Selective Insurance Group Inc (SIGIP) 2004 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 the VP and corporate secretary, Ms. Michele Schumacher.

Please go ahead.

Thank you.

Good morning.

Before I turn the call over to Dale Thatcher, EVP and CFO of Selective Insurance Group; 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 certain risks and uncertainties.

The factors which 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 SEC, including our annual report on form 10K and our quarterly report on form 10Q.

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 the 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.

Jim Ochiltree, EVP, insurance operations;

Jim Coleman, EVP, diversified insurance services;

Ron Zaleski, EVP and chief actuary;

Kerry Guthrie, SVP and CIO;

Michael Lanza, SVP and general counsel;

Sharon Cooper, SVP, director of communications; and John Marchioni, VP in our strategic business unit.

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

A replay will be available at the same site through August 27, 2004.

Now I'll turn the call over to Dale.

Thank you, Michele.

Good morning and welcome to Selective’s second quarter conference call.

This was a very strong quarter for the company, driven by ongoing improvements in both our commercial lines and personal lines operations.

Net income increased 46 percent to $28.9m or 92 cents per diluted share for the second quarter of 2004 compared with $19.7m or 72 cents per diluted share for the second quarter of 2003.

Operating income increased 64 percent for the quarter, to $28.8m or 92 cents per diluted share, compared with $17.6m or 64 cents per diluted share for the same period last year.

For the second quarter we earned a 14.4 percent annualized operating return on equity, substantially exceeding our 7.7 percent cost of capital, and reflecting our goal of a higher level of consistent returns.

Operating income differs from net income by the exclusion of realized gains and losses, net of taxes.

Management utilizes this measure in the analysis of trends in operations.

Net premiums written increased 14 percent to $349.3m for the second quarter, including $67.3m in new business.

Our overall GAAP combined ratio improved more than five points to 95.7 percent compared with 100.9 percent in the second quarter of 2003.

For the same period, the overall statutory combined ratio is 95 percent, down from 99.6 percent for the same period last year.

Weather-related catastrophe losses accounted for 0.8 points of the statutory combined ratio for the quarter, or $1.7m after tax.

There were no net catastrophe losses in the second quarter of 2003.

Our core commercial lines operation, which represents 83 percent of the premium volume, continued to generate consistent favorable results.

Commercial lines net premiums written grew 16 percent for the quarter to $290.8m, compared with the prior year period.

Growth was driven by $60m in commercial new business, as well as ongoing commercial renewal price increases, or about 9 percent for the quarter.

Retention was 83 percent, up from 81 percent at year end 2003.

Importantly, ongoing improvements in our statutory combined ratios were reflected across every commercial line of business except the property line, which still generated an excellent ratio of 84.6 percent for the period, compared with 79.6 percent in the second quarter of 2003.

This overall consistent progress is indicative of our long-term strategy that incorporates higher pricing, continued underwriting enhancements, and heightened loss control efforts, all of which lead to an overall better mix of business.

For the quarter, the commercial automobile statutory combined ratio dropped about five points to 87.5 percent, compared with first quarter 2003.

For the same period, the general liability statutory combined ratio fell 6.6 points to 97.7 percent.

We continue to focus on improvements to our workers’ compensation business, which had a statutory combined ratio of 110 percent for the quarter, down from 112.5 percent for the comparable period last year.

Through the first six months of the year, the statutory combined ratio was down 4 points to 105.5 percent compared with the same period last year.

Workers compensation represents about 24 percent of total commercial lines premiums, and less than 5 percent of the business is unsupported by another commercial line.

Since 2000 we’ve increased workers compensation pricing by 40 percent through a combination of rate increases, credit and dividend reductions and moving business to higher priced tiers.

Our emphasis is on low to medium hazard business and we have targeted 10 to 12 percent overall price increases for 2004.

In the bond operation, the statutory combined ratio fell more than 27 points to 103.7 percent compared with the same period last year, reflecting enhancements to the bond underwriting process as well as the successful roll out of the first phase of our automated bond system.

For the quarter, the overall commercial lines statutory combined ratio dropped almost 4 points to 95.5 percent, down from 99.3 percent in the same period last year.

In personal lines, net premiums written was up 2 percent for the quarter to $58.4m, compared with second quarter 2003.

Fueled by solid improvements in the automobile and homeowners lines, the overall personal lines statutory combined ratio, including the flood operation, fell 8.3 points to 92.2 percent, compared to second quarter 2003.

For the quarter, both auto and homeowners generated an underwriting profit.

The personal automobile statutory combined ratio improved almost 6 points to 96.7 percent while the homeowner’s statutory combined ratio is down more than 16 points to 91.9 percent compared with the same period last year.

We are pleased with the steady progress in personal lines, as it is more indicative of our long-term expectations.

New Jersey personal automobile business generated a statutory combined ratio of 93.3 percent for the quarter, compared with 100.6 percent for the same period last year.

Favorable results reflect long-term pricing and underwriting initiatives, as well as an improving marketplace.

We continue to take actions to remain competitive for the best risks, and currently have a filing pending with the state.

If approved, it would allow us to initiate the use of credit scoring for New Jersey auto business, and implement ongoing tier changes to reduce rates in total by about 2.6 percent.

This would result in greater savings for our best risks, while improving the overall book of business.

Positive trends continued in the personal lines expansion states, which generated an overall statutory combined ratio of 97 percent for the quarter, down 9 points from 106 percent for the same period last year.

Year to date rate increases have averaged approximately 4 percent for auto and 9 percent for homeowners.

Overall retention in expansion states is up about a point to 85.4 percent compared with year end 2003.

Throughout the personal lines operations, ongoing pricing and underwriting initiatives, combined with the new web-based system, are expected to enhance our progress and support growth, leading to a more profitable business segment.

As of June 30, 2004 overall fiscal year net premium written per insurance employee was up 17 percent to $748,000 compared with the same period last year.

Technology enhancements that allow agents to initiate and self-service their Selective business are driving this progress.

During the second quarter, agents initiated close to 40 percent of endorsements through our commercial lines system, while underwriting templates automatically renewed over 30 percent of commercial policies.

The roll out of the new personal lines system is underway, and agents are already issuing 60 percent of new automobile policies.

Our 2006 goal is $1m in net premium written per insurance employee, that will produce a 28 percent expense ratio.

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

The property per risk contract renewed with estimated contract premiums of $10.1m, approximately 3 percent above the expiring treaty, due to our expanding premium base.

In addition, we eliminated our 25 percent co-participation in the second layer of the treaty, along with an exclusion that limited terrorism coverage for multi-million dollar properties.

The contract was similar to the expiring treaty.

The net savings reflect our favorable loss experience as well as property underwriting initiatives implemented over the last four years.

The casualty treaty renewed with estimated contract premium of $14m, about 4 percent below the expiring premium.

However, this year we increased our co-participation in the first layer from $750,000 per occurrence to $1.5m per occurrence.

This contract was otherwise similar to the expiring treaty.

The nature of our business as a regional carrier with smaller risks in middle market communities, enabled us to effectively manage overall costs, maintain strong coverage and continue to work with highly rated reinsurance carriers.

Treaty costs were down about $300,000 over the prior year.

However, increased co-participation as well as growth in the underlying premium base resulted in a net increase of $2.7m year-over-year, which is in line with our expectations.

In the diversified insurance services business, quarterly revenue was up 12 percent to $26.4m compared with the second quarter of 2003.

Return on revenue improved to 8.5 percent for the quarter, up from 7.6 percent for the same period last year.

Revenue at the flood operation rose 22 percent to $7.2m in the second quarter, compared with the same period last year.

Net income was $1.1m, with a return on revenue of 15.6 percent.

New flood business was up 5 percent to $5.4m for the quarter.

Total flood premiums serviced is approximately $72m.

Revenue from managed care subsidiary CHN Solutions was $5.2m for the quarter, compared with $6.4m last year in the second quarter.

Net income was $0.6m and return on revenue was 11.4 percent.

The operation has seen some client turnover in the last year, primarily due to industry consolidation.

As lost business is replaced with new accounts, we anticipate a return to more traditional growth rates.

Twenty new clients are on board through the first half of 2004, and are expected to yield close to $1m in annualized revenue when fully phased in.

CHN’s provider network has increased 142 percent over the past five years to 92,000 providers.

CHN is currently the number 1 provider network in New Jersey.

Revenue for Selective HR Solutions, provider of our human resources outsourcing product, were $13.3m for the quarter, a 25 percent increase over revenue of $10.7m last year.

Net income was $0.4m for the quarter, with return on revenue of 3 percent.

Through the first six months of the year, we added 4,300 new work site lives which brings the total to more than 22,000.

Pricing, underwriting and sales initiatives are on pace with our growth and profitability plan.

The company generated $21.6m in after-tax investment income, compared with $21.4m for the second quarter of 2003.

The modest gain reflects strong operating cash flows, offset by lower interest rates.

In addition, income from limited partnerships of approximately $1m, while favorable, was below exceptional income of $2m generated in the second quarter of 2003.

Operating cash flow increased 19 percent to $70.8m for the quarter compared with $59.3m last year.

The annualized after-tax portfolio yield was 3.5 percent.

Our investment portfolio reached $2.6b at the end of the second quarter, compared with $2.3b one year ago.

Higher interest rates are having an immediate impact on the market value of our debt securities and stockholders equity.

Over the long term, this will lead to higher investment income and an increased return on invested assets and return on equity.

The current duration of our bond portfolio is 4.3 years, which is within the company’s historical range.

A component of our investment philosophy utilizes a laddered maturity structure to help mitigate interest rate risk, as opposed to attempting to time interest rates.

The defensive nature of our portfolio resulted in only a 3.6 percent decline in the market value of our bond portfolio for the second quarter, despite our 100 basis point increase in immediate interest rates for the period.

As previously announced, Selective’s senior convertible notes due 2032 are convertible into the company’s common stock as a result of conversion conditions met in the first and second quarters of 2004.

Approximately 3.9m shares are now included in the diluted EPS calculation for both quarters, as well as an add back of approximately $800,000 in after-tax interest expense per quarter.

At the end of the second quarter, stockholders equity was up 9 percent to $779.4m compared with June 30, 2003.

For the same period, book value per share increased 6 percent to $28.03.

This book value reflects our invested assets at market value, but our reserves are not discounted.

Excluding unrealized gains on bonds, or what is commonly referred to as ex-FAS115, book value per share was $26.87, up 16 percent since June 30, 2003.

Our ability to generate consistent favorable financial results is indicative of the well-defined strategies that differentiate Selective and continue to drive growth and book value.

Now I will turn the call over to Greg Murphy.

Thank you, Dale, and good morning.

This was an excellent quarter for Selective and one that truly reflects the full impact of the pricing, underwriting, technology and diversification initiatives we have aggressively pursued over the last five years.

For the quarter, operating income was up 64 percent and we generated 92 cents of diluted EPS.

These results were driven by strong commercial lines growth and net premiums written of 16 percent, along with strong improvements in personal lines, which are now generating an underwriting profit.

Overall net premiums written for the quarter grew 14 percent, on top of 16 percent increase in the first quarter.

This consistent, double-digit growth reflects four plus years of strong renewal price increases in commercial lines, and Selective’s continued ability to gain commercial lines market share in our 20-state footprint.

In comparison, the industry growth stands at about 5 percent for the first quarter compared with the same period last year.

Commercial lines pricing in our segment of the market has remained stable and ahead of rising loss costs, but as the industry becomes more competitive, our field model and technology platform puts us in a much better position to attract and retain profitable business.

Selective’s long-term strategies, built around ease of doing business and being the market of choice for agents continue to drive momentum and allow us to grow our commercial lines book of business.

On average, each of Selective’s field underwriters who live in the same communities as our agents, write about $3m in new commercial business a year.

For the first six months of 2004, these field underwriters generated about $91m of our total $130m in new commercial business.

Agents tell us the number 1 factor that positions Selective favorably in their agency is the outstanding relationships they share with our field staff, senior management and employees at every level of the organization.

Our field claim and loss control specialists not only help agents sign up new accounts, they also work with existing customers to prevent losses from occurring in the first place.

This quarter, our loss control team rolled out a new database that instantly puts agents and customers in touch with the latest workplace safety information.

In addition to Selective’s emphasis on high touch, our high tech advantage allows us to write more One and Done small commercial business, which amounts to $134,000 a day for the second quarter.

During that period, about 85 percent of all new commercial accounts were originated by agents via Selective’s online system.

Half of that business was placed seamlessly to our small business template at a 23 percent marginal expense ratio.

We continue to expand and upgrade our self-service capabilities we offer agents.

The newest features provide online processing for commercial surety and personal automobile business.

On top of that, agents have placed about $55m of their small commercial accounts in Selective’s service center, which account retention remains a strong 95 percent.

Agents are focusing more on the growing threat from non-traditional competitors, who offer insurance-related products and services targeted at small businesses.

Many of these offerings are similar to our human resources product provided through our subsidiary, Selective HR Solutions.

Selective HR Solutions is gaining traction with more agents as it enables them to round out relationships they share with their customers.

The account closure rate has risen to 34 percent as Selective offers agents real tools to compete with this threat, something competing carriers do not.

Independent agencies are growing market share and expanding their relationships with regional carriers.

As agents look out on the horizon, they see Selective as the one regional carrier who has it all together.

The right people, strategies, technology and commitment as well as focus on the commercial lines marketplace that puts us at the forefront of our industry.

Our competitive advantages are not easily duplicated, and they are the result of years of hard work and refinement.

In addition, we’ve instituted a new long-term knowledge management initiative that involves building a virtual warehouse of valuable information that will enable our field and inside underwriters to make better decisions about how we select and price commercial accounts.

All of these factors continue to solidify our position as a premier regional carrier.

According to [AM Best], Selective is now the 54th largest property and casualty company in the United States, based on 2003 premiums written of $1.2b, up from 61st in the previous year.

Our projections for 2004 are based in part on the following key assumptions, all of which are on track to the end of the second quarter.

They are, increasing after-tax investment income by 3.5 percent, overall premium growth of 14-16 percent, commercial lines renewal price increases of 8 percent, a New Jersey personal automobile statutory combined ratio below 100, diversified insurance services revenue growth of 13 percent and a return on revenue of 6.5 percent.

Barring excessive catastrophe losses in excess of our budget of 1.6 points for the last two quarters of 2004, we anticipate an overall statutory combined ratio under 97 and a GAAP combined ratio below 98.5.

Given our strong performance over the last two quarters, we are raising guidance for the full year operating earnings by 10 cents, to between $3.10 and $3.35.

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

Thank you. (Operator instructions) The first question comes from Mike Dion;

Sandler O’Neill.

Good morning, everyone.

Good morning, Mike.

My question is, we’ve heard a lot this quarter about declining rate increases, particularly in the commercial lines area, and at 9 percent in the second quarter you are definitely at the high end of that range.

If you can just talk a little bit about your reasons why Selective has been able to achieve rate increases at that level, and what your expectations are for the rest of this year, and possibly next?

Sure, Mike.

When you look at our overall increase for the year, we have 8 percent for the entire year and I think that is reflective of the fact that we expect some continuing pressure on that price in the third and fourth quarters.

You have to remember, our market share and a lot of our business is smaller to middle market and we’ve seen a little less pressure on the smaller cap business than maybe the upper end of the market.

I will tell you we are seeing some increased competition in the marketplace, but we still feel comfortable overall with our 8 percent increase and that is way ahead of our rising loss costs.

And if you could just address personal lines for a second as well.

Being in New Jersey, certainly there are some changing dynamics with the credit scoring and the tiering going on, as well as some new entrants.

What are your thoughts as far as competition goes in New Jersey personal auto and your willingness to perhaps cede market share there was we look out to 2005.

You’ve got to remember, our plan has been to reduce our market share in Jersey overall.

We have, from a 4 share of the market to down slightly over a 2 share of the market.

Where we stand right now with our pricing is we do have a rate filing, as Dale mentioned, and with the department.

It is an overall reduction of about 2.5 percent and that 2.5 percent is geared at, it is much more substantial for our best customers and those customers with good credit scores.

And obviously in the other end of the market there will be some increases.

I think in total we are trying to maintain a market share at around 100,000 cars, which is where we are today, slightly in excess of 100,000 cars.

That’s helpful.

Thanks, Greg.

From Advest, Beth Malone.

Hi, Beth.

Ms. Malone, your – Ms. Malone has disconnected.

Moving on we will hear from John Keefe.

Good morning, guys.

I’ve got a question concerning personal lines, and not just New Jersey auto, but personal lines and small business accounts.

What are you seeing in terms of competition coming from Hartford, New Travelers, any dislocation going on there?

Maybe Safeco or some other new entrants with perhaps deeper resources than Selective moving into some of your areas, and how is that affecting competition?

John, I can tell you the only carrier I know that has deep resources – and when I talk about deep resources, I am talking about people on the ground – that’s us.

Because we have our field underwriters calling on agents.

No one else – I mean, you look at your competitors in the marketplace, who truly has a field underwriting model?

When you look at where the business is getting done and the opportunities that are out there is because we are there in that agents office or we are there with the seamless product in terms of agents, their customer service reps, CSRs in their office have the capability to quote with us online, get that policy issued within minutes or hours.

That kind of capability they don’t have with a lot of other carriers.

With respect to the larger carriers, I have to tell you, I think I’d put our technology in terms of our through put capability on renewal processing, on new business processing, I’ll match us up with anybody else in the marketplace.

You may talk about a bigger carrier, but where is their nimbleness in technology and how closely is that aligned with what agents want and are looking for to truly improve their efficiency in their offices?

Thanks, Greg, that’s helpful.

Also, can I ask this to Dale – any reserve development during the quarter either way?

We had some modest reserve development.

Actually I believe year to date we are up $2m through June, and that was from some of the bond stuff that we talked about last quarter.

So for the quarter itself it is pretty black in that regard.

So reserves are very well.

Very good, thank you.

(Operator instructions) Our next question comes from Greg Peters of Raymond James.

Good morning everyone.

Good morning, Greg.

I actually had two questions for you.

First, I was curious if – and I apologize if you discussed this in your opening comments – but I was curious about your new agent appointment targets and how you are coming along with gaining new agents.

Specifically, I am curious about how in a more competitive environment if that might challenge your ability to get to the top three carriers in your agency plans, and specifically the new agents.

Greg, this is Jim Ochiltree.

As far as new agency appointments, we really have not had any issues with getting in the agencies we want to get into.

We don’t have a very substantial number that we are trying to deliver.

We’re really not trying to grow our agency plant all that much.

I mean, as you indicate, they are deep in our penetration of the agencies we are in.

To this point, certainly the various things that Greg outlined earlier, the things we’ve talked about now for probably the last five years, are the things that continually built those relationships and strengthened that, and helped us to continue to increase those penetrations, which we do monitor and discuss with our agents.

So at this point there has been nothing developed in the marketplace that would indicate to me it is going to slow us down in that respect.

I’ll just share with you Greg, I got a letter from an agent trying to get an appointment in one of our territories.

We’re not sure whether we are going to make that appointment, and he was making a plea to me to get an appointment, and the amount of business that he was going to dedicate to Selective, where it was going to come from… So I will tell you that our position in the marketplace and our brand out there is as strong as it has ever been, and agents want to have a Selective appointment.

I am curious, when you get that type of information, Greg, why you don’t look at it and take advantage of it?

Because it would seemingly be a source of additional growth for the company as we migrate and as the pricing cycle evolves over the next two years.

And how I would respond to that, that doesn’t mean we are not going to make that appointment, but what we do do is honor our franchise and franchise value, that is what increases the brand value of Selective, is the fact that we are not going to have agents that are competing in a very tight locale.

Now what we are doing – I just want to make sure this is perfectly clear – we lay out in every one of our 20 commercial states where we want to be in terms of market share, and over what time period and the agents that are going to help us get there.

If we are not getting the business from our existing plant than we are going to continue to round that out with other appointments.

Where I would rather be is take an existing relationship and get it to a higher level before I would want a new agent.

I think that is more productive and efficient for us and one of the best measurements of profitability in this business is where you stand in an agents office in terms of ranking.

And that ranking, obviously, is depending on the type of businesses they write.

I mean, we are talking about ranking for the kind of business that we want to write.

That is the number 1 indicator from our standpoint about long-term profitability that we are going to have with an agent.

So we’d rather take someone up to that level before necessarily just adding someone to the fold.

That doesn’t mean that we are not going to add agents, I just think that we are trying to make sure that we are doing this in a very methodical process.

Greg Peters;

That’s fair enough.

Dale, I had a question on the contingent convertible note issue, specifically, can you remind me where the price point was on that contingent conversion calculation, and also perhaps, and I know up until last week it really wasn’t a factor for you guys, but I was wondering what your viewpoints were on some of the noise we’ve been hearing out of [FASB] regarding the mandating of that contingent conversion calculation?

The price point of $35.15, so if we trade at $35.15 or above for 20 out of the last 30 trading days of any quarter then it is convertible in the following quarter.

I know the EITF, emerging issues task force has indicated that they feel that [Coco’s ]should be included in the EPS calculation from day one, regardless of the contingencies, however that is outside of their purview and that has been referred to [FASB] and [FASB] expects to rule on that in the next six months.

I guess basically where we are obviously it is already included in our calculation for the last few quarters, it will be for the next quarter, because of the way the contingency works.

So we don’t really see that as a big issue in terms of where [FASB] goes with that.

Thank you very much.

Beth Malone with Advest has requeued.

Thank you.

Sorry, I had some phone problems there.

Congratulations on the quarter.

Thank you, Beth.

I just have a couple of questions about the technology.

If you could give us some – maybe you did and I missed it – but when you talk about the amount of business that is being put through, say One and Done are using the system, can you give us some comparisons?

I think you mentioned there were 60 percent of the businesses going through the Internet.

What would that have been a year ago?

Well in terms of the endorsement capability, that’s a new feature that we’ve added on, so the endorsement capabilities is a new add-on feature and in terms of enhanced capability, our renewal, our ability for agents to seamlessly do renewals is a new feature.

In terms of agents entering business, I would say we are about 85 percent this year, we were probably 80 last year.

In terms of the amount of throughput coming through One and Done I would say that is probably twice what it was for the first six months of last year compared to where it is today.

We were doing $135,000 a day, I think we ended last year for the full year at $100,000 for the day, but there was definitely ramp up there.

So somewhere in that range would be a reasonable expectation of that performance.

In terms of penetration, is it about as much used as it can be based on your business, or do you still anticipate that 12 months from now you are going to have even more of your business going through the system?

We should have more business coming through there as agents become more and more familiar and as the customer service reps inside our agents offices get more and more familiar with our product and processing capability.

We are expecting to get that premium per day up to $200,000 a day.

So we are expecting more throughput just based on getting more traction in our existing agency plan.

Then the next question becomes, how do we open that pipe up a little bit more which will allow even more business to flow through there?

So there is a combination of effects that will continue to grow that.

One is just gaining assimilation with agents on that capability, and then two, continuing to round out the products that will flow through that pipe.

I would also add – this is Jim Ochiltree – I would also add to that, Beth, that we are starting to roll out some connections between the agency management systems and our own system.

We are going to make it much easier for agents going forward.

So over the next year or two you are going to see some of the business – the slope is going to get a little more slippery as the technology takes hold.

I guess in priority of these agents that you are trying to penetrate more into their agency in terms of your participation in their book of business, where do they rank this ease of business relative to say, pricing?

I think as a general rule they rank ease of doing business – and ease of doing business means different things to different sizes of business.

For a small business, they rank technology very, very high and we are a big [inaudible] to small business so it is very important to us.

Otherwise, ease of doing business means that person is coming into their office every week or every two weeks and helping take the problem that got on their desk and translate it into income.

That is something that always ranks very high with them.

If you have good field people, you get a lot of opportunities that happen at the last minute that you might not have gotten if you had to wait in an office for an application to come in, so you have more opportunities.

A lot of times their price is not the main factor, however price is always going to be a driving factor in writing new business.

Just a quick question on a smaller business, the PEO business, the human resources business that you talked about that you are seeing the agents use more.

That business has kind of been not really a big contributor to operating earnings.

In this quarter it shows some pretty significant improvement year-over-year.

Is that business getting to a size, economies of scale that makes it more profitable, or is it really the incorporation of that business with the agents that is helping it become more profitable?

Beth, this is Jim Coleman.

There are certainly economies of scale in the business and I think part of it you are seeing all those economies begin to kick in as we’ve grown the business.

But I also remind you going back two years ago we did a major reunderwriting effort as we recognized certain trends in the workers comp business. [inaudible] retool the business, reunderwriting our risk classes, starting to get more price on the list that we need and I think as well better expense discipline.

So I think the improved profitability that we anticipate will continue is also part of all those efforts in addition to the economies.

Thanks, just one last question, in general.

When you look at where your able to get new business or retain the business you have, is it more because your competitors are challenged or not doing as much or not being as competitive, or is it because you are a better competitor?

Do you see the weaknesses in some of your competitors being where you are getting an advantage?

[inaudible] expected drop behind, in some of the states we’ve been in for a while is the fact that we continue to improve our technology and we continue to get easier to do business with.

So I think that’s some of the things we’ve done to round out.

For instance, the small business that maybe we weren’t getting several years ago because we didn’t have a One and Done system.

I think that’s improved our market positioning throughout all of our states.

I think our service center that we started in 2000, launched in 2001, is now improving our position, we have over $55m in the service center and a lot of that is business from competitors that don’t offer service center capabilities as agents look around the table and say, wait a minute, how are we going to improve the profitability of our office?

Part of it is, well, if we can move Selective small business into a service center, we really need to move all of our small business into service centers if we are going to really improve as agents their profitability and what they look at as their revenue per desk.

That is what is generally looked at in an agency’s office.

Those are areas where we are continuing to gain more market share, gain more business because of some of the strategies we’ve invoked over the years.

In some of the newer territories, and when I say new are areas we’ve been in for maybe less than seven years, it is the brand value that is continuing to build in those markets and our recognition as the premier regional carrier.

That takes time to establish that brand in those markets, and I think now we are starting to hit that level and then therefore building a higher level of comfort and getting more and more of agents business in those markets.

So it is a combination of those two things I think that continue to propel our movement forward.

One other thing.

There’s been some discussions that there are new competitors coming into some of your markets, especially on the personal lines as regards to New Jersey and maybe a couple of other markets.

Do you see that as a real impediment to your ability to continue to grow market share and reach your profit goals?

Well you are talking about specifically personal lines now?

Well personal lines, as well as to a lesser extent there is competition in the commercial side.

Let’s stay with your personal lines question first.

I feel new competitors, and let’s talk about New Jersey first in terms of new competitors coming into the marketplace.

I have to say, we have a 75 year history here.

We have one of the most established branches in personnel, quality of people, and our relationship with agents, I mean we write about an 18 percent share on average of an agents business.

If they got a dollar of premium, we got 18 cents of that.

I think our position is strong in New Jersey as its ever been.

That’s our best run office in the entire footprint that we have.

So I don’t perceive any other carrier coming in and trying to write personal lines and (a) either that hurting our personal lines position or (b) even inching away anything on the commercial lines side.

So I want to make sure to make that point first.

Now let’s talk about – and I will say outside of New Jersey, we are not writing personal lines business in every state, we are really only focusing on about six or seven states outside of New Jersey.

Our appointments are not out in every agents office.

So we are only writing personal lines in agents offices where there is a match, where there is a need, and where we are going to continue to establish a position as a strong carrier in that office.

So this isn’t just a global strategy of writing personal lines with every agent in that state.

We are only selecting a group of agents that need us and that there is a match and those are the agents we are going with.

So I don’t perceive that that is going to be a problem outside of New Jersey.

In terms of commercial lines writers, the commercial lines marketplace is extremely fragmented.

There is no market leader.

I think the biggest market share is around 9 percent of the market.

So there really is no market leader and that is a fragmented business.

I think when you look through the 20 state footprint that we are in, the reason why we continue to get more and more business is because as a regional carrier, we have field underwriting, we have field claim handling, which doesn’t get talked a lot about, but I will tell you that every agent meeting I have been to, it is the linchpin of their success to their customers in terms of offering superb claim handling.

The fact that we have a claims service center.

The fact that we have our SRM unit, which is our large account unit, then we have our middle market field underwriters out there canvassing and harvesting all of those account opportunities, and then rounding that out with a small business strategy by agents being able to seamlessly issue One and Done business right in their office.

Yet as a regional carrier we offer all of those products with a relationship that comes with it.

We just had a meeting with our top profitable agents as part of our Presidents Club, we had about 100 agents participate in that meeting for several days, and all I heard about was the fact that our positioning in their office, and it is because of these things that we do day in and day out.

And things we have been working on for years.

So these are not things that are easily replicated by anyone.

Okay, thank you very much.

We will hear next from Gerry Heffernan of Lord Abbett.

Hi, Gerry.

Good morning, gentlemen, how are you today?

Good.

Thank you very much for an extremely impressive result this quarter.

You make mention of getting deeper into the agencies upon the discussion where we were talking about new agent appointments versus getting deeper into the agencies.

In thinking about that, I would think that you have your current product offering with those agents, but as you are trying to get deeper into the agents I would suspect that you have requests from them for new products, new areas of coverage.

Could you talk to us about any new product offerings that you have been contemplating or going after?

I think our goal in the new product area is our PEO product.

I would say from an insurance product we offer a good broad base, and I think we are not really talking about going into an agents office and saying, well if we did this one specific product now we would be higher on the market share.

No.

I think what we’re talking about is looking at that agent and saying look, we write construction business, we write recreational business, we write [mercantile] service business, we write bond business, we write an manufacturing, we write an entire spectrum and I know that that agent writes accounts across that entire spectrum of business that we want to write.

There are certain areas that we don’t write, but yet we are a generalist and there are huge opportunities for us to expand into the products that we know and do well, and that is what our push is, to get more of that business.

And not look for the next “new product” around the edges.

And I have to say, I don’t hear from agents – and Jim can weigh in on this as well – that there are products that we do not offer that we would sit there and say, if we had “x” we would be a bigger factor.

So you are planning to sticking to your knitting here.

Yes.

If I could change topics, the workers comp.

You spoke of the premium, the price increase since, I forget the date you gave the statistics on.

Could you talk about the policy count?

Do you have the policy count for the last several quarters, just to let us know what is going on there?

Dale is going to have to provide that to you, but I think the time period that Dale mentioned was four years, approximately and the price increase was up about 40 percent.

My belief is that the policy count during that same four year time period for comp is probably slightly down.

For that period it was down, if you look at it it is as we have grown commercial lines policy count over the last few quarters the workers comp has grown at a substantially slower rate than the growth in the other lines of business, so we are very careful about that process.

And obviously we get what we can as you are well aware, it is a very heavily regulated line, so it is difficult.

We’ve gotten that 40 percent over the last four years, but unfortunately loss trends have eaten up most of that.

So obviously though, since the statement that the policy count is increasing, albeit at a slower rate than the other commercial lines.

And again, speaking just on a policy in force count here, it is still necessary for you to include that coverage in winning some business?

That is part of the relationship.

If you are going to go strictly ex-comp on every account there are clearly opportunities that you will not write as a result of that kind of strategy.

Okay.

Anything you see out there right now in the regulatory world that may make it a positive for the workers comp?

At this point we don’t see any major changes out in the marketplace.

Okay.

Great.

Again, thank you very much for a very impressive quarter here.

Thanks, Gerry.

Steve Lurito, with Forstmann-Leff.

Good morning, can you all hear me okay?

Yes.

Two questions.

Can you just aggregate the improvement in the auto business for us, maybe talk about frequency and severity, just what the year to date trends have been, and then I just have one other question.

We don’t have that right here with us.

Just color commentary is fine.

Are we talking about personal lines or commercial lines?

Both.

Both. [inaudible]

Just general color.

In general we’ve been seeing on both personal and commercial lines for automobile a decrease in frequency.

It’s been a steady decrease for the last four to five years.

Right.

Our severities in commercial auto have come down a little bit also.

Great.

The other question was on the investment portfolio, if I remember correctly, it seems like you all have increased duration during the quarter.

Is that right?

This is Kerry Guthrie, CIO.

No, actually the duration decreased in the quarter from 4.5 years to 4.3 years.

I’m sorry.

Thanks.

Thank you very much.

You have a follow up question from John Keefe.

One quick question.

Were you all [inaudible] storms in South Jersey earlier in the quarter?

Obviously there was some impact, but since flood is not a covered risk in a lot of cases on homeowners business, there is going to be less of an impact in that regard.

Obviously we also tend to get a little bit of benefit from the flood business.

We have not quantified that publicly, it is really minor to the overall process.

Shouldn’t expect to see much out of that.

Thank you.

And it does appear we have no further questions.

I would like to turn the call back to you for any additional or closing comments.

Thank you all very much for your questions.

If there are any follow ups please contact Dale.

Thank you.

That does conclude today’s conference call.