Selective Insurance Group Inc (SIGIP) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Selective Insurance Group third quarter earnings release conference call.

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

Please go ahead.

Thank you.

Good morning and welcome to Selective Insurance Group’s third quarter conference call.

This call is being simulcast over the Internet at Selective’s website, www.Selective.com. the replay will be available through November 29th, 2004.

As a reminder, some of the statements and projections that will be made during this call are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties.

We refer you to Selective’s periodic filings with the US Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.

Please note that Selective undertakes no obligation to update or revise any forward-looking statements.

Selective has also updated its investor disclosure guidelines to permit the disclosure of forward-looking statements estimates at any time during the year.

The information is available in the Corporate Governance section of the Company’s website.

With us today are several members of Selective’s senior management team.

At this time it’s my pleasure to introduce Executive Vice President and Chief Financial Officer, Dale Thatcher.

Thanks, Michele.

Good morning.

We had another strong quarter with double-digit growth and ongoing improvements across the entire operation.

Compared with the third quarter of 2003, net income increased 92 percent, to $28.3 million, or 90 cents per diluted share.

Operating income was up 94 percent, to 27.3 million, or 87 cents per diluted share.

Net premiums written rose 12 percent, to 356.5 million, including almost $70 million in new business.

Our overall GAAP combined ratio improved 4.1 points, to 98.1 percent and the overall statutory combined ratio improved almost 5 points, to 96.2 percent.

This, in spite of weather-related catastrophe losses accounting for 3.6 points of the statutory combined ratio for the quarter, or $7.9 million after tax.

About 82 percent of the losses were generated by four hurricanes that made landfall in Florida and then moved North into areas where we write coverage.

As a partial offset, our Florida operation generated approximately .7 million in net income from more than 1,800 flood claims.

Catastrophe losses for the third quarter of 2003 totaled $8.8 million after tax, or 4.7 points on the combined ratio.

This quarter we earned 13.5 percent annualized operating return on equity, which was 500 basis points above our cost of capital and reflects 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 and we use this measure in the analysis of trends and operations.

I’d like to talk about a couple of unique items in the quarter.

First, we received a positive ruling on an administrative appeal with the Internal Revenue Service that allowed us to release $2.3 million we had previously accrued for a potential negative outcome.

As a result of this one-time event, our overall marginal tax rates were lower for the quarter.

Industry-wide there was significant pressure in the reinsurance marketplace this quarter, as a result of numerous rating downgrades and substantial reserve developments.

To solidify Selective’s reinsurance position, we raised the allowance on reinsurance recoverables this quarter by $2.5 million, which negatively impacted the statutory combined ratio for our general liability line by 1.5 points and the workers compensation line by approximately 1.9 points.

We also removed one carrier from our reinsurance program via a contract termination provision.

We replaced the company with two highly rated carriers under the same price and terms.

The update impacts both our property catastrophe excess of loss and terrorism aggregate access of loss treaties.

We believe these conservative actions will enhance and strengthen our reinsurance program.

Our core commercial lines business, which represents 84 percent of premium volume, again continues to generate favorable results.

Commercial lines net premiums written grew 14 percent for the quarter, to $297 million, compared with third quarter 2003, driven by $60 million in commercial new business.

Commercial renewal price increases held steady at 9.4 percent for the quarter.

Retention was 83 percent, up 3 points from year-end 2003.

Our strong results reflect the outstanding performance of the property line, which generated a statutory combined ratio of 87.6 percent for the quarter, including more than 26 points from catastrophe losses.

This was an 11-point improvement compared with third quarter 2003, which included 19.6 points from catastrophes.

We experienced fewer large losses during the quarter due to underwriting initiatives we began in 2000.

These efforts have yielded a property book of business that is newer, better-constructed and lower hazard.

The statutory combined ratio for commercial auto has also made significant progress, dropping almost 12 points, to 80.9 percent for the quarter, compared with the same period last year.

Long-term pricing and underwriting initiatives are driving these improvements.

The statutory combined ratio for our liability business came in at 100.7 percent for the quarter, compared with 97 for the third quarter 2003.

On a year to date basis, this line improved more than 2 points to 96.4 percent, compared with the same period last year.

As we have grown this business, our focus has shifted to lower hazard accounts.

Additionally, we have expanded the use of contractual underwriting procedures, which incorporate favorable hold-harmless language in our insured’s contracts.

This program has been highly successful with our contractors’ business and has been expanded to other business segments.

For the quarter, the statutory combined ratio for workers compensation business was at 110.7, compared with 106.7 for the same period last year.

Year to date the ratio improved more than 1 point to 107.2 percent.

While these results did not meet our expectations, we believe ongoing underwriting enhancements will drive improvements.

Since 2000, overall commercial policy accounts have risen almost 13 percent.

In contrast, workers compensation policy counts have risen less than 1 percent.

Given Selective’s broad business appetite, it’s essential that we write this business to meet the overall account needs of agents and their clients.

However, when appropriate, we encourage the alternative placement of this coverage.

Currently less than 5 percent of our worker’s compensation business is unsupported by other commercial business and underwriting criteria emphasize low to medium hazard accounts.

At a time when the commercial market is softening, workers compensation is one segment where further rate increases are attainable.

Since 2000, we have increased workers compensation pricing by more than 40 percent, through a combination of rate increases, credit and dividend reductions and higher priced tiers.

For 2004, price increases will average about 11 percent.

For 2005 we project a 6.5 percent increase.

For the quarter, the overall commercial line statutory combined ratio improved 2.8 points, to 96.5 percent, compared with the same period last year.

This consistent, favorable 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 a better overall mix of business.

Results in our personal lines business continued to improve this quarter.

Net premiums written increased 5 percent, to $59 million, compared with third quarter 2003.

For the same period, the personal line statutory combined ratio dropped 12.7 points, to 94.6 percent, including the favorable impact of more than 5 points from our flood operation.

The personal automobile statutory combined ratio dropped almost 8 points, to 95.4 percent for the quarter.

This strong performance was led by our New Jersey personal auto business, which generated a statutory combined ratio of 90 percent, almost 11 points better than the same period last year.

These favorable results reflect long-term pricing and underwriting initiatives as well as an improving marketplace.

Although a welcomed change, we do not believe a 90 percent statutory combined ratio can be sustained long-term for New Jersey personal auto, due to the State’s excess profits law.

We estimate the combined ratios below 98 percent on a long-term basis will generate an excess profits tax.

To remain competitive for the best risks, we have implemented a new rate filing that allows us to use credit scoring for New Jersey auto business, as well as tier changes to reduce rates by about 2.5 percent.

These enhancements will lead to greater savings for our best customers, while improving the overall book of business.

We will continue to evaluate Selective’s competitive position in light of greater market activity and make additional adjustments as warranted.

For the quarter, the homeowners statutory combined ratio improved more than 32 points to 128.5 percent, compared with the same period last year.

Results were negatively impacted by weather-related catastrophe losses, accounting for 10 points of the statutory combined ratio.

In addition, we added $2 million to our homeowners IBNR reserves, or 23 points of the homeowners statutory combined ratio.

This action pertains to claim trends for groundwater contamination caused by underground home heating oil storage tanks in New Jersey.

Higher frequency was triggered in part by the State’s robust real estate market, which has resulted in more home tank inspections.

Overall claim severity has been low, with average claim payments of $22,000 and there’s been almost no related claim activity in our other operating States.

We began restricting writings Company-wide more than 18 months ago and are reviewing coverage changes for existing business.

Positive trends continued in the personal lines expansion States, which generated an overall statutory combined ratio of 103.3 percent for the quarter, down 26.8 points compared with the same period last year.

Throughout 2004, we have continued to see lower frequency for both auto and homeowners claims, along with the additional use of higher win (ph) deductibles.

Throughout the personal lines operation, ongoing pricing and underwriting initiatives, combined with the new web-based system, are expected to support growth and lead to a more profitable segment.

As of September 30th, 2004, overall fiscal year net premiums written per insurance employee were up 15 percent, to $781,000, compared with the same period last year.

Technology enhancements that allow agents to initiative and self-service their Selective business are helping us to achieve these strong increases.

During the third quarter, agents initiated 48 percent of endorsements through our commercial line system, while underwriting templates automatically renewed over 34 percent of commercial policies.

Our 2006 goal is $1 million in net premium written per insurance employee, which would produce approximately a 28 percent expense ratio.

Our diversified insurance services businesses posted a strong quarter.

Revenue was up 13 percent, to $27.6 million, compared with third quarter 2003.

Return on revenue was up almost 4 points, to 11.3 percent, compared with 7.7 percent for the same period last year.

Revenue for the flood operation rose 22 percent, to $9 million for the quarter, compared with third quarter 2003.

Net income was up 31 percent to $2 million, including $0.7 million from the administration of flood plans.

The return on revenue was 22.7 percent for the quarter and new flood business increased 15 percent, to $6.4 million.

Total flood premium service is approximately $76 million.

Revenue for our managed care subsidiary, CHN Solutions, was $4.5 million for the quarter, compared with $5.4 million for the same period last year.

Net income was .5 million and return on revenue was 10.9 percent.

Lower revenue was primarily due to the accelerated runoff of one large terminated client, as well as overall client turnover, which all managed care companies are undergoing right now.

We continue to closely manage expenses and expect the new clients we have added year to date to yield approximately $1.3 million in annualized revenue when fully phased in.

CHN’s provider network has increased 139 percent over the past five years, to 91,000.

CHN remains the number one provider network in New Jersey.

Revenue for Selective HR solutions, provider of our human resources outsourcing product, was $13.4 million for the quarter, a 21 percent increase over third quarter 2003.

Net income was 0.4 million, with return on revenue of 3.2 percent.

Through the first nine-months of the year we added more than 5,000 new work site lives, bringing total work site lives to almost 23,000.

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

The Company generated $22 million in after tax investment income for the third quarter 2004, up 9 percent compared with the same period last year.

The gain was primarily due to strong operating cash flow, up 31 percent, to $140 million for the quarter, and $266 million for the first nine-months of the year.

We also realized higher income from limited partnerships.

Investment income continues to be pressured by lower new money investment yields, which remain below maturing portfolio bond yields.

For the quarter, the annualized after-tax portfolio yield was 3.4 percent.

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

To help mitigate interest rate risks, we used a laddered maturity structure instead of attempting to time interest rates.

Selective’s investment portfolio is up 16 percent, to 2.7 billion at the end of the third quarter, compared with 2.4 billion one year ago.

We did not meet the contingent conversion feature for our convertible senior notes this quarter.

However, at Selective’s board meeting yesterday, the directors voted to waive the contingency provision of the convertible notes.

Therefore, from this point forward our notes remain convertible.

When calculating earnings per share, it’s necessary to add 3.9 million shares to the Company’s outstanding shares and also to add back approximately $800,000 of after-tax interest expense on the convertible notes.

Stockholder’s equity was up 17 percent, to $834.2 million at the end of the third quarter, compared with September 30th, 2003.

For the same period, book value per share increased 14 percent, to $30.04.

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

Excluding unrealized gains on bonds, or what is commonly referred to as ex-FAS 115, book value per share is $27.96, up 18 percent since September 30th, 2003.

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

As part of our capital management strategy, we repurchased 141,000 shares during the quarter at an average price of $35.04.

We have remaining authorization of 2.4 million shares.

Now I’ll turn the call over to our Chairman, President and CEO, Greg Murphy.

Thank you, Dale.

And good morning.

Before I comment further on yet another strong quarter, I want to speak briefly regarding the investigations of the insurance and brokerage business.

First, we are an agent market.

Independent agents are contracted to represent Selective and generate almost 100 percent of our business.

They are paid commissions, which we publicly file in the States we do business.

And they receive profit sharing based on the profitability of their collective business placements and not on individual accounts.

Independent agents are specifically prohibited from accepting compensation from other sources for the business they place with us.

Second, Selective does not use marketing services agreements or placement services agreements to generate business.

Last week we had our annual meeting with our field underwriters, the individuals who sell and service business with independent agents at the local level.

Given the breaking news out of New York, we took the opportunity to discuss these events and asked them to immediately advise us of any similar activities within Selective.

Not a single incident was reported.

Now I’d like to talk about another strong quarter in which Selective continued to deliver consistent, solid results Company-wide.

As a result of our favorable performance and ongoing improvements, the Company’s Board of Directors approved a 12 percent increase in the cash dividends on Selective’s common stock, to 19 cents per share for the quarter.

Our performance is built on a strong foundation of people and technology, through which we constantly seek new avenues to improve the way we do business.

We have spoken to you often of Selective’s High Touch field model.

That places a total of almost 300 underwriters, claims specialists and loss control experts in daily personal contact with agents and customers.

Each field underwriter produces about $3 million in new commercial business a year.

Meanwhile, Selective’s claim and loss control specialists significantly enhance our ability to prevent losses and manage claim costs.

For example, their ability to intervene early on property claims and aggressively seek out subrogation opportunities have contributed to recoveries in our subrogation area, which totaled $26 million for the nine-months.

High Touch is an essential tool in today’s highly competitive marketplace.

Coupled with high tech, it’s an unbeatable combination.

Selective’s web-based commercial lines technology has been up and running for several years now.

Today our focus is on enhancing systems and implementing new technologies, unlike many competitors who are still building their systems.

We are seeing the impact of Selective’s technology deliverables, as agents now originate 85 percent of all new commercial lines accounts via Selective’s online system.

Half of that business automatically moves through small business templates at an estimated marginal expense ratio of 23.

In addition, our new personal lines and bond systems are already generating considerable business activity with agents already entering 76 percent of new automobile policies.

We have recently expanded our planning process to analyze Selective’s commercial lines market share by State into 2014.

Our emphasis will be on reaching long-term State market share targets by penetrating business segments through Selective’s existing agency network and appointing new agents where needed.

Field underwriters and claims specialists will be supplemented in key territories as our field model is optimized to meet growth needs.

In addition to the strong franchise that field underwriters share with agents, the Company’s strategic business units, SBUs, will be a driving force in underwriting profitable business.

Currently the five commercial lines SBUs track 72 business segments, they analyze existing underwriting trends, review coverage terms and determine how to best utilize loss control services and other training tools.

In addition to the SBU structure, we have many other boundary controls in place to ensure underwriting quality.

Independent agencies control roughly 75 percent of the commercial lines marketplace and they are growing with regional carriers.

We see significant growth potential in Selective’s existing 20-State footprint, because of the many competitive advantages we offer, such as strong agency relationships, ease of use through state of the art technology, best in class products, regional expertise, marketplace stability, underwriting and claims service center capabilities and outstanding levels of service.

At a time when financial stability matters more than ever to agents and customers, Selective remains among only 6 percent of commercial lines carriers rated A+ by AM Best.

Last week, Fitch Ratings upgraded Selective’s financial strength rating to A+ as a result of consistent and favorable commercial lines performance, greatly improved personal lines performance, our high quality investment portfolio and sound capitalization.

Last month, the Professional Independent Agencies Association, a major agency trade organization, honored Selective as the National Company of Excellence for 2004.

This national recognition is truly an honor.

It's also an important measure of the progress we continue to forge with agents who share our passion for exceeding customer expectations through the combination of high tech and High Touch.

Given the strong results through nine-months, our projections for 2004 are based on the following key assumptions – increasing after-tax investment income by 4 percent; overall premium growth of 14 percent; commercial lines renewal price increases of 9 percent; a New Jersey personal automobile statutory combined ratio below 95; and diversified insurance services revenue growth of 13 percent; and return on revenue of 7.

Barring weather-related catastrophe losses in excess of our budgeted 1.6 points for the fourth quarter of 2004, we anticipate overall statutory combined ratio of 96, a GAAP combined ratio below 97.5.

Accordingly, we have increased projected operating earnings per share to between $3.35 and $3.45.

Selective will host an investor day on November 9th, at the NASDAQ market site in New York City.

This event will be webcast at www.Selective.com.

There are still a few seats available, so please contact Jennifer DiBerardino, in our Investor Relations Department if you’d like more information.

Now I’d like to take the call back to the operator for your questions.

Thank you.

(OPERATOR INSTRUCTIONS.) Beth Malone, Advest.

Thank you.

Good morning and congratulations on the quarter.

A couple of questions.

On the tax credit, what kind of tax rate should we assume going forward?

Is that a one-time adjustment and how much was that on a per share basis?

Well, Dale will talk to you a little bit more about the per share basis.

That’s a one-time adjustment in this quarter and we’re looking at a run rate in our effective tax rate for our investment income something around 25 or slightly less than that.

It was about 7 cents per share.

Obviously you take the 32.5 million shares and it was $2.3 million.

Obviously there was the other item there too, for the $2.5 million that we added to reinsurance recoverables, which we consider also, hopefully a one-time event.

So they basically netted each other out in the quarter?

Not a full net, but obviously offset each other.

Okay, thank you.

On the underwriting performance with the book of business, can you quantify maybe you explained this.

The One & Done program, I know it is expected to reduce expenses.

Does it have a better loss ratio?

Does that business have a better loss ratio than the overall business?

Yes.

It's targeted for business segments that we feel are going to be more profitable overall.

So you’re getting the dual combination of an overall statutory – underwriting expense ratio of 23, and some marginal expense ratio, and then you’re getting better performance.

And I’d say somewhere between maybe 5 and 10 points than our normal business.

Okay.

And just another question.

On the pricing and the underwriting performance, there’s a new study from Rimm’s (ph) out saying that there’s a third quarter of commercial pricing pressure in the marketplace that they’ve seen the third quarter of declining pricing on a lot of large case business.

And it would appear that you may not be getting as much price increases as you had in the past, but you continue to get price increases.

Is that the distinction between your small commercial market and what the larger overall property casualty market’s doing?

This is Jim Ochiltree.

Yes, Beth, I think that’s very true.

I think at least the pressure’s more visible at the top end, where the companies are dealing with large accounts.

We have a few large accounts and we see some of that too.

But our typical policy is – I think our average policy premium is around $3,000 and our average account premium is under 10,000.

We don't see as much pressure in that areas as I think our competitors see in some of the bigger stuff.

Okay.

One last question and I’ll let other people ask.

On the recruitment, or building your distribution, you tend to have a smaller number of agents that you are concentrated with.

Do you anticipate – should we expect to see the number of agents grow significantly or materially over the next couple of years?

Is that one of the goals or is it just penetrating the existing sales force?

Yes Beth, we don't have any goal to grow our number of agents.

If we can do the business we want to do, as we discussed about how we’re looking at developing market share targets in certain States, if we can do that business with the agents we have today, we wouldn’t add another agent.

But we think there are going to be probably geographic areas where we come out to be under-represented with the types of business we really want to pursue are there.

We’re just not getting a fair share of it.

So it could happen.

But there certainly is no initiative to go out and appoint a bunch of new agents.

Beth, one thing I wanted to make sure that we’re clear on too, is given the two unusual items in the quarter, the one is a federal tax benefit.

And since it’s a tax benefit it’s already on an after-tax basis, so that $2.3 million is already after tax.

So that's a 7-cent benefit.

The charge on the reinsurance side being $2.5 million is on a pre-tax basis, so once you tax effect that, that’s a 5-cent expense.

And that’s why the two don’t fully offset each other.

John Keefe, Ferris, Baker.

Hi, good morning.

A couple of questions.

Dale, did you mention the amount of new commercial business that is put through the One & Done system?

John, that’s still averaging about $135,000 a day and there’s 21 workdays in a month, so you can do the math on that – so three-quarters of that.

As far as percentages, I believe in the past it was 80 percent or so of new business?

Is that pretty much the same?

No, I don’t think it’s 80 percent of the new business.

I tell you what’s confusing that a little bit is that’s the agency origination and that’s not just One & Done.

That means agencies enter up-front information on 85 percent of our new policy count.

And that doesn’t all necessarily flow through the One & Done system.

That could easily go to a field underwriter or an inside underwriter.

You’re going to get a disproportionate (indiscernible.) It would be more in the count, but less in the premium, John.

But I think your best benchmark for that is $135,000 a day.

And that run rate last year was about $100,000 a day.

We continue to migrate that program up as we round out some of the more -- as we add some of the capability and bolt-on some additional kind of policies that would flow through there.

Thanks for clarifying that.

Second question, Greg, do you contemplate changing the profit sharing contingent structures with your agents going forward?

John, to be honest with you, right now we feel that the compensation that we offer agents is very competitive for the kind of business that we want to write and from a competitive standpoint within the agencies that represent us.

At this point in time it’s just too early to tell what’s going to happen, what kind of regulatory changes you may see long-term, so it’s difficult for me to comment on that.

Greg, it sounds as if you feel you’re receiving something of value in return for these contingencies and that not only are the agents the winner, but you’re a winner in this deal?

Is that correct?

I would say that contingent commission is part of the relationship, it’s part of the strategic alignment between the Company and the agent.

And we feel that when an agent is going to place a piece of business with an insured, they have to look for the best combination of price, coverage, service, financial strength and that the best overall solution for that customer is what they really need to look at.

And in the end, the customer should be the winner.

Mike Dion, Sandler O’Neill.

Good morning.

A couple of questions.

First off, just a follow-on to the last question on contingent commissions.

As you conducted your review, if you could just maybe quantify either the dollar amount or kind of the percentage of total premiums that contingent commissions comprised over the last year through nine-months, et cetera?

Sure.

For 2003, the full year contingent commission was about $26 million, represented approximately 2.1 percent of net premium written.

For the nine-months that number is running about $28 million and approximately 2.6 percent of premium for nine-months.

Okay, great.

That’s helpful.

Just a follow-up question on the buyback.

With the increase from the dividend, is that something that you may look to possibly tail back now, given some of the capital commitments or is that something that you will continue with?

I believe you said 2.1 million shares left on the authorization.

We’re committed to managing our capital at the maximum trim point.

There’s all kinds of factors that we look on in terms of debt capability, equity capability, rating agencies, where they are, and all those factors come into place when we make our overall capital decisions.

But it’s based on a longer-term strategic plan.

(OPERATOR INSTRUCTIONS.) Greg Peters, Raymond James.

Good morning, everyone.

Congratulations on a good quarter.

I had two questions for you.

First of all, Dale I think you said – or maybe Greg, talked about waiving the contingency feature in your convertible debt.

And I’m wondering, is that just from a contingency calculation or does that actually have an impact on the balance sheet in terms of debt and equity levels?

There’s no impact on the balance sheet, but it does mean that the bond will be convertible from this point forward and, therefore, will also be included in our earnings per share calculation from this point forward also.

Please clarify why if you waive the contingency factor, why we wouldn’t automatically make the assumption that that debt becomes equity?

Is it because you have a cash feature?

Basically it’s still paying interest.

And therefore, the conversion hasn’t actually occurred.

But it could if the holders choose to do that.

Okay, that's fair enough.

Greg, excuse me, (indiscernible) the last two quarters that capability has existed and there hasn’t been anything converted.

Right, I understand.

Well, the conversion happens – is only allowed once a year on regular intervals, right?

Well no, what it was – the way the contingency worked was if the stock traded above $35.15 for 20 of the last 30 trading days of any quarter, then it would be convertible each and every day in the following quarter.

Because we missed that contingency by one penny on one day in the third quarter, the bond would otherwise not be convertible for the fourth quarter.

So the board has chosen to wave that provision.

I know the FASB has talked about these types of bonds and has come to a conclusion that they’re going to make them be included in the EPS calculation at some point in the future, but haven’t come up with an implementation date.

This just kind of removes the uncertainty around whether these shares should be in or out of our earnings per share calculation.

And now they are in.

That’s a fair answer.

My second question sort of piggybacks – and this is just a clarification.

You were talking about the $135,000 per day of new small business.

Is that what’s running through your underwriting service center or is there other business that’s running through the underwriting service center?

And I know you’ve given us numbers and maybe you already provided it and I missed it.

But could you clarify the difference between the two and give us an underwriting service center number?

Let me just say, first of all, accounts that fit into our underwriting service center is anything less than $20,000.

So that’s got a much higher account profile that can run through the underwriting service center.

And again, the underwriting service center is there to help agents sell and service accounts by moving that small business out of their agency for 2 percent reduction in commission, putting it into our service center where we’re going to sell and service that account 365 days a year.

So that’s that part of it.

The small business that I don’t want to be confused, but the One & Done business is what we call our templated business.

It fits through our underwriting models.

Agents enter it and it’s automatically issued and done.

And that’s why we refer to it as One & Done.

This is the business that we’re trying to cull through an agency that normally comes through their customer service reps within an agent’s office.

It's generally not producer style business that they share commissions with within that office.

So what we’ve done is aligned ourselves into that and that flow of small business is coming our way, because it’s going through the path of least resistance.

And that’s the business that we’re writing $135,000 a day on.

Okay, so the underwriting service center includes that new small business, correct?

Depending on – if that agency – we have, what’s it, Jim, 200 and some agencies in the service center?

We have about 240 agencies that use the service center.

We also track every day that a number of those new policies that flow through the One & Done, Two & Done system, that go directly into the service center, it jumps around, but it’s somewhere between 25 and 30 percent.

All right, 240 agencies use your service center today, or at the end of the third quarter, how does that compare with the number of agencies signed up for your service center a year ago?

Let me just say, the service center initiative was started – the concept, from our standpoint, we started it in 2000, we launched it in 2001.

So we’ve gone from nothing to about $60 million of business in the service center.

It's been a great leverage point to aggregate more business with us.

And again, when you think about it, in the selling times that agents are going into now, that helps to actually make agents more profitable, number one.

And number two, it allows them more time to sell and service their larger A and B style customers and allows them to offload that high transaction activity/lower premium dollar volume to us.

So again, it helps our agents retain more business.

It helps them move up and sell and service.

And then it allows them – I think it also makes them more profitable overall as an agency.

Greg, do you have targets on getting – going from 240 agencies to all of the agencies having this or do you set internal targets on that?

No, we allow – the difference about Selective and a lot of other carriers – and this is why it comes into the regional minimum list, we allow agents really to dual track in the sense that if agents want to fully sell and service their accounts they can do that.

And they can do that right from our technology.

I mean, they can enter the business and they can do the same things with renewals and endorsements and other things.

We’re not going not force people into that track.

But I think what you’re starting to see in the migration from an agency standpoint, is a migrating to more of a best practices, migrating to figure out how it is they’re going to sell and service their best accounts.

And as the market starts to change, you get more and more agencies out there looking for optimum practices internally within their shop.

And from our standpoint, a service center works best when an agency moves really all of that small business into the service center, and again, aggregating that with us.

All right, another sort of twisted question would be, when you lose an account, when you lose a commercial account, presumably it’s price based, the reason why you’re losing it.

But I’m just curious what the agent says to you when you lose an account?

What the reason for the account loss is?

And on those accounts that you do lose, maybe some of them it’s intentional, I don’t know, but do you find them going to – do you find one competitor or another being more prominent in taking business away from Selective?

Well let me just say in terms of – there’s a whole host of reasons why we lose accounts.

Some are because of mergers in the business, where maybe the company that’s taking over our insured has got insurance somewhere else.

That's one reason.

You do have a certain amount of defection rate in smaller businesses, folks that go out of business.

But then you have people, sometimes the agency, our agent for instance, might be losing the account to another agency.

And in those cases, I don’t see – we’ve been out, Chuck and Jim Ochiltree can add to this, but we’ve been out to see a lot of our agents in the last three to four months and we hear of some patchiness around competition, but we don't hear of any wholesale, where someone’s just absolutely being incredibly competitive and just moving business.

So, sometimes somebody wants an account from us specifically so they may price under market to get it from us.

In some cases somebody just may put out a quotation that somebody just doesn’t understand the exposure on the account.

We may lose it.

There’s a whole host of factors that go into that.

Bill Dezellem, Davidson Investment Advisors.

Thank you.

Two questions.

First of all, if we look over the last three years, you all have had dramatic improvement in profitability.

How would you characterize the split of that success between overall market factors versus internal initiatives?

I’ll tell you, let’s just talk about the overall macroeconomics in the business.

Clearly in this hardening market, although it’s been more equalized over the last four years and not really that significant in any one year, on our price, including exposure on our renewal base, is up about 94, 93 percent in the last four and a half year time period.

So that’s been some element, but at that same time that price has gone up, loss costs have also increased, reinsurance costs have spiked tremendously higher.

There’s a whole host of factors in that in terms of the underwriting performance.

What you’ve got then in terms of our internal operations, I would say that our shop and the success of the operation clearly comes – the lynchpin of our success really is the field underwriting model and the fact that they’re in our agent’s office, the contacts we have, the fact that they know the type of business that we want to write, that we have loss control, the fact that our loss control--.

I’ll just give you one instance, Bill, in the last nine-months we’ve added Thermographics – infrared testing, so we can do hot – we can do heat from hotspots and we can do moisture and moisture analyses for customers.

The fact that we have 60 loss control people and we continue to get each one of them certified.

Over half of them are CSPs, that’s Certified Safety Professionals.

And it’s difficult to sit here and measure how many losses we’ve avoided because of the fact that we have loss control out there.

It's hard to measure the fact that we have a field claim model and have had that model, but continue to improve the depth and breadth of talent around that and how many claims do we settle quickly?

Or how many claims do we go out and see where there may be fraud on the claim – move that claim into our SIU area.

That’s been substantially fortified over the last three or four-year time period.

And the number of claims that they have been able to successfully investigate and deny for good and sufficient reasons.

So it’s hard to sit back here and measure the underwriting improvements that we’ve made as an organization, but you can clearly see the improvement in the property results.

And that’s really one of the key leading indicators in my mind, of longer-term performance.

So it’s hard for me to disaggregate that question.

But I could sit here and point to our SBU structure, our analysis of how we look at our products, the fact that we get our agents’ profitability on a monthly basis and how we manage that agent’s profitability and how successful that management has been in the last four to five-years as well.

So I mean, there’s just a lot of factors that come together for that.

And let me shift to the second question and it’s probably even less answerable.

But when would you anticipate that the full impact of the internal initiatives will be felt?

Or maybe said differently, when will some of these internal initiatives that you’ve been working on be fully employed, if ever?

Never.

The answer to that question is – right now, all the things that we’ve even done and now we’re pushing out new initiatives.

We’re currently looking at predictive modeling in our commercial lines area.

We’re looking at other alterations in some of our SBU structure and how we manage our business.

That’s just a constant level of improvement and we’re always focused on how do we beat ourselves and how do we do things better, whether it be in the claim process, whether it be in the loss control, whether it be in the underwriting and I think it’s a constant level of improvement in the organization.

Beth Malone, Advest.

Thank you.

Just a follow-up question.

On your small commercial business, there’s a number of larger carriers that I assume you compete with, the Travelers, Hartford, in your market.

Do you anticipate or have you seen any kind of issues facing your agents where those companies are under more scrutiny as a result of this Marsh Mac situation than certainly Selective would be.

Do you anticipate that that’s going to give you any kind of competitive advantage in the near-term?

You know, Beth, we look at the marketplace, we do the absolute best we can, offer our agents the best products, services and that’s really what we focus on in the marketplace.

And having no further questions at this time, we’ll turn the call back over to Mr. Murphy for any additional or closing remarks.

Well thank you very much and if you have any follow-up information you need or if you’re interested in our investor day, please contact either Jennifer or Dale.

Thank you very much.

Thank you, everyone, for your participation in today’s conference call and you may disconnect at this time.