Selective Insurance Group Inc (SIGIP) 2007 Q4 法說會逐字稿

Good day, everyone.

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

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

Jennifer DiBerardino.

Thank you.

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

This call is being simulcast on our website and the replay will be available through March 6, 2008.

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 realize 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 made during this call are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guaranteed of future performance and 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 statements.

Joining us today on the call are the following members of Selective's executive management team, Greg Murphy, CEO; Dale Thatcher, Chief Financial Officer; Jim Ochiltree, Head of Insurance Operations; Ed Pulkstenis, Chief Underwriting Officer; John Marchioni, Chief Field Operating Officer; Mary Porter, Chief Claims Officer; Ron Zaleski, Chief Actuary; and Kerry Guthrie, Chief Investment Officer.

We would like to note this is Jim Ochiltree's last earnings call before his retirement in March.

Upon Jim's retirement, Ed, John, and Mary will report directly to Greg, each with new and expanded responsibilities as we previously outlined in 2007.

Before I turn the call over to Dale this morning to review 2007 fourth quarter and full-year results, I want to bring to your attention that the investor packet has been revised due to a typographical error in the press release.

Under the supporting assumptions for our 2008 guidance range, the second assumption for $14.4 million in after tax catastrophe losses was inadvertently equated to a per share amount of $0.18.

That number is actually $0.27 per share.

Now I will turn the call over to Dale.

Thanks, Jennifer.

Good morning, despite the continued highly competitive nature of the insurance industry, the unprecedented turmoil in the financial markets, we produced another year of solid underwriting profitability with a combined GAAP ratio of 98.9% or 97.5% on a statutory basis.

Both ratios increased over 2006, reflecting a more difficult pricing environment and higher loss costs.

Catastrophe losses for 2007 came in lighter than anticipated at one point on the combined ratio or $14.9 million pretax.

We experienced strong fourth quarter overall statutory net premium written growth of 5.5%, including 5.4% in commercial lines and 5.7% in personal lines.

For the full year, we grew statutory premium 1.4%, about three points above 2007 industry expectations which called for a decline of 1.2%.

Our 2007 premium growth was driven by a 13% increase in commercial lines new business, largely attributable to our "high touch" field model.

Other initiatives that drove new business production in 2007 were the addition of 143 agents bringing the total to 876 or 1,800 store fronts.

Expanding into our 21st state, Massachusetts, for commercial lines, and deploying 20 new agency management specialists to support the state and agency expansions.

We have also been proactively asking our agents for their best business through targeted agency sales meetings which created the opportunity to evaluate an additional $76 million in new premium potential in 2007.

Operating income exceeded our expectations for the quarter at $0.60 per diluted share or $32.2 million.

For the year, operating income was $2.21 per share or $124.8 million, and overall return on equity was 13.6%, about 400 basis points higher than Selective's weighted average cost of capital.

The fourth quarter combined GAAP ratio came in at 99.7%, compared to 97% in 2006.

On a statutory basis, the combined ratio in the quarter increased 2.9 points to 101.9%, primarily as a result of price decreases coupled with higher non-catastrophe property losses.

Overall, total property claim counts were down 7% from the fourth quarter 2006 but large loss counts increased.

These losses appear to be part of the normal variability we have seen in 2007.

However, they do represent an increase over the exceptional fourth quarter we experienced in 2006.

Business owners, or BOP, returned a profitability in the quarter with a combined ratio of 90.3% compared to 125.8% last year.

The BOP improvement reflects a decrease in claim severity in 2007.

This is indicative of the variability we expect in this line.

With the implementation of a BOP predictive model, we will be able to grow this line of business more confidently to a level where large losses will not impact the combined ratio as dramatically.

The improvement in our workers compensation book of business is a big success story for 2007.

We implemented a multidisciplinary workers compensation improvement strategy at the beginning of 2006, targeting a two-year seven-point reduction in accident year combined ratio from its then 110.3% level.

Not only did we achieve our goal but we exceeded it by nearly a point and ended 2007 with an accident year combined of 102.5%.

The success we had in workers compensation demonstrates our organizational strength to create the right tools and deploy the best talent to achieve our strategic goals.

For personal lines, excluding flood, we reported a statutory combined ratio of 122.6%.

This includes the impact of adverse prior year reserve development in our homeowners line of $5 million or ten points which related to underground oil storage tank losses in New Jersey.

Personal lines growth was positive for the second quarter in a row as net premiums written grew 5.7% in the fourth quarter to $49.8 million compared to last year.

Growth was driven by the full implementation of our automated pricing system, MATRIX, for personal auto across all our personal line states.

Automobile new premiums written grew 15% in the quarter to $12 million for all personal lines states excluding New Jersey.

These states were almost half of the auto renewal book and our entire new automobile book has been rated through the model, new automobile business was up 130% for the quarter.

With MATRIX, we can now achieve better policy rating and pricing and grow our business with confidence to achieve profitability.

In January 2008 we began to roll out our new MATRIX for homeowners across all states.

Expansion into additional states and the roll out of MATRIX for homeowners will provide us with opportunities to grow and diversify our personal lines book of business.

Statutory loss and LAE reserves developed favorably by approximately $5 million in the first quarter and $16 million for the year.

The 2007 favorable development was driven by continued favorable trends in commercial auto severity and lower than expected loss emergence in personal auto liability, partially offset by adverse development for other lines of business.

For 2007, total direct incurred frequency was down 1.3%; however, total direct incurred severity was up 11.6%, primarily impacted by large losses in excess of our reinsurance retention.

Overall, direct loss costs were up 10% for the year.

There's little question that the competitive markets we saw in 2007 will continue in 2008.

Our goal as an organization is to grow profitability in any market condition.

As a result, we are taking proactive steps to improve efficiencies and optimize scale in our business.

This effort has two components.

First, we have made the difficult decision to reduce our work force by 4%, or approximately 80 positions, including the immediate displacement of 60 employees.

The remaining positions were open and will not be filled.

We anticipate these changes and other operational adjustments will generate annualized pretax savings of approximately $8 million, partially offset by a one-time pretax charge of $4 million in the first quarter of 2008.

Also, we are implementing extremely targeted changes in our agency commission structure that will remain competitive for agents who produce the strongest results for us while reducing commissions where our historically higher payments have not generated what we believe to be an appropriate level of profitable growth.

The changes will bring our program more in line with the competition.

Commissions on 87% of total direct written premium will not be affected by these changes.

Our supplemental commission program designed to reward our most profitable growth agencies remains intact.

The new commission structure is expected to generate annualized pretax savings of approximately $8 million.

The changes are targeted for roll out in most states in July 2008.

On January 1, 2008, we renewed our property catastrophe and Surety and Fidelity Excess of Loss reinsurance treaties.

Additionally, a third treaty was placed with the National Workers Compensation Reinsurance Pool which covers our participation in the involuntary NCCI pool, a residual workers compensation market.

We saw a 16.5% rate reduction for our property catastrophe reinsurance treaty and limits were lowered by $25 million to $310 million with retention remaining unchanged at $40 million.

At these limits, using RMS Risk Link model version 7.0, Selective is covered to a one in 159 year event in the short-term view and a one in 209 year event in the historic view.

Our expected catastrophe treaty cost for 2008 are approximately $16.5 million, a 15% decrease from 2007 levels.

We achieved excellent diversification with 28 quality reinsurers participating in the catastrophe program.

Diversified insurance services revenue was up 5% in 2007 and generated a 10.7% return on revenue.

The fee-based flood insurance operation grew 20%, bringing total flood business service to $143 million.

Our flood program continued to receive the endorsement of the Independent Insurance Agents and Brokers of America.

We are the seventh largest flood writer in the country based on 2006 market share information.

We continue to monitor the current legislation being discussed in Washington to determine any potential impact on our flood operations.

Selective HR solutions ended the year at 25,111 work site employees, down 7% from 2006.

The weakening economy, particularly in Florida, led to the lack of growth in work site lives.

This in turn led to some measures being taken in the fourth quarter to maintain margins.

After tax investment income rose 9% to $37.3 million for the quarter mainly due to an 8% pretax increase in fixed maturity income as the portfolio grew 4% to $3.1 billion over the course of 2007.

In addition, our alternative investment returns increased 138% for the quarter to $6.4 million.

The total investment portfolio increased 4% to $3.7 billion during the year.

The overall annualized after-tax portfolio yield was 3.6%, unchanged from 2006.

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

Invested assets per dollar of stockholder's equity increased 4% to $3.47 compared to 2006.

In our fixed income portfolio, the fall in interest rates during the fourth quarter increased unrealized gains by $11.4 million to a total of $23.6 million at year-end.

This resulted in a $0.14 after tax positive impact on book value per share which was up 5% to $19.81 from year-end 2006.

Our book value at year-end included only $29.1 million or $0.54 per share in after tax goodwill and no discounting of loss reserves.

Book value has grown at a compounded rate of 10.1% over the past five years and is a solid representation of the value we continue to generate for shareholders.

We continue to maintain a high quality fixed income portfolio and have no significant subprime mortgage exposure.

We have included several schedules as a supplement to our investor packet available on the web site to help investors understand our mortgage-related investments.

As a result of strong, prepurchase due diligence guidelines, none of our structured securities, which include residential and commercial mortgage backed and asset backed securities, experienced any downgrades in 2007.

We continue to actively manage our excess capital.

In 2007, we repurchased 5.7 million shares or 10% of total outstanding shares at an average price of $25.13.

In lieu of additional share repurchases in the fourth quarter, we net share settled a total of $46 million of Senior Convertible Notes due 2032 after calling the Securities for Redemption in November and December.

The resulting impact on our diluted share count is that we essentially retired two million shares at an average price of approximately $23 ending 2007 with 54 million shares outstanding.

Through the payment of dividends and share repurchase activity, Selective returned 116% of 2007 earnings to shareholders demonstrating our ongoing proactive capital management approach.

Now I will turn the call over to Greg.

Thanks, Dale.

Good morning.

2007 was a year of challenges in our industry and in the financial markets.

While we were not immune from the challenges, we were able to execute on our strategies to achieve profitable growth.

Our dedicated employees have worked tirelessly over the past few years to put Selective in a strong competitive position so that we can deliver lasting results and value for our shareholders.

Due to our unique field-based model and strong relationships with our agents, we experienced solid 2007 commercial lines new business growth of 13% to $313 million.

Pricing on new business was down about 6% in 2007 as compared with 2006 levels.

By market sector, new business growth for 2007 breaks down as follows: One & Done automated small business, $62 million up 44%, middle market or AMS generated business, $215 million up 6%, Selective risk managers or SRM our large account business, $36 million up 19%.

In 2007, SRM wrote an all-time high of $36 million in new business despite the difficult marketplace which in which total renewal pricing was down about 5% for the year.

Results were favorably impacted by the strong partnership between SRM and Safety Management resulting in 89% of SRM accounts now on safety management service plans.

Our current SRM book of business is up 2% to $162 million on a direct basis and produced a 2007 accident year combined ratio of about 98%.

The growth in the One & Done new business reflects the increase in the number of new business classes eligible for seamless processing through the automated small business system as well as the introduction of the workers compensation and BOP predictive models.

The new classes accounted for 23% of the record setting new business written per work day of $251,000.

In addition, One & Done new business premium increased 56% in 2007 for accounts with modeled lines of business versus 31% for non-modeled.

This substantial growth clearly reflects our more granular pricing capabilities which target the best business.

It is all about ease of doing business and I am confident in telling you that Selective is one of the easiest companies to do business with in the commercial lines market place today.

We attribute this to our very successful combination of "high-tech" and "high touch."

Our first to market agency integration technology, exSELerate, won awards in 2007 from Celent, an IT consultancy group and from the two most widely used agency management systems groups, AMS and Applied.

We believe exSELerate provides a significant future premium growth opportunity.

In fact, new commercial lines business processed through exSELerate in 2007 was up 270% in $93 million.

Additionally, through the increased usage, we can now more aggressively leverage our AMS to focus on accounts above 50,000.

Our unmatched field model creates strong relationships with agents, with our enhanced technology, sales meetings, and agency workshops we expect to drive the average premium volume per AMS from $2.3 million to $3.5 million over time.

Now that all commercial lines predictive models being used our underwriters have the best possible information at their fingertips to facilitate more granular underwriting decisions that should generate profitable business.

We believe ease of doing business is the primary reason that for the second year in a row our agents rated us a very high 8.9 out of 10 for overall satisfaction.

Throughout 2008, we will continue to drive profitable growth by maximizing the tools and strategies put in place over the past few years, and by deploying the best talent the organization to distinguish ourselves from the competition.

Our 2008 profit growth opportunities include expectations to write $70 million in new business from the 200 new agents appointed in 2006 and 2007, the appointment of 75 new agents in 2008, new business opportunities from the 65 new producers we helped our agents hire and train in 2006 and 2007 plus an additional 55 planned for 2008.

Generating new business growth in our 21st footprint state, Massachusetts, as well as opening our 22nd state, Tennessee, for commercial lines by the fourth quarter of 2008 and for personal lines in January 2009 and leveraging our ease of doing business with the award-winning technology, exSELerate, to capture new business.

We have spent years implementing initiatives that improve underwriting and claims performance such as predictive modeling, analytical tools from Knowledge Management, improvements in safety management, MATRIX for personal lines, the workers compensation improvement plan, and other initiatives.

We have factored the expected improvement from these initiatives into our combined ratio assumptions for 2008.

We also anticipate an estimated 0.8 point reduction in our combined ratio for the expense initiatives that Dale outlined net of restructuring charge.

We are setting our 2008 diluted earnings per share guidance to a range of $2.20 to $2.40 including the first quarter $0.05 restructuring charge.

This range includes the following major assumptions: A statutory combined ratio of approximately 98%, a GAAP combined ratio of approximately 100%, after-tax catastrophe losses of $14.4 million or $0.27 per share, after tax investment income growth of 3% including a 10% pretax yield on alternative investment.

Diversified insurance revenue growth of 5% and return on revenue of 10%.

Diluted weighted average shares of 52.5 million, which includes the expectation of repurchasing 3.5 million shares over the course of the year.

Now, I will turn the call back over to the operator for your questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Amit Kumar with Fox-Pitt Kelton.

Good morning.

Congrats on the quarter.

Thank you.

Three quick questions, first of all these 80 jobs that are being eliminated, what part of the company are they coming from?

They're coming from basically all areas of the organization, but just to give you a sense here in the corporate facility about 32 of those jobs overall are coming out of the corporate facility, the remainder of the 60 are are throughout the organization.

Okay.

Just moving on to I guess the commissions revamp, and I think you mentioned an 87% premium number, what's the actual agent count who are going to be impacted by these changes?

Well, I will tell you let's take them piece by piece because it is hard to really answer that question because certain changes like BOP, for instance, changing BOP renewal commissions theoretically affects every one of our agents that writes a BOP account, but I think to really kind of focus in on the message which is that premium on 87% of commissions are unaffected, the biggest one is our New York general liability where that represents approximately 3 million of the overall $8 million annualized commission savings.

That's focused principally on our group of agents in New York and that's the most targeted part of that overall change and then, obviously the New York -- the Pennsylvania and New Jersey homeowners affects all of our agents in those two states that write homeowners.

They're so isolated that to kind of break it down in totality, of the $8 million, $3 million of the annualized commission savings are in New York, GL, about $2 million of them are BOP overall and then the other $1.4 million are on municipalities, but that does not include the state of Pennsylvania.

So, they are very targeted in terms of the change and effect on agents.

That's helpful.

Just moving on, in terms of the reserve addition.

Can you perhaps give more color because you must have finished your exhaustive reserve review in terms of what trends you saw, in the historical accidents years, what trends do you foresee in your current book of business?

Let me just start with that.

Just to let you know, we do a very detailed review systematically in our organization and that is every quarter.

So we are doing a tremendous amount of work on our reserves as we move through.

I am going to let Ron Zaleski talk to you about some of the trends that he has seen in the overall loss development area.

Good morning.

In 2007, we have seen, of course, a total of $16 million in favorable development, most of which is coming from the commercial auto line which has been very favorable to us over the last three years.

The trends we are seeing now is that commercial auto is running pretty flat going into 2008 and we don't really have any expectations for further improvement there.

As far as our other lines of business are concerned, we see for 2008 that the reserve is very strong and stable.

That is helpful.

And then I guess just one final question and I will re-queue.

In your investor day presentation, you put that slide which shows market opportunity by different segments.

I was looking at that and what you outlined for '08, can you just update us as to what your thoughts are and perhaps also touch upon M&A opportunities going forward?

Thanks.

Let me address that in general.

Obviously we are a continuing to round out our footprint.

As you can see we are adding Tennessee.

That won't add much premium volume to the '08 numbers, but it is part of our durable growth message.

A bigger part of the message obviously is the expansion of our franchise.

We have been very protective of the franchise and part of our initiatives was to make sure we had the operation running at absolutely peak opportunities to grow the organization, that included the amount of knowledge we had, our underwriting capability.

I think we have reached that.

That's why we continue to expand the number of agents that we had.

Adding 75 more agents in 2008 will clearly get us close to the 1,000 benchmark that we have established.

I think that then starts to develop what you talked about, in terms of our premium opportunities.

We write about a share of our of the commercial lines marketplace in New Jersey.

We write in many other states anywhere from a 1 to possibly upwards to a 3 share and that is our opportunity to really grow and take a bigger market share in those states, that is going to be our focus.

The reason why we are going to be able to do it is because of the ease of doing business, because our field-base model and our AMS is out there writing business and our first-in-market technology.

That's quite incredible that our technological competition is Travelers, Hartford and Zurich.

We were first in market with that and Selective is the one that won the awards from every major group out there for our ease of doing business in terms of the capability for us to move premium from agents seamlessly to us.

Those are all the things we are going to focus on in 2008.

Now, to touch on your M&A opportunities are we out there?

Yes, we are looking to seize opportunities in the marketplace but our focus right now is mainly executing on our green field growth initiatives that we feel will generate a tremendous value for us and our shareholder into's the future.

We are still looking at the capability of the right fit for us in the marketplace though.

Okay.

That's very helpful.

I will re-queue.

Thanks.

Your next question is from the line of Michael Grasher with Piper Jaffray.

Good morning, everyone.

You were talking about driving AMS higher from $2.3 to $3.5 million, Greg.

I think you said over time, can you define or give us more in terms of what your expectations are from timing?

Yes.

We are looking at that as a three to four year time horizon on that.

Okay.

So we shouldn't expect that all in 2008 alone?

No, I should not.

That's a systematic process of getting our agents and then I will let John Marchioni and others comment.

That's a system of improving our underlying capability to get more business process seamlessly through our One & Done system and then to move our AMS more up market as we move through the next 2008, 2009.

John --

I would add to that, that, Greg's comments he talked about expectations or performance with regard to the three ways in which we measure our commercial -- we are constantly evaluating each of those three areas to determine how the best way to on board that business.

The ability to move more business through that pipeline allows us to free up AMS from that smaller low touch business and allows them to generate more premium per AMS.

That's how we develop and focus our efforts and why the multiple year time horizon is what Greg cited.

It is related to our ability to expand that pipeline and not sacrificing the underwriting capability we have in the One & Done system.

Understood.

That's helpful.

Thank you.

Just thinking about the CAT losses.

Just curious, is there any way or have you attributed any of the reduction in CAT losses to some of the accounts that perhaps you have culled over the past couple of years?

For the most part no.

Where we get hit with CAT losses, obviously the Nor'easters affect us more so and then obviously there is wind that you get, and some of the tornado activity that now is part of our Midwestern exposure.

So they come from multiple fronts.

So that is nothing particular with respects to our overall underwriting profitability initiatives.

We are a little more focused on though, right now, what individual accounts add to our annual average loss and to make sure we are getting proper pricing for those accounts in the market place so that we have a more targeted effort in the management of that risk inventory and we are doing that on a much more targeted basis as we move into 2008 and 2009 as well.

Okay.

Just curious on that, but and then I wanted to switch over to the investment portfolio.

A great amount of detail obviously in this quarters press release, much appreciated.

Question regarding the HELOX and CDO exposures within the RMBS portion.

What are those, can you share with us the vintages related to those holdings?

Sure.

I mean between Kerry has got -- between Kerry and Dale we have vintages identified in some portfolios overall.

I am not sure if we have them.

There's a detailed schedule, Mike, that's included within the packet that will give you the vintages on the mortgage portfolio.

Okay.

I did see it on the CMBS.

Is it there for the RMBS as well?

No.

I don't have those vintages on the RMBS handy but I think they cover a wide variety of vintage years.

Okay.

So there's no heavy concentration in say '05 through '07?

That's correct.

Okay.

The CDO's themselves, are they multisector or are they specifically RMBS?

They're both commercial real estate, there's an Alt A CDO and I believe there's only four of them in total.

Okay.

Very small number.

And I guess the final two questions, one would be who has the wrapper on those HELOX and CDOs?

I believe MBIA has about $9 million, CIFG has about $9 million, Ambac has about $10 million.

It is diversified, spread out, there's no concentration on the ABS wraps.

Okay.

Any FGIC?

I believe there's one loan that has FGIC insurance.

That gets to my last question, is the BBB rated holdings in the portfolio, are any of those wrapped by FGIC?

Back to FGIC.

FGIC has about $7.5 million market value.

There is actually three ABS's wrapped.

I am sorry.

Your last question.

Flipping over to the portfolio, the BBB exposures you have there, I guess the specific holds and then if any of those were wrapped by FGIC as well.

Well, just to be to be clear on that, a lot of that schedule that appears, a lot of those bonds that have wrapped insurance are not BBB rated.

What we did on the nonrated because, as you know, a lot of these insured bonds at issuance are coming with ratings that the issuer is not paying for that.

We do look at the underlying ratings on those.

What we did for the purposes of coming up with an underlying rating we assigned a BBB minus weight just to be conservative.

It is our belief that the average underlying ratings because some of those do have public issues outstanding with ratings attached is much higher, probably an A.

Okay.

Your specific question, we have on a market value basis circumstances less than $3 million of a BBB rated issue and we have $5 million nonrated by FGIC.

Got you.

Of the FGIC exposure, less than 3 BBB and about 5 million is nonrated.

I think the important part is obviously we didn't buy any of the product in the marketplace based on the fact it came with an enhancement.

These guy versus systematically done all of the heavy lifting on every purchase we have done.

That's why you don't see a big down drift in our overall credit quality.

That's why if you just look at the credit enhanced portfolio in the MUNI, it is a A A minus on the underlying credit of just the enhanced portion.

So just, it demonstrates the kind of work that our investor folks do.

Sure.

Thanks very much.

Your next question comes from the line of Charlie Gates with Credit Suisse.

Good morning.

I only have one question.

Greg, I think in your prepared remarks you indicated the magnitude of erosion and commercial lines pricing during period.

I missed it.

Could you elaborate basically on what you are saying about commercial lines pricing including that commentary?

Sure.

Absolutely.

For the year our commercial lines pricing on a pure price basis was down about 4%.

The comment that, and that's on a renewal basis.

The new business comment that I made year-on-year is new business was priced down around 6%.

If you recall at the end of the third quarter was actually down around 7%.

So we see some improvements in the pricing trends as we move on.

When you look at that by, whether you are looking at by region or really by, there is really not a lot of outliers except for maybe one of the Midwestern areas where pricing is off that.

So, pretty much all of our pricing is in lock step.

Our goal is to try to as we move into 2008 is to provide our underwriters with the information to know okay on a renewal basis where do we need to be on price, which can accounts are strong for us and we need to retain our position with those accounts.

I think in terms of the amount of knowledge and information we provide not only to renewal underwriter insiders but also renewal basis is in my mind, best in class to make sure, A, we are going after only profitable business on a new basis and, B, we are trying to protect our beach head position with respect to our renewals.

You commented that you thought that it was more competitive in the Midwest.

Could you elaborate on that?

That's only in one of the three regions where it was slightly.

To give you an idea regionally, our pricing and in almost every territory was pretty much right on the mark with the exception of one territory, one three-state territory where pricing was off about 7%.

In the other two midwestern territories, pricing was off 4.8% and 4.9%.

That's relative to the average that I mentioned to you before of 3.9.

The other two of those six states only three of them were more of an outlier.

What are the three state where is the competition is greater?

We are not going in to that level of depth in terms of which states are not of the nine, three are slightly more competitive than the rest.

There's not a tremendous amount of premium volume in those states anyway.

What do you think it reflects from a general standpoint if you were explaining why it is more competitive in those three states than others?

Since we run into the same competitors, generally in all nine of those states holistically, not much.

Okay.

Thank you.

Your next question comes from the line of Rohan Pai with Banc of America Securities.

Good morning.

I was trying to get a sense of the personal line strategy.

The, even excluding the, I guess the adverse development in homeowners, the results were, I guess pretty poor.

What is the, the strategy behind growing this business with combined ratios above 110 in auto and home?

John.

There's a couple of pieces.

We have talked a little about this in prior quarters.

Let me restate where we are on our strategy.

Clearly, our desire to grow this business is on the basis of our belief and strong conviction that the business we are writing new using our MATRIX predicted modeling tool on the auto side and soon to be homeowners side is putting business on the books at a much more profitable level much quicker than legacy books.

Unlike commercial lines, it takes you longer to address from a profitability because you run up against regulatory restrictions in a number of states.

On the legacy books where you can't move that business through pricing models, we are taking some pretty aggressive base rate action, base rate increases in a number of those states, and that is start to earn it's way through the book.

You will see some of at that in '07 but you will really see the benefits in '08 and '09.

We measure a mix of business from a new business standpoint to make sure that in fact our model is working as indicated.

As we look at favorable trends in terms of mix of business, whether it's average credit scores or full coverage versus liability only, or multi car versus single car, we start to see improvement in our mix of business, which is another indicator of future profitability.

And the final piece on the auto side is with regard to New Jersey, which continues to be our largest state, maintain a portion of your book of urban business that matches your overall state market share.

That business, because of regulatory requirements, is underpriced as it is with anybody, our ability to manage that book in proportion to the overall book is another indicator of future profitability.

The size of that has reduced the book in the last two years.

The last piece on the homeowners side is we are just now rolling out predicted model for homeowner which is is close to the competitive frontier.

Unlike auto, the use of predictive modeling on the homeowner side is really not that well developed.

There are very few carriers using it.

That is starting to roll out in January, it has rolled out in January for a couple of expansions throughout the course of the year.

Clearly, yes we are planning to grow this line but we believe that the strategies we have in place are going to put that business on the books at much more profitable levels than our legacy book would indicate.

Thanks.

I guess, John, can you maybe tell us what the combined ratio is for New Jersey in auto versus the other states?

New Jersey for 2007, one second here for the year.

New Jersey personal auto for the year was a 1063.

Okay.

Is this, I guess the next question would be, I think you suggested at one point by 2008 you would want to bring the book personal lines book to profitability.

Is that still a target or are we looking at '09?

Actually in the last quarter we stated by the end of 2009 we would expect to achieve profitability.

Okay.

And then just one more question on, I think in the press release you cited the contractors book being more competitive.

If you can give us an update on the competitive trends there and, two, if you are seeing anything on the loss trend side?

The comment is really about the construction area is the fact it represents 45% of our aggregate commercial lines business.

The fact that we expecting a more difficult economy as we move through with the housing slow down and start, and housing starts slow down.

I will let Ed talk a little more about it, but from a standpoint, it has been the hallmark of our relations with a lot of agents in the sense that 45% of our business is in the construction area.

We have a very strong position there, only about 15% of that business overall is either in residential or commercial GCs.

So we don't have a big exposure from that front.

We write a lot of artisans a well diversified book.

I will let Ed comment a little more about the construction area.

Yes, good morning.

We do see some impact obviously with the difficulties in the economy in our audit and endorsement premium.

But just to give you a sense of the book, we track our commercial book over 80 business segment, 26 are contractors.

Of the 26, ten of them had more than $25 million of premium for 2007, and those 10 make up about 70% of the book.

Again as Greg said, those are primarily trade contractors.

They are certainly not the larger or even medium side homebuilders you read about frequently in the press.

With that level of diversification, we are able to manage this book.

It has been profitable historically.

We don't see any trends on the profitability side that materially change that going forward.

Okay.

Thanks a lot for the detailed answers.

Your next question comes from the line of Scott Heleniak with Ferris, Baker Watts.

Hi, good morning.

Morning.

Just a couple of quick questions, can you touch on the higher non-CAT property losses is that more of a severity versus frequency issue?

Did you kind of see those trends the past few quarters or is this a new occurrence?

They were more of a issue and Ed has done a lot of work on that.

We have tracked the property losses throughout the year.

As Greg mentioned in the prepared comment or Dale an exceptional year for property in 2006.

As we look at the property losses a number of different metrics, a number of different elements to understand where those losses are coming from.

We see as was mentioned no systematic trends that would lead to any adverse trends in profitability going forward.

I think there are other areas of the property book we look at, our inland marine book which is stable, our commercial auto is stable, our BOP book for the quarter actually showed the combined ratio was down to a 90 which was an absence of large losses.

I think what you are really seeing is the normal volatility that happens on this business, the presence or absence of a few large losses really does swing the results.

That's what we are seeing.

Okay.

And then, the workers comp I guess was a little higher than tracking the past few quarters.

Any changes in loss trends there.

Is there any target that you guys?

The big effect there in the quarter was we had changed, and Ron can comment, on the tail factor in the line overall, just to a combination of medical inflation and just general developmental trends that Ed had about around $3 million of loss development into the quarter that is about 3.5 points of that combined ratio in the quarter due to that one event.

So we do see an ongoing systematic improvement in that book.

I think that's a reflection of the six initiatives that we articulated and have shared with you on many occasions.

All right.

Finally, do you have a policy count for New Jersey auto at the end of the year?

We have a car count I can give you.

That's around 71,000.

To be exact, 70,957 if you want the exact number of cars.

I will round that to 71,000 if that's okay.

That's about as exact as you can get, I guess.

Okay.

Thanks a lot.

You're welcome.

Your next question comes from the line of Amit Kumar with Fox-Pitt Kelton.

Going back to the MATRIX modeling.

If I had to sort of compare the new business and the old business, which did not run through it, what is a good ball park number in terms of the combined ratio swing in this business?

Well, first of all we are just about a year into into this.

Our ability to have are credibility in the new business numbers is still a little bit early but we certainly have measures in place to make sure that what we are seeing from a loss development standpoint in our new business versus our renewal book is where we expect it to be as we roll this out.

It is early, in terms of looking at a credible combined ratio on the book, but we compare the mix of new business to the mix of rebusiness.

Okay.

Second question you were talking about competition and saying you run into the same competitors.

Maybe can you just expand on that in terms of where do you see the competition coming from in terms of what do you see out there, what are they exactly doing?

Is it terms and conditions?

Is it pricing or is it according, having loss runs?

Well, it can be all of the above but I would say the two principle areas are coming from in some cases less sophisticated companies that don't have the underwriting tool that is are try to go bid your renewal business down.

You see that coming across from everywhere and then I just think you see the companies out there just trying to struggle to make premium targets and particular in some of the areas going after some larger accounts.

That's where we saw that hit us in the first quarter 2007.

We talked to a whole group of agents and you find they lost a $50 to $70 to $100,000 account and they lost it at 20 to 30% below expiring, and they had no idea where this even came out of the blue.

So, part of those efforts with our agents is the fact that that was a wake up call in January of '07, and they are very proactively marketing their renewal inventory.

They're out there in front of the customer demonstrating the value and services we bring with our claim handling, safety management services and that's where they're trying to make sure that they are driving the value we bring.

In some cases, the competition is is across the board and it is hard to pick any one competitor, it depends on the state in some case, it depends on who is trying to underwrite the piece of business.

So the competition is across the board.

I mean it is not, there is some level of sanity to it but I would tell you that the carriers that don't have the sophisticated underwriting capability that take a one or two time piece of business from us, even that we are trying to nonrenew in some cases are in for a real wake up call as they move through and get the loss experience on that.

Just to kind of dovetail to your question before when you asked John about the MATRIX new and renewal, as we started to get a little more sophisticated, these numbers are still pretty raw.

When we look at the new and renewal ROE relativities on new and renewal on the commercial lines, renewal inventory runs about 400 basis points better than new.

There are always new business penalties put in the book, even when it is modeled there are new business penalties because your information ratio goes higher as the longer you retain that piece of business.

So, there's always a certain amount even under a modeled environment, there's a penalty for new business, but I will tell you that penalty is way less severe relative to a company that is not using sophisticated models.

If you were looking at new or renewal, those would be, or they should be tremendous, they're not but they should be tremendous.

In a modeled world you lessen that separation but there is clearly a separation there and that is something that we are really focusing on as we move into 2008 to 2009 a better understanding of our inventory, what does it add in terms of ROE points, how do you look at new renewal, how do you segment that business and that's the focus we have as we move forward.

That is very helpful.

And I guess related to that, as you look towards to 2009 and 2010 and perhaps even going forward, how do you expect this cycle to play out compared to the previous cycles?

That's my final question.

This cycle will be the difference between the haves and have-nots.

I think the have-nots are going to wake up in another 9 to 18 months from now and realize what they have got.

It is going to be devastating.

So the companies that have the sophistication, that have the ease of doing business, that have the technology, that have the business model, I mean in terms of field-base business model, agents, companies walk into our agency every day and say why are you growing with Selective and why aren't you growing with us.

We have the ease of business model, the people, the technology and authority and really organizational structure to allow our people to operate in a field model which other companies can talk to you about but they can't really execute that strategy.

They don't have the technology, they don't have the people or they don't have the culture or they don't have all three of those to execute that kind of strategy.

Then you have to couple that with best-in-class technology and we clearly spent a lot of time and effort on getting us to the point we are in the marketplace.

Are we satisfied with that?

No, we are not.

We are now pushing into more customer self service.

We are focusing our agents around how do you be open 24 hours a day?

These are things we are pushing, how do we push good quality accounts to our agents so they run at the accounts that they know we are going to really want to write and write profitability and the the best price.

Those are the things that we are doing as an organization that will drive future value.

I think we are the only carrier out there helping agents hire new producers in the marketplace.

And then as we bring on more agents, this gets to the point before, we are not saturated at a thousand agents.

Think about it, that capability is tremendous.

But we want to maintain our franchise, we want to maintain the ivy league structure of independent agents that we have.

Now we want to make sure that they commit back to us the growth commitment and the dedication that we share with them.

Okay.

Thanks for the detailed answers.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Michael Grasher with Piper Jaffray.

Just a follow up on all of this call here today, with all of the success that you have had with the investment in the back office, the knowledge management systems the modeling, do you have internally expectations for improvement in your eventual combined ratio on longer-run basis for the blended lines of business?

Yes.

And are you willing to share that with us?

No.

Okay.

Fair enough.

At this time,.

Mike I will add to that, it is something we clearly focus on, I don't know how many companies you talk to that analyze their business in 80 product segment codes.

We can articulate our profit segment, how profitable it is and how many are profitable, how many are not, what are we doing about those segment that is are profitable.

That's a level of richness you don't see.

We track our business by line, we track it by state, we track it by agent, exam then we do a whole host of other initiatives to really understand the make up of our business and what drives profitability long term.

Understood.

I am just waiting for the revision for the higher ROE.

So am I.

At this time, I do show are no further audio questions in queue.

If you have any follow up, please reach out to Dale or Jennifer.

Thank you very much for your participation in the call today.

Thank you.

This conclude's today's Selective Insurance fourth quarter release conference call.

You may now disconnect.