Selective Insurance Group Inc (SIGIP) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the Selective Insurance Group First Quarter Earnings Release Conference Call.

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

Please, go ahead.

Thank you and good morning.

Welcome to Selective Insurance Group's first quarter conference call.

A supplemental investor packet that includes GAAP, reconciliations of non-GAAP financial measures we will refer to on this call is available on the investors page of our website at www.selective.com.

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

The replay will be available through May 27, 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 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.

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.

This is another quarter of outstanding profitability for Selective, driven by the solid performance of our insurance, investments and diversified operations.

For the first quarter of 2005 compared with first quarter of 2004, net income was up 31% to $36.1 million or $1.15 per diluted share.

Operating income increased 36% to $32.6 million or $1.04 per diluted share.

Overall net premiums return increased 6% to $396.8 million led by 9% net premium return growth in commercial lines.

Our GAAP combined ratio improved 2.8 points to 95.1%, the statutory combined ratio improved 2.2 points to 93.5%.

After-tax investment income increased 13% and operating return on equity reached 14.7%.

Weather related catastrophe losses accounted for only 0.1 points of the GAAP and statutory combined ratios for the first quarter of 2005 or $0.3 million after tax.

That compares favorably to the 1.5 points or $3 million after tax for the first quarter of 2004.

Effective January 1, 2005, Selective began expensing stock options with the adoption of FAS 123R.

The adoption had no material impact on net income for the quarter and is expected to have an approximated impact of $0.02 per share for the full year.

FAS 123R also requires that we estimate the impact of forfeitures for stock options and restricted stock at the original grant date, which reduces the stock compensation expense.

This facet of the standard led to a positive $0.02 per share impact on net income for the first quarter as a cumulative effect of the accounting change.

Selective uses operating income which is a non-GAAP measure to analyze trends in our operations.

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

GAAP reconciliations are included in the supplemental investor packet on our website.

Our strong first quarter reflected excellent underwriting results and favorable growth in our core commercial lines operations which represents 84% of Selective's business.

Compared to first quarter of 2004, commercial lines and net premiums return grew 9%, driven by new business of $62.5 million, increased commercial renewal pricing of 6% including exposure of approximately 4%, and stable policy retention.

Importantly, the commercial lines statutory combined ratio improved 0.5 points to 92.9%.

While increasingly competitive, we believe the commercial market place can still provide opportunities for profitable growth.

Regional carriers have increased market share 3 points in 4 years and there is no commercial lines market leader.

Our share in the commercial lines market totals about 1% in our 20 primary operating states including 4.3% in New Jersey, our oldest and most profitable state.

Ultimately, if we were to duplicate Selective's New Jersey market share throughout our existing territories, it would equate to over $4 billion in direct premiums.

Current soft market conditions provide a challenge to sell value added services, not just price.

Selective is one of the few carriers to offer loss control services to accounts of all sizes.

We do this to support account retention and new business growth.

Recently, a prospective client, was so pleased with the customized program presented by Selective's loss control specialist that he moved his account to our agent for premium about $700,000.

Our flood personal lines and human resources outsourcing products provide agents with added clients touch points and revenue streams.

The Company's strong commercial lines performance reflected limited catastrophe losses and the result of 5 years of on going underwriting pricing and loss control initiatives.

Our Commercial Auto, Commercial Property, General Liability, and Bond business represent about 62% of total company premiums, and generated statutory combined ratios for the quarter ranging from 76% to 95%.

We continue actions to improve our Workers' compensation business, which had a statutory combined ratio of 108.9% for the quarter, compared to 101.6% for the first quarter 2004 and a 108.2% at year-end.

While not yet performing at an acceptable level.

There remains an important component of our highly profitable Commercial account business.

Over the last 6 years, loss trends for workers' compensation increased in average of 4.2% per year, driven by an increase of 7.1% per year in medical losses.

To address these escalating costs, we are improving our service networks to achieve greater managed care discounts.

We are establishing a more aggressive Back to Work program to control claim costs and improving case management processes to enhance medical bill review and increase the amount of care delivered through more cost effective network providers.

We continue to implement loss control programs, which include OSHA training and participation of Selective loss control representatives on Client Work safety committees.

We are using our knowledge management initiative to segment workers' compensation risks and will precisely identify which are profitable and which should be reduced.

As a result we are writing more non-contracting workers' compensation accounts through our One & Done system.

This segment targets business, which has traditionally performed about 10 points better than the average.

For the quarter, workers' compensation policy count was flat, whereas the overall Commercial lines policy count increased 6.2%.

Workers' compensation renewal price increases were up 10.3% including a 9% pure rate increase in New Jersey.

In Personal lines our efforts to build a smaller and more profitable segment yielded a 9.8-point drop in the statutory combined ratio for the quarter to 96.3%, including the favorable impact of 2.6 points from our flood business.

Although the flood of operation is fee based with no underwriting risk, it is included in the Personal lines statutory combined ratio in accordance with statutory reporting requirements.

Personal lines net premiums written decline 12% for the quarter primarily due to New Jersey Personal Auto market.

After years of attempting the managed growth in an extremely difficult market place, independent agents are clearly in transition as new direct writers and fewer regulatory constraints have made the market far more competitive.

We believe these changes while disruptive to us in the short term should lead to more long term stability for this sector.

The number of Personal Autos we insured in New Jersey was down 11.5% for the quarter to 93,000 as price shopper's switched carriers to get the lowest price.

In some cases, with reduced coverage and potential repricing at the first 6-month policy renewal.

We have no interest in taking part in the competition based solely on price and remain focused on helping agents to attract and retain the best risks.

We have taken many actions over the last few months to target these accounts including new rating tier and credit history factors that allow for more granular pricing discounts up to 10% for customers who insure their auto and home with us.

A series of rate reductions exceeding 20% for our profitable physical damage coverage.

An enhanced policy processing through our new Automated Personal Lines system, SelectPLUS that makes it much easier to do business with Selective.

Agents now originate about 86% of Personal Auto policies and 45% of auto endorsements directly from their offices.

Although, policy count is down our overall mix of business has improved with a percentage of overall business in our top 2 underwriting tiers up almost 8% from year-end 2004.

Importantly, New Jersey personal auto business remained profitable with a statutory combined ratio of 95.7% for the quarter, compared to 94.7% in first quarter 2004.

Due to the states excess profits law, we estimated the combined ratios lower than 96 to 98% on a long-term basis, will generate an excess profit.

For the quarter, homeowner's results improved almost 35 points to 98.9% from 133.2% in first quarter 2004.

This was due to a reduction in catastrophe losses, as well as the rate in underwriting actions taken over the past several years.

Positive trends continued in the Personal lines expansion stage during the quarter.

Net premiums written increased about 3% compared to first quarter 2004, and the statutory combined ratio improved 14.3 points to 103.7%.

We are seeing steady improvement in auto and homeowner accident year frequencies as rate tier and underwriting changes are beginning to favorably impact this business.

Agents in the expansion states speak highly of Selective’s people in service levels.

They welcome the new personal line's automated system and provide valuable feedback in areas where we continue to refine our pricing.

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

At the end of the first quarter, total net premiums written to insurance employee were up 9% to $807,000 compared with first quarter of 2004.

Our diversified insurance services turned in a strong quarter contributing $0.06 in earnings per diluted share.

Compared to first quarter of 2004, revenue was up 15% to $27.8 million and return on revenue increased 1.3 points to 7.4%.

Favorable results were led by the fee-based flood operation.

New flood business increased 42% for the quarter due to expanded marketing efforts and the competitive advantage provided by our online flood system.

Selective is now the eighth largest flood carrier in the nation with total flood premium service of approximately $81 million.

After-tax investment income was up 13% for the quarter to $24.7 million, reflecting a larger invested asset base.

The overall annualized after-tax portfolio yield was 3.4%.

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

For the quarter, after-tax bond income was up 12% to $21.6 million.

The bond portfolio was now structured with 50% taxable and 50% tax-exempt securities, which have moved our effective tax rate down 2 points to 24%.

Although interest rates are beginning to rise, they do not yet exceed the portfolio yield.

Additionally, limited partnership investments had a strong quarter generating $1.4 million in after-tax investment income, up 7% from the same period last year.

We actively manage our capital position and use appropriate levels of financial and operating leverage to minimize our cost of capital, which is currently 9.4% and maximize shareholder returns.

We currently operate at a 1.7 to 1 premiums to surplus ratio and a 21% adjusted debt to capitalization ratio.

To increase economic value, we use share buybacks, debt issuance, and retirement as well as dividends.

During the mid to late 90s we repurchased 7.3 million shares at an average price of $19 per share.

In 2002, we effectively reissued approximately 4 million shares at a price of $29 per share to our 2002 convertible debt offering.

Effective yesterday Selective's Board of Directors approved a new share repurchase plan for up to 5 million shares over the next two years, replacing the previous program, which had a remaining authorization of 2.4 million shares.

In 2003 and 2004, we increased Selective's quarterly dividend by over 12% each year.

For the quarter, we have generated operating Return on Equity of 14.7%, over 5 points of economic value above our cost of capital.

Now I will turn the call over to Greg Murphy.

Thank you Dale and good morning.

This is an excellent financial quarter for our Company highlighting a success for our pricing, underwriting and technology initiatives we have implemented over the last five years.

A statutory combined ratio of 93.5% and operating ROE of close to 15% are two significant measures of our ongoing progress.

Let's begin with the key elements of commercial lines growth remembering that our average premium per account is about $7,500 and net premiums written were up 9%.

For the quarter, new commercial lines business was $63 million, down 9% from last year, but still strong showing.

More importantly, average credits were only increased by 3%, which is the leading indicator of market conditions.

Our automated One & Done small business increased 8% to $145,000 per workday.

We now have over 300 eligible classes under our MerchantsPro business owners program, 37 eligible classes under special contractors, and the new builders risk program that has been added to the system.

For the year we expect to write about $38 million in new One & Done business.

Few of our underwriters generated $40 million in new business.

As market conditions have changed, there are not as many opportunities to quote new accounts.

However, having our experienced decision makers in the field, it is a competitive advantage that helps agents write business at a fair price in their office unlike the competition who can take weeks to issue a quote.

True field underwriting is practiced only by a handful of carriers.

Selective's large accounts segment, which includes accounts over $250,000 generated about $10 million in new business during the quarter and total premium was up 19%.

Our large account team has tremendous expertise in pricing and offers products such as large deductibles, retrospective rating, and pooling arrangements, which have been essential to our success.

Overall, our commercial account retention remains stable for the quarter, while renewal prices were up 6%. excluding exposure, pure price increased about 2%.

Loss trends for commercial lines were down about 1% for the fiscal quarter.

Excluding worker's compensation, which is up 6%, loss trends were down 4%.

We are a Company focused on maintaining underwriting discipline across our operation unlike some competitors who protect the renewal book on the one hand while aggressively under pricing new business for growth on the other.

We know the quality and pricing of new business and we build this into our monthly planning process.

For the quarter, core commercial lines performed as expected generating a statutory combined ratio on 92.9%.

Selective's senior management team spent at least 40 days with agents each year to enhance the relationship that define the selective franchise.

We recently took part in 16 annual road shows and sales meetings during which our agency force talked openly about the changing marketplace and our plans to grow profitably together.

Agents tell us some companies are reducing price without regard to exposure and that for reason.

Most agents now understand the ramifications of the short-term reckless pricing actions.

Financial strength tops the list of what’s important to them and is the primary reason they are trying to place their best business with Selective.

Selective remains one of only 7% of commercial lines carriers rated with an A plus or better AM Best rating.

We do not buy or sell finite reinsurance.

We have no special purpose entities and we earn high marks for good corporate governance.

Selective partners with 750 handpicked professional agents, and we are one of the top 3 carriers in 60% of our agencies.

After 5 years with us that number rises to 80%.

These business leaders are focused on growing our operations and proactively servicing our customers.

Selective delivers the back office support they need by managing $65 million in small commercial business and our underwriting service center for about 35% of our agency force.

These forward-looking entrepreneurs understand the role technology plays in their growing operations.

We take down the wall between the Company and the agents by providing seamless transactions that enhance customer service, improve agency and Company margins, and create more time for selling.

Selective's agents originate almost 90% of new business to our systems.

They issue 55% of all commercial endorsements while underwriting templates automatically renew about 40% of all commercial policies.

Selective is one of the few companies providing integration technology that allows agent's systems to seamlessly connect with the carriers website.

This cutting edge technology provides us with the competitive advantage as it allows agents to sell products and service their customers in the quickest, most convenient manner available today.

More than 25% of Selective's agents now utilize this technology and we are rapidly adding users and enhancing capabilities.

Our recent AM Best technology reports cited Selective as the commercial lines carrier that excels in the use of technology and noted that organizations that successfully integrate technology with business initiatives better position themselves to achieve a lasting competitive advantage.

As we look ahead, our market planning and knowledge management initiatives will allow us to more precisely target profitable business opportunities at a micro level and identify underserved markets where we may need to add agents and Selective's 20-state footprint.

As an example, our May 1st rate change generated by one of our segmentation studies will result in a price decrease for 11 business segments, higher rates for 26 segments, and an overall price change that is revenue neutral.

We believe the move towards increasing underwriting sophistication will make a significant difference over time when combined with the hands on expertise of our people.

Agents value the Selective franchise.

In a recent 2005 satisfaction survey, 84% of our agency force responded and rated us 9 out of 10 for overall satisfaction.

In addition Selective was again named to the Fortune 1000 list of America's largest corporations and as the top regional carrier for quality service in the Goldman Sachs national agency survey.

We value this external validation as agents tell us they want to place their best business for the Company like selective that is financially strong, technology rich, and equipped with business decision makers in the field.

We believe the importance of these advantages is reflected in our highly profitable first quarter and positions us for continued earnings momentum in 2005.

As a result, we are increasing our 2005 estimates for operating earnings to between $3.70 and $4.

Because of our strong position in commercial lines, we still expect to generate profitable growth in excess of our peers while maintaining a focus on healthy margins.

That said, given the significant pricing fluctuations in the commercial lines market at this time and the dramatic competitive because of the shift in the New Jersey personal automobile market, we can neither continue with our earlier guidance of 9% premium growth for 2005 nor can we provide with any certainty and exact premium growth projection for the year.

Our assumptions upon which we base earnings guidance include a GAAP combined ratio below 96%, and overall statutory combined ratio under 95%, catastrophe losses of 1.5 points for the remainder of 2005.

A 6% increase in after-tax investment income and diversified insurance services revenue growth of 11% and return on revenue of 7%.

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

[OPERATOR INSTRUCTIONS].

Elizabeth Malone, Advest Inc.

Good morning, and congratulations on a very strong quarter.

Could you just talk a little bit more detailed about what you are seeing from a competitive standpoint with regional in your markets, and whether you are seeing -- is there anything that's different from just market competition that you've seen in the past?

Yes, I will let Jim Ochiltree to just talk to you a little more about this.

We were just on a series of significant road shows and sales meetings, and what we have heard generally it is spotty, it depends on where you are, who is competitor, who is being entirely competitive, in some cases it can be around a specific class of business, sometimes identified to a specific producer or within another agency or another company.

But I would say generally we didn't hear anything universally that disturbs us, we think if anything the markets probably more cohesive than in prior soft markets.

Jim, would you want to add to that.

I think that pretty well covers it Greg, I don't have anything to add.

Okay, in particular in New Jersey, as you mentioned there is some new competition coming into that market changes and the regulations.

Do you see that if any kind of an issue for -- what is I guess to come more important to you in New Jersey is the commercial business that a lot of that competition is coming in on the auto side.

And do you see that as a concern for the commercial block that you have in New Jersey?

Yes, let me just answer that.

I mean Geico obviously is a direct writer personal automobile business.

They are not going to cross over into the commercial space, but I would say that the relationships that we have with our agents and the agency franchise in New Jersey is incredibly strong.

They are growing their commercial lines business with Selective’s, and in that I have to say just my concern is about the entrance of the personal lines market place.

It is a very different dynamic than how they place their commercial line business.

Okay, and one final question.

A number of carriers -- a large number of carriers now are using very sophisticated tiering process and some have introduced it just recently for their auto business.

Where do you all stand in that particular race?

Yes, Ron Zaleski will talk a little bit about the specification that we have in our personal lines rating plan.

We have spent the last several years doing -- making a lot of changes in our personal lines plan both in New Jersey and other states.

We have a tiering structure that just contains 5 tiers right now.

However, when we bring credit score in, which was just filed last year, we will bring that up to over 20 tiers and I don't know -- other tiers and our rating variables -- it is an ongoing thing and we are now in the process of doing some more work on that New Jersey right now.

Just one last question on that.

Is there any limit to how many -- I mean is there a point where there is a diminishing return for the amount of specification in tiering that you would use in personal lines auto beyond where you are going to get any benefits?

Yes, that's a possibility, especially with companies our size, however, we will look at -- an awful lot of characteristics and awful lot of variables in order to determine which are actually predictive and generally, you don't use every possible variable without a use, the ones that you find are the most predictive and because like you said, if you go too far, it just wouldn't be constructive.

Okay, well thank you very much and congratulations once again.

Mike Dion, Sandler O'Neill.

Good morning everyone.

Couple of questions.

Just a kind of a follow up to last question, maybe if you could break down the commercial market in terms of small, mid-size and large accounts?

If you are seeing any variations within those 3 segments?

And then secondly, just with respect to the commercial lines/personal lines, mix of business is now 84% commercial lines that the personal lines, last couple of quarters we have seen there some negative growth in the personal lines coming directly from the auto side.

If you look out for '05, is it something that we can expect to continue or we are looking maybe flattish growth there from the rest of the year?

Let me, Mike, let me take the second part of your question first.

You are going to see a natural rotation of the sectors in the personal line space although you got new players there, you got direct market, you got lot of internet buyers out there so, you are going to see some first year rotation around the type of buyers in the marketplace.

We like to classify the consultative buyers, transaction buyers, and then enterprise buyers the largest segment of the populace is really around more in the neighborhood of consultative buyers, and this is on the commercial line side, and on the personal line side, it's a little bit different.

So, you are going to see that ongoing migration of business probably for the remainder of this year as we run through 1 whole cycle in the marketplace.

And then also as part of that Dion is, what Ron talked about, is the ongoing changes in -- as a legacy Company in New Jersey, personal lines as we now gotten some better concessions on some of our ability to get price increases and changes through the department, that is helping our position tremendously and that is something that we are leveraging.

They don't want to see a company like Selective lose that kind of market share in the overall market as we have been here for a long time.

On the commercial lines question, I mean, the broad base the small business as you know was up 8% in new business to $145,000 a day.

That's getting a lot of increased penetration from our agents as the number of agents that issued 2 policies a day or 3 policies a day, I am sorry, 2 policies a month or 3 policies -- 2 policies a week or month, I am sorry.

It is week, 2 policies or 3 policies a week, it's continuing to track higher and the utilization as we add more and more capability to that pipe as we talked about adding a lot of classes in our special contracting area and other areas, clearly provides agents and the difference on our small business is that, when the opportunity comes in to an agent, they can get on our system, they can price it, they can issue it, and the customer can have that accounted in a day or 2, it is going to actually physically add that policies.

So, when you talk about speed to market that's the way, that small business is being done and it is tracking up nicely.

The large account for now and Chuck will talk a little bit about that, is our SRM business.

They had a very strong first quarter, very strong retention overall, and that business continues to be profitable.

Chuck on that?

Yes, we are seeing some increased price pressure on that segment but we continue to get a tremendous amount of opportunities in the door and we want to take advantage of those that make sense and that we feel we can make a profit on over the long term.

The big thing is, SRM continues to get a lot of activity, and we are going to take advantage of that whenever we can.

And then -- and so really you can see that from a broad base standpoint, smallest growing or largest growing?

The middle markets, where we have seen some -- a little bit spottiness is as a lot of companies have hunkered down on their renewal book as I mentioned in my prepared comments, it's like one hand and the other hand and in some cases a lot of companies holds 2 hands don't know which each one is doing but a lot of companies have gotten more aggressive on some new business and everybody is trying to retain their renewals so, there are just not as many opportunities available in the marketplace.

So when you sit back and say who is the best available to take those opportunities, it's Selective because we have our field underwriters that show up once, twice, 3 times a week in those agents office, talking to those producers, understanding the broad base appetite that we have.

That's why we get to rate business accounts that other companies would not have an opportunity to see.

Okay great.

Just one quick follow up if I can -- just with the respect to the new buyback plan that's now in place.

You know, is this kind of setting you up to the next couple of years as the market softens for better capital management, while you be, you know, look into more actively utilizing the buyback?

We are always trying to maximize the break points of our cost to capital versus our economic return.

We have had aggressive repurchase programs in the past and we are going to opportunistically participate in the marketplace on this.

Michael Grasher, Piper Jaffray

Good morning, congratulations on the quarter.

Just want to go back to the worker's comp and I think you are suggesting that it is not yet profitable that the combined ratio does need come down.

In this interest rate environment when we have low rates and the return on investment portfolio would be lower than it would be in a normal great environment if you will.

What sort of combined ratio would be those return hurdles?

What would provide profitability in this interest rate environment?

I think we are having trouble hearing you, but what I could kind of gather from your question what you want to understand was -- where was our threshold for combined ratio given today's interest rate environment in the workers compensation to meet our overall hurdle rates.

Ron, combined ratio probably, you have that for worker's comp -- where we need to be about.

Worker's comp is pretty close to a 100 because of the tail that we have in that line and the amount of investment income that we do earn.

So we need to get that down, you know, right around in the low 100 range.

And that's the breakpoint to achieve the level of profitability that we feel to be appropriate.

You can break even at some point a little bit in excess of 100.

Okay.

Then I wanted to follow up just a housekeeping item cash flow in the quarter?

In terms of what was the number absolute or what was --?

Yes.

Dale can -- you got the absolute number, I think it is 30.

We are at $46 million in operating cash flow for the quarter, it was down a little bit from last year, but keep in mind that in the first quarter those are our biggest payments for agents supplemental commission payments as well as for the annual cash incentive plan for our employees.

And then, the margins on the services business continue to improve is there much more in terms of --?

We started to separate the business and Jim Coleman is here, I think there are opportunities in all three businesses.

What obviously is got the biggest scale opportunity as we continue to grow Flood there was a slight reduction in the fee that we get back from FEMA, but we feel that we can properly sell through that we have our internet product that allows agents to seamlessly issue and call policies and that's an efficient operation, so as we continue to grow that, we will improve scale points and in addition to that some of the choppiness around the flood business comes with the claim activity.

What we start to do is better segment [Gap In Audio] the claim versus the underwriting side of that and you know, when we do have floods that is the one hedge to our insurance operations because we actually make money on the claim processing in flood because it is 100% reinsured by the Federal government and we make a service fee of that activity, so that there is a great opportunity to grow that and then in our Selective HR solutions, Jim, you want to talk about some of your ongoing efforts there.

I think all three businesses, there is no capital required to grow the businesses.

So as they grow each of the businesses it is all subject to -- just going forward -- I think over time I think we can continue to grow the business at that rate -- we will see a -- you will see margin improvement.

With Selective HR, we continue to roll our products out to our agents, training our agents on how to sell the product and so we think that business will also continue to grow.

One final question then on the investment portfolio I noticed the tax rate is lower from I think, well year-over-year from almost 26 down the -- 23.8 -- may we see more investments going to the municiple side?

I think as we look at our allocation for the year, it's still tilted more so on the tax advantaged paper than it is on the taxable paper, so you will see that rate continue to track downward throughout the year.

Okay thanks it's helpful.

Doug Mewhirter, Ferris Baker Watts

Good morning, just had a bigger picture question.

You said that across the board the environment is getting more competitive both in the commercial and especially on the personal side and you said you won't sure -- you retracted your 9% premium growth forecast -- still -- the comments still remain very optimistic because kind of implied that your margins are going to be quite healthy, which seemed to conflict with an increasing competitive environment.

What explain is it just better you are getting more positive at selected accounts or you have better underwriting, could you just go through, maybe sort of take apart that mixed, message a little bit?

Well, I guess, in my mind that helps clarify the message in the sense that we kind of removed that 9% growth rate there.

And I think that has taken, let us call, some of that external pressure off and allowed our underwriters to make the right decisions on the right accounts to write information.

And I would say that if you are comparing Selective to any other competitors, you know, you have to look at the level of specificity that we have in our pricing and the fact that we have 74 field underwriters out there that represent Selective.

We have 60 loss control people out there that are in active part of the, you know -- whether we write an account or not and the types of services that we offer, and how that helps keep our loss costs down.

And then you have look at our claim operation.

There are -- 140 claim field people are out there managing the claim process as effectively to keep our cost to goods sold down as best as we can.

So when you look at our overall loss trends and you say that your commercial lines trend is down a percent that says a tremendous amount about the underwriting quality and how you manage your cost of goods sold.

And those are the types of things that we are looking at, our ability to pick the right price points to enter the market to grow certain segments of the business, how we are doing much more segment analysis more so than most of our competitors in the marketplace to allow us to pick the right accounts to write.

So we are a disciplined company, and we have a very sophisticated budget modeling process that we look at credit level, we look at not only new business, but on existing inventory, and then we monitor the loss experienced differently on both segments of that market.

So we understand how that will push our combined ratio around as we move through the market.

We are not immune from the market conditions.

What I am saying is that because we have 750 only -- independent agents on average, they write $1.8 million of business with us.

We are a significant player in that office, you know, we are getting the looks and opportunities that a lot of other people don't get.

Okay, thank you very much.

[OPERATOR INSTRUICTIONS].

Gerry Heffernan, Lord Abbett.

Let us ask questions from two areas here.

One is policy acquisition costs.

The policy acquisition costs overall for the last couple of years has been trending down, I know that it has been part of a management focus to get that number as a percentage of net premiums earned down.

It looks like it took a step up a bit in this quarter, and I was wondering if you could just address that, is there anything particular about this first quarter that has a matter (ph) of cost in there?

And what as you see particularly in light of the comments of the increased competitive market?

And you referenced the term soft market, what happens with the policy acquisition costs going forward here?

I will add some things and Dale can certainly follow up.

I mean, we have been very disciplined, as you know, in the discussions we have with you in terms of how we measure our productivity, the premium written for employee that we closely monitor and then how the improvement of that has taken place over the longer term of the company.

And that is something that we do view as an indication of enhanced levels of productivity.

Whether you are seeing some or a little bit of the choppiness in that policy acquisition costs or in some cases the much more heavily profit based payments that have been made particularly in 2004 and even more so moving into our estimates in 2005 with respect to not only agent, but also employee based.

So the improvements that we are making in the core productivity in some instances are being partially offset by those payments.

However, at 93.5 combined ratio for the quarter we plan to significantly reward our agents for supplemental commission as well as our own employees for that performance.

So that is where you get some of that movement in that number.

Something I would to add that above the incentive based type compensation is that we've also had some Sarbanes-Oxley expenses that it cost about two-tenths on the expense ratio last year.

And we had some additional expenses this year for some of the payments that we had to make to really get over the finish line effectively in terms of all the documentation that we had to go through.

So that is going to certainly an expense.

So, I appreciate the comments on Sarbanes-Oxley I guess your consultants and accountants -- they had to be well paid in the first quarter for work they did throughout the finish of the '04 year.

And Greg I guess your comments for that with improved underwriting where we really see the results on the loss expense, over the eye line that in somewhat there is a negative offset to the policy acquisition cost because of the better underwriting, better results we do have a profitability pay back to those people who have earned it?

Right.

Yes, and I know that you have even touched on one thing even our lost adjustment expenses, when you start to look at that how we are more aggressively working our loss adjustment expenses activity whether it would be special investigation area in terms of fraud or how we manage the inventory of litigation or all the different things that we push and pull around that to manage our loss cost which is the biggest piece of our overall expense.

So, some of those numbers get pushed around a little bit but some of them are part of the success in driving the loss ratio down.

Okay, my secondary questioning, if you would, is a bit more of a higher-level question here and that is if I go back to a couple of years and we were talking to you about the break up of the Company as far as the percentage in commercial, percent of personal lines, I just kind of threw out there, oh boy, this commercial business seems to be so much better than this personal lines is just a drag.

Why don't you go 100% commercial and I believe the response was work to service the agency base that we have, which we need to offer the personal lines, personal lines can be profitable but they are not just two separate things they kind of go together.

Seeing the personal lines business down now to 16% of the business and I am trying to getting a feel that your status amongst the agents, the quality of the product that you are providing and the -- where the agent is now placing you Selective as far as a choice that I would make for my customer relative to the other competitors out there.

I am getting the impression that perhaps this symbiotic relationship of personal and commercial is starting to sever a little bit there.

You are good enough that they will choose you just for the commercial product and you know it is not that personal tag alone part.

Well, I guess let me say Gerry, I would say that commercial has always been the emphasis or even from a technological standpoint in terms where we are in our capabilities?

Personal lines has always kind of dragged a little bit behind although with our new capabilities in our personal line system has improved tremendously, but one -- thesis I know you go through this thought process very methodically, where you have to remember though is a lot of this business is not the fact that the agent is not electing to choose us as the market is rotating out of the sector into the Internet space with Geico.

So, its not like the agent is not happy about losing that share of the market and they are just losing the business because it's going to Geico who is out with a 6-month policy and out there aggressively advertising and pricing.

So, we are still important -- absolutely important from an agent standpoint providing a personal lines market place.

But I want to say that a lot of people have confused this personal versus commercial.

I mean our focus in this what we offer in the commercial line space is so superior to anyone else.

And I mean to go through it all but do you mean underwriting loss control, claim handling, the entire experience is so much better with Selective that is the reason why we have a strong commercial lines position not only in New Jersey but it's ongoing developing brand in every other of our 20 states.

Jim, can you add to that?

The only thing I would add to that is remember the Geico situation represent -- it is a New Jersey situation and represents pent up demand that really because the market was tight here for so many years.

That would seem since they came into the State and a lot of folks it would have -- in any other State may have been in Geico years ago, now with Geico.

So, we don't think to that is going to continue forever and that outside the State of New Jersey we are seeing some increase in our personal lines.

Okay, thank you.

I see the [Inaudible] my thinking that it was -- for the fact it is the business is going waste with different distribution channels.

Okay.

In many cases yes.

Thank you very much.

Thanks Gerry.

Lara Devieux, Wachovia Securities

Just a couple of questions.

I guess a follow up to Gerry’s question, from the expense ratio.

Is your target -- does it remain to 29%, even though there might be more pressure on the top line.

And is it the goal to reach that in 2006?

That remains our goal, although obviously with the pressure on the top line that's going to make that much more difficult.

We will see, how the top line plays out over the course of time.

As Greg indicated in his prepared comments, that we are not able to provide a specific number, for growth for 2005.

However we do expect to grow in excess of our peers.

Are you taking any other additional initiatives from the savings side?

We have ongoing initiatives to save expenses within the Company.

We have got -- what we call our main program is working smarter, but we are really pushing hard on identifying opportunities to save overall in the Company, and continue to make progress on that.

Okay, Greg, and then my second question is from the business owner's policy line, it seems like the level of the premium declined [Inaudible] in the last few quarters, and it seems like the business is going to the One & Done system, it is still very strong.

Can you just talk about what's going on there?

Last year we determined that there were just a few segments in our BOP line, it was sort of driving the profitability issues, we were seeing there.

And we have removed those segments from our book, and that's really caused some of this decrease in the business.

We are still seeing a strong flow of new business through One & Done, but also we are seeing a good flow of small contracting business through One & Done, that does not flow through the BOP line.

And at this time there are no additional questions.

I will turn it back over to your host for closing remarks.

All right, thank you very much and if you have any follow up Dale and Jennifer will be available later today.

Thank you.

And that will conclude today's program.

We do thank you for your participation.

Have a wonderful day.