Selective Insurance Group Inc (SIGIP) 0 Q0 法說會逐字稿

Good day, everyone.

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

At this time for opening remarks and introductions, I would like to turn the call over to Vice President Investor Relations, Ms.

Jennifer DiBerardino.

Thank you.

Good morning and welcome to Selective Insurance Group's second-quarter 2007 conference call.

This call is being simulcast on our website, and a replay will be available through August 24, 2007.

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

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

Operating income is net income excluding the after-tax impact of net realized investment gains and losses.

We believe that providing this non-GAAP measure makes it easier for investors to evaluate our insurance business.

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 annual report on Form 10-K filed with the U.S.

Securities and Exchange Commission for a detailed discussion of these risk and uncertainties.

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

Joining us today are the following members of the Selective senior management team; Greg Murphy, our Chief Executive Officer; Jim Ochiltree, Head of our Insurance Operation; and members of his senior leadership team, including Ed Pulkstenis, Chuck Musilli, John Marchioni, Mary Porter, and Jeff Kamrowski.

Also with us today are Ron Zaleski, Chief Actuary; and Kerry Guthrie, Chief Investment Officer.

At this time, I would like to introduce our Chief Financial Officer, Dale Thatcher, to review second-quarter results.

Thanks, Jen.

Second quarter represents the 14th consecutive quarter of a statutory combined ratio under 100%, 97.1% compared to 95.6% in the second quarter of 2006.

Catastrophe losses added 1.9 points to the statutory combined ratio in this quarter versus 1.3 points in 2006.

Catastrophe losses were driven by the early April nor'easter that impacted many states along the East Coast, but caused the most losses in our New Jersey and New York markets.

We also experienced non-catastrophe property losses that were about $5 million or 1.8 points higher than we expected, mainly due to losses greater than $100,000.

New commercial business was up a strong 13% to $83 million for the quarter, reflecting solid growth in all business segments.

Commercial lines statutory net premiums written were up 3%, reflecting renewal premiums below expectations due to the highly volatile and increasingly competitive pricing environment.

Commercial renewal pricing including exposure for the quarter was down 0.5% while pure price was down 3.8%.

Retention held steady at 78%.

Commercial lines profitability remained strong with a 95.9% statutory combined ratio, up half a point from second-quarter 2006.

These strong results were driven by an 8.8 point improvement in the workers' compensation statutory combined ratio and a 4.1 point improvement in commercial auto.

Results were offset by non-catastrophe property losses of 1.7 points, increased catastrophe losses of .6 points, and a 5.8 point increase in commercial liability results due to prior year adverse development.

During the second quarter, Loss and LAE reserves developed favorably by approximately $2.6 million on a statutory basis.

This development was driven by continued favorable trends in commercial auto severity.

Year-to-date favorable reserve development is approximately $6.6 million.

Commercial property is an overall profitable line of business which generated a combined ratio of 94% in the quarter.

It is typical for property business to have a higher degree of volatility than other lines.

Case in point, over the past 17 quarters our property combined ratios have ranged from 62% to 99%, with average quarter-to-quarter volatility of 11 points.

Results from the business owners or BOP line of business continued to be below expectations in the quarter.

At only 4% of commercial lines premium, this line is hampered by a lack of scale as indicated by the 11 point impact on the BOP statutory combined ratio from a single $1.5 million lightning loss.

In the quarter, BOP net premiums written grew a solid 6.2% as a result of a number of initiatives, including the full implementation of our new predictive modeling.

Through June 30th, 70% of renewals and 97% of new business were scored through the BOP model.

Our models categorize the best risks as five diamonds and the worst as one diamond.

Early indications for BOP are that loss ratios for five-diamond accounts are three times better than those of one-diamond accounts, and we're writing significantly less of the one-diamond business.

Year-to-date, we wrote only 3/10 of 1% of our new BOP business in the one-diamond category versus a pre-model average of 5%.

Over time as we score the entire book and add scale, we expect profitability to improve.

Workers' compensation results improved almost 9 points in the quarter to a statutory combined ratio of 102.2% from a year ago.

For this line, frequency declined 8.9% while severity increased 7.2%.

Net premiums written grew 7%, with direct new business up 18%.

77% of workers' compensation business is now written in the states we have identified as the best states.

The dramatic improvement in this line is a direct result of our multidisciplinary workers' compensation improvement strategy and predictive model, which were originally designed to reduce the combined ratio to a 103% or below by year-end 2007.

Effective July 1st, we successfully renewed our annual property and casualty excess of loss reinsurance treaties with little change in terms and conditions.

Overall ceded premium was up 7%, as a result of growth in exposure and fluctuation in reinsurance rates.

Based on growth in our business, selective purchased an additional $50 million of catastrophe limit effective June 15, 2007.

The total catastrophe reinsurance program is now $335 million in excess of our retention, which remains $40 million.

The current program covers a 1-in-175 year event on a short-term stochastic basis as modeled in RMS version 6.0.

The personal lines statutory combined ratio excluding flood was 112.7%, including 4.1 points of catastrophe losses, 2.5 points for adverse prior-year development, and 2.5 points for the departmental reorganization.

This is now complete and will result in $1.5 million in ongoing annual savings from this point forward.

Personal lines net premiums written were down 3% to $53.5 million for the quarter.

The decrease continued to be driven by New Jersey personal auto, down 17%, while the number of cars insured decreased to 72,800.

88% of our New Jersey automobile book has now been rated through MATRIX, providing more price precision than we could achieve before its implementation.

By the end of August, all of our New Jersey book will have been rated through MATRIX.

Outside New Jersey, personal lines net premiums written grew 10% in the quarter to $21.6 million where MATRIX is fully operational in those eight states, and 58% of our automobile book has been rated through the model.

New business, all rated through MATRIX, is up 87% in these states.

In our continuing efforts to improve our existing book of automobile business, we have implemented significant rate increases in Maryland and Pennsylvania, two states with regulatory restrictions on moving the renewal book into the new pricing methodology.

We are on target to expand into Rhode Island, Minnesota, and Iowa by year-end.

These initiatives will provide opportunities to grow and diversify our personal lines book geographically.

Diversified insurance services revenue grew 11% in the quarter and generated a 13.1% return on revenue.

Flood operations, a natural hedge to the insurance operations, generated $1.4 million in flood claim revenue in the quarter, mainly from the April nor'easter, and partially offsetting catastrophe losses.

Flood grew 30% in the quarter, bringing total flood premium service to $131 million.

Selective HR Solutions, our benefits and administration outsourcing company, ended the quarter with about 27,200 worksite lives, up 4% from June 2006.

After-tax investment income rose 9% to $31.8 million for the quarter, mainly due to increased fixed maturity income from a larger asset base, and higher dividend and other investment income.

The overall annualized after-tax portfolio yield was 3.5%, unchanged from June 2006.

Duration, including short-term assets, was four years.

Invested assets per dollar of stockholders equity was up 5.7% cent to $3.53 from year-end.

In our bond portfolio, rising interest rates during the second quarter led to a $40 million swing from an unrealized gain position to an $18 million unrealized loss position from March 31st.

This resulted in a $0.48 after-tax negative impact on book value per share, although when compared to a year ago, book value was up a strong 9% to $18.76.

We maintain a high-quality bond portfolio and have no sub prime mortgage exposure.

During the quarter, we completed our previously authorized share repurchase program.

2.3 million shares were repurchased at an average price of $26.23.

On July 24th, the board authorized a new share repurchase program for up to 4 million shares which expires on July 26, 2009.

Now I would like to turn the call over to Chuck Musilli, our Chief Field Operations and Marketing Officer.

Thanks, Dale.

Insurance is a relationship business, and we do relationships very, very well.

My job is to manage our field operations and agency relationships.

The field supports our superior growing agency plant with 98 experienced decision-makers we call agency management specialists or AMSs.

Rounding out our field personnel are 14 large account managers, 140 claims management specialists, 75 safety managers, and 14 field technology specialists.

Having a field force is a competitive advantage, and to convey the power of our field force I would like to share with you what an agent recently told me.

This agent said the best producers are impatient, and response time means everything.

He said that our field presence is what drives his agency to provide Selective with their best business opportunities.

We hear similar comments often and from many agents.

I spend about 40% of my time on the road with agents at producer councils, roadshows, president's club meetings and individual visits.

So far in 2007, we have held 40 sales meetings at individual agencies throughout our seven regions where we brought the experts from our Strategic Business Units, or SBUs, directly to agents and their customers to help write more targeted classes of business across our broad underwriting appetite.

These meetings have met with rave reviews from our agents.

They tell us we are the only carrier bringing senior management to ask for the business, and they say it results in a preferred position within their agency.

During these meetings, our SBU and field people meet face-to-face with agency personnel to discuss specific accounts and develop action plans on how best to pursue this business.

It is not unusual for us to leave a larger agency sales meeting with $1 million of new business opportunities.

This effort contributed to the strong growth in the quarter.

While on the road these past six months, our senior management team has increasingly heard from agents how tough conditions are getting.

They say carriers can't take any renewal for granted, and we aren't.

Our inside underwriting teams are proactively reaching out to agents well before renewal dates to discuss renewal strategy and get a sense of the competition.

Our commercial lines policy count retention is steady at 78%, although we are renewing for a lower but disciplined price.

Despite the current market dislocation, we are within $2 million of our expected new business target for the first half of the year.

Small-business, or policies of $25,000 in premium or less, represents 45% of our direct premiums written.

This segment generated direct new business of $43 million in the quarter, up 10% from a year ago, as competition remains reasonable.

Profitability is also higher with five-year loss ratios about 3 points better in small-business versus policies over $25,000.

Our efforts to grow this profitable business included expanding our fully automated One & Done small-business system, which now comprises 440 classes of business.

This means that more small business can be seamlessly processed at a 23% marginal expense ratio.

Through this automation, we free up our AMSs to focus on the next level of business.

Policies with $25,000 to $250,000 in premium, which we refer to as middle market business, are the main focus of our AMSs.

The middle market represents 48% of direct premiums written and represented direct new business in the quarter of $34 million, up 17% from second quarter 2006.

Policies above 50,000 are experiencing the most competition, although pricing pressure has extended further down the spectrum with each passing month.

For example, we recently quoted a plumbing contractor controlled by one of our agents.

Expiring premium was $52,000 and our initial quote was $46,000, but another carrier wrote the account for $26,000.

Competition can also manifest itself beyond price.

We declined a $4 million frame property exposure within one mile of the coast but one of our regional competitors offered a quote.

Our large account business or policies over $250,000 is handled exclusively by our Selective Risk Managers unit and represents about 7% of direct premium written.

New business production of $6 million in the quarter met expectations despite the extreme competition in this end of the market.

Due in part to our high visibility throughout the first half of the year we have had opportunities to write agency controlled accounts at appropriate pricing levels.

We are however still losing renewals to pricing levels below technical premium and we are comfortable walking away from business when the pricing goes below the technical premium level as identified by the pricing actuaries who consult with the SRM unit everyday.

Regardless of the state of the market our agency relationships and fundamental strategy are strong and will drive future profitable results.

I'll now introduce Greg Murphy.

Thanks, Chuck, and good morning.

In a quarter where commercial lines competition became increasingly volatile and at times undisciplined we delivered solid new business production, continued commercial lines profitability and strong growth in after-tax investment income.

The pricing deterioration in the industry remains a significant challenge every commercial lines pricing survey being quoted, Market Scout, CIAB and CLIPS demonstrates the decline in pricing; only the magnitude is different.

Agents are trying to protect their books of business by marketing their renewals in order to retain business.

Most pressure continues to be at the high end of the market or policies over $100,000 which represents approximately 20% of our commercial lines business.

Reflecting the impact of renewal price decreases commercial lines net premiums written (representing 87% of our business) is up just 1.5% for the first half of 2007.

Due to the volatile pricing environment we no longer feel that we can predict premium growth with sufficient accuracy and thus withdrew our net premium written guidance for 2007.

As indicated in our July 5th prerelease, the tougher market conditions industry wide will continue to negatively impact loss and expense ratios for the balance of the year.

Consequently combined ratio targets are a GAAP ratio of 99% and a statutory ratio of 97.5%.

Our 2007 earnings guidance is a range of $2.00 to $2.15 based on the following assumptions.

Catastrophe losses of $16 million after-tax or $0.28 per share; after-tax investment income growth of 10%; Diversified Insurance Services revenue growth of 12% and return on revenue of 10%; and weighted average diluted shares of 57 million which reflects the completion of our 10 million share reauthorization in May.

As Chuck told you, the management team spent a great deal of time on the road with agents highlighting opportunities in their territories for new business in targeted segments.

These efforts are reflected in our strong commercial lines new business growth of 13% for the quarter.

Going forward, as we plan more sales meeting for 2007 and 2008 we have additional initiatives under way to drive profitable growth.

Our newly formed Strategic Operations Group is partnering with the regions and strategic business units to mine new business opportunities through predictive modeling and other Knowledge Management tools now available to us.

These efforts fall into two major categories: delivering prequalified new business leads to agents who can convert them into profitable new business; and two, identifying and pre scoring large volumes of new accounts such as book rolls and associations to write large books of business where possible.

We added 17 new AMSs since year end 2006 bringing our total to 98.

Each AMS, once fully operational in their territory, writes about $2.3 million in annual new business.

With more AMSs we have created the infrastructure to support about 1000 agencies.

To date we've appointed 91 agents including eight from our Massachusetts expansion towards our 2007 goal of 100 agency appointments.

This brings our total agency count to 845 or 1700 storefronts.

We continue to successfully grow our small-business.

In a quarter we achieved a record $251,000 in new premium written per business day through our One & Done system.

In support of our excellent agency relationships to date we have assisted agents in hiring 19 new producers.

Our 2007 goal is to help agents higher and train 50 producers.

Personal lines growth planned is centered on a knowledge-based MATRIX pricing model for automobile.

The question in everyone's mind is "given the competitive market you have described why the new business growth?"

We are growing because we're more confident today than ever that the new business we're putting on the books will be more profitable overall than in past cycles; in some cases it will be even more profitable than our existing inventory.

Through our Knowledge Management and predictive modeling initiative millions of data points have been transformed into valuable information we can use to focus on quality business.

The data mining we've achieved through Knowledge Management allows us to analyze our business so we can target the historically most profitable segments.

We manage our business along 80 segments, ranked by profitability we're growing the top half of the most profitable segments by 18%.

These 40 segments represent 44% of our premium volume and generate a 2.5-year direct accident year statutory combined ratio of 84.

We believe that with our modeling capabilities we are ahead of the majority of the competition and that the success we've had with our worker's compensation book of business reflects this.

Through six months the worker's compensation accounts under 50,000, 94% of new business was in the three or better diamond categories.

We've also nonrenewed 27% of the low performing one diamond business.

Our data indicates the loss experience on five diamond accounts is three times better than on one diamond account.

By the end of the year we'll have predictive models in place for all commercial lines of business.

The key to our long-term success is the integration of predictive models with our high touch way of doing business, as models alone will not produce long-lasting results.

We have the right combination of powerful tools in the hands of our skilled field personnel.

Selective's high touch business model coupled with easy-to-use technology and sophisticated predictive models create a strong foundation to grow profitably over the long-term.

Now I'll turn the call back to the operator for your questions.

(OPERATOR INSTRUCTIONS).

David Lewis, Raymond James.

A couple questions.

First, can you talk about some of the commercial pricing trends on the new business?

A lot of companies have indicated in this quarter that clearly renewals are holding pretty steady, but obviously the ability to bring on new business is very competitive and some of the rates are down anywhere from 10 to 20%.

If you can give us an idea of kind of what you're saying out there and what the brokers are telling you?

Two, can give us a little more details on the non cat property losses in the quarter and whether that's just normal quarterly volatility?

And then three, I just want to clarify that there haven't been any material cat losses in the quarter to date.

Thank you.

I'm sorry; the last question was that there haven't been any material what?

Catastrophe losses in the quarter.

Let me kind of run through the list.

In terms of how we -- let's just go through the pricing environment.

Obviously I think we've got unbelievable tools to measure our price, our inventory, our existing inventory.

And I have to tell you, for you guys, you have to really get a handle on the competition in terms of what are they telling you in terms of renewal price increases.

Are they quoting pure price or are they quoting renewal prices including exposure based changes?

And you know for us the trend on that, on a renewal price increase, which when we say renewal price that means that includes exposure.

And that was for the six months basically flat and then for the quarter it was down about half a point.

When we talk about pure price for the six months it was down about 3.5% and for the quarter it was down 3.8%.

So you can see there is some slight deterioration in the second quarter relative to the six month band.

And then when we start to look at what -- the more difficult part for us to start to assess your question about new business particularly is that we are looking at that business relative to how it scores inside the model and then we look at that business and the performance of how that business is priced relative to whether it's inside the band, above the band, below the band.

At this point in time we're pretty comfortable with the new business that we're writing relative to the bands, but it is very difficult for me to then correlate that to our existing inventory because we're writing a totally different new style of business because, as we mentioned to you, we're writing absolutely -- in comp we're writing 3/10 of 1% of a one diamond account versus historically that would have represented approximately 5% of our business.

So it's very difficult to look at that business relative to prior benchmarks and relative to the industry benchmarks because I have to tell you these premium numbers are all over the place.

So that's the best that I can do for you.

We're comfortable, we monitor that, we monitor the style of business that we write relative to the bands that we're writing it in.

Then the color on the nonproperty -- on the non cat property losses, I don't know, Ed, if you want to add something to that, to the quarter?

Sure.

On the property losses -- this is Ed Pulkstenis.

Again, there is variability on those losses.

We do have excellent information and we look at a very detailed level at what's causing those losses.

There are a couple of things that we do look at that occurred in the quarter that we haven't seen in past quarters, but those are really just one point of observation at this point.

We really don't see any trends, we don't see anything that's really been repeated from past quarters or going into last year.

And so -- and we continue to watch it going forward and to the degree that a trend materializes we would obviously take action on that.

Thanks, Ed.

And then Dale, with respect to your third question.

As far as material cat losses, obviously the weather hasn't been that extraordinary so far this quarter, so don't have anything to report there.

Thank you very much.

Mike Grasher, Piper Jaffray.

A few questions here.

First of all, with regards going back to the July preannouncement, we went up by a nickel in terms of guidance and then down by $0.15 I think all within two months.

And I guess I'd just like to get a better understanding of what really changed in those two months.

And I know you've cited the market and competition and -- could you give us a little bit more clarity?

It just seems quite a change relative to the short time frame.

Was it because you were seeing highly increased competition in just the large account size and that threw it off?

But it seems like everything else is doing well, so I just wanted to get a little bit more flavor on that.

I would say that the reason for that obviously, the property volatility in the quarter, obviously that manifests itself through the quarter.

That was a relatively fast-moving change.

But I think what really kind of has backed us off the market has been the lack of commercial lines pricing power that we've seen universally.

Some of the things that we've seen from some of our competitors have just totally backed us off our premium expectations for the year and we just want to be mindful that our folks in the field have been given the right message which is we want to write the right account at the right price and that we just don't want to have a premium target out there.

And I will tell you that backing that premium down has clearly put some pressure on our underwriting expense ratios and then the general deterioration in the market has put some pressure on our combined ratios and then obviously the property losses.

So we sat there and we recalibrated the year, we stepped back and we looked at where we thought we could reasonably be and we felt it was prudent to change the guidance at that time based on the information we had available at that point in time.

Okay, fair enough.

And then I wanted to ask a question regarding the DIS business.

I understand it's a scale business, but it seems like margins tend to jump around more than I expect on a quarter-to-quarter basis.

Is that simply a function of the mix of business during the quarter or is there something else going on?

When you say there's a lot of volatility, let's just go through it.

Obviously for the six months we've got $60 million of revenue, the return on revenue on that -- that's how I measure the volatility in that business.

Return on revenue was like 11.6 and then -- for the six months and then obviously the quarter was 13 which tells you that, all right, fine, the first quarter was a little lower on a relative basis than the second quarter, but our flood business clearly tracks a big part of the revenue in our flood operation.

In addition to the underwriting aspect of the volatility comes in on the claims side and when we have a lot of flooding in the claims side we generate a lot of claim revenue.

That has a tendency to make our flood operation a little more lumpy and a lot of times the flooding happens maybe to some extent in the second and third quarters, particularly if it's associated with a major wind event, but you do get some lumpiness on the claim revenue aspect of that.

The other thing I might add, Mike, is it is a bit of a mix issue, playing off of what Greg indicated is that embedded within that operation the two major components are the flood operation and the HR admin operation.

The flood operation tends to have a return on revenue of 15 to 18% whereas the human resources admin has a return on revenue of about 6%.

So as the relativities between those to change, like this quarter where we had higher flood revenue because of the flooding, you end up having a little bit more volatility in the bottom-line return on revenue number.

Okay, that's helpful.

Our goal is to continue to grow that flood aspect of our business.

As Dale mentioned, it's a great hedge on the insurance operations and it's something that kind of puts a little more stabilization in the weather activity.

Understood.

And then, Dale, you made reference to the investment portfolio and not holding any sub prime.

I wonder if we could take that a step further.

I'm wondering about the vintage within the exposures or the mortgage-backed security exposures.

I mean to the extent that you have '05, '06 vintage, have you seen anything or what percent might you have of those vintages?

This is Kerry Guthrie.

I don't have the breakdown on the vintage of 2005 and 2006, but the vast majority of the portfolio is AAA rated mortgage-backed.

Some of the noise you're hearing around the 2005 and 2006 vintage years, that's really in some of the underwriting and the sub prime and some of the Alt-A was kind of very, very lose.

We avoided the sub prime just because we felt that the pricing on those particular mortgages did not reflect the risk in those.

We do own some Alt-A, but we look at each individual issuance to see what kind of underwriting and where those loans are originated and there's a big difference between different types of Alt-A classes.

So we're very, very comfortable.

We've been in mortgages for almost 15 years now.

We really have taken the very high-quality road there just because we didn't feel that the risk on some of the lesser quality and lesser rated tranches were properly priced.

That's interesting.

Are you actually diving down to the point where you're examining LTV's and FICOs or not that deep?

No, definitely looking at FICOs and LTV on every deal that we look at.

Okay, fair enough.

Thanks.

Ron Bodman, Capital Returns.

A question about the stock buyback authorization that I guess was sort of reloaded a couple days ago.

And not so much in sort of the context of your guidance, but if I heard you right the guidance that you put forward if I heard you right assumed for presentation purposes I believe no additional buybacks in the back half of the year.

But I'm really sort of more --

That's correct.

Okay.

Is that more for presentation purposes and less a reflection of intent?

And candidly, given where your stock is relative to book and the difficulty to grow your writings and obviously leverage, what is your intent to be active relative to pace?

Albeit you've indicated two-year authorization.

Yes, and I would say we will opportunistically be in the marketplace based on what we see as opportunities in the marketplace.

And you're right, that was -- what we put out there the weighted average shares included no additional repurchase.

That was just to kind of develop a clear baseline.

And we will assess the market and I think that our capital management strategies over the past several years kind of speak for themselves.

How would you characterize the market opportunity now?

I would say that it's pretty good.

I'll circle back in the queue.

Thanks a lot and best of luck.

Charlie Gates, Credit Suisse.

I guess my first question -- one of you opined that you thought the market was more competitive for cases where the premiums exceed $100,000.

Could you elaborate on that?

I can tell you that in our SRM unit for instance in the first quarter even we saw where we lost some business on the larger accounts and I think that our agents have been a lot more aggressive and clearly in the basis of their customers making sure that they're out there, they're getting a last look at that account.

But I would say overall it's -- the pressure is clearly there.

That's where you see the price compression and that's where you see the most competition.

As carriers want to try to fill their premium quotas for the year they're not going after $3000 and $5000 accounts, they're going after the larger end of the market and that's where you see the most competition and why.

And that's where you see the most rational aspect of what happens.

Travelers said yesterday that their renewal price change for accounts in the market was down 3% and they're saying that includes exposure.

That's correct.

I'm looking at that exhibit right now myself.

Yes.

What is your thought on that?

I would tell you that that includes exposure.

So it's hard to disaggregate -- I don't know what their commercial lines accounts are and I couldn't even begin to comment on what theirs is.

I can only tell you where ours is and our renewal price increase for the quarter was 0.5% down.

So comparable to how they quote it because they're including exposure.

So you have to look at ours with exposure.

Now you've got to look at our book of business, as Chuck mentioned to you before, 40% of our business is small and less than $25,000 category.

So I don't have that disaggregated into the three different segments of our business, but I would assume that if you looked at ours you would see some gradation where the smaller end of the business is other a lot less price competition than the higher end.

Chuck, you might have a comment.

I think you might have some pricing on SRM to kind of give some accounts over 250.

The accounts over 250, the way that we handle them within our SRM unit, everything is looked at from an actuarial standpoint.

So we price everything actuarially according to the actual experience of that particular account.

The point I'd make on the pricing reporting on accounts over 100, I mean what you report on is what you kept.

So what you lost to a rational competition is not in those numbers.

That would be true for the Travelers.

Right, but your worst-case scenario is out of the picture there.

And because we've got fewer of those accounts I don't I that you can make a valid comparison with a Travelers.

I think this is a good question.

You said on this plumber piece of business that you guys had, that some guy wrote it for 50% of what you were willing to charge, who was that?

We are not telling.

I think more important, Charlie, is the guy that wrote that property on the water.

That's the bigger disaster.

Yes, it is.

And I have to tell you, at some point, Charlie, some of this irrational pricing is going to manifest itself into the loss ratio assumptions that actuaries are setting up within companies.

The only thing I can tell you as our actuaries are clearly monitoring our price changes frequency severity changes overall and they're constantly tuning their numbers.

We mentioned to you overall we had commercial lines premium growth of about 1.5% for the six months.

Our reserve ratio is a strong 14.5% for the first six months of the year.

So we continue to be disciplined in our reserving and our actuarial assumptions.

Here's my final question.

If you guys were to look back in history, what period of time from a competitive standpoint would be roughly similar to what you've got today?

That's really hard.

What would you -- if you had to guess.

It's hard to say.

It is hard to say.

Part of it is you're not dealing with all dumb competitors.

I mean as they say, would you rather have a smart competitor or a dumb competitor?

I'd rather have a smart competitor because they know where their pricing points need to be.

I think you have a whole host of different management teams out there, although you've some companies doing some pretty dumb things.

I think the pricing tools out there make this market cycle a lot different than previous market cycles.

And I'll tell you there's going to be a huge dichotomy between the haves and the have-nots because the people that don't have the underwriting sophistication and don't know what they're writing that think they're picking up a selective great one diamond account that they sit there and price 30 to 40 under that, they've got a massive problem on their hands.

And to the extent that that's happening within the marketplace, I mean the good companies out there know they're good renewals and they're trying to protect them as best they can.

We're not fighting to keep the one diamond account, just so you know that.

And so as that business moves off and finds a home somewhere else those losses most likely won't start to manifest themselves until the accident year clicks either 15 or 18 months which means you're talking sometime in March '80 or June/July of '08 before those numbers start to move up or they start to move off their actuarial picks for the year.

It's a different style market and it's hard to compare it based on the underwriting tools and things that we see relative to previous cycles.

Thank you.

Daniel Baransky, Fox Pitt Kelton.

Good morning.

I'm curious; did I hear correctly that you had some level of adverse development in the quarter?

Can you repeat the number?

No, that was favorable development of like 3 million.

Okay.

Was there an adverse in one particular line then or something that I might have heard?

Right, that's what you heard because we did have some limited adverse development in the general liability line of business.

But on an overall basis you had favorable development of $2.5 million.

And can you quantify how much that was in the GL line and sort of what was behind that?

Yes, this is Ron Zaleski.

GL has got $3 million adverse and personal lines of about 1.5 million adverse, and commercial auto is about $7 million favorable.

Just normal volatility, right.

Right.

Normal volatility in the line.

Okay.

I guess that answers that.

The New Jersey auto combined ratio during the quarter, or loss ratio, whichever you might have, and the percent of the personal book that is now on a premium basis?

The percentage of the premium of the book is now 5% of our overall premium for the first six months and then the combined ratio of New Jersey auto for the quarter (multiple speakers) 106.6.

Okay.

And the other question I have is if we think of the competition and the competitive environment, are you seeing more competitive pressures from the large national players sort of similar to a Travelers trying to increase their small commercial presence, is it other regionals?

I don't know if you have any color you can provide there.

I know you can't and won't name names, but do you have any sense of where the competition --?

It depends on the geo location and who we're really running up against more than another territory.

So it's really difficult to answer that question.

In some cases it is more of the nationals, in some cases it's the small mutuals or regionals whether you're in the Midwest or --.

You're fighting a multi-front war depending on where you are.

Okay.

And on these large property losses, they were 5 million; I would assume that that single BOP loss you highlighted is part of that number?

I'm sorry; it's breaking up a little bit.

It was hard for me to hear what your question was about on the large property loss.

Yes, the 5 million of larger losses, I assume that that BOP loss was one of those?

Yes.

And what's the characteristic of these larger losses?

Are they fires, can you give us any sense of just sort of what you're --?

There was some flood -- there was a small amount of commercial lines flooding in there, but go-ahead, Ed.

A little bit of it was flood.

We did see for the first time this quarter about $2 million of fire losses that resulted from electrical causes.

Those are the kinds of things that we look at.

Again, that was just one point of information for the quarter, not something that we've seen over past quarters.

So we keep an eye on those kinds of things to see if there was a trend.

One thing also to remember just on the BOP line of business, when you look at those losses that is business that we write on an account basis.

We don't typically write just monoline, the BOP line of business.

So you have to look at the totality of the profitability of those customer relationships.

Overall when you look at all of the lines that come along with that you have about $100 million that we write every year and that generates combined ratios on a direct basis that are very profitable in the low 90s on an accident year direct basis.

So that's not business that we want to disrupt, we want to grow those relationships.

And as we do that I think you'll see better stability in some of these small subsets that we kind of look at in isolation.

Okay.

And can you remind me again what your individual retention is on the property side?

I don't think we've quoted that, but that's something that -- I don't know, do you guys provide that?

(multiple speakers).

Oh, I'm sorry.

We thought you were asking something else.

2 million, sorry.

Okay, great.

Thanks.

And the last question I had is -- I guess is really a question for Greg.

The M&A front, I mean given what we've seen with Ohio Casualty and Alpha and some of the other regional players and where your stock price is today, how do you view yourself in that environment?

Is there any sense that you could grow graphically through that through your own acquisitions and are you getting approached more frequently from bankers?

We obviously want to continue to keep the selective model and continue to grow.

We feel that we've got a great model and franchise that we want to expand outside of just our core 20 states, that's why we're entering Massachusetts, that's why we have some other states that we'll be adding.

We feel that we're way under penetrated in the states that we're in.

So our ability to grow -- and kind of between Chuck and myself went through that -- our business model and then we've got the capacity to handle a lot more agents now and we've gotten a lot more aggressive.

We have our goal to appoint 100 agents this year; we'll have a goal to increase our agency count as we move forward.

But obviously sitting here at the stock price that we're at, I mean, our best defense long-term is a better stock price and that's what this management team is focused around, generating the right underwriting results, the right profitability.

If we felt if there were a property out there that we could sit there and acquire and make a reasonable acquisition of, that could increase our scale both from a premium standpoint and an information standpoint, that could make sense for us.

So we're not ruling anything out.

We also have a Board that has to -- has their fiduciary responsibility as well.

So we are aggressively implementing our strategy throughout the states that we operate in.

Okay.

And just one follow-on on that vein of thought.

Is there anything that philosophically precludes you from growing the personal lines book of business through an acquisition of some sort?

Or just do you want to keep the mix where it is today -- or just how you feel about that?

I think the mix got a little tilted too heavy to the commercial lines.

I think having some personal lines business actually would provide a better long-term result and a little more stability in our results.

And we're not managing to any specific number, but we'd sit there and look at a nice 80-20 split would be good.

But we're really setting up this organization to grow the commercial lines operations between the modeling and the Knowledge Management in the agency and everything else that we're doing on the small business side.

So that provides a lot of bandwidth as we go forward.

Great, that's all I have.

Thanks for your feedback.

Ron Bodman.

My old mind remembered what I wanted to ask.

Thanks for giving me another chance.

I was wondering if the rating agencies, and I guess particularly Best, but maybe it's someone else, but it's basically your A+ Best rating acts as a governor over how fast you could deploy the current stock buyback authorization.

I'll let Dale jump into that, but we have to be mindful of all the different tools in terms of capital that are out there.

How we manage our cost of capital, how we maximize our return on revenue and then we have to look at rating agency issues and is that a consideration made in that overall process?

Absolutely it is.

And we'd love to run the Company at higher leverage ratios, but rating agencies today, both whether you're talking about A.M.

Best or S&P or looking at 25 debt to capital, but now you've got this new hybrid capability which allows you to go higher than 25 at the capital because you're getting equity credit.

So there are all a host of opportunities that factor in there and we manage every one of those to the best of our ability whether it be stock repurchase, debt and the writing of our business.

So we know we need to be mindful too of other opportunities and how turbulent the market may be for what duration of time.

That's interesting that no one has asked that question yet in terms of how long does this market continue like this and then how long will it continue to impact results.

So we are kind of looking at a market that actually gets more intense with the second half of the year and we're already starting to see signs of that.

And then as we move -- don't really expect much change on that as we move through into 2008.

So you've kind of got to look at your results and your capital requirements and everything else in light of your expectations that those actions in 2008 will pretty much foreshadow your results in 2009.

So you kind of look out at the horizon you have to weigh all of those things in as you start to manage your capital position.

Of course, but I mean, I consider you and I expect that you guys are going to be more disciplined than the average competitor and in some respects you'll be requiring less capital because you're going to be putting the brakes on organic growth and thus in effect have net less capital required to support the writings and the underwriting risk.

That's just one factor of a whole host of other factors that go into the equation that you have to look at in terms of capital requirements, where you are, how the goalpost gets moved by the rating agencies during that time period.

There's just a lot of things out there in the marketplace today that are unknown.

And Dale, what would you say to that?

One thing I just wanted to hit there was that our goal and the way we've set this company and the talents and the skill set that we've brought to bear allows us, we believe, to continue to grow the business organically and profitably at the same time.

So yes, we'll be careful about how we grow as always, but we believe that we've got tools in this marketplace that will allow us to continue to grow.

Having said that, on your original point recording rating agencies, generally speaking rating agencies are always jittery when you do anything quickly.

So the art to that is making sure that they understand every step of the way the movements that you're going to be making in terms of managing your capital structure.

And we have very good relationships with all of the rating agencies that we deal with to help us manage our way through our different capital moves.

Okay.

Thanks a lot and best of luck.

Hope it continues.

(OPERATOR INSTRUCTIONS).

Charlie Gates.

Where you said you were entering Massachusetts you don't intend to write personal auto up there do you?

No, it's commercial lines only and I'm sorry that that probably should have been added in there.

But yes, that is commercial lines only.

Okay.

I guess the only other question -- one of you said in answer to the last individual's question that people should the asking more about the duration of this thing.

What is your speculation or your anticipation further for the balance of this year from a competitive standpoint, sir?

As I said before, we've seen a steepening of that competition starting in the second half of the year and we expect that level of competition most likely to continue in through 2008.

Thank you.

(OPERATOR INSTRUCTIONS).

At this time I am showing no further questions.

Do you have any closing remarks?

No, operator, that's -- thank you all very much.

If you have any follow-up Dale and Jennifer are available.

Thank you very much.

Thank you for joining today's conference.

You may now disconnect.