Selective Insurance Group Inc (SIGIP) 2007 Q3 法說會逐字稿

Good day, everyone.

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 Vice President, Investor Relations, Miss Jennifer DiBerardino.

Thank you, Sylvia.

Good morning, and welcome to Selective Insurance Group's third quarter 2007 conference call.

This call is being simulcast on our website and the replay will be available through November 26, 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 or 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 risks 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 Selective's senior management team.

Greg Murphy, CEO; Jim Ochiltree, head of our Insurance Operations and members of his senior leadership team, which include Ed Pulkstenis, Chuck Musilli, Mary Porter, Jeff Kamrowski and Daniel Bravo.

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

At this time, I would like to introduce our CFO, Dale Thatcher, to review third quarter results.

Thanks, Jennifer.

Third quarter results were very strong with a statutory combined ratio of 96.2% continuing the Company's profitability trend with a 15th consecutive quarter of a statutory combined ratio under 100%.

Catastrophe losses in the quarter were lighter than anticipated at $1.2 million after tax, or one-half point on the statutory combined ratio.

Total net premiums written were up 2% to $410 million versus a year ago, including a 2.3% increase in commercial lines and a 0.3% increase in personal lines.

Despite the highly competitive market place, we're having great success writing new commercial business which was up a robust 16% to $82 million for the quarter.

Commercial renewal pricing including exposure for the quarter was flat while pure price was down 4.3%, in line with what our peers are reporting.

The Tillinghast CLIPS survey which, in our opinion, uses the best methodology to assess the pricing environment reported that pricing was down nearly 5% in the second quarter.

Additionally, our commercial lines retention continues to hold steady at 78%.

Commercial lines profitability was strong with a 95.4% statutory combined ratio, relatively flat from third quarter 2006.

These solid results were driven by a 5.6-point improvement in the worker's compensation statutory combined ratio to 99.5% and a 2.7-point improvement in commercial auto to 86.3%.

This was offset by a 4-point increase in our still profitable property combined ratio mainly due to lower pricing, as well as a 4.7-point increase in general liability due to prior year adverse development.

During the quarter, loss in LAE reserves developed favorably by approximately $4.5 million on a statutory basis.

This development was driven by continued favorable trends in commercial auto severity and worker's compensation frequency.

Year-to-date, favorable reserve development is approximately $11 million.

Almost two years ago, we stated that we expected to reduce our accident year worker's compensation net statutory combined ratio by 7 points by year end 2007.

We exceeded our goal ahead of schedule with a 101.6% year-to-date in September, down 8.7 points from the starting point of 110.3% at year end 2005.

This success reflects a multidisciplinary improvement strategy that included predictive modeling, premium audit, claims initiatives and growing business in the most profitable states.

Statutory net premiums written in this line grew 4% with direct new business up 33% for the quarter.

76% of worker's compensation business is now written in our targeted "best states." Results from the Business Owner's Policy or BOP line of business were mixed for the quarter.

BOP statutory net premiums written grew a robust 11% as a result of a number of initiatives.

Profitability, however, continued to come in below expectations and similar to our worker's compensation line, we're in the process of implementing a multi-front profitability improvement plan that includes the full implementation of predictive modeling in the third quarter.

We also identified the need for additional pricing flexibility and will introduce new pricing tiers in 2008.

In order to gain scale, we're broadening the number of products in our One & Done small business system, as well as working with agents to educate them on our breadth of appetite in small business.

As we continue to gain scale in BOP, refine the pricing structure, as well as fully realize the benefits of predictive modeling, we expect this line to return to profitability.

Importantly, we remain sensitive to the fact that while the BOP line in isolation is unprofitable, it brings with it overall account business that is highly profitable.

Personal lines results remain somewhat challenged as we reported a statutory combined ratio in the quarter of 106.2%, excluding flood.

The good news is that for the first quarter in about a year, personal lines net premiums written grew, increasing 0.3% to $53.8 million for the quarter.

The growth was driven by an 8.3% increase in homeowner's, partially offset by a 4.2% decrease in personal auto.

New Jersey personal auto net premiums written were down 14%, and the number of cars insured decreased to 71,600.

Of the total cars lost in the quarter, 44% were due to price increases ranging from 10% to 20%, largely representing the most unprofitable business.

In August, we completed the rerating of the New Jersey automobile book through MATRIX providing more pricing precision than we could achieve before its implementation.

Outside New Jersey, where MATRIX is fully operational in our eight other personal line states, net premiums written grew 13% in the quarter to $22.2 million.

In these states, where 37% of our automobile renewal book and 100% of our new automobile book has been rated through the model, new business is up 166%.

We'll expand personal lines into Rhode Island, Minnesota and Iowa in November with automobile first, followed in January by our new MATRIX for homeowners.

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

We expect to return to profitability in 2009.

Diversified Insurance Services revenue was flat in the quarter, but generated a 10.5% return on revenue driven by the flood operations.

Flood premium grew 16% in the quarter from a year ago bringing total flood premium service to $138 million.

We're monitoring the current legislation being discussed in Washington to determine any potential impact on our flood operations.

Selective HR Solutions, our benefits and administration outsourcing company, ended the quarter with approximately 25,900 work site lives, down 2% from September 2006 due to a weakening Florida economy and the consolidation of several large clients into operations with their own human resource departments.

After tax investment income rose 11% to $33.4 million for the quarter, mainly due to a 9% increase in fixed maturity income as the bond portfolio grew 2% to $2.9 billion and higher reinvestment yields.

Alternative investment income increased 52% and short-term increased 25% quarter-over-quarter.

The overall annualized after tax portfolio yield was 3.6%, up 0.2% from September of 2006.

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

Invested assets per dollar of stockholder's equity was up 4.2% to $3.48 from year end.

In our bond portfolio, the fall in interest rates during the third quarter led to a swing from an unrealized loss position to an unrealized gain of $12.2 million at September 30.

This resulted in a $0.37 after tax positive impact on book value per share which was up 7% to $19.64 from September 2006.

Our book value represents very little in the way of goodwill and no discounting of loss reserves.

Book value has grown at a compounded rate of 10.2% over the past five years and is a solid representation of the value we continue to generate for shareholders.

We maintain a high quality bond portfolio and have no direct subprime mortgage exposure.

Of the $406 million residential mortgage-backed securities we hold in our portfolio, $215 million are agency securities.

Of the $191 million of non-agency mortgages, 61% are prime and 39% are Alt-A with AAA ratings.

Since the August subprime contagion started, we have not experienced any downgrades on any of this paper.

We continue to actively manage our excess capital.

During the quarter, we repurchased 480,700 shares at an average price of $20.68 under the current 4 million share repurchase program.

Last night, we announced that we're redeeming one half of our senior convertible notes due in 2032, $18 million.

We plan to net share settle any voluntary conversions that are presented before the November 30 redemption date.

This means we'll pay cash for the principal amount plus accrued interest and the remaining value in shares.

At our current stock price, net share settlement will effectively result in an approximately 800,000 share reduction in diluted weighted average shares, the full impact of which will not be realized until 2008.

In addition, we're net share settling a $10 million conversion which will impact our diluted weighted average share calculation by a net reduction of 478,000 shares, but will not have a material impact on diluted earnings per share in 2007.

By year end, we expect the diluted outstanding shares to be approximately 54 million.

Additionally, the Board approved an 8% quarterly dividend increase to $0.13 per share, payable December 3, 2007 to shareholders of record November 15.

We remain primarily focused on our organic growth strategy.

We're taking note of opportunities that marketplace competition may be creating and will not preclude making an opportunistic acquisition to continue our strong track record of generating shareholder value.

Now, I'll turn the call over to Greg.

Thanks, Dale, and good morning.

We delivered strong results in the third quarter despite the modestly weaker commercial lines pricing conditions.

As renewal price reductions outpaced loss cost and other underwriting improvements, there will be industrywide pressure on statutory combined ratios in 2008.

Our underwriting team will continue to respond by deploying established cycle management tools in the Selective arsenal to fight and keep renewal business and add new business in a disciplined manner.

Due to our unique business model and strong relationships with our 860 agents, we experienced outstanding year-to-date new commercial lines business growth of 11% to $241 million.

Pricing on new business is down about 7% year-to-date, which compares with the 15% to 20% declines being cited by other carriers.

By market sector, new business growth year-to-date versus 2006 breaks down as follows.

One-and-Done automated small business, $46 million, up 43%.

Middle market or AMS generated business, $167 million, up 5%.

Selected Risk Managers or SRM, our large account unit, $28 million, up 6%.

Our small business increase reflects the success we're experiencing from the broadening of our product through our One & Done system and the implementation of our BOP predictive model.

Through One & Done year-to-date, we increased production 43% from a year ago averaging $243,000 premiums written per business day, with a record $267,000 in the third quarter.

By increasing the amount of business written through this automated process, we expect our agency management specialists, or AMSs, to have more time to focus on larger accounts and increase their productivity.

The strong growth recorded in the middle market is largely attributed to our field structure and our excellent agency relationships.

We currently have 100 AMSs who have historically averaged $2.3 million in new business per year.

We have been hosting sales meetings with agents across our footprint where members of our strategic business units and senior management team travel to our agents to highlight business opportunities in their territories, targeted at profitable business segments.

Accounts over $100,000 are still under the most pressure in the market place.

When we're able to find accounts that meet our standard for underwriting and pricing, we have the ability to write those accounts because of the services we offer that other carriers may not such as safety management and superior claims services.

Retention remains very strong at 91%.

Of the 22 risks we've identified as being at-risk this year, we retained 19 of them.

Overall pricing on SRM business year-to-date is down only 4.8% compared to the low to mid teen price decreases quoted in various commercial lines pricing surveys.

Commercial lines predictive modeling capabilities in the industry are sparse but growing.

Even those carriers that may be contemplating modeling have a long road ahead of them before they'll be able to launch such models.

We believe that our modeling capabilities are ahead of the majority of the competition.

Worker's compensation and BOP models are fully implemented.

Of the $241 million in new commercial lines business written year-to-date, 33% was scored through models.

We won't grow just to grow.

We're utilizing superior underwriting tools that put quality business on the books including performance monitoring through segmentation reports, price monitoring by line of business and region, as well as decision support for new and renewal business through predictive modeling.

On an overall basis, the top 60 performing of our 80 business segments have an 11-quarter direct statutory combined ratio of 87%, and net premiums written growth of 4%.

In addition, by April 2008, all of our commercial lines predictive models will be fully operational.

Our long-term success is predicated not only on the use of predictive modeling, superior technology and an unmatched field model, but also hinges on a highly qualified and focused management team, as well as a strong balance sheet.

Selective's management team has experienced a soft cycle or two throughout their careers.

This dedicated team of insurance professionals has the knowledge and superior agency relationships to successfully lead Selective into the future.

Financial strength, as reflected by our 46-year running A+ A.M.

Best rating, is based on a conservative investment portfolio with solid returns, measured utilization of reinsurance to protect the Company's assets, sound and consistent reserving practices and proactive capital management.

Our focus is on rewarding shareholders with solid returns as evidenced by our five-year annual compounded annual growth rate in book value, including dividends of 10.2%.

Based on the strong results for the quarter, we're tightening and adjusting our 2007 diluted earnings per share guidance upward by $0.05 to a range of $2.10 to $2.20.

The following are the key assumptions for the 2007 guidance.

A statutory combined ratio of 97.5%, a GAAP combined ratio of 99%, after tax catastrophe losses in the fourth quarter of $3 million, or $0.05 per share, after tax investment income growth of 10%, Diversified Insurance Services revenue growth of 6% and return on revenue of 11%, diluted weighted average shares of $56.8 million.

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

Thank you.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Charles Gates from Credit Suisse.

Hi, good morning.

Good morning, Charlie.

Could one of you elaborate on how the competitive environment has evolved during the year?

Yes, I'll provide a little high level comment and Jim Ochiltree or anyone else, Chuck, can add on.

I mean you kind of really evidence -- one of the measures to look at, Charlie, would be what the changes in the pure price trends have been.

On a year-to-date basis, our pure price has been down 3.8% on a nine-month basis, and for the third quarter it was down 4.3%.

So, that just shows you on a relative basis, I think things got a little more competitive, not significantly, but if you just use that as the baseline as we try to retain our business, we had a very stable retention ratio, modest tick up but yet we only had to -- our pure pricing only went down in the quarter 50 basis points over where it was running at.

I don't know, Chuck?

No, I don't really have anything to add there.

We're still writing a good depth and breadth of new business throughout all of our new territories and the response from our agents has been -- what we tell our agents, we're not chasing stupid.

There is some of that out there in the market place.

But we feel that through the tools and what we have, we have a very close handle on what we're writing.

What is chasing stupid?

We hear it -- I was on the phone with an agent last night.

$100,000 account that someone priced 30% under expiring.

That's stupid.

What kind of an account was that?

I'm not even going to go into it.

I guess my only other question, is the -- do you have two problems in your personal line business.

The first problem is that I've always been taught it was a variable cost industry where economies of scale matter.

The second problem is that you've got a lot of new competitors in Jersey.

I'm sorry, Charlie, you were cutting out.

I'm sorry.

You have two problems in your personal auto insurance business.

The first problem is the fact that you've got a lot of new formidable competitors in New Jersey.

The second problem is the fact that basically, I've always been taught that it was a variable cost industry where economies of scale matter.

Yes, let me just talk about the economies of scale.

I will tell you that a lot of our business is coming from agents that have a significant relationship with Selective and want to put more of their small business with us as a market.

From an economy of scale, I agree there is clearly a certain scale break point that you need in that business and we were, as a carrier, we've invested most of our technology dollars, most of the intellectual capacity went more towards the commercial lines business in the organization because it represented almost 86% of our business.

Well, from a cost standpoint, now, we're moving over many of those same features whether it be our accelerated product that seamlessly moves business or a lot of the modeling work we've already done has seamlessly kind of fit into the personal lines space.

We're selectively growing with agents that want to have a relationship with us and I will tell you that from a mix standpoint we look at it, if we can get to an 80/20 mix, it would provide a little more stability in our earnings long-term because it is a little less volatile as a line relative to the commercial line space.

So we're not sitting here saying we're going to be a huge personal lines carrier, from our standpoint our agencies have a need for this and we can serve that need and write business profitably with our new models.

It will take another year or two before we actually evidence that.

Thank you very much, sir.

Your next question comes from Ron Bobman from Capital Returns.

Hi, good morning.

Hey, Ron.

You know, a lot of -- mostly commercial lines management teams will talk about year end -- I guess you're referring to as chasing stupid, but year end efforts to make budget and pricing actions and sort of underwriting actions reflect that with companies trying to make budget in the fourth quarter.

The guidance that you put forth, sort of the revised guidance for the year which implies the fourth quarter numbers, do you incorporate some degree of added pressure with that expected behavior by so many management teams?

Well, yes, I would say, yes.

Let me also state that when you look at the quarterly distribution of premium in the industry, anybody that's trying to make their goal on the fourth quarter, there is not a lot of business -- if you look at it the most of the commercial lines business, or a substantial amount of the commercial lines business is written in the first and third quarters.

Anybody who's trying to make their premium targets in the fourth quarter is going to have a lot of trouble doing that.

But, yes, we constantly monitor the market place and what's happening.

Okay.

And mucking it up for everybody else, unfortunately.

Couple other questions.

I know there's always sort of a blackout period associated with the preparation of quarterly numbers.

For example, I'm sure -- I presume the first part of October, you would be prohibited from buying stock, but outside that limitation, the other 60 some odd days of the quarter approximately, were you active in buying back stock?

We did buy back over 400,000 shares in the quarter.

We were active during the open period.

And what was your view, sort of the pace at which you -- you wanted or you practiced buying back?

Obviously, the stocks have been under pressure sort of ever since the -- I don't know when it was.

The mid-second quarter release, pre-announced in the second quarter numbers.

What was your view about how active you wanted to be to complete the current authorization?

Candidly, I would have thought you would have been more aggressive.

I may be biased in my perspective.

Ron, you also have to take that in concert with the net share settlements on the convert because those are effectively buying a lot of shares back, theoretically, in the market place, as we believe many of these convert strategies are short the stock.

So in a sense, that is taking a lot of inventory out.

I think that's like a November 30 settlement or thereabouts.

No, there's one ahead of that too, though.

We also had one in October.

Okay.

But the effect of those settlements aren't in net reduction to the outstanding authorization I assume, right?

That's correct.

No, they're not.

That's why we were trying to tell you and why we kind of put some clarity around -- although the outstanding -- we expect the outstanding for the year to be the number I expressed to you, we expect our outstanding -- our diluted, weighted average diluted to be almost 57.

We expect the outstanding at the year to be 54.

So, I think that's something that you have to look at and that's why we provided that element of information so you could get a better handle on the run rate of the diluted weighted average shares as we move into 2008.

So, you're looking at a number going down almost 3 million shares.

That's solely at the Company's option in effect.

There's not a risk of people not accepting the offer, contesting the redemption, so to speak?

That's correct.

Basically, we have an option to call these bonds and then, obviously, it is in the economic best interest of the holders to actually present them for conversion as opposed to letting us call the bond because that would be a lot less money that they would receive, and upon presenting for conversion again, it is our option to settle them in cash and stock or any combination thereof.

We have articulated that we'll be net share settling those.

So, the total amount of over $28 million that we'll be expending for that.

Ron, to put it in context, Kerry just gave me, it is a 5% reduction from the 57 down to the 54.

That's just on this short set of transactions we've done recently.

There are other transactions that have been weighted in through the course of the year on just normal repurchase that we've done.

We feel we've been pretty aggressive overall as an organization in terms of managing our capital and the different attributes to shareholders, and which includes an 8% increase -- an increase to dividends of 8% to shareholders as well as the repurchase program, as well as other opportunities that we have.

Okay.

My last question, in the prepared remarks, and I'm sorry, I forgot who said it, there was some language to the effect that you expect growth to be organic albeit limited and thus subject to sort of market opportunities you would consider or would pursue or are looking at acquisitions.

I know I didn't paraphrase it exactly right.

But are -- is that new language that you sort of haven't included in your prepared remarks before and could you explain what you mean by sort of market conditions, are you sort of, companies suffering underwriting pressure or market conditions sort of stock price falls and thus cheaper deals?

I would say both.

We're out there constantly looking and I think part of it is a little bit of a change in tone.

I think our tone generally has always been around organic growth and we have a very organic growth green field strategy throughout the Company.

Our goal is to build out an agency plant that looks looks like 1,000 agents in 21 states.

Our goal is to drive more volume of business through each agent.

Our average agency writes $2 million of business with us.

We're trying to get on a glide path to get that substantially higher than that.

We also kind of want to set out there that we need -- we've got the infrastructure.

We've got the management team.

We've got the tools to now start to write more business and in some cases, that at where we sit in the market place at $1.6 billion in premium estimated, somewhere around $1.6 billion in premium overall, that we've got to start to drive more business through that and we are starting and we are getting a number of opportunities and we just want to make sure that you're aware of that as we start to move forward.

I'm sorry.

Is the lowest hanging fruit in that regard a certain state or geography where you think you are, whatever, somewhat underrepresented and thus the economics of added penetration, added volumes in that state?

That's better than an acquisition opportunity in the state of New Jersey where we already write a four plus share of the market place.

Right.

It would be less line of business focused, a la you are weak in a certain commercial specialty area and --

We're looking at harvesting a whole host of opportunities.

You have to understand, we have 860 agents which I will call the Ivy League of independent agents that have a huge amount of business right now and the question is what is the best match for us to write more of their business and we're looking at that in addition to how do we garner just more straight up scale overall.

Okay.

I've used up more than my fair share.

Thanks a lot and good luck.

Your next question comes from Mike Grasher from Piper.

Good morning.

Good morning, Mike.

Congratulations on a nice quarter here.

Thank you.

First question on the worker's comp, do the comparisons from here on out get more difficult on a year-over-year basis?

Have we driven through the improvements and from now on, it should sort of be flat year-over-year or at least can you help us in terms of expectations in that regard?

Yes, Mike, I would tell you what you've got there, obviously, the changing landscape going forward in my mind is still a lot of the benefits that we've done in terms of modeling and other improvements the fact that we're growing now the best business there.

We've got a very focused strategy in terms of how we tier our states, how we're really running at worker's compensation business, but there is a lot of competition out there.

But there's still a lot of things that haven't even started to be harvested yet.

We launched some our new medical networks and pharma networks last year, and we're in the process of looking at a lot of opportunity for further improvement in our claim infrastructure that I think will demonstrate benefits throughout the Company.

But I think there are a lot of opportunities still embedded within the worker's compensation line.

I'm not going to put any points on that, but I would just tell you that as we continue to migrate our book of business and better underwrite it and you will see the benefits of that and there are benefits on the costs of goods sold side.

I think -- but they're not going to be like what you've seen -- the 110 going down to 101.6.

There are still opportunities to be harvested not only in that line but in all of the lines.

The only thing we have to, as a management team, balance is what's happening to price.

And this is why I made the universal comments.

Price reductions come down and they outpace loss cost improvements and other underwriting improvements that it is going to put pressure on the combined ratio.

Not only for us but for the rest of the world.

People that don't have the good tools are the ones that will be more adversely selected against than the carriers that have good discipline and can articulate their position and really have a good handle on their agency plant and what's happening.

Okay.

So, continued improvement, but don't expect the same magnitude?

That's a very fair comment.

Okay.

And then the commercial auto, the improvement there, any of that driven by the predictive modeling aspect of it all or just a one quarter improvement?

That line is really -- has really got just unbelievable claim experience, continuing to run through.

We've talked about it several times.

We talk about the large claim frequency being way down.

And that severity trend has continued to hold up in that line overall.

But we just finished our commercial auto model recently and I have to tell you, the lift curve on that just gets your actuaries all giddy and they sit there and they go, so there are still even in a line like that, that's running mid-80s there is still a huge opportunity for improvement on a book of business like that.

Just by overlaying -- so even in a line that's very profitable, you find that your modeling demonstrates pockets of improvement that we can now earmark to pricing increases, safety management increases and so we've got -- there are opportunities everywhere.

So, I would say modeling isn't even reflected in that line yet.

Okay, great.

And then another question just -- I think it was, Greg, your remarks again on the performance modeling, I think you mentioned top 60 of 80 with an 87 combined.

Does that imply that the remaining 20 likely become cold or culling candidates?

No.

I will tell you that's not -- that's not our strategy.

That's how we divide the universe of standard industry.

We divide our commercial lines book.

There are still pockets in that last 20 that are very profitable.

What that does demonstrate to you though is our ability to drill down and do an underwriting improvement process and to tell you that we're not just looking at our business by line of business.

We're not just looking at our business by state.

We're not just looking at our business by overall agency profitability.

We're drilling it down even into different subsegments so the strategic business units here can help the field and the regional offices develop action plans around underwriting improvement whether it be on a renewal book basis or modifications that need to happen on a new book basis.

So, the multiple front war that we fight here is tremendous.

That's what I want to come across.

So, the goal -- if you just constantly cut the bottom performing either agents and/or business segments you would find eventually that you would have nothing left.

And there is a lot of -- there is a lot of sector rotation in that.

But yet there is a lot of -- in terms of the education and the growth efforts and all of those things that get evidenced as a result of looking at your business on such a granular methodology.

Okay.

And then final question here for Dale, I believe.

After the redemption in the capital transaction is complete, what -- can you help us with sort of risk to capital ratios, debt-to-capital ratios, I'm assuming you get some credit for these CoCos as they come to redemption.

Can you help us just in terms of where some of these ratios might end up?

Well, we don't get any equity credit for the convertibles.

So, that's really not factored in to an adjusted debt-to-cap scale.

And the total dollar amount on the books at September 30 was $46 million.

So, there is some modest improvement in the overall debt-to-cap ratio so that would indicate that there would be some room for additional debt as we trim our capital sales.

And that's, obviously, something that we always look at and are always cognizant of.

Okay.

Appreciate that.

That's helpful.

Thank you.

Your next question comes from Doug Mewhirter from Ferris, Baker Watts.

Hi.

Good morning.

I just had two pretty small numbers questions.

First, the other expense line, what kind of things are dumped into that line and it seemed a little low historically speaking is.

Is there anything to that?

There is some seasonality to that in terms of the other expenses.

So it does get a little bit lower towards the back end of the year.

The front end of the year is when we have some of our incentive-based items, particularly restricted stock items as they're awarded.

You have higher expenses in the first part of the year.

So, it does get a little bit lower at the back end of the year.

There's nothing unusual there that I can provide to you as far as color.

Okay.

The one thing I will add though is as the stock price moves around, that does impact that.

Keep in mind.

Our awards of restricted stock, as well as our long-term incentive plans are based on our share price and because the share price dropped over the last quarter, you had some in effect, positive impact or offsetting expense impact in that line.

Okay.

That's helpful.

I also noticed, if I'm calculating correctly, your tax rate seemed -- your effective tax rate seemed unusually low.

Seemed like in the very low 20s.

Is there anything to that?

Did you have any unusual credits?

No, actually, if you look -- that should be the same rate as it was through six months, is spot on.

Okay.

Maybe what you need to -- the thing I always advise analysts to do is make sure you pull apart the investment income piece from the all other piece.

The all other piece travels at 35% and the investment income is generally around the 22% to 23% kind of range as a marginal rate.

So, as the components of those two things move around that will impact what you're doing but through nine months should be about almost on top of the through six months.

Now, the quarter itself may be a little different.

I think the quarter was like 23.5% effective tax rate on the investment portfolio and the nine-month rate is 22.4%.

So, that's really what you're looking at there.

That gets pushed around a little bit based on what the composite of the income is in terms of how much comes from other investments and things like that, but that's pretty predictable and pretty standard in terms of tax ratios.

Okay.

Thanks.

That's all my questions.

All right.

Your next question comes from Alain Karaoglan from Banc of America Securities.

Hey, good morning.

This is Rohan Pai on behalf of Alain.

Just a quick one.

One of your competitors that actually talked about increased difficulties and contractor's liability and citing macro factors, if you can just kind of drill down on that line, what are you seeing in terms of premium generation as well as loss experience?

I'm sorry.

You were breaking up just a little bit.

Was it on the construction book now?

Yes, yes, exactly.

The construction book.

The contractor's liability in particular.

I think one of your competitors had cited macro reasons as --

Yes, we read those comments.

I think Ed's got some commentary on the entire construction book that I think he would like to share with you.

Yes, you know, what we see on the construction book and it does represent about 44% of our total premium, one of the things, a couple of things you have to remember about our book of business is first that we write primarily the trade contractors, so we do not write the large residential general contractors or the larger GCs who are most exposed to the economic conditions.

Certainly, as you see the economy start to slow down, those larger homebuilders, home builders who are doing hundreds or thousands of homes a year can really be adversely impacted.

That's just not a space that we really have any significant exposure to at all.

If you look at our 80 business segments, about 26 of them are contractors and of those 26, 11 of them are over $20 million in premium year-to-date through September.

So, we have a very, very diversified book of contractors among all of the different trades and in total, only about 11% of our book are residential contractors.

Great.

Thanks for the clarification.

Just another question.

The commercial property business, the combined ratio, is that a run rate, I think you said it reflected the lower pricing but is that the 90% kind of combined ratio, is that what we expect or were there some large loss events that might have hurt this quarter?

I would say on the quarter basis, based on the price reductions in that line, that's probably a new -- that's probably where the run rate will run in there give or take a little bit.

Okay.

And just -- one more question.

I think you said that the net reserve releases for this quarter, if you can just repeat the number and also what the moving parts were?

I think commercial auto was favorable, but were there any offsets in that?

Dale is pulling that out right now for you.

Sure, for the -- just for the third quarter of '07, you had $4.5 million of favorable development in total.

You had $3.5 million favorable in worker's comp.

About $6 million in commercial auto favorable and then about $4.5 million unfavorable in general liability.

Okay.

And then just quickly, what is the issue in general liability, which accident and is there any particular type of exposure that's hurting?

In terms of accident year allocations?

Ron, I don't know, what do you have on that?

It is just -- it is just attributable to higher severity that we did see in that line of business over the quarter.

It is more -- it is more probably 2004 and prior that we're seeing that development.

Rohan Pai Great.

Thanks a lot for the answers.

(OPERATOR INSTRUCTIONS) I'm showing there are no further questions.

Thank you very much, operator.

Thank you.

Ladies and gentlemen, this concludes the Selective Insurance Group third quarter earnings release conference call.

You may now disconnect.