Selective Insurance Group Inc (SIGIP) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the Selective Insurance Group's third-quarter earnings release conference call.

At this time for opening remarks and introductions, I would like to turn the call over to the Vice President, Assistant Treasurer, Ms. Jennifer DiBerardino.

Thank you.

Good morning and again welcome to Selective Insurance Group's third-quarter 2005 conference call.

A supplemental investor packet which includes GAAP reconciliations of non-GAAP financial measures referred to on this call is available on the investor's page of our web site at www.selective.com.

This call is being simulcast on our web site and the replay will be available through November 25, 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 update or revise any forward-looking statement.

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

At this time, I would like to turn the call over to Executive Vice President and Chief Financial Officer, Dale Thatcher.

Thanks Jennifer.

Good morning.

This was another strong quarter for Selective.

Compared with the third-quarter 2004, net income was up 39% to $39.3 million, or $1.25 per diluted share.

Operating income increased 34% to $36.4 million, establishing a new quarterly record of $1.16 per diluted share.

Total net premiums written increased 8% to $383.4 million.

Our GAAP combined ratio improved 3.1 points to 95.0%.

The statutory combined ratio improved almost 2 points to 94.3% and our annualized operating return on equity for the quarter was 15.4%.

Selective uses operating income, a non-GAAP measure, to analyze trends and operations.

Operating income differs from net income by excluding realized gains and losses net of taxes and the cumulative effect of accounting change is net of taxes.

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

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

That compared favorably to 3.6 points, or $7.9 million after tax for third quarter 2004.

It's estimated that hurricanes Rita and Katrina may cost the insurance industry between $35 billion and $50 billion, plus additional losses from Hurricane Wilma.

Although our hurricane losses were minor, we believe these storms may negatively impact reinsurance pricing and availability for the industry, but stabilize or even have a positive effect on property pricing in the primary market.

Our Commercial Lines operation delivered a solid 94.0% statutory combined ratio for the quarter, a 2.5 point improvement over the third quarter 2004.

For the same period, Commercial Lines' net premiums written grew a strong 11%, driven by broad-based new business growth of 11%, or $63.1 million.

Commercial renewal prices were up 2.4%, primarily from increased exposure, while policy retention remains stable.

On a fiscal year basis, net premium earned per Commercial Lines policy was up 4% while loss costs increased only 1%.

This was due to a 6% drop in claims frequency and an 8% increase in severity.

Commercial Auto, our largest single line of business, continued to perform well with a statutory combined ratio of 79.4% for the quarter, including seven points of favorable reserve development.

Our property business came in at a 68.6% for the period, reflecting continued low catastrophe losses and consistent profitability across all six of our regional offices.

Excluding workers compensation, almost every Commercial Line of business generated an underwriting profit during the quarter.

We began to implement a more aggressive program to improve our workers compensation business which had a statutory combined ratio of 117.9% for the quarter, including seven points of adverse reserve development.

Our multifaceted approach will focus on a number of key deliverables that combine underwriting execution tactics with the use of predictive modeling.

The plan includes: enhanced identification and recoupment of premium loss leakage, particularly from wage misclassification; increased use of medical networks and discounts; ongoing implementation of knowledge management tools and decision support systems designed to equip our field teams and business managers with better information to better price and underwrite our business; and a stronger alignment between Selective's successful Loss Control operation and targeted workers compensation accounts.

Although it would take time to improve results in this highly regulated line, we're refocusing our efforts to make workers compensation a stronger component of the overall Commercial account.

Excluding flood business, our Personal Lines operation had a statutory combined ratio of 103.1% for the quarter, compared to 99.9% in 2004 which reflects heavy competition from New Jersey Personal Auto, which led to an 11% decline in Personal Lines net premiums written.

We continue to see steady improvements in our homeowners business, along with ongoing progress in the Personal Lines expansion states.

On a fiscal year basis, net premium earned per Personal Lines policy was up 7%.

Loss costs also increased 7% driven by an 11% increase in severity, partially offset by a 4% decrease in claims frequency.

Recently, we began to see an increase in New Jersey Personal Auto business submissions and policy cancellations have slowed.

This is due in part to rate and tier changes implemented over the last 18 months, our enhanced use of credit history and improved process flows with our agents, all designed to write and retain the best account and stabilize the number of cars we insure.

New Jersey Personal Auto now represents 7% of overall premium volume.

Underlying trends in the eight expansion states continued to improve as premiums increased 10% and new business was up 66% for the quarter.

We expect ongoing improvements across the Personal Lines operation from targeted pricing and tier changes by state that will take effect beginning December of 2005.

In addition, agent use of our automated Personal Lines system continues to rise.

At the end of the third quarter, agents originated almost 85% of new Personal Lines of business, 62% of auto endorsements and 38% of homeowner endorsements.

To better service Personal Lines business and create a competitive advantage, we plan to open a Personal Lines service center next year.

The rollout will begin in New Jersey and extend to the Personal Lines expansion states in 2007.

Our Diversified Insurance Services turned in a strong quarter, contributing $0.13 in earnings per diluted share.

Compared with third quarter 2004, revenue was up 13% to $31.3 million and return on revenue increased 1.8 points to 13.1%.

Favorable results were driven by the fee-based flood operation which was underwritten by the National Flood Insurance Program.

This business generated a 19% increase in revenue to $10.7 million for the quarter, including $1.4 million from the processing of 1,500 flood claims.

New flood premium increased 25%.

Selective was the eighth largest flood carrier on the federal program with total flood premium serviced of $89 million.

After-tax investment income was up 16% for the quarter at $25.6 million.

Our favorable performance reflects higher than anticipated reinvestment rates in our bond portfolio and an increase in the investment asset base as cash flow from operations increased 15% to $162 million for the quarter.

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

We actively manage our capital position and use appropriate levels of financial and operating leverage.

This is designed to minimize our cost of capital, which is currently 9.6%, maximize shareholder returns and manage total capital to allow for future growth opportunities.

Our statutory surplus reached almost $900 million at the end of the third quarter and we currently operate at a 1.6 to 1 premiums-to-surplus ratio and a 20.1% debt-to-capitalization ratio.

To increased economic value, we utilize share buybacks, debt issuance and retirement and dividends.

As a result of our continued strong performance, the Board of Directors increased the cash dividend this quarter by 16% to $0.22 per share.

In addition, Selective repurchased approximately 265,000 shares of its common stock during the quarter at an average share price of $48.94 and a 1.4 price to book multiple.

We had approximately 4.7 million shares still available for repurchase under the current authorization.

Now I will turn the call over to Greg Murphy.

Thank you, Dale, and good morning.

Our continued strong performance reflects a powerful combination of financial stability, broad commercial lines appetite, cutting-edge technology and a field model that's virtually unmatched in the industry.

Selective's excellent third quarter established a new record for operating earnings per share, fueled by: double-digit Commercial Lines premium growth; a 15% increase in operating cash flow to $162 million; and a 16% increase in after-tax investment income from our investment portfolio that now stands at $3.1 billion.

Another significant measure of our progress is a 16% dividend increase to shareholders which pushed our annualized dividend yield up to 1.8% based on a stock price of $49.

This is the third dividend increase in three years and reflects ongoing financial improvements.

Through nine months, Selective's automated small business segment generated $31 million in new premium at a marginal expense ratio of 23%.

This represents 16% of new Commercial Lines premium and performs at a loss ratio about two points better than our overall Commercial Lines.

To increase the flow of this profitable business, we're focusing on areas such as inland marine, which performs at a statutory combined ratio of 62%.

For the quarter, these targeted efforts generated $3 million, or an 83% increase, in inland marine small business.

Today, agents can seamlessly process 330 classes of small business and significantly more will be added in the future as decision support models are fully deployed.

Selective's middle-market Commercial Lines segment generated $136 million in new premium through the nine months.

To drive growth, our market planning initiative will help agents target profitable segments by county.

As an example, our Food Manufacturing segment runs at a three-year country-wide statutory combined ratio of 82%.

In one state, we have a 13% market share in this profitable business, however, our market share is less than 1% in one of our newer states where $55 million of premium is available.

Through nine months, Selective's large account operations selected risk managers generated $26 million in new business.

Our strong risk management capabilities support profitable growth as we write $116 million in this segment at a statutory combined ratio of 85%.

Outstanding agency relationships are Selective's greatest competitive advantage and our success is based on the franchise value we share with only 750 agencies who on average write about $2 million in premium with us.

For the nine months, 580, or almost 80% of our agencies, were profitable.

More importantly, however, after five years, we rank as a top-three carrier in 67% of their offices, a key indicator of future profitability.

As we move to the next level, we must increase our penetration of current agencies and increase the number of agencies overall.

The reality of today, according to one of our Pennsylvania agents, Bruce White, is that clients expect incredible things from their insurance agent.

We help agents meet and exceed customer expectations by providing cutting-edge technology and superior service.

Over the last 12 months, Selective's underwriting service center managed more than 80,000 small commercial transactions for our agents.

We surveyed their clients and a resounding 97% rated their experience as excellent or good.

Retention for these accounts is four points higher than overall Commercial Lines retention.

Our new technology interface allows agents to manage Selective's business directly from their own system.

Now data is entered once, saving 30 to 50% of the time it takes to enter a transaction.

At an average agency, where five customer service reps do 15 transactions a day, that equates to more than a one-person year, or over $45,000 of savings, to an agency.

We are one of the few carriers that actually deliver real-time solutions and giving agents more reasons to write new business and consolidate existing accounts with us.

Going forward, our knowledge management initiative will continue to provide better information to support smart decision-making.

As we begin to implement decision support models in Commercial and Personal Lines, our ability to price business on a more granular level will increase.

We will continue to make decisions by account but use new and better information to strengthen agency relationships and our field structure.

For the nine months, total revenues were up 9% to $1.3 billion, and today, our market cap is $1.4 billion.

At September 30, 2005, stockholders equity per share of $33.79 was up 12% over the same period a year ago.

Invested assets per dollar of stockholders equity stands at $3.22 and the after-tax yield on invested assets was 3.4%.

In other words, the return on equity produced from invested assets is about 11%.

Pre-tax bond yields in the marketplace have gone up approximately 100 basis points over the last year.

For Selective, each 31 after-tax basis points in total portfolio yield drives an increase of 1% on return on equity.

In addition, each one point of combined ratio generates approximately one point of return on equity.

We believe we're in a strong position to grow profitably and leverage our capital to most effectively drive performance.

For 2005, the assumptions upon which we've based earnings guidance include: a GAAP combined ratio of below 96%; an overall statutory combined ratio of 95%; catastrophe losses of 1.5 points for the fourth quarter; an increase in after-tax investment income of 15%, up from our earlier estimate of 12%; and Diversified Insurance Services revenue growth of 13% and return on revenue of 10%, up respectively from previous estimates of 11% and 7%.

With projected overall premium growth of approximately 6% for 2005, we now estimate operating earnings of between $4.20 and $4.30 for the year.

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

(Operator Instructions).

Greg Peters, Raymond James.

Good morning, everyone, congratulations on your quarter.

I guess I need to switch back to the workers compensation area.

It's something that seems to come up almost every quarter on your call and it's something that is seemingly that you're always in a continual state of trying to improve.

And I'm just curious, given the fact that it doesn't seem like you've made much progress there, what has changed with respect to the way you're doing it now versus the way you were doing it two quarters ago or three-quarters ago, et cetera?

I would say that, Greg, the biggest thing is, many of the things that we have been working on and articulating to you over the past several quarters are now in the process of being deployed, starting really in more full effect starting really in 2006.

There are things that we've done around the edges for improvement, but when we talk about knowledge management and predictive modeling for instance, our decision support systems will be rolled out in the fourth quarter.

We have got now some of our -- we have our workers comp book scored on a predictive modeling basis.

We are currently reviewing that results and looking at how we best deploy that into a field model.

Plus, we have really on staff that's really shepherding our entire workers compensation strategy and we're looking at everything end-to-end, including renegotiating contracts for things even like how we use managed care services.

So all of these things take time to deploy.

We are confident that as we move through each initiative that we have will yield improvements.

It's just that those will move through the course of 2006 through 2007 as well to bring that line more under control.

Greg, is it a function of price that is causing you to have the -- obviously, it is.

You're not getting enough.

But how is your price compared with your competitors on the workers compensation line?

Jim can add to this.

I would say that our price is in line, it's a fairly regulated line in terms of your flexibility from a pricing standpoint.

But I think part of it is our approach to the marketplace in a sense that, you know how much -- we've been growing our overall count in the Commercial Lines area something like in excess of 7 or 8%.

Our workers comp policies have been fairly flat.

I think our lack of growth strategy in that area, or our avoidance strategy in the area, has not been as successful in terms of, we end up writing the accounts that we should not write.

And our push more is along the avenue of creating a growth appetite on a state-by-state basis based on the 80 segments that we now track.

So I don't know, Jim?

I think the only thing I would add or amplify on that a little bit is that, it seems like a lot of regional companies have an appetite for workers compensation that is sublimated to the rest of the Commercial business.

So we want to write the package, and in order to write the package, sometimes you have to take the comp.

And when you do things that way, you wind up sometimes getting the account that maybe losing maybe -- losing -- maybe not writing some of the comp accounts that are better managed than you should, and then writing some of the ones that you probably shouldn't.

I think we have not had the level of expertise in workers compensation in the past that we do today.

And I think the rollout of our new comp strategy headed by our new Senior VP of casualty and the knowledge management area will have a pretty positive impact on that.

Okay.

The other question I had for you is, in your opening comments, you talked about the large account risk management business being a source of growth.

And I was wondering if you might provide us just some basic commentary on exactly what this large account risk management business is, just some color there.

Sure, Chuck will take care of that question for you.

We started this unit in 1997 basically from scratch; we had a couple of legacy accounts.

But since that time, large accounts for us has been any single account with guaranteed cost premium greater than 250,000 or any single line generating guaranteed cost premium greater than 150,000.

In addition to that, we will look at any risk in that unit that has any form of risk acceptance on their part, so large deductibles, self-insured groups, retrospective rating pools.

Those are generally the general types of risks that would fall into that arena.

The other thing I will state there is that our appetite relative to class in the large account arena mirrors that in our small and middle market business.

So there's really no expansion of class appetite in that large segment.

And our goal from the beginning in that unit has been to grow it cautiously and to grow it profitably over that period of time.

And through the hard market, we had some significant opportunities to pick up good business at pricing that we thought would make us money over the long-term.

This year, we have seen some attrition in that pricing of that segment and we have been very cautious in terms of how we growth that in 2005.

I'm curious on that business where there is (technical difficulty) with your existing business, because large account business isn't necessarily the footprint of Selective.

Well I think the difference there for us what we call large account business is significantly different than what most other carriers would consider large account.

It's very much a middle market slant, and for us, we have found that that segment of business, the $250,000 accounts and $1 million accounts is a segment that has been largely ignored by the rest of the marketplace, and we have been able to go in there and offer risk management services and create structures that really differentiate ourselves from some of our competitors.

And we really feel the gap for both those insurers and for our agents that service those insurers.

This is Jim.

I think to add to that, the fact is, many of our -- especially our larger, more sophisticated agencies, have got some of this stuff in house.

So as we try to become a bigger player in our agencies and as was mentioned earlier, you know, we're the top three carrier and we average around $2 million a premium for agency, these opportunities come your way.

And so it's not like we're out seeking them outside of our normal agency footprint as well.

This is stuff that typically our agents control our have an in on.

The other thing, Greg, I might add is that this is just a bigger version of the stuff that we already write throughout the other classes.

So as some of our policy holders grow and get larger, this enables us to continue to service their insurance needs.

And I thought you said in one of your answers that you're laying off a little bit because pricing has come under pressure in that.

Could you give us some additional color there?

I don't think we're necessarily laying off, it's just that we're looking at every opportunity on its own merits.

And in the third quarter of this year for example, our new business was down a little bit compared to the third quarter a year ago.

And then most of that is because the pricing that, the market place generator was not pricing we thought we could support on some accounts, so (technical difficulty).

And Greg, just a little bit too.

We have an actuary that sits in that unit that's part of that integrated price -- two actuaries, excuse me -- that sit in that unit and are part of that pricing decision-making process.

Is the pricing coming down?

Is that just in terms of more lenient credit terms, or is it something else?

The marketplace pricing?

Yes.

It is hard to tell how they're pricing the account.

All that we know is that the pricing that some of these accounts are going for, we don't feel that we can support and make money.

Fair enough.

Thank you very much for your answers.

Mike Grasher, Piper Jaffray.

Good morning.

The Commercial Lines, I think you mentioned they are up 11%, renewal prices up (technical difficulty) 2.5%.

Could you give more details in terms of -- not all the lines, but a few of the lines were impacted?

Sure.

I could do some of that.

Obviously, the lead line on that is the workers compensation, which on a total basis, is up about 9% versus the average.

So that has been the biggest line.

And you can understand that -- that's the line that we're focusing the most amount of rate increase, and a lot of that is regulated in nature in terms of getting it.

But just to give you some other sounding benchmarks, property's up around 2%, GL, excluding umbrella, is up about 3.

So that gives you a broad base -- Commercial Auto is almost flat or up 1%.

If you look at the performance of some of those lines and auto running at the performance in the mid-80s like that, it's kind of hard to substantiate ongoing price increases.

You kind of tie this back into Greg's comment, we are and account underwriter and we have to look at the total account and we're not going to write a basket of business unless we feel it's profitable overall.

Let's focus on our total Commercial Lines combined ratio and then let's look at the pieces.

We want to make sure we get the comp element of it under control.

We feel that some of the things we've looked at in terms of the scoring of our book is very telling in terms of making improvements going forward.

But as we move some of the pricing around, you have to understand that the account is priced to make a profit.

So let's not lose sight of that.

Okay.

And then I think Dale also mentioned Commercial Auto.

There was a favorable reserve development of 7 points.

Any other reserve activity in the quarter in terms of releases?

In total, it's fairly flat.

We had adverse development in workers comp also affected about seven points for that line.

And the overall is fairly flat, other than those two major items.

Okay.

And once again, the margins on the DIS segment improved.

Is there more improvement on the way, or have we seen about -- is this the level operation our --?

Let's step back for a second.

There's two things that will drive improvement in our Diversified operation.

Let's focus first on our flood business, which is the true hedge that we have in the marketplace.

And as we continue to grow, we are now the eighth largest flood writer.

Our goal is to continue to push market share in that and write more of that business in Florida, in Texas, in Louisiana, in California and to be in those more flood-prone states.

They got a big boost in margin because of approximately 1.5 million or so of claim revenue that they got that the margin on that is close to 97%.

So that has pushed margins in that line higher.

And so therefore, we don't really budget flood revenue to any large degree as we move forward.

What will drive margin higher in that line long-term though is the ongoing scale in terms of our infrastructure cost and continuing to grow that business.

We feel the larger we make that on just the underwriting service fees, the more we will continue to drive improved margins.

So that is what will push that business.

On the Managed Care side, that was relatively flat revenue growth but a good margin improvement on that side.

That was done as a result of more internal efforts on expense reductions.

So I think that's not really -- those aren't necessarily sustainable, other than we're at a new run rate level in that business.

And then on the Managed Care -- on the CHN Solutions side, excuse me, that is a similar argument in terms of a scale.

We write about 25,000 lives in that business.

Our goal is to try to push that higher and get it in that north of 30,000 level if we can better support the business at that level.

We expect some margin erosion and some elements of the business, but need to kind of make that up in more growth.

So each one of the businesses is a slightly different story, but overall, they have been a big contributor to earnings and growth.

Okay, thank you.

That's helpful.

And then, with regard to the investment portfolio, cash flows and new money rates, where are you investing today, or can you give us some guidance in terms of where rates are that you're employing, and any shift in the choice of munis or tax?

I'm going to turn that over to Kerry Guthrie (ph), but we've been managing our portfolio.

And just from a high level, we try to manage our portfolio in terms of tax advantage taxable to try to get our A&P at a zero run rate.

That's kind of the overall guiding principle within our group.

Let me let Kerry talk to you about what he's doing specifically in the portfolio.

Yes, the focus of the portfolio has been to reinvest the cash flow into the municipal bond market.

We have a strong need for tax advantage securities.

We find that asset class fairly attractive to the taxable market anyway and we're probably putting some 90% of our new money into the tax-exempt market.

We have seen a shift in our bond portfolio from a year ago.

We had roughly 50 -- 43% of our assets in tax advantage, and now we have 54%.

So a big shift and there to that asset class.

And as far as new rates go, where we invest on the curve, depending on how that curve presents the opportunities, probably a 3.5% tax advantage rates to 3.25.

To answer that too, I think when you look at the effective tax rate on the investment portfolio, for the year it's running close to 23 and for the quarter, it's more like 22.

So you're going to see that tax rate continue to maybe decline over to the 2006 year.

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

Doug Mewhirter, Ferris Baker Watts.

Good morning.

A couple of various questions.

First, do you have a figure for your dollars per day through your won-and-done system?

Yes $160,000 a day for the third quarter.

That's just the quarter only.

What was it the same quarter last year?

Do you have been handy?

I don't know if I have it from that quarter.

I could dig it up.

For the quarter, it was up about 38% from last year.

So you can back into whatever the average was.

That's very helpful.

The reserve development, the positive or negative reserve development -- which accident years did they come from?

Ron Zaleski will talk to you about that.

The adverse development that we received on the workers comp came from back to (ph) accident years 2001 and prior for the most part.

And the favorable development that we received in the Commercial Auto line came from more recent years, 2003, 2004.

Okay.

And could you also just go back over the -- I missed the severity and frequency trends for your Personal Auto business?

Yeah, Dale's got them in the call.

Sure.

In the Personal Auto business, we had an 11% increase in severity and a 4% decrease in frequency.

Okay.

I guess the frequency trends have been talked about for awhile with various other companies.

Where do you see the severity?

Is it more from the liability side, like medical expenses, et cetera, much like your workers comp issues, or is it more of materials cost for sheet metal and things like that?

No, you're right on the first count.

It's more from the medical side of the equation.

Okay.

And is that a unique to New Jersey kind of issue?

Because I noticed it seems a little higher than companies that are more on a national basis.

I guess, one of the things when you are looking at our Personal Lines, it is so dominated by what we have in New Jersey that it's tougher for us to comment on national trends.

What you also have to consider also is there Personal Auto numbers with New Jersey in there.

We're getting a change in case reserves due to the VPP change.

So that's built in and kind of overstating that number.

Okay, thank you very much.

Beth Malone, Advest.

Congratulations on the quarter.

I just had a couple of questions.

When you talked about the penetration of the technology with presenting commercial risks to you, I think the number was 85%.

85% of new business is being entered by our agents directly into our system, that's correct.

Is that -- do you see that as the maximum amount you're going to be able to penetrate?

There has got to be some people that will never use the system.

I think, when you look at the type of agency that represents Selective, I think you're going to see those numbers even move higher.

I think as our technology gets easier and easier to use, I think the assimilation rates will move up.

Agents that are really committed to Selective are ones that really adopt and use our technology universally.

So I don't want to say it's not an option, but it's really not an option.

We want folks -- we have spent time building these systems based on commentary from agents, these aren't systems that are cooked up by the Company and then forced back into the agency plant like many other companies do.

These are things that are broad-based initiatives that come up through the agency channel.

And so they're really responding to what they want.

Now we need to make sure all of our agents are on board and using it, and it's really -- that's not an issue.

When you look at the technology and the traction rates that we get are unbelievable and have to be superior to any other company if you ask those questions about utilization rates.

Do you see -- I understand it's a competitive advantage, but do you see competition coming up to compete with you at this level in terms of their technology?

Is it a selling point?

It's absolutely a selling point, and I think when we look at the market, we look at our technological competitors more in that area of a Travelers, Hartford and Zurich.

But yet we're in there as, again, the high-tech, high-touch approach in the marketplace.

We're out there with the strong relationships, we're out there writing the business, providing the services.

And agents are really want to grow with regional carriers.

When you look at the regional space, I don't think there is anybody that is in our league and no one that's really close to us.

On earlier comments by Dale, he mentioned that there was an increase in severity and a decrease in frequency.

I'm sorry I missed -- which part of the business was it.

Well that's both actually.

Commercial Lines had similar trends as frequency across all of the lines in Commercial Lines were down.

Severity is up in most of the lines on the Commercial side and I think it's similar kind of trend in the Personal Lines as well.

Do you know what's driving -- is that inflation, or what's driving the severity?

I would say as articulated before, it's a combination of higher medical on the medical-sensitive lines and then I think to some extent it's also just seeing the effects of higher liability semblance in some cases.

It's an aggregation of both.

So as far as expectations in your pricing, do you anticipate that it's going to continue?

Absolutely -- on the medical trends, yes.

Alright, thank you.

Mike Dion, Sandler O'Neill.

A couple of questions.

First, maybe you could just touch on pricing trends in Commercial Lines post-Katrina with your book of business primarily in the Northeast.

Do you expect to see any benefit at all from the large industry losses from the hurricanes?

And then secondly, a question on Personal Lines, particularly New Jersey auto.

I'd just curious what the PIF (ph) is in the third quarter of '05 and how would that compare to last year's third quarter?

The PIF in New Jersey auto I can tell you for the quarter was down about 800 cars for the third quarter over the second quarter, and I think that's a better measurement to look at.

In other words, that the car count for Jersey, we lost about 7000 cars in the first six months of the year.

And now, we lost less than 1000 cars in the third quarter.

So we've definitely slowed that process down.

And these our car counts, not PIF counts, because that's just really what I can remember off the top of my head.

And that's what we focus on is cars.

So we feel the market has stabilized with respect to some of the new entrants, although you do have Progressive coming into the marketplace.

We have seen our agents better respond to that internally.

We see them re-marketing a lot of accounts as we move forward and we have also been in several discussions with the department about revisions to our programs to get on a more equal footing with some of these other folks.

They understand the situation that we're in and have been more receptive to some of the changes that we have been discussing with them.

So that's something that we're actively working on with them today, which I think will further enhance our position to grow and maintain our book of business.

Chuck will address more of the pricing overall in the Commercial Lines sector.

And terms of any Katrina or Rita effect, most of the impact of those storms in terms of price have been realized in the areas that were hit.

Since we don't really have any exposure in those Gulf states, we haven't seen any immediate impact in price increases from those storms yet.

However, I think as reinsurance contracts renew, most of them in January, you may see some improvement in particular the property line pricing going forward.

In one of the areas where there is some movement, has been some movement across the board post-Katrina, is in some of the excess in surplus lines risks, coastally exposed risks, the feedback we're getting from agents is those types of property accounts have seen increases anywhere from 10 to 40% depending on where they're located.

But to this point, we really haven't seen a tremendous -- any kind of impact on our book of business on the property lines, or any other lines, for that matter.

Okay, great.

Greg, if I could just ask what the auto count was at the third quarter for New Jersey Personal Auto?

90,000, you guys (multiple speakers)

It was 89.346.

Okay, great.

Thank you.

(Operator Instructions) Lara Devieux, Wachovia Securities.

Great quarter.

I just had one question.

Have you seen an unusual amount of claims so far from the flooding in the Northeast?

No, we have not.

Okay, all my other questions were asked.

Thank you.

Having no further questions, I would like to turn the conference over to Greg Murphy for any additional or closing comments.

Thank you.

If you have any follow-up, please get back to either Jennifer or Dale.

Thank you very much.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.