Selective Insurance Group Inc (SIGIP) 2003 Q2 法說會逐字稿

Good day everyone, welcome to the Selective Insurance Group, second quarter earnings release conference call.

At this time, for opening remarks and introductions, I would like to turn the call over to Mrs. Michele Schumacher Vice President and Corporate Governance Officer.

Please go ahead.

Thank you.

Good morning.

Before I turn the call over to Dale Thatcher, Executive Vice President and Chief Financial Officer of Selective Insurance Group; and Greg Murphy, our Chairman, President, and CEO, I want to remind you that some of the statements made during the call are not historical facts and are forward-looking statements as defined in the private securities litigation reform act of 1995.

Such statements are subject to certain risks and uncertainties.

The factors which could cause actual results to differ materially from those suggested by any statements include but are not limited to those discussed or identified from time-to-time in the filings we make with the Securities & Exchange Commission, including our annual report on form 10-K and our quarterly report on form 10-Q.

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, which are supplemented by the investor packet and other information on the investor page of our public web site at www.selective.com.

After the prepared remarks, we will have a question and answer period.

The following corporate executives are on this call along with our speakers, Richard Bernstein, Executive Vice President and General Counsel;

Jim Ochiltree, Executive Vice President, Insurance Operations;

Jim Coleman, Executive Vice President, Diversified Insurance Services;

Kerry Guthrie, Senior Vice President and Chief Investment Officer;

Ron Zaleski, Executive Vice President and Chief Actuary;

Sharon Cooper, Senior Vice President, Director of Communications; and John Marchioni, Vice President, Government Affairs.

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

A replay will be available at the same site through September 5, 2003.

With that, I'll turn the call over to Dale.

Good morning and welcome to our Second Quarter Conference Call.

Yesterday evening, we released second quarter results for the period ending June 30, 2003.

Net income increased 140% for the quarter to $19.7m or $0.72 per diluted share, compared with $8.2m or $0.31 per diluted share in the second quarter of 2002.

Operating income from continuing operations more than doubled for the quarter to $17.6m or $0.64 per diluted share compared with $8.6m or $0.32 per diluted share for the same period last year.

Operating income differs from net income by the exclusion of both realized gains or losses on investment sales and net income from our discontinued operations.

Annualizing our second quarter operating income produced a return on average equity of 10.3%, well in excess of our 8% weighted average cost of capital which is based on a 5.5% equity risk premium on a .81 beta.

In contrast to the first quarter this year, Selective was not impacted by weather related catastrophes that affected large sections of the country during the second quarter.

These favorable results, coupled with our ongoing pricing and underwriting initiatives, generated an overall statutory combined ratio of 99.6% for the quarter, an improvement of almost 5 points from the 104.3 posted for the second quarter of 2002.

Weather related CAT losses had no affect on the combined ratio for this quarter, compared with 2.4 points for the same period last year our core commercial lines operation, which represents over 82% of premium volume generated a statutory combined ratio below 100% this quarter, improving 3.6 points to 99.3, down from the 102.9% at this time last year.

These results reflect the impact of 3 plus years of double-digit commercial renewal price increases that averaged 13% this quarter.

Commercial lines premium grew 16% for the quarter to $250m compared with the prior period.

Strong growth was driven by a 35% increase in new business to $62m and a retention in point of renewal have exceeded 86% for the quarter, up from 83% for the full year 2002.

Our commercial property line was a big driver of improvement this quarter, posting a statutory combined ratio of 79.6%, 30 points below the second quarter of 2002 results.

This is tangible evidence of the underwriting improvements we have been talking to you about.

Commercial Automobile also registered a strong quarter with the statutory combined ratio of 92.4%, down almost eight points compared with the second quarter, 2002.

Earned premium for this line continues to outpace loss trends by seven points.

Our workers compensation business came in at a 112.5% for the quarter, consistent with the same period last year.

Although not performing at acceptable levels, we continue to focus our improvement efforts on providing workers compensation coverage, part of an overall package of insurance protection.

By including this coverage, we are able to write more commercial accounts while maximizing our results against less profitable lines of business.

In fact, less than 5% of our workers compensation business is unsupported.

Our appetite is for low-to-medium hazards that do not pose a high potential for catastrophic loss.

We refined underwriting guidelines to eliminate the most unprofitable classes of business.

We take full advantage of rate opportunities where allowed by law, as well as additional pricing opportunities generated by credit reductions, higher pricing tiers and limited use of dividend plans.

As a result of these initiatives over the last three years, our workers compensation pricing has increased 48%, while policy count declined by one point to 8% of our total commercial policy count.

For the first six months of 2003, we received an additional overall price increase of 14%, including 16% in New Jersey, our largest workers compensation market.

For the fiscal year ended June 30, 2003, the productivity measure of net premiums written for insurance employee increased to $639,000, up 11% compared with the same period last year.

Our personal lines results showed significant improvement for the quarter.

Net premiums written rose 7% to $57m compared with the second quarter of 2002.

Our overall personal lines' statutory combined ratio including the flood operation improved almost 10 points to 100.5% for the quarter, down from 109.8% for the same period last year.

Continued underwriting and pricing improvements led to a nine-point drop in our personal automobile statutory combined ratio, 102.3% for the quarter.

While the homeowners line improved about six points to 108.1.

In New Jersey, we're nearing underwriting profitability in our personal automobile book of business with a statutory combined ratio of 100.7% for the quarter, close to an eight-point improvement from the same period last year.

Additionally, state lawmakers passed automobile insurance reform legislations during the quarter that offers at least the possibility of improved rate adequacy in underwriting profitability.

Average premium per vehicle in New Jersey increased 10% for the period compared with second quarter 2002.

And the number of insured vehicles has declined by about 2000 since year-end 2002 to 109,000.

As we continue to earn higher premiums from price and tier changes, we expect ongoing improvements in this line.

Importantly, New Jersey as a whole remains one of our most profitable territories posting a statutory combined ratio for all lines of business of 93.4% for the quarter.

Efforts to control our exposure in New York are ongoing due to the high cost of required participation in the involuntary automobile insurance market.

The New York personal automobile statutory combined ratio was 122.7% for the quarter including almost 34 points from assigned risk charges.

However since year-end 2002, the number of vehicles we insure has dropped 12% to below 10,000.

In our eight other personal lines states, net premiums written increased 16% for the quarter to $17m.

The personal lines statutory combined ratio for these eight states dropped 17 points to 106% compared with the same period last year.

This significant improvement reflects price increases, tier changes and other underwriting actions designed to improve results.

With total estimated price increases of 8% for automobile and 15% for homeowners in 2003, we expect ongoing improvements for these states.

We recently completed successful renewals for two of our major excessive loss reinsurance treaties.

Despite a firm reinsurance market, the nature of our business as a regional carrier with smaller risks in middle market communities enables us to reduce costs for both treaties while increasing the protection they provide.

Our property per risk contract renewed at $10.1m approximately 7% below the expiring premium.

This was an improvement over last year due to our favorable loss experience in property underwriting initiatives implemented over the last three years.

In addition, we expanded our treaty capacity by $5m to $20m at any location.

The casualty treaty renewed at $14.6m, about 2% below the expiring premium including $5m increase in umbrella capacity.

Higher levels of treaty capacity will reduce our facultative reinsurance costs.

As discussed last quarter, we purchased a terrorism reinsurance treaty for about $5m in February that covers $45m in the aggregate in excess of $15m aggregate retention.

Since April, a significant 92% of our primary insureds have opted to purchase voluntary terrorism coverage.

This does not include premium collected for mandatory workers' compensation coverage.

Strong take up participation in terrorism coverage will enable us to cover our treaty costs and more importantly fill the long term strategy to deal with that exposure, which is highly unpredictable.

In our diversified insurance services businesses, quarterly revenue from continuing operations was $23.5m, up 13% over second quarter 2002.

Return on revenue improved to 7.6% for the quarter, up from 5.2% for the same period last year.

Revenue at our flood operation rose 23% to $5.9m.

Net income was $0.9m with return on revenue of 15.6%.

New flood business was ahead of plan at $5.1m for the quarter due in part to enhanced marketing efforts with our personal lines operation.

Total flood premium service is approximately $59m.

In our managed care businesses, revenue increased 5% to $6.4m for the quarter.

Net income was $0.7m with return on revenue of 11.3% for the period.

Included in the quarter's results is a one-time $500,000 lease and related expense charge involving the consolidation of the managed care operation to one office location.

The move is expected to generate annual pretax savings of about $400,000.

Revenue for Selective HR Solutions, provider of our human resources outsourcing product was $10.7m for the quarter, 14% increase over revenue of $9.4m last year.

Net income was $0.1m for the quarter, with return on revenue of $0.6%.

On a year-to-date basis, pricing continues to move higher with workers compensation fees up 11% and client administration fees up 7%.

In the first six months of the year, we added 3,500 new worksite lives, which pushed our total to 19,700.

Our pricing, underwriting, and sales initiatives are all on track with our profitability improvement plan.

Lower interest rates continue to put pressure on investment returns.

However, we still generated a 15% increase in after-tax investment income $21.4m for the quarter up from $18.6m for the second quarter 2002.

Increase reflects continued strong operating cash flow of $59m for the quarter compared with $34m last year as well as increased contributions from our limited partnership investments.

In the first six months of 2003, our annualized portfolio yield was 3.7%.

We continue to maintain a conservative diversified investment portfolio with our bond holdings representing 88% of investment assets.

Approximately 62% of our debt securities are 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.

Thank you Dale and good morning.

We are pleased to see that our hard work is starting to pay off.

Results of our three year pricing in underwriting initiatives having a significant impact on commercial lines results while at the same time our personal lines and diversified insurance service operations are making positive contributions and gaining momentum.

Operating cash flow remains strong, as demonstrated by substantial growth in our book value per share.

Most importantly, we are still making solid progress on commercial renewal pricing.

For thirteen straight quarter price increases reached double digits to 13%.

As expected, we are beginning to see a slight moderation in the level of increase, however, our outlook for commercial lines remains favorable as price increases continue to outpace loss trends by more than seven points.

Given an ongoing industry wide pressure from both lower investment returns and from rating agencies to improve underwriting performance, we do not expect significant changes in the commercial lines pricing environment for the balance of 2003.

At the same time, personal lines prices continue to move higher industry wide.

Sustainable price increases for commercial and personal lines combined with continued improvements in retention, led to strong premium growth this quarter.

Overall net premiums written were up 14% or $307m.

Price however, was only one part of our profit improvement plan, technology is another.

Through Selective's enhanced web based commercial line systems that adds functionality for agents to process endorsements and renewals, coupled with download capability, we are now processing even more seamless transactions with our agents.

This will greatly improve our productivity as well as the overall capacity of the company.

Our technology is clearly at the forefront of the industry which in addition to web based commercial line systems provides online capabilities for our 6000 flood insurance agents, underwriting and claims service centers supporting agents and customers at their convenience, eSelect a customized web site where agents seamlessly manage their business with Selective along with additional plans to roll out new bond and personal line systems starting later this year.

Our Personal lines operations posted strong results this quarter.

Statutory combined ratio was just above 100, almost ten points ahead of the second quarter last year.

With our New Jersey Personal Automobile business also nearing an underwriting profit.

Three years of pricing and tiering improvements in New Jersey have driven our average premium per vehicle up 21%, over 2000 premium levels.

And as a result of ongoing diversification initiatives, this line now represents less than 11% of company wide premium volume.

Another indicator of improving fundamentals in the industry is the amount of cash generated by operating activities.

At Selective, operating cash flow is up almost 40% year-to-date to 100m compared with the same period last year.

The higher level of cash help to drive the investment income up 15% year-to-date to $57m.

The diversified insurance services operation had a solid quarter with revenue up 13% and a return on revenue reaching 7.6%.

Results were favorably impacted by traction in our flood operation, which grew 22% the first six months of the year compared with last year, including $7m in new business and $2m in book rollovers.

For two consecutive years, the National Flood Insurance program honored Selective for having the highest percentage of new flood policy growth.

At the same time, we continue to benefit from our relationship with the independent insurance agents and brokers of America as their endorsed flood insurance carrier.

Strong results posted for Selective across every business sector grew our book value per share 12%, to $26.37 at June 30 over the same period last year.

In closing, barring excessive catastrophes, we anticipate for the full-year 2003 net premium written growth between 13% and 15%, the New Jersey personal automobile statutory group combined ratio below 102 and overall statutory combined ratio below a 102, diversified insurance revenue growth of 12% and a return on revenue of 6% and we are raising our operating earnings guidance between $1.95 and $2.15 per diluted share.

In the second half of the year, we expect to continue to generate a return on average equity in excess of our cost of capital.

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

If you wish to ask a question at this time you may press star, then the number one on your touchtone phone.

Your questions will be answered in the order received.

If you're in the question queue and no longer wish to ask your question simply press star, then nine.

Your first question comes from Elizabeth Malone of Advest.

I'm sorry operator you're awful choppy to us.

I'm not sure whether people on the line can hear us better than you.

Your first question comes from Beth Malone of Advest.

Thank you.

Can you hear me?

Yes, Beth we can hear you.

Okay, congratulations on the quarter.

I just, these are a couple of questions.

On the workers' comp market, have you seen a ditch?

I know it seem to be improving in many areas and I don't know how much exposure you have.

But I understand that Pennsylvania continues to be a very difficult place to have to write that kind of business.

Generally, have you seen you know fundamental improvements in the markets that you're in for workers' comp?

Are you encouraged by the trend or are you just kind of managing it because you have to offer it?

Well, I guess, we write it as part of an aggregated account.

I think if you look at where comp represents the largest segment in some our business units.

In our construction units and even in our mercantile and service units, you'll find that the overall profitability of that entire business unit is there and comp is an integral part of that and comp is big part of that account.

We are an account underwriting company, we try to limit our exposure on comp where we can.

If there are monoline markets for it we'll have that business put into a monoline market.

But more importantly, we're also fundamentally improving our price structure, we are moving our pricing higher, we are shifting business into less preferred companies so pricing moves higher there.

We've been more restrictive in our utilization of dividend programs.

And I think overall we're trying to make that line a more profitable segment.

I think, New Jersey is a big part of our overall workers' compensation business and we're pleased to get the price increase there and now you got to give it a certain amount a time to work its way through the earned premium.

Okay and on New Jersey, as you mentioned there's been some developments that are favorable.

I noticed that some companies are considering coming back into the market, you see the New Jersey environment as continuing to improve or do you see there's a possibility for more competition there?

Well, one company does not make a huge amount of, you know, given the level of players that have left the market versus who is here, I think there is plenty of opportunity in a very stark market for new companies.

So, I don't view that as a big issue.

I would say that we're continuing to monitor, it's the regulations that need to be written and John Marchioni could comment a little bit.

But there are number of regulations that are still part of this process that we've not yet seen.

But generally, we're pleased with our improvements and there are many years of hard work to get to where we are.

So, John do you want to comment on some of the regulations that would be forthcoming.

Sure, Greg.

Certainly the second part, as we mentioned last quarter, there are three parts to this reform effort if we're going to really track, if we're going to see any new competition into the market place.

First one is the law, which is done.

The second one is the regulations, which we have 18 out there that are going to be promulgated over the next six months.

So, those appear to be on track, but the third component and this is going to be the most difficult.

Based on New Jersey's history, there's going to be a level of stability required for at least a couple of years before you see any significant movement in the market place.

Now, that's you know time will tell we do have one significant player about to enter the market, but in terms of companies reentering I think that's probably a longer-term proposition.

So from the competitive standpoint, we may see a real small short-term of uptick.

But I think it's going to be more of a longer-term proposition.

Okay, one other question on the flood insurance business.

There appears to be a trend from the federal government, a trend limit who can receive flood insurance.

They've changed the rules so that, if you are in a flood plain, you had a couple of incidents and if you're not going to be able get that insurance.

Do those more restrictive flood plain issues have a bearing on your opportunity to grow that business?

I would say absolutely not.

I think what you're referring to is the effort by FEMA to start to mitigate their higher tentative loss accounts.

That is a very very small segmentation of their business and basically those are properties in very high, high risk areas with you know they are just trying to say what really -- they are not going to -- they are talking about not insuring them any more.

But I think, if you look at the segmentation of what that represents it's a very small piece of the population versus how many people that are out there in flood plain or in other areas that need flood insurance that are covered by their homeowners policy for the coverages that are afforded by that there's a huge market opportunity.

Okay, thank you.

Your next question comes from Mike Dion of Sandler O'Neill.

Good morning everyone.

I've got a couple of questions.

First, in your growth guidance that you gave at the tail end of your comments, just looking at the breakdown between the commercial and the personal lines is now approximately 82% commercial to 18% personal lines.

Would you expect that ratio to increase in favor of commercial lines to personal lines as we look out for the rest of '03 and possibly '04?

And as a follow-up to that, with your combined ratio guidance of 102, do you think that, going forward to next year, assuming loss costs continue to increase and prices continue to increase at the rate that they have, so you do have a 7% differential between the two, the combined ratio will get down into the high 90's?

Let's talk about it, you know, rebuilding policies with 82% of our operations' commercial lines, and given the growth rates there both in new business and in renewal price increases, you know, we expect that number to continue to grow slightly higher.

It's not going to change, maybe as much as it has over the past few years, but it will continue to move a little bit stronger.

We are positioned as Dale mentioned earlier, for eight states, for personal lines where we are growing business and those are opportunities for us.

I expect Mike that, you know, we look to continue to move that percentage slightly higher in favor of commercial lines business.

With respect to performance, we've made no disclosures with respect to 2004, but what we have said though in this call is that commercial lines price increases continue to outpace loss trends by seven points.

I think, which, you know, you are seeing those slight moderation in commercial lines pricing.

And then in terms of performance improvement next year, you are going to get the benefits of the premium that we've written off this year that will work it's way through earned premium, next year number one.

Then number two would be then, what's our ability to maintain pricing for in excess of loss cost.

I think that's really where you look at performance improvement before you are going to be looking at, really in my mind, three factors.

As before, the first one will be the benefit for higher level earned premium working its way into the '04 numbers.

Number two then is the price that we write the business at next year relative to loss cost and that's something that we'll view favorably that we will have a slight margin although I don't think it's going to get anywhere near the seven points that you are seeing now.

And then I think, from our standpoint, our productivity improvements and some of the things that we have done from the technology standpoint now, we'd made a lot more seamless for agents across this business with us, and I think we are going to continue to see productivity and the scalability of the company improve by '05.

But we are making no forecast beyond what we've had in the call in terms of future results.

Okay, now that's helpful.

Thank you very much.

Your next question comes from Alison Jacobowitz of Merrill Lynch.

It's actually Jay Cohen.

Just some numbers questions first, do you have book value per share excluding unrealized gains?

If we don't, we can have someone calculated during the hour, while we are talking to you.

Okay.

Next one.

The personal lines combined ratio, what would it have been excluding the flood operation?

Hold on a second.

For the quarter, our combined -- no, I am sorry.

I have to get that for you.

My numbers are all embedded flood in there and the reason why we do that is because our competitors have flood embedded in their personal lines results.

So, when we start to strip it out, what I can tell you though is that our homeowners' combined ratio was for the quarter 108.1.

Our auto for the quarter was 102.3, then we can give you the other pieces of other.

What's in other Jay, is our umbrella business, as well as some dwelling fire business.

Let's see if we can get those numbers for you.

Okay.

Homeowners' was 108 and you didn't have any cats in the quarter?

Our total cat exposure was zero.

You might have had a little bit in a line-by-line analysis, but it would have been relatively de minimus.

Okay.

Staying with personal lines for a second, you gave a number for the combined ratio in state outside of New Jersey and New York of 106, was that just auto or was that all personal lines?

That's all in operation.

Okay.

And you are growing that business 16%?

Is that the right number?

I believe that was the number as Dale quoted.

Yes.

Okay.

It just seems that, I mean what's the goal here?

It seems that the auto market is probably not going to get easier going forward?

You talked about rate increases, we hear that, we also hear rates starting to decelerate, and you are still well above a 100 in a low-end trading environment.

I mean, is this a business that you are absolutely committed to?

Well, let me just say this, let me kind of go through.

I think it's important to understand our strategy or personal lines with the agency.

We are not rolling out personal lines, even to all of our agents in any particular state that we have a concentration in.

We're finding agents that there is a reason why we are in their office.

In other words, they have a need for us and we are going to deploy our personal lines really on an agency-by-agency basis.

I think when you look at the 106, you got to remember there is a tremendous amount of price increases that has been working, and underwriting changes that we deployed over the past year that haven't evidenced themselves in that number yet and I continue to see that a little lower.

We will manage the business, to answer your question directly though, we understand the amount of capital the personal lines takes and we know that we need to operate that segment by range.

We are only going to operate it where we feel that we get to those kind of the returns long-term.

Okay.

[Inaudible] question, that if we find like New York where we have added that market, where we, all those things would not really come to fruition.

We have made that decision exactly that you are asking, but in these other states that we are in, we feel that we have got the opportunity to do that.

We feel it is a nice opportunity to add something to our agents round up the full relationship that we bring to the table.

Then again, I just want to make sure.

If we are going to a state, we may have 60 to 80 agents in that state.

We may be doing business with 10 or 15 or 20 of those agencies.

Okay that's helpful.

Jim, do you would to want to add something to that?

Jay, I have got one answer for you and another question for you too.

One is the personal lines combined ratio, overall without the flood would be a 102.2 compared to 100.5.

Yeah.

And when you ask for the book value without unrealized gains, do you mean just without unrealized gains on the bond portfolio, that's normally what people ask for is the ex-FAS 115?

Ex-FAS 115, yeah I am sorry.

Okay let me work through those numbers.

We will make sure we --

Okay, then one another quick question, again numbers related.

The limited partnership portfolio, how much did that add in the quarter, just look at your overall yield went up versus the first quarter, obviously interest rates came down, so I am wondering what that impact was?

All right, we had for limited partnerships, we had about $2m worth of investment income pretax in the quarter compared to only a $140,000 in the same quarter last year.

You don't happen to know what it was in the first quarter, do you?

I can calculate it quickly.

First quarter would have been $400,000.

Okay.

That's helpful.

I will jump off and let others ask questions now.

Thank you.

Thanks Jim.

Your next question comes from Jeff Thompson with KBW Inc.

Thanks, actually Jay asked most of my questions, but I'm curious a little bit about New Jersey Auto, can you look out maybe five years and what do you see, is this the market that's going to stay profitable or stay operable or could it revert back to something we've seen in the past?

I'm asking because I'm just getting a sense with particularly this new entrance that's considered fairly smart money and I don't think they would make a decision without some kind of basis for this being a sort of a strong market going forward.

What do you guys see?

I would say this.

Obviously, the auto market can run in gubernatorial cycles.

However let me say that the situation in New Jersey is a little bit different today than in past years primarily due to the walling off of surplus that supports New Jersey Auto by most companies, and what I mean by that is in the past years, the department has had a certain amount of ability to push companies around in terms of pricing or else they had other companies' balance sheet there supporting all lines, all states.

Now it's a little bit different that most companies have walled off their surplus supporting New Jersey.

New Jersey Auto is standalone and that has to be a financially viable organization and departments are responsible for pricing and also fact that the company is viable.

So, I think that puts a little bit different play on the market going forward because the pricing is not adequate, financial stability will drop, ratings will drop and then the ability for companies (Audio Gap) need to do business in the state will be hampered.

That's exactly what happened at State Farm, and I think going forward you still have got that fundamental there which I think is very different than in past cycles.

So, there could be a little bit more stability and right now the Jersey situation is availability issue, I mean in the sense that there is not a lot of markets out there that want to write and the department is fundamentally trying to change that.

They want to bring our players to the market to get more competition.

I think with their pricing in the market place we view that as a positive.

Okay.

Then as a follow-up, are you seeing any opportunities or are you at all interested in making smaller acquisitions whether weak mutuals or different opportunities in your markets where you would now be interested?

I would say that what we find, our strategy for growth is on an agency-by-agency basis.

We know the companies that are represented in a particular agency and our ability to go at that business at an agency-by-agency basis allows us to do the things that you are talking about but more on a subtle basis.

Okay.

Thanks a lot.

Your next question comes from JF Trembley of Credit Suisse First Boston.

Good morning.

Good morning.

I have a few questions for you.

Can you provide some additional color on your growth in your commercial lines in terms of products and agents, are there any new products you're offering or would you say most of that growth is from new agents or existing agents?

I would say that obviously the growth part of it is the renewal price increases, which were 13% for the quarter and improving retention, but I would say that our growth is more broad base, we see growth throughout our entire agency plan and I don't have an exact, what the growth would be in same-store agents versus new agents, but I can tell you what we look at from our standpoint is broad based.

They just haven't.

This is Jim Ochiltree, there just haven't been that many new agents appointed.

This is basically, and it is coming from all territories, all states where we operate.

Okay.

So, from people you've done business with in the past?

Yes.

Okay.

And then in the previous quarters you shared how closely you were monitoring this new business in the new states.

Are you still using the same protocol you use to monitoring pretty closely?

I'm sorry I missed that question.

Yes, what I'm saying is are you still monitoring your commercial lines in the new states still very closely?

Oh yes absolutely.

What we look at in our organization is we look at renewal price increases, we look at that monthly, we look at retention, we look at that monthly, we track new business, and we look at new business to credit level that it's written at, we have a number of folks here that also are going through accounts that are written in territories and there's a heavy process of monitoring the types and the quality that's written throughout our entire 20-state footprint.

Same that happens in the new markets is the same thing that we're doing in established markets.

We kind of manage the company the same way.

And do you have a reserves review in the quarter?

We do reserve reviews every quarter.

Right.

And was there anything special or?

The only thing that we have on a year-to-date basis, we had about, well in the first quarter we had no loss development at all.

On a year-to-date basis, we had $5m of development and it was split into loss adjustment expenses and losses about $2.5m each, but nothing out of the ordinary.

And did you connect those losses, adjustment expenses to your some specific lines?

I'm really sorry, having trouble, for some reason you're breaking up to us, I can't hear the question.

Okay.

The loss increases you mentioned, was that attributed to some specific business line?

The biggest line that we saw on the loss development side was on general liability.

On the expense side, I'd say where we're seeing a little bit of pressure on the loss adjustment expense area is in the workers' compensation line.

Okay, and finally a number question, what is the duration of your fixed income portfolio?

4.5 years.

Okay.

Thank you.

Your next question comes from Beth Malone of Advest.

Yeah.

I just have two follow-ups.

One, could you just explain a little bit more about, when we look at the three months period compared to last year on looking at the statutory combined, the general liability and the [inaudible] policy line showed a deterioration in the, and in the combined ratios over a year ago?

And I was just wondering, could you just speak to that a little bit?

Yeah.

On the general liability line, it's pretty much what we just talked about.

That's the line that saw the development, and I think though, on for the quarter and year-to-date I am just sorting it out right now --

Year-to-date it's improved by about a point, a little over a point.

But for the quarter, the deterioration is the adverse development.

So, our general liability line ran at a 104.3 for the quarter and on a year-to-date basis, are still on the 100 though.

I mean, still profitable, even though we had a certain amount of development in that line, was the 99.5.

So, we look at total performance and by line, and when you look at where the price increases have come in, a lot of, you know, the lead lines for us, price increase wise, has been the property.

Now the comp is started to develop, as the matter of fact in terms of price increases and this will really working to get that combined ratio on a year-to-date basis back down.

On the BOP, now I don't think there was anything unusual in the quarter on a year-to-date basis that's still suffering from the high weather related losses experienced in the first quarter.

But again, that's why in that we are still pushing price increases through, still trying to move that performance down.

That's also a small lines, so that doesn't take a whole lot to move the combined ratio around.

Little more volatility because of the size of the premium.

And the other question on your return on equity goals, are they still at 12%?

You could reiterate what they are.

Our return on equity goal as we stated in the past, is three points higher than our cost to capital, and that was the goal that we were working to a while ago, and I think as we continue to get closer, we will continue to examine and push that goal further.

So, it's not -- its' never been a stated number.

I think it was 12 when our cost to capital was 9.

And now that the cost to capitals have come down because in the CAPM Models where you see that risk premiums have come down.

The risk premium charge in our older model was running about at 7.30.

And now in the newer models and also the Bloomberg the risk premium is down to about at 5.50, in applied they our beta to that, that's where you get the excess premium charge that you had then -- that you've been at to the ten-year treasury.

So, you know that number has come down, and so our target is three over that.

So what is that -- within the cost of capital?

Our cost to capital is just about 7.75.

Okay, thank you.

At this time you have no further questions.

We do have a follow-up for Jay's question regarding the book value per share without the unrealized gain in bonds.

We've got $26.37 book value; the unrealized gain on the bond portfolio adds $3.41, so to reduce it by that would be at $22.96 book value per share.

In comparison, if you look at the same item at year-end we have a $24.52 book value per share, $2.60 of that was from the unrealized gain and the bond portfolio on an after-tax basis.

So, that was $21.92 per share without the affects of FAS 115.

Okay there are no further questions, thank you very much.

No questions, operator?

At this time you do have a question from Gregory Peters with Raymond James.

Thank you.

Good morning everyone.

Good morning Greg.

I want to apologize upfront because this is already been asked.

However, I was curious if the Board has changed its view with respect to capital allocation in light with the recent tax law changes, specifically where you guys are viewing, whether it's growth dividends or share repurchase or what the orientation there is, and if there is any change going forward?

Well, I am going to say this, we've been an aggressive buyer of our stock, and now we bought $140m with our stock back by an average price of 19 something.

But we also had a long-standing history prior to this last string of very tough market of the history of increasing dividends on a pretty consistent basis, up until the mid 90's through now I think in the last [Inaudible] .

Dividends are something that we review every quarter.

And I would say that if you look at all the opportunities, and I think that's what we do every quarter, and that's all I really can say on that.

Fair enough.

At this time, there are no further questions.

Thank you very much.