle of September of last year.

So wouldn't -- as far as the actuarial assessment you provided wouldn't you have done that back in January rather than the third quarter of this year?

You're going to start to see those changes work in on a quarter by quarter basis.

You're going to start to see ongoing improvement.

Seem like like it was such a drastic improvement from the second to the third so I was having a tough time understanding that.

When you talk about New Jersey personal auto that was for the quarter under 108 and we projected 108 we're slightly ahead of expectation on the quarter and, in our non-New Jersey sectors, it's coming in just about where we thought it was going to be.

Okay.

And just lastly with regard to some other expenses, that seemed to have fallen off in the quarter.

Was there anything unusual happening in there?

I think we have it down as --

Other expenses, no, not off the top of my head comes to mind as far as anything unusual going on there.

Okay.

Great.

One thing I'd add to that, as you're looking at a run rate statutory expense ratio of about 30 and you're looking at a trailing gap expense ratio of about 31, and, you know, that reflects the amortization of the expenses written in the prior year, so as you move out into 03 you should start to see a gap expense ratio narrow closer to the statutory ratio.

Great.

Thank you.

Next we'll hear from Greg Peters with Raymond James.

Morning, Greg.

Good morning, everyone.

Let me a a apologize I've been in and out of the conference call so some of these questions may have been addressed during the initial comments.

I was hoping if you might address the declined ratio workers comp and Bob.

We've observed several other, specifically in workers come and I'm wondering what your experience is there and if you could comment.

Sure.

I certainly can take care of that.

Comp is probably the most regulated line in terms of our ability to move pricing higher, as we've talked on several calls previously we write the entire account and we look at the account we look at the all end profitability, so I would say that the reason why comp has not gained as much as traction in terms of underwriting, fundamental underwriting improvement is because of the fact we haven't been able to increase the comp pricing as much as in other lines.

I think that's why that line trails plus the fact you've he seen the higher cost of goods sold in that line through increased medical.

I am happy to report to you that the New Jersey NCCI effective 1-1-03 approved a 9.4% workers comprise increase, we're starting to see a little bit broader base pricing increase in some of the work come areas but generally I think it's the fact that we haven't been able to move pricing as high as we'd like to coupled with the fact that we're seeing probably more pressure on the cost of goods sold in that line.

Greg, is it fair to say that the calendar year combined ratio in that line might peak out sometime in 2003 or is it still a wild card?

I don't know.

You're looking at combined ratio that I guess for the full nine months and even for the quarter's running just under a buck 10.

You know, we expect that that, you know, some of the things that we've done in underwriting curtail meant of dividend plans, some of the reductions in the deviations that we take for, you know, for managed care credits, those things will start to work its way in.

As we get the higher price increases, particularly 9.4% pricing increase in New Jersey that's substantial book of business you'll see improvements start to gain traction into the third and fourth.

I think you're seeing a little bit of maybe slight improvement as we move into the fourth quarter but you won't really see substantial improvement into 03 in that line.

We write the whole account when we look at it so if there's other places that we need to push price we are pushing price.

With respect to the bop situation, there is, one in particularly, large fire in that small segmentation of business that blew the results in that line out of whack for the quarter and that was an usually large fire and so I think that's what hurt the results.

Was that part of your cap number that --

No, no.

Our cat activity is strictly ice so related cats through the claim service center.

What was BOP, what was the combined ratio in BOP excluding this fire?

Do you have a idea or quantify that?

That fire --

It was about 10 points on the combined.

Wow.

And there was also 3 point, 2 points of CAT in BOP.

One final question, and I know I know this is a little bit ahead of the game but I was wondering if you might provide some snapshot about how the discussions are starting to, specifically as your potential costs you insurance cost you may be paying in 03.

This is Jim Ochiltree, I was out at convention and met with a number of our, the reinsurers on the three treatise we have coming up 1-1.

Which are property cat our New Jersey homeowner quota share and our bond treaty.

In the cases of the bond treaty and the quote it a share the early indications and I stress they're early indications because they're still some sometime to go beforehand are those there will be renewed as expired.

Property cat looking at maybe somewhere in the neighborhood of a 5% to 10% increase is what we're currently thinking.

And could you remind me what the increase was in 2002 as it relates to 2001 at the beginning?

In terms of the programs that renewed?

Yes.

I would say that the homeowners program renewed with a higher margin of two points on that book of business so that was two points on let's say $20 million, that was what that increase was.

The bond program increased at $2 million increase. $2 million increase on the bond program an and then the CAT program was maybe about, you know, went from 15%.

That's it.

Great, thanks a lot, gentlemen.

Next we'll hear from Allison Jackwitz with Merrill Lynch.

Just a couple questions.

I was wondering what the drop in peo employees the expected drop you talk about in January might mean for your earnings and then also if you could talk a bit about what you expect your roe to be doing going feared when you expect it to go maybe north of 10%.

Let me-I'll talk a little bit about the line drop.

We have a large client that we will not be renewing at 1-1.

That's a fairly large number of lives.

And as we continue to tighten down, you know, the P/E of underwriting to Contra Costa form with selective standards and other things that we deployed effective the first of the year we expect to see some decrease in lives.

That will not affect our overall numbers really.

When you look at the overall operation, that's not that big of a segmentation of our business.

But with respect to the ongoing ROE, that is something that we, we have not yet put out any forecasts for the 03 year as we are still, like most of our other competitors working through our full planning process as we speak.

Our long-term goal though is to exceed our cost of capital by three points.

And, you know, we have said before that, you know, by expected to get to that run rate probably by the end of, at the end of 03 or the early part of 04 on a run-rate basis.

Thanks.

Thank you.

As a reminder please press star 1 to ask your question.

Next we'll hear from John Keat with Ferris, Baker Watts.

Hi, guys.

Good morning.

Fine quarter.

Hi,.

Couple of questions, first on workers comp on the peo book, Greg, can you explain what actually under writes the P/E o workers comp book and is the under writing process any different from how you might under write a workers come part of a package program or even on a model line basis?

John, let me have Jim Coleman walk you through what they do down at SHRS but I'll tell you as part of the process here we've looked at a substantial amount of the business written down at the P/E o to make sure it fits into our underwriting guidelines but Jim will take that question on.

John, we follow exactly the same guidelines as selective, selective comes down four times a year, audits the books, my underwriters down in Florida frequently call the SBE staff for questions and advice.

We get a lot of corporate training and support from branchville.

My vice-president of underwriting at selective hr is actually ex-selective underwriter field underwriter.

So when we look at it, and we also use the same types of monitoring tools available at selective in terms of price changes, book changes, business mix things.

So when we look at it, we really feel the books are identical to with a what is occurring at selective's books.

And have you all recently, you and I guess selective in general, undergone a reserve audit recently?

Well, the audit that we went through, that you may be referring to was we had our subcontractor, CNA who had the workers comp policy the upper limits for us, the excess program, had done a very large audit back starting in the -- you know, May, June time frame, and that is eventually culminated in us taking the $4 million reserve increase in the third quarter of 01.

What we do now is, I mean, all of those reserves and all of that process is fit into our normal quarterly reserve review that we do.

And I guess what caught us kind of by surprise is we had this big emergence of claims that came through in June, and that's why the [INAUDIBLE] had to react to that.

Now we have that process down, and we're getting a better flow of information from CNA.

We feel good about how our quarterly reserve process is working going forward.

And that emergency generals was June of 2001.

Right.

So the business is essentially written in-house and it's monitored by you all in-house.

Yes.

Great.

But, Greg, you mentioned the 9.4% NCCI rate increase, has that been filed or accepted.

It's been approved.

Been approved as of 1-1-03.

Yes.

Great.

Just a couple of final questions.

Can you go over again where the proceeds of the convertible note have been placed and what the ultimate use of those proceeds will be?

Absolutely.

First of all, I'll tell you that the proceeds were invested by our investment department at double A+ credit and a 90 basis point or positive arbitrage over the 425 rate.

What we've done with the money is two things.

We've created about a $72 million escrow fund up at the Selective Insurance Group level to handle the debt service on two private placements that start maturing neck year.

That will substantially reduce the dividend requirements by Selective Insurance Group of their operating companies.

So that's the first part of it.

The second part of it, the remainder was down streamed to our insurance operations to provide them additional abilities, capabilities to grow their business.

Now, just so you're clear on this, the money that we put in escrow how we did this we had securities from the insurance operations and transferred those securities and then paid the insurance operations the money so they could invest the money longer and that's how we were able to get positive 90 point arbitrage.

All right.

And that's 70 million in escrow will essentially be kept there as you pay down the --

$72 million.

The various senior notes.

That's correct.

That have maturities extending out to into 2010.

The big ones in from that we're actually pre-funding is the $54 million senior note that has three tron was coming due, those are $18 million each starting next year and then there's $6 million that's due in each one in 03, 4 and 5 as part of another senior note that starts its maturity process so that's really a, really it stabilizes the debt service for the company for the next really three-year period.

Great.

My last question, Greg, is it possible for the company to achieve an all end 100% combined ratio for 2003?

Well, we haven't put our, we haven't put any expectation out for the 03 year as I mentioned earlier, until we go through our planning process, and look at what kind of forecast we want we want to make for the year and at that time we'll put that forecast out.

Alternatively, is it reasonable to expect that the personal lines trend will continue in its current direction?

Were I got to tell you I am very encouraged about what I read about the personal lines in terms of the pricing pressure that's been put on all our competitors to improve profitability in that sector of their business so we see a lot of opportunities in there.

In particular our New Jersey situation although we're still not generating an underwriting profit, we are very comfortable with with the new rating plan and the new tiering plan that we've implemented and continue to fine tune as we move forward.

So, you know, we look at, ongoing improvement as the rate increases that have already been approved are either, a, going forward, or b already in our unearned premium reserve yet to be earned will generate some traction in that marketplace going forward.

Personal lines maybe in 102 is definitely conceivable for 03.

Well, we'll continue that in the planning process.

All right, thanks.

Okay.

John, thank you.

You're working hard at it, though.

And next we'll move to Beth Malone with Advest Investments.

Morning, thank you.

Just a clarification, were the cat charges that you took in the quarter, were they related primarily to the personal lines or were they a mix over both commercial and --

They were basically evenly balanced between the personal lines and commercial lines.

Both had about 1.2, 1.2 points of losses in there.

On the flood insurance business could you give us just a sense of where you think the opportunities are right now to make more acquisitions in that area and the new markets that you're in, were they due to acquisitions or was that, you know, internal growth, and what's the status with the flood, the FEMA people right now?

Yeah, the entire situation is as such, we look at the flood business as a huge opportunity for us.

It's a very under penetrated market right now.

There's a lot of people who are in flood zones right now that don't have flood insurance so we look at that as a great fundamental opportunity to Grote business.

Our same-store sales continue to go higher.

We've gotten the national backing of the big i as they're recommended, they're their recommended carrier and I think that is starting to pick up business for us as we gain more and more recognition.

You got remember, our brand is in 20 markets.

And now we're getting the big i endorsements in 50 states so we're continuing to push out the selective name out in these other markets.

We look -- so we look at a good opportunity in same store growth sales, employing more agents in every state that wants to sell flood business through us.

So we look at that as a great core opportunity to grow the business.

In terms of acquisitions, we are out in the marketplace.

We are looking to grow our business through acquisitions.

You know, we have done two acquisitions previously and that is funding part of the growth in that business.

I would say that flood group 20% and I don't know, I would say acquisitions were probably maybe half of that growth overall approximately.

Flood grew 28% and 20% of that is organic grew.

Thank you.

Flood 20% of the overall growth was through, 20 points of the overall growth was organic.

So with the whole situation with FEMA, we're going continuing to look at other opportunities, and we'll be aggressively pursuing them.

Okay.

So the feedback from them, they haven't said you can't participate in this or you haven't gotten any.

No.

Like any real communication from them in that regard.

No.

Okay.

Just more of a strategic question at this point.

You have built up your diversified insurance operations over time and I guess that was more of a focus when pricing in your traditional property casualty business was not as attractive as it is today.

As you look forward, are you going to continue to try and build up that diversified or more capital will be deployed to your more traditional commercial and personal lines business where pricing is now much more attractive?

I guess first I'd say in terms of capital, capital allocations the diversified businesses really don't require an awful lot of capital.

We don't have a tremendous up front capital invested in those businesses and the beauty about those businesses is they generate a lot of free cash flow through the nine months of this year I think the free cash flow in those businesses was close to 6 to $7 million.

That's approximately 6 to $7 million.

And we are an able to take those businesses and reduce the dividend requirements of our, of the insurance operations and that actually inherently puts money back into the insurance operations for them to grow their market share.

But I would say to answer your question strategically, you know, we have-there's really two criteria that we look at when we buy a diversified business.

Business.

Either vertically which means we use that target's products or services in the output of the overall corporate caught of goods sold or fits complementary meaning that we can sell through a common distribution channel, and that's where the P/E o and flood fit.

So we aren't really looking to add any other diversified segment at this time, but, you know, we are looking at aggressively continuing to grow our commercial lines and personal lines books because we see tremendous opportunity in there.

But I didn't want you to think that these businesses are absorbing capital.

They're actually throwing off free cash flow that are helping us, helping the insurance operations now invest, more heavily in the business.

Okay.

Thank you.

Next we'll hear from Ira Zuckerman.

You mentioned that you seem to be satisfied with the asbestos reserves.

Was there any prior period development in the quarter on any of the other lines either positive or negative?

Any lines other than asbestos you're talking about in asbestos.

Yes.

We saw a certain amount of development this year in this quarter and I'd say it probably was close to 4, it was about $4 million in development overall.

Okay.

In all businesses.

That's you're talking negative?

Excuse me,.

When you say development you mean adverse development.

Yes.

What was it a year ago?

I don't have that right here with me.

Okay.

Thanks very much.

As a reminder to ask your question please press star 1, and we'll take a question from Tom [Vanveskurt]

I apologize if I missed this but on your reinsurance the renewal process for that, has there been or do you expect any change in the terms and conditions you're going to face or the amount of business that you're going to have to retain?

And then I have a follow-up on the diversified insurance businesses.

I would say from a T&C standpoint, no, we don't really see any changes in terms or conditions.

Okay.

In the contracts.

And just two quick things on the diversified insurance insurance services, are all of those segments free cash flow positives and with regards to the managed care segment, what's the story there, profitability still seems to be depressed versus last year.

What are the obstacles and what are your expectations about getting that back up?

With respect to the first part of your question, yes, they are they all are free cash flow positive.

Obviously the one on the lower end is the professional employee organization.

With respect to the managed care performance for the quarter, and the ongoing run rate, Jim Coleman will talk to you about that.

Yeah.

Part of the lower margins in the course of the year weren't unexpected.

We've had -- as these businesses develop, there's ban movement to lower margin business, part of it was as we introduced our New Jersey auto product.

In the beginning that product generated very high fees but as the product emerged and part of the product offering was labor-intensive services that came later, 12 months, 18 months, 24 months later and so really you're seeing a change in business mixed to lower margin business.

So it's just a mixed shift kind of thing.

Yes.

Thanks a lot.

At this time there are no further questions.

I will turn the call back over to Mr. Murphy for any additional comments or closing remarks.

Well, thank you very much for participating in the call.

And thank you.

That concludes today's conference call.

Thank you for your participation.