Selective Insurance Group Inc (SIGIP) 2004 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, 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.

Good morning and welcome to Selective Insurance Group's fourth quarter conference call.

A supplemental investor packet is available on the investor's page of our website, www.selective.com.

This call is being simulcast on the Internet at our website.

The replay will be available through March 2, 2005.

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 U.S.

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.

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

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

Good morning.

The strong fourth quarter caps off a record year for Selective as we achieved the highest earnings in company history.

For the fourth quarter of 2004, compared with the fourth quarter of 2003, net income was up 84 percent to $43.9 million, or $1.38 per diluted share.

Operating income increased 56 percent to $32.6 million, or $1.03 per diluted share.

Our GAAP combined ratio improved 3.5 points to 96 percent and our statutory combined ratio improved 4.3 points to 97.3 percent.

Total revenue increased 16 percent to $418.1 million and net premiums written increased 5 percent to $284.2 million.

Commercial Lines net premiums written increased 7 percent while Personal Lines declined by 4 percent from the run-off of our New York Personal Lines business as well as increasing competition in New Jersey.

The fourth quarter is traditionally our lightest premium quarter.

Net income for the quarter included a $9.7 million capital gain after-tax on the sale of an equity security in the Company's investment portfolio.

Total realized investment gains for the quarter were $11.3 million after tax or 35 cents per diluted share compared with $2.9 million after-tax or 9 cents per diluted share for the fourth quarter of 2003.

For the full year 2004 compared with 2003, net income was up 94 percent to $128.6 million or $4.07 per diluted share.

Realized investment gains increased 92 percent to $16 million after tax or 49 cents per diluted share.

Operating income was up 94 percent to $112.7 million or $3.58 per diluted share.

Net premiums written increased 12 percent to $1.4 billion and total revenue was up 16 percent to 1.6 billion.

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

We use this measure in the analysis of trends in operations.

Earnings per share numbers for 2002 and 2003 have been revised to comply with the latest ruling from the FASB regarding the treatment of contingently convertible bonds. 2004 numbers remain unchanged since they were already calculated using the as-if converted method.

Selective's Board of Directors has also decided to early adopt the expensing of stock options commencing with the first quarter of 2005.

Catastrophe losses for the quarter reflected a net positive development of $1 million after tax or 3 cents per diluted share.

For the same period last year, catastrophe losses were $5 million after tax, or 16 cents per diluted share.

For the full year, catastrophe losses contributed 1.4 points to the statutory and GAAP combined ratios compared with 2.7 points in 2003.

Selective's strong performance throughout 2004 was led by our core Commercial Lines operation, which represents 84 percent of our business.

Commercial Lines' net premiums written grew 7 percent for the fourth quarter compared with fourth quarter 2003 and increased more than 14 percent to $1.1 billion for the year.

Despite a steady increase in marketplace competition, we wrote $46 million of new commercial business in the fourth quarter and $236 million for the year.

Commercial renewal pricing including exposure increased 7.4 percent for the quarter and 8.8 percent for the year.

Retention exceeded 82 percent for the year, up from 80 percent in 2003.

An important component of the management of our Commercial Lines business is an emphasis on reserve adequacy.

Each quarter, we conduct an internal actuarial review.

Additionally, three times a year, we ask our outside auditor KPMG to conduct an independent review of our reserve position.

In the fourth quarter, we made a modest increase in general liability reserves.

As a result of this, the general liability statutory combined ratio was 106.1 percent for the quarter compared with 101.1 percent for the same period last year.

For the full year, the general liability statutory combined ratio improved to 98.7 percent from 99.1 percent in 2003.

Overall, the company saw minimal reserve development of only $5 million for the year.

Of this, approximately $3 million was for reinsurance recoverable write-offs and $2 million related to salvage and subrogation in the bond line.

Our Property business generated excellent results for the fourth quarter with a statutory combined ratio of 64.4 percent compared with 85.4 percent in fourth quarter 2003.

This 21-point improvement includes the positive impact of approximately 12 points from lower catastrophe losses compared with the fourth quarter of 2003, including positive catastrophe loss reserve development.

For the year, the Property segment generated a statutory combined ratio of 80.9 percent, almost 17 points better than 2003.

The Commercial Automobile statutory combined ratio was a strong 90.5 percent for the quarter and improved more than 7 points to 85.8 percent for the year.

The statutory combined ratio for our Workers Compensation business improved more than a point to 112.2 percent for the quarter and 108.2 percent for the year.

Our goal is to continue the progress we were making with this segment as it remains an important component of the overall profitable commercial lines account.

In 2004, Workers Compensation renewal price increases, including exposure, were up 11.2 percent.

Policy count was up only 2 percent versus 7.8 percent for all commercial lines.

We expect this business to continue to grow at a slower rate than the overall commercial lines book.

Workers Compensation action plans for 2005 include a rate increase effective January 1, 2005, of almost 9 percent in New Jersey, which represents about 26 percent of our workers compensation premium; ongoing loss control initiatives that include work site safety inspections;

OSHA certification training for contractors and the direct involvement of Selective loss control professionals on insured workplace safety committees.

Writing more non-contracting workers compensation policies through our small business One-and-Done system.

This system is growing and profitable as these policies perform about 18 points better than our traditional Workers Compensation business and our Knowledge Management Initiative will provide new informational tools in the first half of 2005 for the Workers Compensation line of business.

These tools will provide a finer level of detail that will contribute to better risk selection and management of this business over time.

Selective's overall commercial lines performance continues to improve.

This steady trend is based on more than 5 years of double-digit commercial renewal pricing increases, ongoing underwriting enhancements, heightened loss control efforts and the value of the Selective Agency franchise.

For the quarter, the Commercial Lines statutory combined ratio improved 4.6 points to 97 percent compared with the same period last year.

The full year Commercial Lines statutory combined ratio improved 5.5 points to 95.4 percent compared with 2003.

Our Personal Lines business continued to make progress in 2004.

For the fourth quarter, the statutory combined ratio improved 2.3 points to 99.5 percent compared with fourth quarter of 2003.

The full year Personal Lines statutory combined ratio was 98 percent, almost 6 points better than last year, including the favorable impact of 3.8 points from the Flood operation.

Although the Flood operation is fee-based with no underwriting risk, we include it in the Personal Lines statutory combined ratio in accordance with statutory reporting requirements.

Better Personal Lines results were driven by the strong performance of our Flood business as well as continued improvements in Personal Automobile in some of our expansions states and New Jersey.

We were pleased to see continued profitability in our New Jersey Personal Automobile business, which generated a statutory combined ratio of 98.6 percent for the quarter and 94 percent for the year, almost 6 points better than 2003.

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.

As the New Jersey market grows increasingly competitive, we're taking actions to enhance our market position.

A rate filing in the fourth quarter allowed us to use credit scoring for the first time for New Jersey Auto business.

Combined with tier changes to attract and retain our best business, this changed reduced rates by almost 2.5 percent.

In March 2005, we plan a further rate reduction that will lead to a more competitive product.

Although premium volume for our New Jersey Auto business declined slightly, the overall profitability profile of the book improved.

Increased competition in New Jersey as well as accelerated runoff of our New York Personal Lines business, contributed to a 1 percent decrease in overall Personal Lines direct premiums written for the year.

Homeowners results improved for the quarter from a 109.7 percent to a 102.8 percent, primarily due to reduced catastrophe losses.

Positive trends continued in the Personal Lines expansion states, which delivered a full-year statutory combined ratio of 105.7 percent, almost 10 points better than 2003.

We're seeing steady improvement in Auto and Homeowner accident year frequencies while tier and underwriting changes as well as increased rates are beginning to favorably impact this business.

Although there is still work to be done, these changes are producing a better mix of more accurately priced business.

We expect our new automated Personal Lines system to drive more profitable growth as it becomes even easier to do business with us.

This leads to greater scale which reduces underwriting expenses over time.

All of these enhancements will lead to a more profitable book of Personal lines business.

At year-end 2004, overall net premiums written per insurance employee were up 14 percent to $789,000 compared with 2003.

Technology enhancements would allow agents to initiate and self-service Selective business are helping us achieve these increases in productivity.

At the end of 2004, agents were initiating 55 percent of all endorsements through our Commercial Lines system while underwriting templates automatically renewed over 33 percent of Commercial policies.

In 2004, our strong performance led to profit-based incentives to employees and agents of 3.7 points on the statutory expense ratio compared with 2.9 points in 2003.

The portion related strictly to underwriting expenses added .8 points to the expense ratio.

Given the more competitive pricing environment and our focus on maintaining both growth and profitability, we expect somewhat more limited growth in 2005 and 2006.

When combined with continued high levels of profit-based incentives, we now expect to achieve a 29 percent expense ratio in 2006.

On the Reinsurance front, our January 2005 renewals were very favorable.

All four treaties renewed with similar retention limits and coverage.

We achieved some significant rate reductions and expanded reinsurer participation to further diversify the spread of risk.

The catastrophe excess of loss treaty renewed with a 9.5 percent rate reduction.

The contract was restructured from 5 to 3 layers; however, total coverage of $133 million was virtually unchanged from the prior year.

The Terrorism Treaty renewed with no change in premium or coverage.

The New Jersey Homeowners Quota Share Treaty renewed with more favorable seating commissions with estimated savings of $300,000 and the Surety Excess of Loss Treaty renewed with a 22 percent reduction in premium rate and no changes in coverage.

Our Diversified Insurance Services operation posted strong results for the fourth quarter.

Compared with the same period last year, revenue was up 16 percent to $26.1 million and return on revenue increased 4.2 points to 9.5 percent.

For the year, revenue was up 14 percent to $104.4 million, return on revenue increased 2.2 points to 8.9 percent and net income was up 51 percent to $9.3 million or 29 cents per diluted share.

Revenue at our Flood business rose 26 percent for the quarter to $7.2 million compared with fourth quarter of 2003.

Net income was up 51 percent to $1.5 million.

Return on revenue increased 3.3 points to 20.4 percent while new flood business increased 9 percent to $5.3 million.

As a hedge to our insurance operations, the Flood business contributed to results for the year.

Administrative fees from the active hurricane season increased revenue by close to $3 million in 2004.

Total flood premiums serviced is approximately $78 million.

Revenue for our managed care subsidiary, CHN Solutions, was $4.3 million for the quarter compared with $4.6 million in fourth quarter 2003.

For the same period, net income was $0.2 million and return on revenue was up 2.7 points to 4.6 percent.

Lower revenue was primarily due to aggressive competition in New Jersey and overall client turnover which is generally affecting the industry.

CHN remains the number one medical provider network in New Jersey and we continue to closely manage expenses during this highly competitive period.

For the quarter, revenue for Selective HR Solutions, our provider of human resources benefits and administration services, was up 19 percent to $13.9 million compared with fourth quarter 2003.

Net income was up 0.6 million compared with last year while return on revenue increased 4.2 points to 4.4 percent.

For the full year, Selective HR Solutions recorded net income of $1.6 million compared with a net loss in 2003.

During the year, Selective H.R. added 6000 worksite lives, bringing the total to approximately 23,000.

As the commercial insurance market becomes more competitive, this product offers additional agency revenue and another value-added touch point with agency clients.

The more touch points, the harder it becomes for the competition to take an account away.

Over 100 Selective agents now sell this product with an account closing rate of almost 40 percent.

After-tax investment income was up 11 percent to $25.3 million for the quarter and up 8 percent to $90.7 million for the year.

Strong growth was fueled by a 30 percent increase in operating cash flow for the year of $367.1 million along with increased dividends and higher returns from our limited partnerships.

The overall annualized after-tax portfolio yield was 3.5 percent.

Selective's investment portfolio was up 17 percent to a record $2.8 billion at year end, including the favorable impact of $50 million and proceeds from our fourth quarter debt offering.

Invested assets per dollar of stockholders equity was $3.22.

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

This is accomplished through disciplined securities selection and portfolio diversification while maintaining adequate safety and liquidity.

We manage interest rate risk associated with fixed income investments by actively maintaining targeted average portfolio duration and laddering bond maturities.

The current duration of our bond portfolio is 4.3 years.

Bond holdings represent 83 percent of invested assets with 64 percent of the portfolio rated AAA.

The bond portfolio has an average rating of AA with less than 1 percent rated below investment grade.

During the fourth quarter, we earned 15.2 percent annualized operating return on equity.

For the year, operating return on equity was 13.8 percent.

This was 524 basis points above our cost of capital and reflects our goal of a higher level of consistent returns.

We continue to manage our capital structure to maximize the risk-adjusted returns generated for shareholders.

Now, I will turn the call over to Greg Murphy.

Thank you, Dale, and good morning. 2004 was a tremendous year for Selective, led by strong performance in our Commercial Lines operation and diversified businesses.

We delivered a total return to shareholders of 39.3 percent and generated operating earnings of $3.58 per diluted share, which exceeded the high end of our projected range by 13 cents.

Across the board, our people and technology delivered a powerful combination of value-added products and services that favorably positioned our company in the marketplace.

Importantly, only 6 percent of commercial lines companies have an A+ or higher rating from AM Best and we've been rated A+ for 43 consecutive years.

And again, Selective was again named to the Forbes Platinum 400 list of companies with the best balance of long and short-term financial performance.

Our statutory surplus grew 21 percent to $808 million for the year, driven largely by underwriting profits and increased investment income which lowered our premium to surplus ratio to 1.7.

Book value per share at year end was up almost 15 percent to $31.57 and our 10-year compounded annual growth rate was 11 percent.

Selective's financial strength and stability provided significant competitive advantages in the marketplace indirectly impact where agents placed their best business.

This is an important factor as the Commercial Lines marketplace becomes increasingly competitive.

As expected, prices are softening industry-wide.

However, our initiatives are designed to deliver continued growth and profitability.

Independent agency system controls about 80 percent of the Commercial Lines marketplace and regional companies are increasing market share by taking business away from national carriers.

We have launched a long-range market planning initiative to accelerate Selective's Commercial Lines market sharing growth in our 20-state footprint.

Our goal that sees better information to more accurately identify true market opportunities for Selective and our agents.

The challenge for independent agents is to be more proactive in identifying and responding to customer demands.

Because we distribute our products through only 752 agents, they focus on the franchise value they share with Selective and our goal of achieving profitable growth by exceeding customer expectations.

These are agents who work through relationships, not just transactions.

We rank as one of the top three carriers in two-thirds of our agents who have been with us for five or more years.

Company ranking is one of the most predictive indicators of success at an agency.

Price and ease of doing business are also key factors in getting business commitments from our agents.

Each of our 71 field underwriters generates about $3 million in commercial premium each year.

Our hands-on ability to review and price each risk differentiates us from other carriers and provides a competitive advantage to earn more of an agents' best business.

Today's customers demand fast and efficient claims handling.

Selective's employees provide 24-hour service from our claims service center.

They currently resolve 55 percent of small claims in just two weeks and customers receive immediate access to rental cars and qualified repair shops.

Agents also depend on their 130 field claims specialists to exceed customer expectations when handling a claim.

To prevent claims, Selective's loss control professionals conducted 1700 inspections and value-added safety visits in 2004 for accounts of all sizes.

Selective's underwriting service center manages more than $61 million in commercial premium from 243 agents.

Retention from this business is about 5 points better than our traditional commercial business and an important factor for consolidating more of an agent's best business with us.

Premium volume and usage have continued to increase as agents once reluctant to place their clients in a call center environment now tout Selective as the best in class for other carriers to follow.

Selective's technology deliverables supported premium growth and efficiency in 2004 as agents initiated 85 percent of commercial business directly from their offices.

Almost half of all new commercial policies flowed through our One-and-Done small business system.

We generated $125,000 a day through this expanding opportunity at an expense ratio of approximately 23 percent.

We've made substantial progress in 2004 with agency integration technology that provides even greater ease of doing business between Selective and the agency systems that they use in their offices.

Many other carriers talk about their plans for agency integration;

Selective is doing it now and we are expanding our capabilities in 2005.

We are also expanding several expense initiatives in 2005 to enhance our ability to increase performance without increasing price.

This includes eliminating low value-added work from the organization and streamlining operations, such as the automation of our commercial policy endorsements.

Our working smarter initiative is putting a renewed focus on expense management companywide.

Based on ideas our employees have already generated, we expect to achieve at least $3 million in savings from this initiative, of which $1 million would be in 2005.

The diversified businesses delivered a solid performance in 2004; return on revenue was almost 9 percent.

The operation contributed earnings of 29 cents per diluted share, up 53 percent over 2003 and generated cash flow of $15 million.

As these businesses continue to gain scale and provide value-added services to agents, we see additional opportunities for growth.

The enterprise value of Selective stems from our people, our commitment to our strategies and our agency relationships.

Selective's vision is to be the market of choice for a select group of independent agents driven by a hi-tech, high-touch business approach that meets and exceeds their customers' insurance and other small business needs.

Other companies talk about it, we deliver it.

Throughout 2004, we were honored to receive external validation of our efforts.

In a national survey by Goldman Sachs, independent agents ranked Selective as the top regional carrier for service.

A national marketing survey of independent agents ranked Selective in the top 10 percent of carriers for the overall ease of doing business and the Professional Independent Agents a leading national association named us their Company of Excellence for 2004.

Everything Dale and I have talked about -- results, strategies and our hi-tech, high-touch business approach -- are sustainable competitive advantages that will produce long-term profitable growth opportunities.

Our guidance for 2005 is based part on certain key assumptions, including net premium written growth of approximately 9 percent, more than twice the industry growth rate; increasing after-tax investment income by 4.5 percent; catastrophe losses of 1.5 points and diversified insurance services growth of 11 percent in revenue and 7 percent return on revenue.

We anticipate continued earnings momentum in 2005 and expect to achieve a GAAP combined ratio below 96, an overall statutory combined ratio under 95 percent and operating earnings between $3.65 and $3.90.

We're looking forward to another strong year.

Thank you and now I will turn the call back to the operator for your questions.

(Operator Instructions).

Mike Thrasher, Piper Jaffray.

Good morning, nice quarter.

You mentioned 4Q is typically your lightest quarter in terms of your top line.

Is there anything else -- I mean, is 2.8 percent I think year-over-year -- is there anything else coming into play here from a competitive standpoint?

And if so, is the competition more or less from the national carriers or more regional?

Well, Michael what I can tell you is, in terms of when you look at our premium growth overall, our Commercial Lines premium growth was still 7 percent for the quarter.

And -- let me flipping through here something.

When we sit down and we look at our quarterly growth, clearly our highest growth quarters are our first quarter and our third quarter.

We've seen some enhanced competition in the marketplace and there's a lot of things that we've done as an organization that will continue to drive growth.

I hope they are clearer to you when you listen to the conference call.

We're looking at a more aggressive longer-term analysis of every market that we are currently writing in and that's to identify higher levels of growth for us in terms of additional agency appointments.

We are very aggressively working on our field strategy and developing an apprentice program to get a better pipeline of field people because some of the spottiness in our production -- I am going to let Jim Ochiltree talk a little bit more about it -- is you know we've moved some and we've promoted a number of field underwriters within the Company.

And every time that happens, it puts a slight gap in the generation of business line.

We do see some increased competition.

I'd say it's coming across the board.

There's nothing that we see there though that disturbs us.

Okay.

With that being said, the agents -- have you appointed any new and at the same time, have you had any turnover?

This is Jim Ochiltree.

Turnover in terms of agents?

Yes.

No, not particularly.

There's some sort of combinations in the market.

You still have some acquirers who are out there acquiring agencies.

And so when we've told you we've had 800 agencies before and we have 752 now, over the last couple of years, those folks have been very active and most of those agencies still represent our company.

But we have not been in any particular area, except some of the new areas of the company attempting to appoint a lot of new agencies.

Jeff Thompson, Keefe, Bruyette & Woods Inc.

Thanks, very good quarter.

I was wondering on the growth -- maybe you can comment a little more on what happened this quarter.

I mean 7 percent, I know it's a light quarter but it was a little as -- I'm sorry, 5 percent was a little less than what I was expecting overall, and maybe comment on Personal Lines.

You said you took a better look at New York and pulled out.

Was that something you planned?

Is there something going on there and how's personal lines growth going to look for '05?

Well, no, I think let's just talk about -- let's separate the discussion between the Commercial Lines growth and the Personal Lines growth.

Commercial lines growth at 7 percent I think when you look at how the premium volume for us as a quarter on a quarter-by-quarter basis -- that isn't nearly I think a major factor.

When you look at the Personal Lines situation, which then just pulls the overall growth down, we have been actively and we've been communicating that for a number of years now, not writing business in New York.

What has happened in New York recently is with the number of competitors in that marketplace starting to be much more aggressive, many of the agents that were holding on with us in their books of business have now found new opportunities to move that market with and that was very much accelerated in the fourth quarter of 2004.

New Jersey now, I think, is a little bit different -- a slightly different story.

It's much more enhanced competition.

We've got a number of rate filings in place with the department.

We're waiting for still working through all the particulars to make sure that our product is at a better price breakpoint, particularly for the higher end customers.

But when we look at the business that came off the books this quarter, our profile actually has improved slightly, so there's nothing in there in terms of losing the best business.

So, I don't want you to think that they're just cherry-picking our best accounts.

That's really -- it's coming across the board, but in order to better insulate and protect our position there, we are looking at tuning and making a number of changes -- a number of rate filing changes with the department.

I guess maybe to rephrase it, was New York a onetime blip in the quarter, or do we see -- for Personal Lines -- do we see growth in '05, or will it be a little constrained here?

No, you're going to see growth in '05 in total as we move through it.

It's just cleaning up some of these things in the fourth quarter.

Once we get our New Jersey rate filing in place, then we'll be getting a lot more new business from our New Jersey agents.

The New York problem has pretty much wound down.

I don't know, Dale, do have the numbers now, what we've got now, just less the New York order?

We'll look for our New York business.

But, that's pretty much wound off the books.

And then our other states now -- since we've launched our new personal lines system and it's a much easier system for agents to do business at -- I've heard that comment from several of our large agents now that they're now using us as a market to grow that business with us.

In New York, we were down to $5.4 million in net premium written for the year and we had $1.1 million of that came in the fourth quarter.

Okay, great.

And then to move to commercial.

You talk about rate increases of 7 -- I think 7.4 percent.

Given the competition, do you think you are pushing too hard on rate increases?

And given your better underwriting templates, could you pull back there and maybe the balance of getting more units versus rate increases makes sense?

I don't know if I'm asking it right.

Are you pushing for too much rate increase right now?

Let me say overall -- we're looking at all of that.

We think though that there are still places in the market where we can push for more rate.

You have to be a lot more surgical about it.

Now that we look -- we look at our commercial lines businesses across 71 business segments actually and some of those segments, we probably need to be a bit more competitive in and other ones, we still think there's room to push.

So, it's a balancing act.

I would say, Jeff, of any carrier, we are closely monitoring this.

Our underwriting, our field underwriters are the ones that have the best ability to tune the message through that we want to deliver.

So, if any company is going to be responsive to this changing marketplace, it's going to be us.

Okay, and then one last question.

In the One-and-Done system, can you talk about the fourth quarter?

Did you see the same kind of growth in that distribution line as you have in the past, or is it slowing down?

Yes, our volume, if you were to look at it on a quarter-by-quarter basis, our first two quarters were much stronger in and around the $135,000 a day -- that's how I would measure that premium volume per day.

We're around $135,000 a day.

And then, the third quarter and fourth quarter were more in line at about the $114,000-$115,000 a day range.

And that is -- and what's working on the -- the person that's running the shop is, we've got our new -- a lot of changes to our policy product coming in place that have definitely tuned along the lines of what Jim Ochiltree was articulating earlier, is better tuned our product pricing and we've also expanded the number of classes that can fit through there and built in a lot more -- I think some more product enhancements that I think that better meet our customers' needs, and we feel very confident that we'll get that flow where we expect to see it.

The only thing I would add to that is it remains -- that system remains about 50 percent of our new policy count.

Keep up the great work.

Thanks.

Greg Peters, Raymond James.

Dale, you were zipping through a bunch of things there and I was having trouble keeping up.

Could you just restate or remind me exactly why you bumped up your expense ratio target for 2006 to 29 from 28?

A couple of things really relate to that as expectations for growth are a little bit less than we had anticipated before, given the softening and the pricing.

The other thing is, we've had higher payouts in terms of our profit based -- our commissions and some of the awards for employees have added 0.8 points to the expense ratio in 2004 compared to 2003.

So with the expectation for continued profitability and continued payouts like that, the expectation is that the expense ratio is just going to get to a 29%.

Now, on the higher payouts, that is internally, or does it also include things as bonus commissions for the agents, etc.?

It does include supplemental payments to agents based on the profitability of their book of business.

Now, has there been a change in that formula from last year to -- as we look forward to 2005 -- or are you trying to give a little bit more incentive, or has that has that formula stayed pretty much the same, it's just based on where the results are coming in?

No, we've made a number of changes to that formula; in particular, the breakpoints of where the caps on individual losses that agents have to absorb internally.

That's probably one of the bigger drivers.

There was also a lot of tuning that's done.

It's got a one- and three-year element to it in terms of probability and there was a lot of tuning in the one- and three-year breakpoints.

So, we have a better distribution that we feel correlates consistent, profitable agents with the payouts that they are getting.

And, that one and three are out through your payout structure -- is it now moved more towards -- more heavily weighted towards front end of one-year, or is it still skewed toward the three-year?

It's a little bit more skewed into the one year.

Okay.

You also mentioned Greg -- and maybe Jim, you want to comment on this as well -- the promotion of some field underwriters in one of your prior responses.

I'm just curious what's going on there.

Specifically, I know the field underwriters is something that you've always focused on.

Is there -- are you bringing in new people to replace the promotions or can you give us just a little more flavor there?

Yes, and I'll let Chuck Musilli talk about that a little bit.

He runs our -- Chuck is the Senior Vice President that runs the Field Operation.

Good morning.

One of the key initiatives we have going into 2005 is to further develop our AMS apprentice program.

We've got a program in place for this year where we're trying to bring in folks in each of our regions that are ready to step into these open slots when they become available.

And this year, we're really focusing on building a bench there so that when we do have commercial opportunities for the folks that are in those jobs, we don't lose any production ground in the interim time between when they take the job and when we get someone to fill in.

We also think that in the next 10 years, we're probably going to need 50 percent more AMS's than we have today -- field underwriters -- than we have today.

So we went to make sure that were ahead of that curve and don't fall prey to any of these open spots going forward.

Is the AMS -- the acronym is same thing as a field underwriter?

Yes.

Okay.

I guess switching gears with two last question, you mentioned the introduction or the approval of our credit scoring model for your Personal Lines business in New Jersey.

Yes, that was approved earlier in the year.

Yes.

Is this a proprietary model, or have you rented it out from someone else?

I'll let -- Ron will answer that.

The model that were using right now, the way it's filed is that we apply surcharges for credit scores over a certain amount and we also give credit for credit scores under a certain amount, which comes from Choice Point.

So, it's basically our system.

It's just a matter of how the scoring gets in and how the filing then works off the individual -- where the score breakpoints are where our customers get discounts and/or are surcharged.

So, needs to touch on a little point too, Greg, because I know you're going to ask the next question about more agency appointments, so I will answer that one.

Really, while we're talking about -- we have not been losing field underwriters to the competition.

We've been very stable in the retention of our field underwriters.

What we've been talking about is the number of promotions within the organization, which is what other people coming into that role really want to see that long-term track record within the company.

And most of these folks have risen now and are running other parts of the business.

So, I think it's a critical part of -- when you start to see the organization, you start to see some of these folks move up in the higher levels, they know what has to happen out in the field, and I think that makes them much more effective managers as they move forward.

Hello?

Any other questions?

Mike Dion, Sandler O'Neill & Partners.

Two questions.

First off, just a little more color on the expense ratio.

Greg, I think in your remarks, you mentioned that you're looking to exit some low value businesses in 2005.

What are those?

And secondly, is there an expense ratio target for 2005?

You mentioned the one for '06.

And second question is, with respect to your New Jersey personal and auto competition, I know in the past, you had mentioned roughly 100,000 autos as your kind of target or floor there.

If you could just talk about that in light of some increased competition there in New Jersey?

Sure.

So, let me just make one make sure one thing is clear.

What we talked about in our expense initiatives was eliminating low value work, not low value business segments.

There really aren't any segments of business that we're looking at moving in or out of.

We're constantly evaluating our business and business profile.

But, what we're talking about is just taking a deeper dive within the organization and to enhance the efficiency of measuring the value of the work done versus the cost associated with it.

And so one of the things that we -- Dale didn't mention was all the costs associated with Sarbanes-Oxley that got spent this year that has pushed up this year's costs and also will be part of our ongoing costs going forward.

Some of our other expense initiatives are in our apprentice program that we articulated has a little bit of a push on the expense ratio.

But I think these are things that will drive the long-term success of the organization.

The requirements that we're now pushing back on all of our managers and supervisors is let's carve out some of the things that aren't as productive and let's weigh them off against the cost associated with them and start to eliminate some of that.

It seems like in expenses, everybody continues to add and you need to take away at some point.

That's the focus of what we were talking about.

With respect to the second question, on the 100,000 units, we ended the year at 97,700 approximate cars in New Jersey and we're looking at starting to get more and more business in from our business agents to maintain a level in and around that area.

Okay, and would you basically say that the loss of some of those autos in New Jersey is directly as a result of competition or also having to do with some of your credit scoring initiatives where you're more comfortable with your risk profile, given I guess more color on a given insured.

I think it's a combination of both.

There's some of the enhanced profile of the book in terms of what we're doing.

You know, we increased the price because of a credit score debit -- you know that accounts most likely would be shopping in the marketplace.

And then I think the other part of it though is tied around -- we need to get our rates through the department and we need to make sure that happens expeditiously.

And I think that will make us more competitive on the business across all segments.

And when I talk about all segments, I'm talking about all the different tiers that we manage our personal lines business in.

Okay that's helpful.

And just lastly, on the expense rate, is there a target for '05 for the expense ratio?

Not -- the only disclosures we've made are what you have heard today on the call.

Doug Neewhatter, Ferris, Baker Watts.

I just had a quick question about your investment.

I noticed that your yield, if you take your investment income divided by your total investments, was sequentially much higher than it was last quarter.

Although, it was only -- it was a double-digit increase from the same quarter of last year.

Is there a seasonality to your effective yield because of maybe some of your equity investments backload other dividends or your limited partnerships, and can we expect that kind of seasonality going forward?

This is Kerry Guthrie.

Yes, you do see some fourth quarter back loading.

You see that increased dividends coming out of mutual funds.

And I don't think there's any seasonality with the limited partnerships, but I do think you see it in the equity portfolio.

Okay.

And is there anything maybe out of the ordinary in your portfolio that might have caused that yield to go higher, or do you think it was a normal just the normal pattern of your investments.

It was the normal pattern.

Okay, thank you very much.

Beth Malone, Advest.

Thank you, good morning and congratulations on quarter.

I have a couple of questions.

You all mentioned that the small policies on Workers Comp that goes through the One-and-Done program has better -- I guess a combined ratio or a loss ratio than a more traditional way to put that business through the system.

I wondered if you could elaborate on that.

Does the One-and-Done system generate better underwriting performance than the more traditional way of marketing and processing the business?

This is Ed Pulkstenis Dennis.

There's a couple of things that help drive that.

One is that the type of business that flows through the One-and-Done system tends to be more favorable towards the Workers Comp line.

It's less hazardous business by its very nature and it also tends in some cases to be less price sensitive.

On that business, it's very important to have an easy way to do business, and that's probably one of the drivers that -- or most important drivers that pushes that line.

So can we anticipate, as you -- as this One-and-Done system penetrates more of the market, that that would drive the loss costs lower overall?

I would say that, as we look at moving other products into that system, we evaluate each system or each product on its own merits.

And one thing to remember is that, the workers compensation brings with it other business which in many cases is significantly profitable.

So, we evaluate that on an account basis.

And as we go forward, we would look at building templates that allow those products to come in at the same level of profitability as we've seen in the past.

And Beth, I would also say that in a lot of the business we write in One-and-Done is -- are small contractors.

And we don't write any workers comp on those small contractors.

And also remember that the expense ratio on this business is significantly lower as well.

On the -- you talked about initiating a long-range marketing plan.

How important is the technology that you have or developed to developing that marketing plan?

Is it going to be proprietary in its nature because of the technology that you all possess as a regional carrier?

Well, what it's going to -- we're using a vendor as providing data and that data that they're gathering is coming from multiple sources and what it's allowing us to do is to target -- Jim mentioned the 71, 72 business segments that we track, which is a huge broad scope.

It's most everything in the marketplace aggregated into those 72 styles of buckets by standard industry codes.

And it's allowing us now to pull through information by county and telling us where are our growth opportunities and how profitable are we in every one of those segments, in terms of 1, 3, 5-year performance.

And then how do our -- in every county, how do we match up relative to those 72 segments -- 72 different business segments that we're tracking, and then what is it that we're looking for in terms of opportunities?

Do our agency appointments match the high concentration areas of places that we want to write?

So, it's going to provide us tools over time to make sure that we're deploying agency appointments in critical growth opportunities for us, but also identify areas where maybe we've got good growth segments but yet we're not growing.

And maybe it's because in that particular area, maybe the agent only focuses on one type of business, like construction and they don't focus on all the rest of products that we write.

Well there is an opportunity then to sit down with an agent and say look, we are looking for a holistic relationship.

Our most profitable agents are ones that we ranked number 1, 2 and 3 in, but also are agents that we distribute a broad base of products through.

In other words, they are writing the small, our medium and large accounts through us and it will identify -- provide us a better capability to identify those mismatches and make sure that that agent either is going to bring in producers to help supplement the kinds of business we want to write, or maybe we go out and appoint another agent in that territory to write those accounts that we want to go after.

So, part of the process then is to develop this -- this is really like a 10-year kind of longer range plan and it will also identify maybe in areas where our products or price needs to be altered and that comment may come back quicker when you start to look at business by county.

Okay.

Is this also in response -- I mean, if there is signs of pricing competition and a cycle downturn in general in the property casualty industry -- do you believe that Selective's is positioned to manage that pricing competition?

You are seeing it a little bit in New Jersey and elsewhere.

Is that one of the part of this process?

I would just step back and say that's part of the nimbleness of being a regional carrier and the fact that we deploy our products through the 71, 72 field underwriters, the fact that we have six regional offices and every one of those offices is responsible for their premium production, their renewal pricing and their growth targets.

But the longer range planning then brings in to say, look, where are the true opportunities and to make sure that we're pushing and harvesting everything in the 20 states that we need to be doing.

And it just will help us do that much more systematically and I think effectively over long-term.

Okay, right, thank you very much.

Jeff Feinberg, JLF Asset Management.

Congratulations guys.

Great results.

Just a follow-up question.

I don't know if this is for Greg or for Dale, but just trying to make sure that I've followed the guidance you gave for '05 and how that adds up if you may, if I may.

I guess the first piece of its was -- you mentioned net investment income growing by 4.5 percent, which just taking the $2.80 reported this year will get us a little over 290.

That seems pretty straightforward.

The underwriting profit, with your premium growth targets and the guidance of the combined being less than 96.

If we do that math, we get about $1.15 or $1.20, which gets me $4.10, and that's before any of these diversified insurance operations.

I'm just wanting to know, am I missing anything in terms of the sum of the pieces?

Is there something here I've missed.

Yes.

The biggest thing you've missed is interest expense and general corporate in there.

And also, it depends on what you're applying the combined ratio to.

You have got to obviously make sure that you are applying a GAAP combined ratio to earned premium expectations.

Correct, I just -- I grew that 9 percent -- in line with the growth to be conservative.

So what you're really missing in the edges of that are the interest expense and general corporate expenses.

How much were those for the year just ended, please?

For the year just ended, the general -- the interest expense.

About 29 cents a share.

Combined?

Combined.

All of that together.

And last question.

I would add the diversified operations profit to that?

That's correct.

And what was that for the year just ended?

Last question -- thank you.

I think the year number on the interest, just to make sure is --.

29 cents for the year.

I think it's 20 cents for the interest and then another 18 cents for other.

But, we will get back to you to make sure on that.

I see here diversified was 9.3 million, which was a positive 29 cents exactly offsetting, if I'm not mistaken.

Right.

So, why would I not think of diversified's positive generally speaking offsetting the interest expense and corporate expense?

I think we need to get back to you on that.

I believe those two numbers were 38 cents for those two pieces.

So, alright?

Maybe the simple fair take-away is it's fair to say the thought process here and the total results leave you some flexibility?

Well, those are -- those are ranges.

Yes.

Thank you very much.

If you did have a minute later to follow-up just to understand the piece, then I would sure appreciate it.

Mike Thrasher, Piper Jaffray.

Just one follow-up.

With the -- talking about the efficiencies that you are gaining -- knowledge management initiatives that you're taking on.

Is it fair to (technical difficulty) anticipate somewhere down the road that maybe there's a longer -- there's a different longer-term profitability goal or outlook in terms of -- at a higher level?

I'm sorry, could you repeat that question?

Just in terms of your initiatives that you've taken on -- the knowledge management initiatives and efficiencies gained -- I think right now as you state, it's 3 percentage points above your cost of capital in terms of your long-term goal.

Is it possible we might see something a little higher with all of these other initiatives going on?

Yes, I would say that as we start to move through -- really the question is, when you move through the marketplace, what are your sustainable competitive advantages, how are you going to increase performance without increasing price?

And I think we try to lay out all of those different pieces about the relationships we have with our agents, the service center initiatives, all the other touch points that we've got with an agent to aggregate more of their best business.

And then when we add on to that, our knowledge management initiative in terms of getting as Jim Ochiltree and Ed Pulkstenis have talked to you about -- getting more surgical, getting more granularity in our pricing, I think that we've got the ability then to grow at better rates than anyone else, but also deliver higher levels of probability.

We're never going to be immune from some of the cycle issues that you hear about all the time.

Understood.

We just have to figure out how are we going to outperform the industry and then when do we want to really grow maybe slightly more aggressively than other points.

But we need to always be providing a market for our agents.

That's just something you to just can't turn on and turn off.

And we're just figuring out how to do that smarter than anyone else in the marketplace.

I think that will then ultimately generate higher levels of performance.

Okay thank you.

Jeff Thompson, Keefe, Bruyette & Woods Inc.

Thanks.

I have two actually.

When you talk about a small workers comp running through your multivariant pricing, ultimately what percent of your total commercial lines business do you think you could manage that way?

This is Ed Pulkstenis.

Are you asking how much of our business would run through those types of template?

Yes, it could be factored with the knowledge-based system.

And I know it gets gray sometimes (technical difficulty) I'm sorry sometimes it's not as precise as the policy size gets bigger.

But maybe give us just some sense as to how much of your business can be priced that way?

Right now, I think that what makes the most sense is to keep the smaller the policy size where the efficiency is most important.

So we're really looking at policy down below $20,000 and under.

So, right now, we've got about 50 percent of our accounts running through that system.

It's obviously a lesser percentage than on a premium basis.

We don't really have a sense of ultimately what that system could do.

What I would say is that we look at each product individually and as we get comfortable building templates around it, we have a plan to roll some of those out in the future.

But, right now, we don't have an estimate of how much premium would ultimately run through and there's obviously a balance as you get up into higher premium levels, there's more complexity in accounts and it's more important to have more personal involvement, more involvement between our field underwriters and our agents to look at those policies individually.

So, there is a breakpoint, but we think that point is around $20,000 per policy.

Excellent.

And then a follow-up question.

I'm wondering how you view acquisitions today and maybe over the next few years?

Because it seems like you're building a platform where you could run a very good block of business from maybe a regional competitor or someone and drive earnings accretion by putting it through what looks like a much more efficient platform, a better pricing platform.

As market competition creeps in, is that something you might consider over next couple of years?

Right now, our strategy is more centered around organic growth.

We feel there's plenty of opportunity to do that and we just see consolidation calamity after calamity.

So I think our focus today is on organic growth, but I have to say that we're out in the marketplace.

We're making sure we get the opportunities in our agents of players that lose their ratings, are other agencies are worried about certain companies.

We want to make sure we're there to step in.

Okay thanks.

Operator, any other questions?

Laura Devieux, Wachovia.

I just had one quick question.

I wanted to know, did you repurchase any shares in the quarter, and what are your expectations for capital management in '05?

Thanks.

No, we did not repurchase any shares in the quarter, as we have historically stated.

We opportunistically purchased our shares.

We do have an outstanding share authorization of 2.4 million shares.

So, that's our policy.

Okay, thanks.

The other thing, if I might add though, to get back to Jeff Feinberg's question.

The interest expense for the year was 21 cents per share, other from the corporate was 12 cents per share and the other future that is not included within a calculation of the combined ratio is the impact of federal taxes.

And we did have a favorable settlement this year with the IRS, in terms of maintaining a municipal bond portfolio at the insurance company level at the same time that we had debt on the books, and that was a positive $2 million impact in the year.

So there are a number of different pieces, so it makes it a little bit more difficult to work into the number.

With that, operator, any more questions?

No, there are no further questions at this time.

Thank you.

We're looking forward to another strong year in 2005.

Favorable growth and profitability and we will not lose sight of either one of those.

Thank you very much.

Thank you.

That does conclude our conference today.

We'd like to thank everybody for their participation.

Have a nice day.