Selective Insurance Group Inc (SIGIP) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the Selective Insurance Group fourth quarter earnings release conference call.

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

Please go ahead, ma’am.

Thank you.

I just want to clarify, it’s the fourth quarter earnings results.

Good morning, and before I turn the call over to Dale Thatcher, Executive Vice President and Chief Financial Officer of Selective Insurance Group, Inc. and Greg Murphy, our Chairman, President and CEO, I want to remind you that some of the statements made during this 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 risks and uncertainties.

Factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the filings we make with the Securities and 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’ll have a question-and-answer period.

The following corporate executives are on this call along with our speakers: 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.

This call is being webcast over the Internet at www.selective.com.

A replay will be available at the same site through March 3, 2004.

With that I’ll turn the call over to Dale Thatcher.

Good morning and welcome to our fourth quarter of 2003 conference call.

Our consistent performance, driven by continued improvements across our operation produced net income of $23.8 million, or 86 cents per diluted share for the fourth quarter,2003 compared with $12.3 million, or 46 cents per diluted share for this period last year.

For the full year net income was $66.3 million, or $2.40 per diluted share, compared with $42 million, or $1.56 per diluted share in 2002.

Operating income from continuing operations increased 90 % to $20.9 million, or 75 cents per diluted share for the quarter, up from $11 million, or 41 cents per diluted share, in the fourth quarter of 2002.

For the year operating income from continuing operations was $58 million, or $2.10 per diluted share, compared with $40 million, or $1.49 per diluted share, in 2002.

For the quarter net premiums written increased 15 % to $271.4 million compared with the same period last year, including $58.1 million in new business.

For 2003 net premiums written climbed 16 % to $1.2 billion, including $261.8 million of new business.

Our overall GAAP combined ratio fell to 99.5 % for the fourth quarter compared with 103.2 % for the fourth quarter of 2002.

For the same period, the overall statutory combined ratio improved almost two points to 101.6 %.

For the full year, the GAAP combined ratio was 102.2 %, down from 103.9 % last year.

The statutory combined ratio dropped to 101.5 % at yearend compared with 103.2 % for 2002.

Improvements in the expense ratio of 0.4 points were masked by the impact of incentive-based agent and employee profit sharing that added 0.8 points to the statutory expense ratio for the year compared with 2002.

Catastrophe losses were $5 million for the fourth quarter, $3.2 million after-tax, or 12 cents per diluted share.

For the same period last year catastrophe losses were $.6 million after tax, or two cents per diluted share.

For the full year, catastrophe losses contributed 2.7 points to the statutory combined ratio.

This is about one point above our budget, which lowered fully diluted earnings per share by 29 cents.

Selective’s solid 2003 performance was led by our core commercial lines operation, which represents 82 % of our business.

Commercial lines net premiums written were up 17 % for the quarter and 18 % for the year.

We wrote $50.3 million of new Commercial business in the fourth quarter and $228.1 million for the full year.

Higher premiums were driven by the 15th consecutive quarter of double-digit Commercial renewal price increases.

Renewal pricing held steady at 11 % for the fourth quarter and averaged 13 % for the year.

Retention at point of renewal improved to 87 % for 2003, up from 83 % in 2002.

Our Commercial Property line delivered a statutory combined ratio of 88.9 % for the quarter, compared with 86 % last year, up slightly due to seasonal claim activity.

Our Commercial Automobile statutory combined ratio fell to 97 % compared with 98.1 % for the same period last year.

The General Liability statutory combined ratio was down almost three points to 101.1 % for the quarter.

Our solid performance in these lines reflects higher pricing, continued underwriting enhancements and heightened loss control efforts, all of which lead to a better overall mix of business.

The statutory combined ratio for our business owners policy, or BOP, came in at 108.5 % for the quarter, up about a point from fourth quarter of 2002.

We are focusing great efforts to this line and a more profitable “office” class of business, which is running a five-year combined ratio of 91.3 % on an accident year basis.

The office segment now represents more than 50 % of total BOP locations, up three % over 2002.

In addition, we continue to implement ongoing pricing and underwriting actions to improve results, including; three-year compounded rate increases totaling more than 22 %, with an additional four % rate increase planned for 2004; automatic insurance to value increases averaging four % annually; higher surcharges for age of building and certain cooking classes, along with a reduction of sprinkler credits; and removal of unprofitable classes on exposures from the program.

The workers compensation statutory combined ratio dropped one point for the quarter to 113.6 % compared with the fourth quarter of 2002.

Selective has always maintained a conservative underwriting position with respect to this line of business, focusing on low to medium hazard business.

Workers Compensation represents about 24 % of our total commercial lines premiums and less than five % of the business that is unsupported by another commercial line.

Over the past four years we have increased the Workers Compensation pricing by 33 % through a combination of rate increases, credit reductions, dividend plans, and shifting business to higher-priced tiers.

These are the main reasons why our book of business performed substantially better than the industry.

Ongoing underwriting and pricing actions include; a targeted six % price increase in 2004, including about seven % in New Jersey, which was effective January 1st.

New Jersey represents 26 % of our overall workers compensation premium.

Mandatory job site inspections for certain contracting classes; enhanced training for our 60 loss control specialists, and our field underwriters, in areas such as falls from heights, lifting and loss analysis, and quality assurance program for all the renewal business.

For the quarter the overall commercial lines statutory combined ratio was to 101.6 % from 103.1 % for the fourth quarter of 2002.

For the full year the commercial lines statutory combined ratio dropped to 100.9 %, including 2.4 points from catastrophes, compared with 102.2 % and a 1.1 points from catastrophes last year.

Commercial lines earned premium increases outpaced loss trends by six points for the year.

Turning to Personal lines.

We continued to make progress in our personal lines operation during the fourth quarter.

Net premiums written increased seven % for the period and eight % for the year.

The personal lines statutory combined ratio, which includes the flood operation, improved to 101.8 % for the quarter, down from 105 % for the same period last year.

Led by ongoing improvements in New Jersey, our overall personal automobile statutory combined ratio came in at 104 % for the quarter compared with 110.3 % for the same period last year.

New Jersey Personal Automobile delivered a statutory combined ratio of 95.9 % for the quarter, down more than eight points compared with the fourth quarter of 2002.

For the year the New Jersey statutory combined ratio dropped more than seven points to 99.7 % compared with 2002.

Continued progress in New Jersey is the result of significant actions taken over the last four years, including aggressive pricing initiatives, a redesign of our rating tiers, reduced agency commissions, and improving political and regulatory climate.

In New York, we no longer focus on writing personal lines due to regulatory challenges and the high cost of the involuntary automobile insurance market that make it extremely difficult to do business.

Over the last two years we have taken strong actions to improve our position.

These include double-digit automobile insurance rate increases, a reduction in commissions, and renegotiated automobile assigned risk treaties that will generate savings of more than $1 million in 2004.

As a result, New York now accounts for only four % of our total personal lines business.

In our Homeowners’ line we recorded a statutory combined ratio of 109.7 % in the fourth quarter compared with 95.7 % for the same period last year.

Results were significantly impacted by catastrophe losses that added 14.2 points to our homeowners’ combined ratio for the quarter, compared with 2.8 points in the fourth quarter of 2002.

Average homeowners’ price increases totaled about six % for the quarter — or for the year, excuse me.

Throughout our personal lines operating regions we are implementing rate increases and tier changes, where allowed, we are implementing credit scoring to improve our rating structure.

These initiatives, combined with our new Web-based personal lines system, are expected to continue our underwriting improvements, leading to a smaller, but more profitable, personal lines segment.

Our January 2004 reinsurance renewals went well.

The positive impact of Selective’s operating footprint, along with our favorable contract experience, positioned us to take full advantage of the stronger market capacity and lower pricing.

Our property catastrophe treaty renewed at the expiring terms, $150 million coverage, excess of our $15 million retention.

With adequate capacity available, we reduced the deposit premium by four % to $6.9 million.

The rate online was five %, down from 5.2 % in 2003.

Terms, conditions and ceding commissions remained unchanged for our New Jersey Homeowners’ Quota Share Treaty.

We also added two new reinsurers, enabling us to spread the risk to multiple quality markets.

This contract provides form following coverage and a maximum per occurrence of $75 million on any one event.

Three of our treaties provide recovery opportunities for terrorism losses.

In addition, we renewed our terrorism coverage at the expiring terms of $45 million in coverage excess of our $15 million retention.

Given that we do not have significant exposure in metropolitan centers or buildings over eight stories and we do not write targeted risks, such as bridges and tunnels, we believe this is a prudent approach to partially offset our $97 million deductible under the Federal Terrorism Risk Insurance Act.

The Treaty cost us $4.8 million, about $400,000 less than the expiring contract, and includes a 10-% no-loss bonus.

The takeup rate by our insureds for terrorism coverage has been about 94 %.

In our Diversified Insurance Services operation, quarterly revenue from continuing operations was $22.6 million, up 13 % over fourth quarter of 2002.

For the year, revenue from continuing operations for these businesses was $91.8 million, an increase of 14 % over 2002.

Return on revenue from continuing operations increased to 5.3 % for the fourth quarter compared with 3.9 % for the same period one year ago.

Full year, return on revenue for our Diversified Insurance Services operation was 6.7 % compared with five % in 2002.

During the quarter revenue at our Flood operation increased 33 % to $5.7 million.

Net income was $1 million, up from $0.5 million for the same period last year.

As a hedge to our insurance operation, the Flood business contributed significantly to results for the year as administrative fees from Hurricane Isabel flood claims increased revenue income by more than a million dollars.

In our managed core businesses, revenue decreased 12 % to $4.6 million for the quarter due to aggressive competition from several major competitors in New Jersey, as well as our aggressive pricing strategy that led to the expected loss of several large clients.

Net income was $0.1 million compared with $0.4 million for the fourth quarter of 2002.

Revenue for Selective HR Solutions, our provider of Human Resources benefit and administration services, was $11.6 million for the quarter, compared with $9.9 million for the fourth quarter of 2002.

The business delivered a slight profit for the quarter compared with a loss in the fourth quarter of 2002.

We ended 2003 with 20,000 work site lives.

With our expense reduction and the reunderwriting initiatives firmly in place, we are now focusing our efforts on growing this business.

Although the ramp-up time to sell this product is longer than originally anticipated, we are finding increasing support among our agency force for the value-added benefit that Selective HR brings to their clients.

For the year workers compensation prices were up more than eight %, while claim administration prices rose about five %.

This stronger pricing will drive further gains into 2004.

We generated a nine-% increase in an after-tax investment income for the quarter to $22.7 million, up from $20.9 million for the fourth quarter of 2002.

After-tax net investment income rose 10 % to $84.1 million at yearend 2003, reflecting strong operating cash flow of $282 million in 2003, compared with $180 million in 2002.

The after-tax portfolio yield was 3.7 %.

Our investment portfolio reached $2.4 billion at yearend, compared with $2.1 billion at yearend 2002.

Investment assets per dollar of shareholders’ equity were $3.25.

We continue to construct our investment portfolio with the long-term objective of maximizing after-tax results.

Currently our bond holdings represent 85 % of invested assets with 62 % of our portfolio rated AAA.

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

As previously stated, our goal is to achieve a return on equity of three points in excess of our cost of capital.

We surpassed this run rate in the fourth quarter with annualized ROE of 11.9 %, more than four points ahead of our 7.4 % cost of capital.

Full year ROE was 8.3 %, not yet to our goal, but exceeding our cost of capital by almost 100 basis points.

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

Thank you Dale, and good morning.

Our strong fourth quarter capped off a solid year in which Selective’s distinctive competitive advantages and growth strategies enabled us to deliver strong top-line premium growth as well as a 31.4 % total return to shareholders.

Our results for 2003 met or exceeded projections in almost every area.

We remain among the 10 % of companies with an A+ (superior) rating from AM Best;

Net premiums written advanced 16 %, on target with projected growth of 15–16 %.

New Jersey Personal Automobile business delivered a statutory combined ratio of 99.7 for the year, ahead of our projection of just under 101.

Diversified Insurance Services produced revenue growth of 14 % and a return on revenue of 6.7 %.

Our statutory combined ratio improved to 101.5, on track with our yearend estimate of below 102.

And we generated operating earnings of $2.10 per diluted share, at the upper end of our revised estimate of $1.95–$2.10, and just short of our initial projection of $2.15–$2.35.

This was an excellent result considering the extra 29 cents of extreme weather related to catastrophe losses over our budget.

Growth in our core commercial lines operation pushed overall premium volume up 16 % for 2003.

For the year, Commercial lines renewal price increases remained strong at 13 %.

When compounded over the last four-year period, Commercial lines renewal price increases were up about 75 %.

Although we anticipate more moderate pricing levels in 2004, our Commercial lines outlook is very favorable as pricing continues to outpace loss trends, providing even greater earnings momentum in 2004.

For the last two years, surveys conducted by Goldman Sachs of independent agents and brokers ranked Selective one of the best companies for service.

Service, our field model and regional advantage are all important aspects to increasing our market share.

Independent agents control 75 % of the commercial lines marketplace and they want to grow with regional carriers.

In 2003 premiums per Selective agent reached $1.6 million, up 18 % over 2002.

Selective now ranks as one of the Top Five carriers based on premium volume in 80 % of our agencies.

The goal is to increase their share of wallet with Selective.

Our strategies and high-tech, high touch approach to doing business are sustainable competitive advantages that will produce long-term growth opportunities.

In addition, Selective’s technology advances in Commercial lines now allow agents to seamlessly process certain new business, renewal, and endorsement transactions.

In 2004 we expect agents to process about 40 %, or over 100,000 of these transactions.

The Commercial lines system provides a secure, powerful, and easy-to-use platform that allows agents to service customers at point of contact and enables us to grow our business and increase productivity.

We ended 2003 with net premiums written per insurance employee up 17 % to $694,000.

The 2006 goal is $1 million per employee, which will produce a 28-% statutory expense ratio.

Productivity at Selective has been driven in part by our successful Small Business strategy that provides straight-through processing and exceptional service through the One and Done System and Underwriting Service Center.

In 2003 we wrote $100,000 a day in new One and Done business, at a marginal expense ratio of about 23.

The goal for 2004 is to double One and Done premium volume.

Service Center volume reached $42 million at yearend, with policy retention at 93 %.

Seamless Small Business processing, coupled with superior service, are why agents consolidate more of their business with us.

The fee-based Diversified Insurance Service operation contributed 22 cents per diluted share to earnings for the year and generated free cash flow of $11 million.

These businesses leverage our risk management skills and enhance the value proposition we bring to agents by offering additional solutions for their customers.

The more products we sell into our customer base leads to greater retention and better profitability.

Throughout 2003 we reinforced our competitive position by accelerating the Selective Advantage.

Our field people are the best in the business.

We make it easier, more efficient, and less expensive for agents to do business with us than the competition.

This does not happen quickly and it is not easily duplicated.

As we look ahead, we anticipate significant earnings will net them in 2004, including an overall statutory combined ratio under 97, a GAAP combined ratio below 98.5, and operating earnings between $3.00–$3.30.

These projections are based in part on certain key assumptions for 2004, including increasing after-tax investment income by 3.5 %, an estimated fulfillment of the conversion contingency on our convertible bond in the third quarter, which will add 3.9 million shares to the diluted calculation from that point forward and average two million shares for the year 2004, Commercial lines price increases of eight %, a New Jersey Personal Automobile statutory combined ratio below 100, catastrophe losses of 1.6 points, and Diversified Insurance Services revenue growth of 13 %, and a return on revenue of 6.5 %.

Our stock performed well in 2003 and we anticipate ongoing improved fundamentals in our business that will continue the upward trend in operating results.

In fact, each one-point improvement in the combined ratio generates one point of return on equity.

When you consider Selective’s strong dividend yield, favorable growth opportunities, and ongoing earnings momentum in our core Commercial lines business, it’s still a value at 1.3 times yearend book value.

Thank you and now I’ll turn the call back to the Operator for your questions.

Thank you, sir.

If you would like to ask a question on today’s call you may do so by pressing star, one, on your touchtone telephone.

Again, to ask a question you may do so by pressing star, one, on your touchtone telephone.

If you are on a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment.

Once again, that is star, one, to ask a question.

We’ll pause a moment to assemble our roster.

We’ll take our first question from Jeff Thompson with KBW Incorporated.

Thanks.

A very good quarter, Greg.

Thanks Jeff.

I had a question on your outlook for 2004.

You didn’t talk about premium growth, I don’t think.

What are you expecting there, and I have a follow-up to that?

Yes, we didn’t put a projection out for premium growth for next year, but I think — we try to just focus on the main drivers.

We look for strong growth based on our strategies, but at this point we’re not putting a growth target out for 2004.

OK.

And this year four Commercial lines, are you starting to see any pickup in your larger Commercial account growth?

And maybe you can define that a little bit.

I’ll hand that question over to Jim Ochiltree, who will respond to that.

Hi, Jeff.

Yes, we have seen some more movement in the marketplace on that.

We haven’t seen it becoming overly price sensitive at this point and we were able to write a lot of good business this year.

But, still, the difference in our large accounts is really one of size.

They’re still the same as our normal appetite and we’re not trying to just go out and grow this business.

We grow it as a part of our overall agency operation because our agents write a certain number of large accounts and they need us to handle them.

But, yes, we’re still seeing a lot of opportunity there.

And by large account, what is that premium per policy for you?

Yes, it’s probably a lot smaller than some of the big guys.

It’s more like $250,000 to — we’ve got accounts of up to $4 million.

Now, are agents seeing that you’re providing better service, the A-plus rating?

I mean, what’s sort of driving them to think they could give you more business in this category?

Partly it’s because they like the service they get on a general basis.

They like our automation; they like our claims service; they like our people.

And we have some good folks out in the field that can help them do this stuff.

And we also have some rather sophisticated people here in the home office.

We’ve got our most experienced underwriters in that unit and it helps our agents land these account.

And I would kind of add to that too, Jeff.

When you think about it, the success of our agency plan comes because our field underwriters in that agency office, once a week, twice a week, whatever it is, and they know the kind of opportunities that are coming.

And then, our SRM unit — I think you’ve met Chuck Musilli, who works for Jim and runs that area — I mean, they get locked into a lot of great opportunities because we’re there and they know the kind of business we want to write.

And if you think about where we’re going to go next year, we’ve got a lot of great traction.

Our small One and Done business, we’re writing that basically on a 23-% expense ratio and we’ve got a good fundamental strategy for that, and then seamlessly move it into our Underwriting Service Center.

We’ve got our 75 field underwriters out there, harvesting accounts in that, call it small to mid-sized market, but still smaller on a relative scale.

And then SRM allows agents to round out their full experience with Selective because they’re getting the same people handling their claims and it helps them grow and meet a lot of our objectives internally.

So, it’s the holistic relationship that really pushes it forward.

OK, and then, just one final question.

New Jersey Auto, it looks like the regulatory front is pretty clear.

Am I missing anything, or what’s your outlook there for the next couple of years?

Well, I’ll let John Marchioni talk a little bit about some of the regulatory aspects.

I mean, we do hear new competitors coming into the marketplace.

We’ve been very disciplined in how many units we write and the business as a result of pricing changes and tier changes that we’ve implemented over the years.

This has been a long strategy for us, and now you’re starting to see the success of that strategy.

And then, obviously now it’s other people not interfering with a lot of the regulation that’s in place.

I’ll let John talk about that.

Well, I think Greg has explained it right.

We talked about the reformat but we talk about it being in three stages, the first one being the law, which is obviously done, and we’re now about halfway through the implementation stage and that appears to be on track.

But I would say the next 12 months will be very telling as to whether or not the administration and legislature will leave this alone and let it work.

I mean, the indications right now are that they will, but as we approach an election year next year, there will be some increased pressure politically to put some controls on it, but the indications are right now that that will not be the case and we’re still hopeful in that regard.

OK, thanks.

We’ll take our next question from Mike Dion with Sandler O’Neill.

Hi everybody, and once again congratulations on a great year.

A couple of questions.

One, as far as the premium growth, you’re still seeing some strong growth there.

If you could just address the growth piece of the competitors on the regional side, are you gaining some there from some of the regional players and mutuals, for that matter?

And my second question is regarding the capital position, and given your ’04 outlook, do you think you’re adequately capitalized for your ’04 goals?

Yes, I would say that where our premium growth opportunities come, they’re on several fronts.

The first front is again, because our field underwriters — we’re providing agents opportunities to write new accounts to grow their agency, and that’s a key part of why agents want to do business with us.

It’s the entire experience, the way we handle claims.

It’s all that, and the fact that we’re there to help that agency grow.

And we train and help our agents move in terms of better identifying their competitive advantages in the marketplace to differentiate themselves from other agencies, even start to that level in terms of just from a better sales discipline and culture.

But we’re seeing — we’re also seeing business now, broad base, coming to us either: a) concerns so that they may have an amount of concentration they have with one carrier or carrier mergers; b) and also they’re concerned about other carriers’ ability to be able to deliver the type of technology.

As I’ve been talking about that over the past several calls, we’ve seen our agents now trying to figure out how do they do business more effectively and what companies in their portfolio are going to help them get to where they need to be, and we consistently are at the top of that list, and then why, when they start thinking about aggregation of business and the fact that we have a substantial profit sharing to reward agents for that growth and that profit, is why they move that business to us.

With respect to capital, I’ll let Dale jump in on this one, but we feel very confident with the very conservative balance of how we run the Company in terms of our investment portfolio, in terms of our reinsurance and reinsurance positioning, and then our capital and capital models all indicate very favorable indications.

But I’ll let Dale address the rest of that.

We feel very comfortable with our capital position and it fully supports the growth that we expect.

Obviously, that always comes with a caveat.

As long as the rating agencies don’t change the rules of the game, we feel very good about where we stand and our ability to support the growth that we expect to see.

OK, fair enough.

Thank you.

Once again, that is star, one to ask a question.

We’ll take our next question from Beth Malone with Advest.

Thank you, good morning.

And again, like everybody else, congratulations on the quarter.

Could you articulate a little bit more about the costs saved that you get from the technology?

I mean, can we anticipate seeing the expense ratio continue to progress down as a result of the implementation of the technology?

Yes, I would say that — many of our initiatives are broadbased, but let’s just specifically talk about the technology driver.

What you’re going to find — and you have to understand that within the industry generally, in a company independent agent environment, there’s huge amounts of duplication, frictional costs.

Our system now eliminates much of those frictional touch points.

So as our agents start to seamlessly process more transactions, which I mentioned we expect on the process over 100,000 transactions in 2004, those transactions now are not being touched in our regional office.

So that will allow us to become more efficient and effective and get our people to where they’re not managing transactions, but they’re managing business and relationships.

So, you’ll see that as one of the big drivers and as we ended the year, just short of $700,000 of net premium written for insurance employee, we expect by ’06 to get to a million, and at that million-dollar benchmark our expense ratio should be about 28 %.

And it’s the combination of having a more efficient platform to write more business on, plus a little bit of additional scales and move forward.

But, it’s been a very successful driver of improving our model and allowing us to more efficiently and effectively grow our business, and allowed it to be easier for agents.

You remember when a customer calls an agent, an agent then has to fax, phone, e-mail that request to the Company.

The Company then processes that transaction, gives it back to the agent.

The agent — and if it’s been processed correctly then— will then contact the customer again to do that.

In our system, that all happened online.

At the same time that customer is on the telephone, they can process that renewal or endorsement opportunity.

Also, could you articulate how is your technology — is it comparable to what some of the larger carriers that you have to compete with in the Small Commercial market, or are you equivalent to what Travelers or Hartford can offer?

We view ourselves as — in terms of we try to always be ourselves.

That’s our benchmark.

And we view our technology and platform capability are in the same venue as a Travelers, Hartford, or Zurich.

OK, thanks.

We’ll take our next question from Jeff Feinberg with JLF Asset Management.

Good morning, guys.

Congratulations!

Just a couple of quick questions.

You went through the guidance a little bit quickly.

I apologize.

I just wanted to make sure that I understood all the moving pieces there.

I guess, can you just please outline, what was the assumption in terms of the combined ratio for ’04 and how does that compared to ’03, excluding catastrophes, please?

Well, I’ll just — I mean, our combined ratio for the ’04 was under 97%, and that 97% includes 1.6 points of catastrophe losses as part of that budget process.

We ended 2003 with a 101.5%, and in there we had about 2.6 or 2.7 points of weather-related catastrophe losses.

Just to make sure, the ’04 estimate, which again, just make sure, was $3.00–$3.30?

Yes.

Was it a 97% or 98.6%?

I’m confused, I’m sorry.

Under a 97% of the statutory combined ratio, which equates to a GAAP combined ratio of below a 98.5 %.

So we gave you both, depending on how you construct your model.

Terrific!

Thank you for clarifying.

And the number in ’03 on a GAAP basis, excluding CATs, was what?

In ’03 on a GAAP basis for the full year is a 102.2 %.

And how much catastrophes?

2.7 points to catastrophes.

So, just to make sure that I’m comparing apples to apples here, last year was a 99.5 on GAAP, excluding CATs.

Right.

And the ’04 guidance includes a 98.5?

And includes 1.6 points of CAT, so all that…

So it’s a 96.9% on a GAAP basis without catastrophes.

Terrific!

Thank you for clarifying.

The second question with regard to the assumptions there is, just in terms of the fourth quarter, what was the CAT experience and what was it versus normal, please?

The catastrophe losses in the fourth quarter were 1.7 points.

That tends to be our overall average.

It’s right in that ballpark, although, if you look at the fourth quarter for the last five or six years, we didn’t have a single year that was over a point.

Usually, over that period, if you took an average for our fourth quarter it’s more about a half-a-point.

What was it that caused the CATs to be above normal this quarter and if you artificially compress your Q4 results?

Winter storms and a little bit of wind comes to mind.

Some of the runover from Isabel into the fourth quarter from the third quarter.

OK.

Overall, good conservative accounting.

And the final point, in terms of the longer term.

If you could just talk a little bit longer-term in terms of what the positive delta between prices and loss costs and the improvements you guys have made sort of across the book of Diversified business.

Longer term, not ’04, but what type of ROE opportunity is there for the Company?

I know a lot of other niche regional players who seem to have a similar profile are writing in the sort of mid-teens there and I’m just curious in terms of your thought process longer term.

Well, I can’t provide specifically because we haven’t provided the guidance, but I will give you a couple of things to think about.

It is clear the fourth quarter performed right about at that 12 % ROE level.

Our expectations, obviously, are to achieve at least three points in excess of our cost of capital.

And the other thing I would say is that every one point of improvement in the combined ratio generates a one point improvement in ROE.

So I think that you begin to see the power of the model in that respect, just the idea of going from the 30-% expense ratio that we’re at now to a 28-% expense ratio generates a couple of extra points in our ROE from that.

And Jeff, in terms of overall scale and how scale plays, I mean, obviously, scale plays a huge part on Jim Coleman’s Diversified businesses, particularly in the PEO arena where we write 20,000 lives.

As we get to 40,000 lives, the margins significantly improve.

And then think about — and you have to remember, all the cash that we generate in that business is free cash flow that allows us to support our insurance operations or other initiatives.

And then, in terms of just the business going forward and our push internally, it’s constantly around knowledge management, better underwriting, more profit buying per agent.

And then as we continue to push more what we refer to as ‘share of wallet’ in the states that we’re in to get a better market share position, we’ll also have a lot of scale opportunities on the insurance side because our basic infrastructure and the platform that we have to build off our model is pretty much established and won’t significantly change as we continue to ramp-up a lot more opportunity and premium volume.

OK.

So in reality, there’s no reason you shouldn’t be in line with competitive sales over time.

I’d say that we expect to see continued improvements in our ROEs.

OK, great!

Thank you so much.

We’ll take our next question from Xiuping Li with Putnam Lovell

Hi, thank you.

Can you go through your cash position at the holding company level, and also talk about if you’re planning to increase your dividend or just keep it at the level it is?

I’m sorry, you broke up.

I heard a little bit, will you go over your cash position at the holding company level, Dale will pick that up.

And then dividend policy was the next?

Yes.

The second question is related to your dividend policy, and if you’ll comment on if you’re planning to keep dividends at the level it is now, or if you’re planning to increase it over time.

Let me address the dividend question and I’ll let the other folks talk about the cash and cash position at the holding company level.

Our dividend policy has generally been — you know, we’re looking for a payout ratio, top rating earnings that is because that’s really what we focus more on, something in the 25–30 % range.

And you can see that did increase the dividend from 15 cents to 17 cents in the past quarter, and we plan on holding that rate.

But yet, that’s something that we will look at as earnings continue to improve.

We’ll look at other dividend opportunities, but it’s nothing that we sit here and do any kind of forecast on, but it’s something we are looking at in terms of just an overall strategy of that 25–30 kind of % payout.

The other thing, as far as holding company cash, I mean, we ended the year with about $6 million in cash, but also keep in mind that we have an escrow account of about $50 million in bonds that are very short maturities.

We’ve matched those maturities to our private placement maturities so that we have those fully funded for the next couple of years.

So we manage that cash very carefully to make sure that we don’t have excess cash, but we have plenty of room.

In addition to that we have $45 million worth of lines of credit to support any kind of short-term fluctuations as we carefully manage our cash.

OK.

In some of the cash stream that you can take out from the subsidiaries, for the Diversified Service subsidiary, it’s not regulated, right?

That’s correct.

So, what’s the operating income or cash — operating cash generated by that subsidiary in ’03?

It generated free cash flow of about $10 million during the year.

OK.

The Diversified Insurance Services subsidiaries.

Are you expecting to down stream capital to your insurance subsidiaries?

We have done that on occasion.

It really kind of depends on the opportunities that we have, either in the Diversified Services businesses or within the insurance operations, so we just manage that carefully.

But we do sweep all of their cash on a continual basis to keep fully invested.

OK.

Can you give me a ratio at the insurance sub-level.

Ratio?

I mean, basically we run all the insurance subsidiaries right at about a 2:1 premiums-to-surplus ratio.

Two-to-one.

OK.

Thank you.

The only thing I’d add to that is obviously as we pull dividend monies out of the Diversified businesses up to Selective Insurance Group Inc., that lessens their demands to take money out of the insurance companies, so in a sense that is a surplus-enhancing methodology.

We’ll take our next question from Keith Strong with UBS Global Asset Management.

Hi, Greg.

I just have a couple of questions on One and Done.

You mentioned that in ’03 you did about $100,000 a day in premium and you wanted to double that.

What was the run rate, either in the fourth quarter as you left the fourth quarter in December and then where are you as far as rolling that out to all the agents you do business with?

I did talk to a fellow the other day that runs that and I know he was extremely pleased with the percentage of growth that we had.

I don’t think it was fully to the $200,000 run rate yet, but it was substantially higher than the $100,000 that we were doing on average for the full year.

That’s as much as I can give you now.

OK, thank you.

He has a lot of confidence that with the traction, with the agencies, that we can get to that $200,000 level.

And then, how about where you stand with [indiscernible]?

Well, it’s fully employed.

OK, thank you.

That’s the one thing you’ll find.

We roll technologies out.

I mean, we make sure — we have a group of field-based people and their sole job is making sure our technology is being utilized at the agency level, and if there are any problems they’re there to resolve those problems and get that agent up and running, so there’s no friction points about why they wouldn’t be using our system and system capability.

Once again, that is star, one to ask a question.

Mr. Murphy, there appears to be no further questions at this time.

I’d like to turn the call back over to you, sir.

Alright, thank you very much and if you have any follow-ups please get back to Dale.

Thank you.

And this does conclude today’s conference call.

At this time you may disconnect.