Selective Insurance Group Inc (SIGIP) 2008 Q1 法說會逐字稿

Good day, everyone.

Welcome the Selective Group first quarter 2008 earnings release conference call.

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

Jennifer DiBerardino.

Thank you, Marianne.

Good morning and welcome to Selective Insurance Group's first quarter 2008 conference call.

This call is being simulcast on our web site and a replay will be available through May 23, 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 web site, 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 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, CFO; Ed Pulkstenis, Chief Underwriting Officer; John Marchioni, Chief Field Operations Officer; Mary Porter, Chief Claims Officer; Ron Zaleski, Chief Actuary; and Kerry Guthrie, our Chief Investment Officer.

Now I will turn the call over to Dale to review the quarter results.

Good morning.

First-quarter financial results did not meet our expectations and there were several contributing factors.

Premium growth was a challenge in the quarter due to the competitive insurance marketplace and a slowing economy.

Statutory net premiums written decreased 6.4% from first quarter 2007, reflecting a decrease in commercial lines of 8% while personal lines grew 6%.

Commercial lines competition continued to intensify as the major focus of agents and carriers was to maintain their renewal books as they try to lock up accounts, sometimes 60 days in advance of the expiration date.

In spite of the difficulties, there were also some positive signs.

First, our commercial lines retention remained strong at 78%.

Second, renewal pricing including exposure was down only 0.4% while pure price declined only 3%.

Sequentially, both measures improved from fourth-quarter 2007.

Greg will share more with you on premium growth later in the call.

Despite relatively flat pretax capacity losses of $4.7 million, overall losses in the quarter were higher than anticipated.

Looking at the Selected Income Statement Data exhibit in our investor packet on page 7, the $0.12 per share year on year decline in insurance operations is due to the following: $0.04 per share for the restructuring charge we announced in February and $0.08 per share, mainly as a result of volatility in commercial auto physical damage and property results as well as some casualty deterioration due to competitive pricing trends in commercial auto and general liability.

All partially offset by improvement in workers compensation.

Commercial property was impacted by increased severity in the quarter , relative to longer term expected averages and also by pricing.

Property losses, by their very nature, are volatile.

Despite the volatility we experienced in the quarter, our Commercial property results remained profitable at 96.6% statutory combined ratio.

The commercial auto combined ratio increased by 12 points in the quarter, reflecting price decreases, which contributed 3 points the combined ratio, and physical damage severity that added another five points.

In addition, 2007 included favorable prior year development of $3 million or 4 points.

Workers compensation continued to demonstrate the benefits of predictive modeling and our other strategic underwriting initiatives as well as favorable development in the quarter.

We reported a statutory combined ratio of 94.5%, a 3.7 point improvement from a year ago.

We anticipate that these results will fluctuate somewhat as we move through 2008.

The softening economy is putting some pressure on our contractors book, which represents 45% of our book of business.

Although new business counts are only down about 1% from last year, audit and endorsement premiums decreased approximately $5 million for the quarter from a year ago.

Overall, statutory loss in the LAE reserves developed favorably by approximately $3 million in the first quarter, driven by continued improvement in workers compensation.

In the first quarter of 2007, prior year reserves developed favorably by $4 million.

After tax investment income was down $1.8 million from a year ago, primarily driven by a decrease of $1.2 million after-tax or $0.02 per share associated with the implementation of FAS 159 for a high quality separately managed investment account.

A trading portfolio can create greater volatility as any for mark to market adjustments now run through the income statement.

Historically this portfolio has been a solid performer and we have already recouped $1.2 million of our losses in April.

Another contributing factor to investment income in the quarter was the opportunity cost of our decision to hold a larger average cash balance of $236 million due to the turmoil in the financial markets.

Under normal circumstances, particularly given the current yield curve, the Company would have held $90 million less cash.

The elevated short-term position lowered investment income by $0.8 million after tax or $0.02 per diluted share.

The combined impact on the quarter from the establishment of the trading account and the opportunity cost of short-term investing activities was approximately $0.04 per share.

We will, however, benefit going forward from higher tax advantaged yields which are currently approximately 4% versus our budgeted expectations of about 3.3%.

Over the course of the year, we expect to continue to add tax advantaged fixed income securities to our portfolio.

The other expense category from the Selected Income Statement Data exhibit shows an increase of $0.05, which is largely a result of taxes booked in the first quarter based on the full-year expected tax rate, which equated to $0.03 per share.

This anomaly occurs when there is a quarter earlier in the year that is out of line with the profitability expected later in the year.

We expect this to equalize as the year progresses.

We continue to deploy long-term strategies to reproduce a profitable personal lines business and we are seeing some signs of improvement.

Results in this line continue to be driven by our New Jersey auto business.

Although this book has stabilized as we currently insure 70,300 cars, while account retention improved approximately 7.4 points to 80%.

Over the past four years as New Jersey transitions from a highly regulated environment to one of much greater rate flexibility, overall pricing reached inadequate levels.

The marketplace has begun to change, putting us in a better competitive position to take additional rate, and, therefore, we filed a 6.8% rate increase in New Jersey that will become effective May 15.

New business written under the MATRIX personal lines rating plan increased $2.6 million in the quarter from a year ago, largely driven by personal auto.

Business written under the old rating plans in our expansion states is receiving average rate increases of 7% over the course of the year on top of the 7% received last year.

We expect the turnaround in personal lines to take some time to develop, but feel positive about our strategies to improve profitability by aggressively pursuing rate increases for both auto and home, implementing targeted underwriting initiatives, and working with agents in our expansion states to diversify and grow our book of business.

As a result of the Company-wide restructuring and other expense initiatives announced last quarter, we improved our net premiums written per employee productivity measure in the quarter to $823,000 from $797,000 at year end.

The full impact of the restructuring will be annualized pretax savings of approximately $7 million.

Additionally, the commission reductions we announced at year end are expected to generate another $7 million in annualized pretax savings after they take effect July 1.

In the quarter, we repurchased 1 million shares at an average price-to-book of 1.2 times.

We have 2.5 million shares remaining on our current authorization, and we will continue to opportunistically repurchase shares while also monitoring the markets and balancing liquidity needs.

Now I will turn the call over to

Thank you, Dale, and good morning.

We have been planning for the soft market for some time by implementing modeling and rolling out our award-winning xSELerate technology that makes it easy for agents to do business with us.

The current commercialized marketplace continues to be difficult to navigate as new business in the first quarter was down 17%.

With the use of scoring and pricing tools, our AMSs are able to make informed decisions about writing business that has the best opportunity for profitability.

New business by market segment for the quarter demonstrates that larger accounts are under the most pressure, while small business afforded greater opportunity.

One & Done automated small business, $17 million up 23%.

Middle market or AMS generated business, $42 million, down 22%.

Selective Risk Managers for our large account business, $4 million, down 50%.

Small business continues to be the sweet spot in the market and we expanded our capabilities to increase volume.

Our growth in small business is partially driven by the increase in number classes of new business eligible for automated processing through One & Done, as well as predictive modeling capabilities.

New business per work day was $271,000 and new classes accounted for 15% of the total.

At the other end of the spectrum, large account business, which represents only 11% of our total premium, is the toughest, most competitive segment of the market.

As our 50% decline in SRM new business indicates, large accounts are hard to find as pricing in this segment has become reckless.

Our hit ratio, which is historically between 45% and 50%, dropped to 22% for the quarter, largely due to what we feel is overly aggressive pricing by the competition.

We tell our underwriters, don't "chase stupid."

Opportunities for new business in the middle market remain difficult.

AMSs or agents are in our office every day and tell us they are not getting as many "at bats" to write quality business.

Agents are proactively reaching to to incumbent carriers before renewals to obtain the best pricing.

Predictive modeling tools, our AMS have at their disposal are critical to ensure that we are only writing quality business in the current market conditions.

Our commercial lines renewal pricing was down only 0.4% in the quarter and over the past three years has averaged an increase of 2%, while the industry decreased 4% over the same time frame base on the Advisen Survey.

In addition, new commercial lines pricing declined only 4.1% in the first quarter, while we are hearing from competitors that their new pricing has been decreasing by as much as double digits.

Predictive models work best for business under $50,000, and we believe this business, which represents about 65% of our book will perform better over the long term.

Since the implementation of our predictive models, we have seen the quality and distribution of new business under $50,000 change dramatically.

Our best performing 4 and 5 diamond business has increased from a historical 50% of our book to 58% while our worst performing business, the 1 and 2 diamond accounts have decreased from 20% of our book of business to 11%.

Our focus is on long-term profitability and modeling is just one tool to meet our goals.

We have implemented a number of other cost savings and underwriting initiatives, many of which we have shared with you.

We have always been focused on our claim operation, and during 2007, we undertook a number of initiatives to improve an already strong claims organization.

We are experiencing the early benefits of these efforts in 2008, with the reduction in cycle times, lower legal expenses, and quicker establishment of case reserves.

We expect to realize these benefits over the course of the next two years.

We remain confident in our direction and our strategic initiatives to successfully navigate this soft market, as we have previous cycles, based on our strong agency relationships, a superior field force, excellent technology, and underwriting tools to grow profitably.

Due to the more challenging industry and financial market environment, we have updated our earnings guidance to a range of $2.00 to $2.30 based on the following assumptions: A statutory combined ratio of approximately 98.5%, a GAAP combined ratio of approximately 100%, after-tax catastrophe losses of $14.4 million or $0.27 per share, growth in after-tax investment income of 1%, including an 8% pretax yield on alternative investments, diversified insurance services revenue growth of 5%, and return on revenue of 10%, and diluted weighted average shares of 52.5 million.

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

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of David Lewis from Raymond James.

Thank you and good morning.

Good morning, David.

A couple of questions.

First talk a little bit about the pricing.

Some of the brokers out there and I know you deal with some of the intermediate, larger, middle market brokers.

A lot of them are seeing an accelerating downward trend in overall pricing.

Is that what you are saying?

Some of the other underwriters are saying they are really not seeing that.

I understand if they are going to renew a piece of business, they're going to have to try to do it at down double digit rates.

Maybe your comments on that.

And secondly, if you can talk where some of the biggest pricing pressures are outside of the large accounts.

I understand that will be the most competitive environment.

And also maybe just talk a little bit about the contractor pricing business please.

I will handle this among the folks here, but pricing I have to tell you on a quarter on quarter basis, if you look at pure pricing which I think is really the right way to look at pricing.

Our pricing was only down 3% in the quarter.

And if you looked that the relative to last year, that's improved.

So we were down about 4% for the year.

And we've improved in terms of -- we are giving up less price and still meeting our retention target, which is telling us that our field folks are doing, our inside underwriters are doing the right job in terms of the balance of maintaining retention and price together.

So we are not seeing those huge double-digit price increases that you are articulating, and we are trying to make sure that we protect our best business and our pricing actually improved in a sense on the quarter versus the year run rate.

With respects to pricing pressure overall, I will just tell you from the line business -- I know you asked from a large account area, from the line business we are seeing most price on a pure price basis still down in the commercial property and commercial auto lines.

And I think that's why, you know, you continue to see a little bit of margin compression in both those lines of insurance.

And then, from an overall standpoint on the contracting, our contracting book, which you would think would be maybe under a little bit more pressure with respects to price actually, matched -- virtually matched our average price reduction of 3%.

So there wasn't any significant dislocation in the contracting book with respect to giving up price.

Now what we are seeing in the contracting book obviously is, less additional audit premium as we refer to it.

We are seeing some return premiums or RPs versus additional premiums or APs we have seen in prior years.

So we have seen a little bit of tightening in the audit area year on year with respect to our contracting book.

But overall, it has performed very well in the market.

I guess any other comments anyone else wants to make?

Just to follow up on that.

A lot of companies -- the renewal business and what you are willing to accept may be down only in the low single digits.

What are you hearing that that business is going for that you are losing of that 22%?

And do you have any sense of what you are losing that business to the regionals or the nationals?

Yeah, that -- that covers the waterfront.

And I've heard some pretty scary stories out there of accounts that, I was on the phone recently with a AMS out of Wisconsin and we had a renewal on a fine dining account that our expiring premium was $16,000 and if we max out all of the credits on that account, we could get it down, maybe to 12.

And that account went for 9,000.

Wow.

So, you know -- and it's -- it's across the board in some cases.

It's the National players.

It is in some cases.

It is the local regional.

Or mutual players.

And that -- that all depends on, you know, how aggressive somebody wants to be on that trade and I think I will let John comment a little more on the general market conditions.

I think -- this is John Marchioni.

That is a fair assessment of what we see out there.

It certainly depends on the class of business you are talking about, so if it's a contractor versus a manufacturer or a golf course, your set of competitors will be different and will vary by state.

Clearly we anecdotally we hear stories -- you will lose renewals for pricing levels that we just can't -- can't justify.

The ability we have right now through modeling to provide true pricing ranges to our renewal underwriters and our new business underwriters gives them a much better sense of what a typical pricing level is for each individual account so they know where the line is and how far they can push that before they just let that walk.

We also look at our renewal book and measure -- and Greg mentioned in his comments earlier, diamond score to make sure the business we are losing is the business we are comfortable losing and the business we are preferring to keep or be more aggressive on.

That is another important measure for us that points to longer-term probability.

Thanks for the comment.

I will follow-up with an additional couple of questions.

Okay.

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

Good morning.

Hi, Rohan.

Hi.

I guess, Greg, I am trying to reconcile your commentary after the fourth-quarter results where you seemed substantially more upbeat on the growth prospects relative to right now.

What has changed in the environment the most in your view?

It doesn't seem like pricing has fallen off a cliff or anything.

When we talk pricing, remember, the only benchmark that you have out there that is somewhat legitimate is the renewal pricing, and I will tell you, there are a lot of surveys out there, and obviously we follow the clip survey which we put the highest degree of credibility in with respects to renewal pricing.

In some cases, that is a very different story than what you hear relative to new.

I think in some cases when you look at our budget and our missing premium last year, that was focused more with respects to the renewal inventory, and this year it is a different story.

It is more focused on new business.

And I -- and I think we have seen a lot of carriers very aggressive in the marketplace to write new business to meet whatever premium objectives that have been set within their organization.

So I would say that there a pretty ferocious appetite out there for some carriers to write business in the first quarter that clearly became, clearly evidenced itself I think more so in this quarter than in the fourth quarter or third quarter of 2007.

Is it possible that some of your competitors are using your new agent compensation strategy against you even before it goes into effect that is hurting your premium volume.

Our compensation structure first of all wasn't even rolled out until February, and you have got to admit -- the business booked in January -- the business recorded in January for the most part was booked in November and December and most of that business was two -- two months ahead of time.

So, no, my belief is that did not have an effect on -- on our premium levels.

Okay.

The -- I guess on commercial property, you cited higher severity -- was that in your views one-time related, weather-related or anything there that might not recur or do you think that was just because of -- like --

I am going to let Ed Pulkstenis address that -- that question.

Sure.

The -- if I can ask on the question.

You mentioned Commercial property.

The severity comment was in relation to the auto physical damage.

Is that where you were or on the property?

I -- I interpreted it as -- as being Commercial property losses were higher than expected due to severity reasons.

Was there anything with Commercial property?

I can talk to you about property a little bit.

I think -- one of the things we have to start with is, when you look at our results relative to the industry, we do track that.

If you go back to 2000, we have outperformed the industry in our property book by about 19 points.

Now if you take out 2011 and the impact -- I am sorry, 2001 and the impact of September 11, we are within a half point of the industry.

Our results for property over a long period of time really track on par with the industry's.

One of the things when you look at the industry number and our numbers is the volatility that is just inherent in this book of business.

For the industry that is on a base of billions of dollars of premium and on our annual base, you continue to see volatility.

As you start to break that down to look at the results for an individual quarter or for other metrics that we look at, you really start to look at numbers that do tend to bounce around just by the very nature of the business.

Just to give you a sense -- and we look at a number of different metrics on the property side.

We track our overall frequency and the severity trends.

We track our predicting modeling metrics.

We track our results by construction, by age of building, by hazard grades and we really do not see anything across a wide range of metrics that would cause us to believe that we see any trends or we need to make any changes in what we are doing.

Some of the -- some of the increase in the property was simply due to the continued pricing pressure that we have seen as Greg mentioned earlier.

We do feel like we have a very, very good understanding of where we are in the property and at this point, we don't see any trends.

Okay.

Since you mentioned commercial auto, that also a been over the last few years a successful line for you.

What changed in terms of the severity and competitive environment that led to the margin deterioration there?

Yeah.

I think that is a number of line where we track a number of metrics on the auto side.

There we look at our experience across our various product lines.

We have different products with different price points, different underwriting criteria, different coverage levels.

We look at our experience across different hazard levels within the commercial auto line.

We look at business that was written more recently versus business that has been on the books for a longer period of time.

We look at things like our size of account, which is important because our One & Done small business program is growing very well right now, and, again, that's another area where when you look across the broad metrics, you really don't see trends that indicate should be changing what we are doing or indicate one area is performing much better or worse than any another area.

I will tell you for the first quarter, we did see a couple of physical damage losses in our volunteer fire company book, which is a very profitable book of business for us.

It is a book of -- or an area where we are an industry leader.

And it has been very successful for us, but with that, we will have to pay physical damage losses on a fire engine from time to time and those are expensive and we did experience a couple of those in the first quarter and that is a little bit unusual, but no trend, really nothing that we see that indicates a trend and nothing that we see that we would need to change.

And Rohan, just on a accident year basis, to kind of just round out Ed's comments, the physical damage for the quarter added to our overall combined ratio in Commercial auto somewhere between 4 and 5 points.

So, on an accident year basis, we expect that line to level out into the -- let's call it the 96 range which is where the liability is running.

Now when you look at it relative to the prior year, obviously it shows like a 12-point difference in terms of combined ratio.

Some of that is just the price compression that's been given up in Commercial auto over the last two years, which is a line that has been under a lot of pressure.

The other thing is that in the first quarter of 2007, we had about $3 million of reserve releases in that line.

That also improved that combined ratio by about 4 points.

So, when you kind of level it out, we expect that line to run at about the 96 range and taking out the unusual physical damage activity that Edward just referred to it does get into that level of expectation.

Okay, great.

Those are the questions I had.

Thanks a lot.

Your next question comes from the line of Mike Grasher of Piper Jaffray.

Good morning, everyone.

Good morning, Mike.

Just several questions here.

With the predictive modeling in place -- I think that was in the press release -- with that in place, is the expected impact from that worked within your guidance yet?

Or not.

There's some aspect of that within our guidance in terms of our improvement.

When you look at our combined ratios and you look at the year on year change, obviously what drives those combined ratios, year on year are price changes, changes in severity and changes in underwriting.

And if you don't have changes in underwriting that are significant, those combined ratios year on year are going to go higher.

So our -- our current year expectations do reflect a certain amount of improvement and as you know actuaries, they have a tendency to be much more measured in terms of how they work that credit in, and that's just part of the normal process.

And I have got to tell you, in terms of our planning, we have a very, very sophisticated planning model.

We disaggregate this as new, renewal and there are new business aspects in terms of how that business is expected to perform.

And those have weightings on them that are different than just an overall weighting in terms of expectation on loss ratio?

Okay.

I am wondering if -- certainly allowing you to decide on certain accounts whether to go with them or not, in particular on pricing.

But in -- in the area of the actuarial analysis, are you putting up a different level of reserves or changing your multipliers in thinking about how you reserve for these accounts with the new modeling?

In terms of overall and how they figure into the current year, yes, there is.

Okay.

I guess I am trying to reconcile the combined guidance that you gave in the -- in the press release as well, and if I look at the first-quarter's results, will this pretty much be a reflection for the rest of the year in terms of what you anticipate on a line-by-line basis?

No, it's not what we anticipate at all.

We believe that the property obviously, there was a lot of volatility in the property in the first quarter.

We expect that property which -- I want to make sure we are talking about the OF and EC line or the property line itself.

Then you got the same kind of thing to a larger extent going into commercial physical damage line.

So we expect, those areas to normalize more as we move forward.

And, that will happen over time.

But some of the guidance change, obviously as you saw, we reduced our investment income projection partly due to a change in expectation on our alternative investment portfolio expected performance.

We had a 10% expectation, there.

We dialed that back to 8.

We felt that was prudent given the fact of the M&A slowdown and what may happen in terms of realizations in that portfolio and that changed our investment and part of the reason the guidance came down.

In addition in the quarter, we had restructuring charges and other things that are nonrecurring.

We had this tax situation of $0.03 in there.

If you look at it on a line-by-line basis and every liability line, there is going to be a little bit of volatility among the lines.

Generally speaking, we expect the property lines to more normalize as we move through the rest of the quarters.

Okay.

And then couple more.

The -- obviously the economy is slowing down here.

Is that impacting your workers comp business at all?

Are you seeing a change in headcount and also on the loss side?

Yeah, we are seeing definitely that impact.

As a matter of fact, a lot of our new business miss was relative to a shortfall in workers compensation premiums.

Not only in the large account space, but also on the fact that we didn't get as many -- we didn't write as many worker compensation accounts than we thought we were.

And in some cases the pricing for that by the mono line carriers have been extremely aggressive.

And with respect to general pressure, yeah, obviously you see it.

Employee -- number of employees per site per location at every one of our insurers is obviously under a certain ament of pressure.

Small businesses that we generally insure are under pressure.

I don't think they are under as much pressure as the large -- the larger enterprises, but sure you are going to see payrolls in a lot of case goes down because of less employees.

Okay.

And then what trends are you seeing in terms of severity, frequency.

And do you sense impact from inflationary loss cost?

Well, right now in terms of -- frequency has been pretty stable for us.

Severity is actually gone higher in the quarter mainly because we have been more quick to establish reserves than we have in the past as I mentioned in my prepared comments, but with respect to inflation and everything else like that on the medical side, our actuarial folks are using a multiyear inflationary estimate.

And we feel very comfortable with those.

Ron, I don't know if you have any comments about inflation in there.

Yes, our inflation area estimates are good.

Where we are seeing the improvement in workers comp is really on the frequency side.

Even in the latest quarter the frequency continues to decline and on a year on year basis, frequency is down about 4%.

Interesting.

Well, thank you --

Mike, the other thing I will point out as are building your model and things like that, remember in that first quarter here, we have got -- 1 point of the combined ratio is impacted by the restructuring charge.

Every line of business has roughly 1 point of restructuring in it and as you build that out you have to factor that in.

Okay.

That's helpful.

Thank you.

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

Thanks.

Just going back to your commentary on reserves and losses.

You mentioned there weren't any in Q1 '08 and there were some in Q1 '07.

Can you talk a little bit more about that and were there any pluses or minuses, or net-net, there weren't any reserve adjustments in the quarter?

Amit, for the quarter we had favorable reserve development of $3 million in the first quarter of 2008.

So that's $3 million in the first quarter of '08 and $4 million favorable development in first quarter of '07.

So comparable in that regard.

Okay.

That's -- that's helpful.

I guess -- just moving on and I guess going back to the discussion of your model and I know you spend a lot of time explaining to us how it makes Selective different from others.

I am just wondering at this stage of the cycle, especially when everyone talks about having a model, does it really end up making that much of a difference, over the longer time I guess as we go forward from here?

I will tell you -- let's just talk -- I don't want to get all -- the Selective insurance brand really is high-touch, high-tech.

The touch points make us really different.

I don't care whether we are talking about safety management services, claims services, or the fact we have AMSs in agents office.

That I think really gives us -- why we have been able to grow our long-term premium rates on a compounded annual basis much better than our competition.

And that's -- across the board.

I don't want anybody -- one quarter does not make a year.

I want to make sure that's clear.

What I think, in some cases what modeling gives for you is to stay clear maybe of -- of what would be perceived in my mind as the most toxic of the toxic business, and that -- you know, and I think that is where, we get a -- a more informed decision about the type of business we want to be competitive on.

And I think that helps us steer clear of that -- let's say the worst 5% in the industry or the worst 20% in the industry.

That's where we want to make sure our folks are guarded on.

If we have to give up some price to write a new piece of business, you want to do so on a good quality account.

Then in a year from now or two years from now.

Do you get 2, 3, 4% -- if you get another 2, 3, 4% on that account, you can do that.

If you were writing that one or two diamond business now, it is not going to be good today and it will not be good in three years from now.

I think that is the difference.

And, again, we are not immune from the cycle.

I don't think there is any carrier that can tell you they are immune from the cycle.

Everyone has a certain amount of aggressiveness in their pricing structure, but when you look at how that worst 5% business drives higher loss ratios and to the extent that you can mitigate that in your new business selection and continue to migrate is down in your renewal inventory, you have a much better opportunity to spring back into the market when conditions do change.

That is the difference in my opinion.

That's helpful.

I am just wondering if -- if you sort of look at your guidance going forward has your models been fully online.

How much of an impact on the combined ratio would the model have compared to maybe the overall market or your peers in terms of points on loss ratio.

I got to tell that you is information we are not really comfortable giving out.

But it is something we clearly analyze internally and make long-term strategic decisions around that type of information.

Okay.

That's helpful.

I guess my final question would be on M&A.

Recently we saw the Safeco deal and previously we have seen other deals in this space.

Maybe you can just comment about that.

And -- and would you be a willing a willing seller at this time or would you explore opportunities with other carriers?

That is my final question.

Thanks.

With respect to M&A overall, any time there is M&A activity we benefit from that.

We benefit on a whole host of issues in terms of changing dynamics.

Changing concentration, inside independent agencies and I think that provides us opportunity in the marketplace and we try to seize that as best possible.

With respects to Selective -- our goal is to maintain and generate good, solid long-term returns for shareholders and obviously, our Board is not immune from making their fiduciary -- executing their fiduciary responsibility, but our goal is to maintain our independent position in the marketplace.

Okay.

That's helpful.

Thanks so much.

Your next question comes from the line of Doug Mewhirter of Ferris Baker Watts.

Hi, good morning.

Good morning, Doug.

The question I had was on personal lines, regard to actually more specifically the homeowner lines.

I see you had kind of a rough go with it recently, and I just wondered, is it also as competitive as maybe the personal auto because I realize a lot of the big National carriers are not -- Geico and Progressive don't write homeowners insurance and that will receive as much fanfare when they entered the New Jersey auto market.

Are you having a lot of weather-related losses or are there a lot of pricing pressure in that market as well and what is your plans for, I guess, getting that back to profitability?

John Marchioni will answer that question.

Just a couple of comments on that.

Generally -- I mean on an overall basis, the competitive levels in the homeowner market are not nearly as aggressive as they are in the auto market.

You mentioned the players differ there and that certainly drives some of that.

If you look at our ex-cap combined ratio for the quarter a fair amount of improvement and specifically on the loss ratio side.

We are seeing improvement there.

But longer term, and we talked about this a little bit in prior quarters, we are in the process of deploying a predictive model for homeowners.

We have built it and we've actually deployed it in a couple of our brand-new expansion states, which for us are Rhode Island, Minnesota and Iowa, and that really sets us apart from the vast majority of competitors.

There are only a couple of competitors deploying predictive modeling for home because, again, those modeling leaders that exist on the auto side do not exist on the home side and that's where you begin to add in some of the rating factors specific to the occupants of the home as opposed to purely rating on the attributes of the property itself.

That is rolling out as we speak.

In addition to that, the pricing environment overall for personal lines has already started to turn and our ability to take overall base rate changes is also something that we have built into our plan for this and subsequent years.

And then the final piece is over the last 12 or so months, and clearly going toward, we have started to build in additional rate in our wind-exposed territories, specifically in New Jersey and South Carolina, which we think will help profitability going forward as well.

Doug just to give you some numbers for the quarter, the homeowners line had 5.6 points of catastrophe losses in there compared to 3.9 points of cat losses last year.

Okay, thanks a lot.

It is very helpful.

Your next question comes from the line of Susan Ross of Wachovia Securities.

Hi, Susan.

Good morning.

My questions have been answered.

Thank you.

At this time, there are no further questions.

Well thank you for participating in our call this morning.

Despite the challenges we face in the first quarter, we are optimistic about our long-term success, and please give Jennifer or Dale a call on any follow-up questions that you might have.

Thank you very much.

Thank you for participating in today's conference.

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