Selective Insurance Group Inc (SIGIP) 2005 Q4 法說會逐字稿

Good day, everyone.

Welcome to the Selective Insurance Group fourth-quarter earnings conference call.

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

Please go ahead.

Good morning and, again, welcome to Selective Insurance Group's fourth-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 website at www.selective.com.

This call is being simulcast on our website and the replay will be available through February 28th.

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

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

We refer you to Selective's periodic filings with the United States 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 statement.

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

But at this time I'd like to introduce Executive Vice President and Chief Financial Officer, Dale Thatcher.

Good morning. 2005 was another record operating earnings year for Selective as we continued to execute our high-tech, high-touch strategies designed to make Selective the market of choice for our agents.

Total net premiums written grew 7% to 1.5 billion for the year.

And commercial lines, which represent 86% of our business, net premiums written were up 10% to 1.3 billion.

Selective once again outperformed the industry with an overall statutory combined ratio of 94.6% for 2005.

We've seen industry combined ratio estimates in the range of 100% to 105% for the year.

Despite the impact of severe weather on much of the industry, 2005 was a very light catastrophe year for Selective which clearly added to our strong underlying results.

The Gulf Coast region where the majority of hurricane activity took place is not one of our primary operating territories.

Weather-related catastrophe losses for 2005 were only $3 million after-tax or $0.09 per diluted share versus a more typical $12 million in 2004 or $0.37 per diluted share.

In the fourth quarter of 2005 compared with the fourth quarter of 2004 total net premiums written increased 9% to $309.7 million.

Net income for the quarter decreased 7% to $41 million or $1.30 per diluted share.

Operating income increased 23% to $39.7 million or $1.26 per share.

And the statutory combined ratio improved 0.8 points to 96.5% which includes catastrophe losses of $1.9 million after-tax compared to a 0.7 million after-tax benefit in the fourth quarter of 2004.

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

Operating income is net income excluding the after-tax impact of net realized investment gains or losses and discontinued operations as well as the cumulative effect of change in accounting principle.

GAAP reconciliations are included in the supplemental investor packet on Selective's website.

In the fourth quarter, we reallocated reserves by line of business in order to achieve more precision within our carried reserves.

The net impact of reallocation is a pretax reserve release of $2 million in the quarter.

The lines most affected were commercial auto and worker's compensation.

In the fourth quarter worker's compensation reserves were increased by $29 million to reflect rising medical cost trends that impacted accident years 2001 and prior.

At the same time we lowered commercial auto reserves by $34 million primarily due to ongoing favorable frequency and severity trends in the 2002 through 2004 accident years.

Overall reserves for all lines continue to be well positioned above the midpoint of the range at 55%.

In 2005 worker's compensation continued to be a challenging line of business for Selective with a statutory combined ratio of 124.1%.

On an accident year basis the combined ratio for 2005 was 110%.

While our overall 2005 commercial lines renewal price increases including exposure were up 3.5%, worker's compensation pricing was up 8.9%.

Over the past three years we have achieved rate increases of 37%.

In 2005 frequency was down about 3%, severity was up 27% as overall loss costs increased 24% versus net premiums earned which increased 10%.

After a complete evaluation of all our processes for worker's compensation we adopted a comprehensive approach that will focus on several key areas.

We are combining underwriting improvements with Knowledge Management and Decision Support to improve results.

This plan includes six key initiatives that focus on Predictive Modeling, loss control and maximizing our quality agency relationships.

Independent of other factors affecting the worker's compensation combined ratio, these initiatives should produce a benefit of about 7 points over the next two years.

Our record results for 2005 were driven by commercial lines.

We've achieved 11 straight quarters of improving commercial lines underwriting results year on year.

The statutory combined ratio in the fourth quarter was 95.8%, a 1.2 point improvement over fourth quarter 2004.

Commercial lines net premiums written grew a robust 12% driven by new business growth of 28% to $58 million for the quarter.

Commercial lines renewal price increases including exposure were up 2.5% while policy retention remained stable.

In 2005 all of our six regions and 78% of our agents were profitable.

We manage our business by five strategic business units in 80 different business classes.

All strategic business units were profitable in 2005.

For the two years and nine months ended September 30, 2005 90% of the 80 classes were profitable.

Selective's approach to underwriting is focused on the concept of the whole account.

This relationship-based approach is key to our commercial lines strategy and success.

Excluding the flood business our personal lines operation had a statutory combined ratio of 105% for the quarter compared to 103.7% in 2004.

For the year the statutory combined ratio deteriorated 3.2 points to 105%.

For the year, frequency was flat and severity was up 15% due to the verbal tort threshold decision earlier this year.

Net premiums written for the full year 2005 were down 10% to $200.8 million, driven primarily by a decrease in rates of 5.2% and a reduction in New Jersey insured autos of just over 10,000.

The trend in our personal lines expansion states continues to improve as net premiums written grew 9% for the quarter and 7% for the year while new business was up 80% for the quarter and 42% for the year ended December 2005.

Over the past four years we have spent the majority of our resources on commercial lines as we've built and rolled out technology to the field and our agents.

Our Knowledge Management and Predictive Modeling initiatives have also been focused mainly on commercial lines.

In 2005 we expanded our focus to personal lines with the introduction of SelectPLUS, a personal lines automated system.

Agent usage of this system has already reached 83% for new business origination.

To improve our competitive position in our eight states personal lines footprint we realigned the personal lines management team and in 2006 expect to roll out rate and tier filings based on a multivariate model.

At year-end 2005 overall net premiums written for insurance employee increased 5% to $829,000 compared to 2004.

Over the last several years we have put tremendous effort into reducing expenses.

The overhead component of our expense ratio has gone from 12.7% in 2001 down to 10.5% in 2005, while the expense ratio decreased from 31.5 to 30.7% for the same period.

This improvement is closely related to the technology enhancements that allow agents to initiate and self serve selective business.

Over that same four year period our combined ratio improved more than 12 points to 94.6%.

This improvement led to higher incentive-based payments to our agents and employees.

Combined these incentive payments increased from 1.7 points in the expense ratio in 2001 to 4.2 points in 2005.

Going forward we have the infrastructure in place to support significantly more premium volume.

The effect of the hurricanes on the insurance industry as a whole during 2005 was evident in the January 1, 2006 renewal of our property catastrophe program.

We eliminated our New Jersey home owners’ quarter share treaty effective January 1,2006 and increased limits on our property catastrophe treaty to more broadly cover the growth and diversification in our 20 state footprint.

The elimination of the quarter share treaty resulted in a return ceded premium of $11.3 million to be recorded in the first quarter of 2006.

We increased our retention under the property catastrophe treaty to $20 million from the expiring $15 million and purchased $220 million in excess of this retention.

The overall program cost increased $2.4 million or 26% primarily due to a 19% increase in our RMS modeled losses based on exposure growth and changes in the reinsurer's view of catastrophe risk.

We believe our new program will enhance protection across the property book of business.

Our terrorism excessive loss treaty renewed with no increased cost.

This treaty covers all terrorism losses whether a treaty is certified or not and includes nuclear, biological, chemical and radioactive, or NBCR losses.

For the quarter revenue from diversified insurance service's continuing operations grew 8% to $23.8 million with a return on revenue of 10.6%.

For the full year revenue increased 14.1% to $98.7 million.

In November 2005 we sold CHN Solutions, our managed care operation, for an after-tax loss of $2.6 million or $0.08 per share, although for the full year we had net income of $0.02 per share from discontinued operations.

We realized a total return on investment of 23% over the eight years of ownership.

Revenue in our flood operation rose 14% in the quarter to $8.3 million compared with the same quarter a year ago.

Net income decreased 11% as we ramped up our sales force in several locations where we're seeking to aggressively grow our business.

Return on revenue was down 4.5 points to 15.9% for the quarter.

For the full year 2005 return on revenue was down 1.8 points to 17.2%.

Premiums serviced by the flood operation were up 20% to $93.7 million for the full year.

For the quarter revenue for Selective HR Solutions, our provider of human resources benefits and administration outsourcing, was up 4% to $14.5 million compared with the fourth quarter of 2004.

Net income was up $250,000 to $0.9 million for the quarter, and up $1.1 million to $2.7 million for the year.

Worksite lives increased by 1,000 to approximately 24,000 lives during 2005.

After-tax investment income grew 16% to $29.4 million for the quarter and 16% to $104.8 million for the year.

The strong growth was driven by an 11% increase in operating cash flow for the year to $406.8 million.

The proceeds from a $100 million senior note offering, higher than anticipated interest rates, and excellent returns from our alternative investment portfolio.

Selective's investment portfolio increased 14% to a record $3.2 billion at year-end and the after-tax portfolio yield was 3.5%.

We continue to effectively manage our overall tax position within the context of prudent investment management.

In 2005 we shifted the portfolio mix to 55% tax-exempt and 45% taxable securities compared with 48% tax-exempt and 52% taxable in 2004.

The overall effective tax rate on investments was 23% for 2005.

Investment assets per dollar of stockholder's equity finished the year at $3.31.

Operating return on equity was 14.8% for the year, up 1 point over 2004.

This is 527 basis points above our cost of capital reflecting the Company's substantial 2005 performance.

We finished 2005 with $930.6 million in statutory surplus and currently operate at a 1.6 to 1 premium to surplus ratio and an adjusted debt to capitalization ratio of 23%.

We are generating excess capital and returning it to shareholders through a combination of dividend increases and share repurchases.

We increased the dividend 16% in 2005 and repurchased 335,000 shares through our share repurchase program which currently has 4.7 million shares remaining available.

Now I'd like to turn the call over to our CEO, Greg Murphy.

Thank you, Dale, and good morning.

Our unwavering focus on delivering a high-tech, high-touch experience to the agents and their customers was a powerful engine of profitable growth for Selective throughout 2005.

Our franchise value with agents is the highest it's ever been and that relationship translated into commercial lines premium growth of 10% for the year, ten times higher than the Standard & Poor's industry growth estimate.

Selective's average agent writes about $2 million in premium with us, more than double five years ago.

Based on year-end 2004 data, we're a top three carrier in 67% of our agents with more than five years of experience.

We believe this is a strong indicator of the franchise value we have with our agents and the best indicator of long-term underwriting profitability.

In 2005 we wrote $252 million in new commercial lines business, an increase of 8%, and this growth came from the following sources -- middle market or AMS business $180, up 7%;

One & Done automated small-business $41 million, up 30%; and large account business selective risk managers $31 million, and that was down 5%.

There's been a lot of talk about how highly competitive the commercial lines marketplace has become.

However, in Tillinghas commercial lines monitoring survey, overall commercial lines pricing for the first nine months of 2005 was only down 5%, which is a much different view from other industry reports indicating much steeper declines.

Selective new business in 2005 was written at rates about 1% below 2004 levels and our renewal price increases, including exposure, were up 3.5%.

We expect pricing to remain competitive throughout 2006.

Selective is one of only a handful of companies that utilizes a true field model.

The excellent relationships we have with our agents begin with our field model and the agency management specialists, or AMSs.

We have 75 AMSs who on average write $2.3 million in new commercial lines premium in 2005.

And 45% of their compensation is based on a combination of profitable growth and the achievement of certain initiatives by their agents.

In preparation for the expansion of our agency plant and targeted growth territories we've added 14 AMS apprentices.

Our automated small-business system, One & Done, allows agents to issue policies and continues to show strong growth.

In 2005 new One & Done business was up 31% to $41 million and averaged $163,000 per day.

As we continue to widen the pipeline by adding new products and classes, we expect to drive significantly more premium volume through this system.

This business runs at a loss ratio that's typically about 2 points better than our average loss ratio and is written at a 23% marginal expense ratio.

Selective's large account operations, Selective Risk Managers, or SRM, had a very strong year generating $31 million in new business.

Our strong Risk Management capabilities support profitable growth.

In total $141 million of SRM business was written in 2005 at a statutory combined ratio of 88.6.

There are currently 151 agents writing this profitable business and we plan to add 75 more in the next two year period.

Selective has significant organic growth opportunities in our 20 state footprint.

To generate consistent growth, we are driving the planning process with agents by identifying profitable new business opportunities through our Market Planning initiative.

We evaluate business opportunities by 80 business classes throughout 106 territories in our 20 primary operating states.

The segmentation gained through the Knowledge Management initiative allows us to target our marketing efforts on profitable business classes.

The top two profitability quartiles showed average new business growth of 16% while the bottom profitability quartile declined 6%.

In 2005 selective launched xSELerate, our agency management integration technology which allows automated movement of information between an Agent's systems, (AMS and applied only) and Selective’s, resulting in a seamless quote.

This is a huge timesaver for our agencies and it lets them provide on the spot customer service with fewer resources.

Currently 80% of our agents use AMS or applied systems.

In 2005 the Applied agents network honored Selective with the “Ease Of Doing Business Award” for advancing commercial and personal lines technology.

Knowledge Management is one of the most extensive and exciting initiatives.

Based on improved analytics, Selective is taking the collective knowledge of the organization and delivering it to our underwriters' desktops.

We call this Decision Support and it enables us to be more precise on pricing and more focused on marketing the most profitable business classes.

The next phase of Knowledge Management is Predictive Modeling.

Through the models completed to date we're learning a great deal more about the predictors of loss.

We've brought new insights to traditional underwriting metrics and affirmed and quantified some of our core operating values such as the importance of the agency relationship to profitability.

This initiative is helping us change the way we look at our worker's compensation business, for example, as we've discovered new and unique predictors of loss.

Predictive Modeling is important to maintain a competitive advantage in our underwriting performance as we've outperformed the industry by 3 points over the past ten year period.

Ultimately the winners in our industry will be those who are committed to their strategies.

These will be the companies that will be able to outperform their peers over time.

We continue to be focused on driving profitable growth in 2006 and beyond.

In 2006 we anticipate operating earnings per share of $4.25 to $4.45, which at the midpoint generates a 13.5% return on equity.

These numbers assume a more normal level of catastrophes -- $13.6 million after-tax or $0.42 per share versus only $0.09 per share in 2005, and accordingly a combined ratio of 96.5% on a GAAP basis and 96% on a statutory basis.

At this point our guidance reflects weighted average shares of 32.2 million; although, as you know, we do have a share repurchase program in place that we will utilize on an opportunistic basis.

Other assumptions include after-tax investment income growth of 13%, diversified insurance operations revenue growth of 12% and a return on revenue of 8%.

The tremendous efforts of our employees and agents in 2005 rewarded shareholders with a 21.9% total return including a 16% dividend increase in the third quarter.

We will build on this momentum in 2006 as we continue to execute the strategies that position Selective to outperform in the marketplace.

In fact, our theme for our recent agency Roadshow was "Selective is your best solution whatever the scenario".

We can say that with conviction because of the creativity and commitment of the people throughout our organization.

Thank you and now I'll turn the call over to the operator for your questions.

(OPERATOR INSTRUCTIONS).

Mike Grasher, Piper Jaffray.

Good morning and congratulations on your quarter.

Just wanted to talk about the worker's comp area and the commercial auto.

I guess the realignment of reserves was the primary driver for the change in performance year-over-year.

But can you talk about how it performed excluding that reallocation?

Sure.

I would tell you that on the comp side we ran the worker's comp at an accident year of 110 combined ratio and I think that's the best indicator of how the line's performing.

Commercial auto -- I don't know, Ron, do have an accident year on the commercial auto, what that's running about?

My guess is it would be somewhere in the high 80s, low 90s, somewhere in that neighborhood.

But we could get a more specific number for you.

Okay.

And then when you speak to a 7 point benefit over the next couple of years within worker's comp, are you speaking to -- from a base of 110?

That's obviously our starting point into the year.

There's a number of factors that we're dealing with.

One is the ongoing cost of goods sold, that moves year on year, as well as our ability to get rate increases that have to match those costs of goods sold.

So I would say that that improvement is outside of those two other factors and our ability to generate the lower combined ratio would be the aggregation of all three of those events.

Okay.

One other question and I'll get back in the queue.

But could you talk about retention levels currently?

Yes, they've been running and it's consistently at about the 78% range in commercial lines and that's been very stable.

And how would worker's comp fare within that?

I don't have a retention for comp off the top of my head.

Okay.

I'll come back.

Thank you.

On the commercial auto front, for the year it was a 74.4% combined ratio, without the reserve activity it was an 88.9 combined ratio.

Thanks.

Greg Peters, Raymond James.

Good morning, everyone.

You were flying through a lot of information there in your comments, so pardon me if you said something and I missed it.

In the guidance, Greg, did you provide the net premium written guidance?

If so can you just remind me of what it was?

No, I can't remind you of what it was because I did not provide it.

But it's a nice way to ask the question.

Okay.

Then you're being fairly specific with earnings numbers, combined ratios, etc., so how should I be thinking about your top line for '06?

If I were you I'd be thinking about our top line -- and this is the best way I can articulate that -- based on the strategies that we have in place in terms of the relationship and franchise value we are looking at expanding our plant on the agency side.

And then we're really more importantly though trying to aggregate more business with each one of the agencies -- get a deeper penetration.

So if you were to sit down and look at us relative to the marketplace, let's use 2005 as a benchmark.

S&P has a 1% commercial lines growth rate and we were 10.

I think there's a reason for that and part of it starts with the relationships that we have with our agents.

And then what is it that we're doing to expand that?

And I think market planning is something that we've been out in the field with all of our agents and that is a very I'd say detailed planning process that will allow us to continually grow and grow in the right segments.

The reason for not putting a premium number out on the table is it's just -- there's too many factors in the marketplace that we're not comfortable putting that out.

I guess I should infer that you anticipate growing faster than whatever the market grows at, you just don't know where that's going to come in.

And I'm putting words in your mouth there, I recognize that and you can say something on that or not.

But agent count -- total agent count year-end '05 versus year-end '04?

The total agent count at the end of '05 was 754, that's up a total of plus three from the end of '04.

But really we have an increase in net storefronts of 22 as there was a bunch of merger activity throughout '05.

So total agency storefronts increased 22 on a net level throughout the year.

So what really Chuck is telling you, the number of producers -- the number of feet on the street is going up because a lot of our agents are out their aggregating.

They're out buying other agents.

But yet -- and you really have to -- if we really were measuring, it would be feet on the street.

How many producers are out there generating business for us and that would really be a better indicator and that number continues to track higher.

However, that being said, we write in 20 states, we have 750 agents that represent Selective.

I know this has been a big issue with you over the years, but we are starting to look for and harvesting new opportunities for agency appointments in certain territories.

Okay.

I'm going to circle back offline on that.

And then just maybe you could spend a minute and -- I missed some of the commentary you made about this in the opening comments because Dale was speaking at warp speed.

People complain that the conference calls go on too long.

But personal auto -- I was surprised by the combined ratio results I guess to some degree, and I know we've talked about the growth there or lack thereof reflecting some competitive pressures.

And I'm just wondering if you can provide us some additional color there?

What I can tell you about Jersey auto maybe in total (indiscernible) focus and I'll let maybe John [Marcioni] or one of our other folks here, James McClain, talk about what we're doing outside of New Jersey in terms of growth.

But New Jersey's premium, it was down approximately 20%, that was due to a 10% reduction in cars and then some rate-on-rate issue and the fact that we have lowered our rates in that line, we feel that the pressure on the rate level will obviously be less in 2006 than it has been this year.

Although you'll see us in what we're doing be a lot more granular in our pricing overall, but I think you'll see less of a dip in totality.

And then I think with respect to units, I think we're trying to get -- when we get our product out on the marketplace we will stabilize the unit loss and actually start to show growth in that.

John, what would you want to add to that -- or James or --?

The only thing I'd add to that is -- and Greg sort of alluded to this in New Jersey, but it applies country wide as well -- we're in the process -- and you heard this in Dale's comments -- of retooling our pricing structure to be a lot more granular.

And we're also being very deliberate to make sure that our growth has not become overly aggressive until that new pricing structure is rolled out.

And we believe that will not only drive the growth but also drive the profitability.

Is it fair to say that you have not yet used credit as part of your pricing strategy in Jersey?

No, that's not the case.

We are using credit.

We're talking about a multivariate model that introduces a number of different variables in a multivariate fashion one of which is correct, but that has been in place.

Where should I think -- how should I think about the combined ratio result just in auto alone as I look to 2006?

I don't think we're giving any specific guidance on that.

I would say that going forward I think our ability to generate an ongoing profitable combined ratio in a line like auto, though, is significantly higher with some of the things that we're doing.

The only other guidance that we can provide is really just of a historical nature.

If you look at the 2005 results, you had about 5 points on the combined ratio was as a result of the verbal tort threshold decision in New Jersey.

So that is an impact there that you have to take a look at.

That point is appreciated.

Thanks for your answers.

(OPERATOR INSTRUCTIONS).

Mike Dion, Sandler O'Neill.

Just want to get a little bit more color if I could on commercial lines and your outlook for '06 for growth.

And I understand you don't want to give hard guidance or a range of guidance, but you had said in your opening comments that you expect a competitive environment.

And just curious, if we were to backtrack a year ago would that still have been the case.

And just looking to the results for this year commercial lines growth was 10%.

Is it fair to say that if the outlook is in line with last year that we could see something on the magnitude of that in '06?

Or maybe you could just add a little bit of color there.

Obviously there are three components to our overall premium base and we have to be careful with the three different levers.

Three levers in that area obviously are retention, our renewal price increases and then the amount of new business production that we have been.

And then how is that new production priced year on year?

And we closely monitor all three aspects of that on a month-by-month basis within every one of our regions as we move through the year and we are pushing each and every one of those levers as we move.

We would sit there and say that our expectation in terms of renewal price increases is probably not as optimistic in 2006 as it was for 2005, although the difference isn't that great.

And then I would believe that where we're going on new business, and what I was trying to tell Greg earlier in the commentary, is that we are positioned better than ever before in terms of our AMS plant.

We now 14 apprentices in training at varying degrees of level to deploy into the field.

We didn't have that kind of capability before, so every time we lost or an AMS got promoted or something happened in the field we would lose business opportunities.

We've got our One & Done system up, and I don't say it's industrial strength yet, but we're definitely widening the pipe of that and adding more classes to it.

So we expect that to grow a lot more and that's business that agents can enter right in their office seamlessly and ready to quote an issue when it's done.

And then lets supplement that with what we're doing just in terms of market planning and the amount of knowledge that we're bringing to agents about the depth and breadth of product that we can write.

And then in terms of our technology; although I touched on it I don't think it really means a lot to you guys.

But our xSELerate product, if you think about it today, an agency wants to quote an account and if they've got a big fleet of vehicles or a huge schedule of property, for them to get a quote from another company they normally have to re-enter all that information, and sometimes on a big scheduled fleet that could take a day or so.

In our new system capability that we've got -- and I believe we're the only company out on the street that has this capability, an agent can seamlessly move that over to us and then get a price from our system and then be able to issue that policy through our agency management specialist.

Those are the kinds of things that when you sit out there and say well, why are the agents going to write more business with Selective?

I'd point to those things specifically at the detail level as well as move back and say they want to write more business with regional carriers and they want to write that business because they want to have a relationship with the people at the Company, they want to know who's making the decisions, they want to know that that company is committed to the independent agency channel.

And I think when you look at the holistic relationship, that's why we're able to grow faster than other people.

And the reason why we're more profitable than anyone else is because we rank high in the franchise and then we're pushing that out in our knowledge management, predictive modeling to make sure we maintain a competitive position in the marketplace.

Okay, that's helpful.

Just on follow up if I could.

Given the Company's lack of cat losses in '05 and your limited exposure to cat prone areas particularly in the southeast, are you seeing more competition in your core northeast and I guess Midwest markets now than you saw six months ago before the hurricane season?

Is that also a factor and potentially lower growth in '06?

Well, understand that more of our business, and let's start with Georgia, we don't want to write personal lines in Georgia, but go Georgia, South Carolina, North Carolina, Virginia.

We don't write a lot of personal lines there, and I think you get more aggregation issues on a personal lines basis in terms of concentration in geolocations and you get a lot of higher [damageability] estimates out of these models and we're all kind of tooled off of aggregation.

So I don't really -- I think the larger companies will look at any coastal exposure when they look at their new RMS models or the model that comes out later this year and say maybe we got too much exposure because they might have thought they've been writing for a 1 in a 200 year event or a 1 in 100 your event and all of a sudden, bang, that gets cut either in half or by a third when they look at their new models.

I don't really perceive that as going to be either a competitive advantage or disadvantage as we move forward.

Okay, thanks very much.

Alison Jacobowitz, Merrill Lynch.

Sorry, I miss the first couple of minutes and I also -- you were going a little fast.

So I was wondering if you talked at all about investment income and the good quarter there, if there was anything unusual.

No, there was really nothing unusual in the quarter.

I think what you saw was a positive impact of short-term rates rising, growth in invested assets were up 14% and we're just plowing that back into the bond portfolio.

We saw good growth across all of our asset classes.

And no, I don't think there was anything unusual in the quarter other than your typical seasonal dividends that you get from some of the mutual funds that we own.

So sequentially it looks like the pretax yield went up a decent amount.

Should we expect a similar run rate going forward?

I think you could see the yield creep up a little bit as interest rates rise, yes.

And then also, Alison, in the fourth quarter we did have some positive impact from the proceeds from our debt offering as well.

Okay, great.

Thanks.

Although I will point out that after-tax income for the year was up 16% and it was up 16% for the quarter.

So it was pretty smooth in terms of rate of increase on an overall basis.

But as Kerry indicated, there is a little bit of seasonality in the fourth quarter because of dividends out of the equity portfolio.

Okay, great.

Thank you.

(OPERATOR INSTRUCTIONS).

Lara Devieux, Wachovia Securities.

Congratulations on the quarter.

I just had a follow-up question for Mike.

I guess I'm just a little surprised by your comments about being less optimistic on the renewal prices for 2006 when compared to 2005.

I guess especially given the increase in the reinsurance prices across the industry.

So maybe can you just talk about what factors are driving your less optimistic outlook?

Let me just start with all this about the reinsurance cycle.

Our total cat premium went up $2 million.

So how market changing is a $2 million increase on our cat cost?

That's the way I look at it.

Obviously that may be different for companies that write in really heavily exposed areas, but I would say a lot of the competitors that we base -- are so fragmented based on the territories that we operate, and in the Midwest it's more regionals and in some places it is the nationals, but we don't perceive that that will be a major event.

And then there is -- the capital in the market has actually gone -- the surplus in the industry has actually gone higher in the third quarter even after all these events.

And when people try to put that surplus to work in a relatively slow growth business that we operate in in the P&C world overall, the only way you're going to grow is to take business from other people and in some cases that starts with more of a price war.

So we sit there and we look at the overall macroeconomics in the industry and say that they are really no better, slightly maybe worse than they were a year ago and maybe we just don't put as much credence on this market changing event from the reinsurance world only because it's really not that material to us nor do we think it will be that material to a lot of our competitors.

So that's our reasons for why we feel the way we do.

Although I will add to it -- in case you didn't hear it when Greg talked before is that although we think it will be a little bit more competitive it's only a modest amount.

It's not like it's a huge degradation that we're expecting.

Okay, great.

Thank you.

Justin Maurer, Lord Abbett.

A quick question on the guidance again.

You said $4.25 to $4.45, correct?

Yes.

And does that -- what level of options expense -- is that in there?

Yes, it's been in both years.

It generally runs at about a penny to two pennies per year.

We don't have a lot of options.

Okay.

Thanks, guys.

Good luck.

There are no further questions at this time.

Mr. Murphy, I'll turn the conference back over to you for any additional remarks.

Thank you very much.

If you have any follow-up items please contact Jennifer and Dale.

Thank you very much.

This does conclude today's earnings conference.

We thank you for your participation and you may disconnect at this time.