Selective Insurance Group Inc (SIGIP) 2008 Q2 法說會逐字稿

Good morning and welcome to Selective Insurance Group's second 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.

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

This call is being simulcast on our website and the replay will be available through September 2, 2008.

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

Selective uses operating income in 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 US 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, CFO, Ed Pulkstenis, Chief Underwriting Officer, John Marchioni, Chief Field Operations Officer, Mary Porter, Chief Claims Office Officer, and Kerry Guthrie, Chief Investment Officer.

Now, I'll turn the call over to Dale to review the quarter results.

Thanks, Jennifer.

Good morning, second quarter financial results were solid, especially given heavy industry catastrophe losses, the soft cycle and deteriorating economic and financial market conditions.

Catastrophe losses in the quarter were a bit heavier than normal and added 3.5 points to the statutory loss and LAE ratio.

Heightened storm activity in our southern and midwestern regions was the primary cause and of the 16 named storms in the second quarter, we were affected by six.

Catastrophe losses exceeded our expectations by about 2 points in the quarter, yet our statutory combined ratio came in at a profitable 98.7% while the GAAP combined ratio was 100.9%.

Excluding catastrophes, the statutory and GAAP combined ratios were 95.2% and 97.3% respectively.

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

Statutory net premiums written were down 4% from second quarter 2007, reflecting a decrease in commercial lines of 6% while personal lines grew 5%.

In commercial lines pressure on new business continued unabated.

However, our renewal book retention remained strong at 78%, an indication of our superior relationships with agents as they work with us to renew accounts up to 60 days in advance of the expiration date.

Renewal pricing, including exposure, was down only 1% for the quarter and 0.7% year to date, while pure price declined only 3.1% in the quarter and year to date.

The softening economy is affecting our contractors' book, which represents about 45% of our commercial lines business.

New business counts are down about 12% from last year and audit and endorsement premiums, which usually result in additional premium, decreased approximately $10 million for the quarter from a year ago.

The economy's impact is evident in our worker's compensation, general liability and commercial auto premium numbers.

Commercial property results for the quarter posted a solid 94.4% combined ratio, including 18.5 points of catastrophe losses.

This is 9.2 points more than 2007 and 11 points greater than our five-year average.

Workers compensation continued to demonstrate the benefits of our multi-faceted strategic underwriting initiatives and business analytics as well as favorable development of 3.9 points in the quarter.

We reported a statutory combined ratio of 98.6% for Workers Compensation, a 3.6 point improvement from a year ago.

Premiums for this line declined about 13%, primarily due to the competitive pressures for accounts over $100,000.

We are seeing very aggressive marketing and pricing behavior from monoline writers and certain other competitors, who are using Workers Compensation as a lost leader to write the rest of the account.

The general liability line is facing pricing pressure and higher loss costs, which are having an adverse impact on profitability.

We are, however, maintaining underwriting discipline in our contractors' book by limiting exposure to subcontractors despite market pressure to do otherwise.

We are also focusing on growing business segments with lower completed operations exposures.

Commercial autos combined ratio increased by about 12 points in the quarter compared to the second quarter of 2007, which included favorable prior year reserve development of $7 million or 8.9 points, results also reflect price decreases which contributed 3.7 points to the combined ratio.

There was no statutory loss in LAE reserve development on an overall basis in the second quarter of 2008, compared to favorable development of $3 million in the second quarter of 2007.

During the quarter there was some movement within lines, including $3 million in favorable development in Workers Compensation offset by $3 million of unfavorable development in general liability.

We successfully completed negotiations of our July 1 excess of loss reinsurance treaties.

The property excess of loss treaty renewed with a $5 million increase in limit to $28 million in excess of $2 million retention.

This resulted in a 4% price decrease on the treaty, and estimated analyzed facultative savings of $375,000.

The casualty excess of loss program was restructured into one treaty encompassing all casualty lines, including Workers Compensation.

We now have reinsured limits as follows: after an initial $2 million retention.

The first layer provides coverage up to 65% of $3 million in excess of the $2 million retention.

The second through fifth layers provide coverage up to 100% of $45 million in excess of the $5 million; and

The sixth layer that provides coverage up to 75% of $40 million in excess of $50 million.

The cost of the layers above $5 million has decreased by approximately 2% to $10 million.

On a fiscal year basis the ceded premium for the entire casualty program will be approximately $10 million above expiring, due to significant extension and coverage.

The overall impact of the restructured program will be to improve insurance operations by about $2 million with lower investment income being the offset due to the higher ceded premium.

All of the reinsurance information will be included in our 10-Q, which we expect to file later today.

Personal lines statutory combined ratio,excluding flood, improved more than 9 points to 103.5% for the quarter.

This steady progress reflects greater pricing accuracy from Selective's new automated MATRIX(r) system, targeted rate increases across our personal lines footprint and lower expenses due to the personal lines restructuring in second quarter 2007.

Although much work remains to be done, we believe our personal lines strategic initiatives are beginning to gain traction that will favorably impact our long-term results.

Results in personal lines continue to be driven by our New Jersey auto business which has stabilized at approximately 70,000 cars, while account retention improved approximately 3.6 points, to 78.6%.

Over the past four years, as New Jersey transitioned from a highly regulated environment to one of much greater rate flexibility, market conditions drove pricing lower.

In response to profitability challenges, and an easing of competitive pressures, we filed a 6.8% rate increase in New Jersey that became effective May 15 and an additional 6.5% rate increase which will become effective October 1, 2008.

We recently received approval if a newly defined territory structure in New Jersey, effective December 1, which will allow us to improve rate adequacy in urban areas.

Our plan to improve personal lines profitability includes continuing to aggressively pursue rate increases for both auto and home, implementing targeted underwriting initiatives and working with agents in our expansion states to diverse and grow our book of business.

New auto business written under MATRIX increased $2.5 million in the quarter from a year ago.

Expansion state auto business written pre-MATRIX is receiving average rate increases of 7% over the course of the year, on top of the 7% received last year.

We continue to proactively manage our expenses across the organization.

In addition to the restructuring and commission changes announced earlier this year, effective June 30, 2008, we redomesticated two of our insurance subsidiaries to Indiana.

The changes were made primarily to streamline expenses and will result in a durable annual savings of approximately $2 million.

These savings benefit our statutory expense ratio first as expenses related to production of business are deferred and amortized for GAAP earnings purposes.

This explains the current wider than usual difference between our GAAP and statutory expense ratios which will continue for the present due to the previously announced commission changes that became effective July 1.

As mentioned last quarter, we have instituted a number of initiatives in our claims area based on a review of industry best practices.

By concentrating on reduced cycle time, improved work flows and quicker establishment of case reserves, we are able to reduce legal expenses and ultimately loss cost.

In the near term, the quicker establishment of loss reserves inflates our severity statistics.

But the longer term benefit is a refined management of the claims process.

On the Selected Income Statement Exhibit on Page 8 of the supplemental investor package, you will notice that the other expense category has decreased by $4 million from the second quarter of 2007.

This is largely attributable to the decline in SIGI stock price that reduced the carrying value of employee long-term and stock incentives.

For the quarter, after tax investment income was down $1.7 million from a year ago, primarily driven by a decrease of $3.8 million pre-tax, in alternative investment returns, due to the slowing merger and acquisition activity in the current tight credit environment.

This was partially offset by increased investment income as a result of a higher invested asset base in our fixed income portfolio.

High credit quality continues to be the cornerstone of our investment strategy as we maintain an average overall portfolio rating of AA+ with nearly 100% of our fixed maturity securities being investment grade.

In addition the fixed maturity portfolio market value, in relation to amortized cost, is 98.8%.

We have provided you with substantial disclosure in our quarterly investor package around our municipal bonds, mortgage-backed securities, asset backed securities and government sponsored entities.

We don't hold any Fannie Mae or Freddie Mac subordinated debt common or preferred stock.

However, we do own $47 million of Fannie Mae and Freddie Mac senior debt securities.

While we cannot guarantee the ultimate performance of any security held, we are very comfortable with the high quality and conservative nature of our overall portfolio.

We use Intex, a structured securities analytical tool, to assess the performance of our underlying collateral and the default likelihood of our securities.

Utilizing Intex and reflecting worsening market conditions, we took other than temporary impairment or OTTI write downs of $9.8 million pre-tax in the second quarter.

Although the majority of these securities were insured or guaranteed by mono line bond guarantors, they did not have underlying ratings.

In addition collateral performance had deteriorated over the past three months, presenting negative credit and pricing pressure.

It's important to note that our portfolio continues to benefit from high quality underlying ratings.

Portfolio rebalancing activity in the quarter led to an overall net gain of $1.2 million after tax.

We continue to believe that unrealized losses on certain securities and equities are not necessarily predictive of the ultimate performance of the underlying collateral.

However future write downs may be necessary for securities that are performing in line with anticipated or contractual cash flows, in light of unprecedented market and liquidity disruptions.

We currently have securities in an unrealized loss position totaling about $36 million with a market value to amortize costs of less than 85%.

These securities have continuously been in these unrealized loss positions for less than nine months with about two-thirds for six months or less.

During the quarter we repurchased approximately 0.8 million shares of Selective common stock.

The average price per share was $21.35 or 1.1 times book value.

There are approximately 1.7 million shares remaining under the current 4 million share repurchase authorization.

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

Thank you Dale, good morning.

I'm pleased with the solid results we delivered in the quarter.

As competition remained fierce, financial markets churned and storm activity was on the rise.

Our approach has been to continue to focus on writing good quality new business and working hand-in-hand with our agents to protect renewals.

Our underwriters now have tools they didn't have in past soft cycles to help them assess and price the best new business opportunities.

The market is being affected by a slowing economy, and there are companies out there growing market share at the expense of profitability.

In addition, there are less sophisticated companies who lack the business analytical tools and that are writing business at underpriced levels.

For Selective new commercialized business was down 24% in the second quarter as follows -

One & Done automated small business $18 million up 10%

Middle market or AMS generated business $42 million down 25%

Selective Risk Managers, our large account business, $3 million down 72%

Small business continues to provide the best opportunities for growth in the market and the expansion of our capabilities in this area are clearly working.

New business written per work day averaged $275,000 in the quarter.

Up 10% from a year ago, reflecting the ease of doing business that our One & Done small business system provides the agents and their customers.

New business opportunities in the middle market continue to be challenging.

While our agents are working with us proactively to renew business up to 60 days in advance, new business is difficult to harvest, particularly for accounts over $25,000.

Large account business, while representing only 11% of our total premium, was responsible for 40% of our new business decline in the quarter.

Pricing in this segment, in our opinion, can be reckless.

We tell our underwriters to walk away from what they believe to be overly aggressive pricing by competition by our competitors.

As you have heard me say before, "we won't chase stupid."

Over the long-term Selective is a growth company.

We have excellent relationships with our agents and we have expanded those relationships into two new markets, Massachusetts and Tennessee.

Since July 1, 2007, the 24 new agent appointments in Massachusetts have generated premium growth of $12 million in partnership with three new AMSs deployed in that state.

In the month of June, 2008, our first month of operation, we wrote $600,000 in premium with our 10 new Tennessee agents supported by three AMSs Through June we have appointed 64 agents throughout our footprint bringing our total agency plant to 920 agents.

We have a well developed personalized improvement plan that's beginning to show progress as we grow premium and policy count.

Most importantly we have the financial stability to back up our growth with a 47 year track record of A+ superior financial strength rating from A.M.

Best.

Selective is dedicated to growth but not without profitability.

This is much tougher in a climate of deteriorating price which is why we launched our Knowledge Management initiative back in 2005.

The information and tools garnered from this initiative are allowing us to construct a more stable and profitable book of business over the long-term.

Our best performing four and five diamond new business that has increased from historical 50% of our book to 58% while the worst performing new business one and two diamond accounts has decreased from 20% of our business to 12%.

We expect to see some moderation in price decreases in a stabilizing market as we move into 2009.

There are many pressures on carriers that we believe support this view.

Many companies have been making their earnings targets principally with prior year reserve releases.

As excess reserve levels are depleted, there will be less earning support going forward.

The commercial line segment of the industry reported a combined ratio for the first quarter of 2008 of 101.7 As premium growth levels continue to decline, there will be increased pressure industry wide on expense ratios of the many companies do not have sophisticated pricing monitoring tools to calculate pure premium changes on the renewal books that could put them at risk for future adverse loss development.

We have already seen a much higher level of catastrophe losses in the first six months than we have seen in the industry in many years.

ISO estimates $9.5 billion or approximately 4.3 points on the industry combined ratio for the first half of 2008.

And finally, fair value accounting will continue to put pressure on investment portfolios resulting in more OTTI write downs.

Fixed income write downs will lower surplus levels with a historically low investment yield cash flow underwriting is less likely.

Excess surplus levels, strong industry profitability and a fragmenting commercial lines industry have fueled a reckless grab for market share.

And in turn have driven down commercial lines pricing.

As pressures continue to build, the only way to mitigate the combined effects of all of these factors is through commercialized pricing power.

All of this should lead to more financial strain, more industry consolidation and ultimately an overall improvement in the business climate for strong, stable companies like Selective.

Our goal is to work to maximize shareholder value and one way we do that is through our robust Enterprise Risk Management programs designed to maintain financial strength and stability.

We protect capital by maintaining conservative reinsurance programs.

We have lowered our casualty retention and have a catastrophe program that limits our 1 in 100 year event to 4% of stockholders's equity.

We also have a well diversified and conservative investment portfolio.

Our investment team is using state of the art portfolio monitoring tools and do frequent value at risk analysis.

Our business analytics and monitoring tools are some of the best in the industry and help us write quality business at the appropriate price.

Overall we believe that Selective is in much better competitive position than most carriers to emerge on the other side of the current cycle stronger and more nimble than ever.

In the meantime we will maintain discipline.

Reflecting six month results we have tightened our earnings guidance to a range of $2.00 to $2.20 from $2.00 to $2.30 based on the following revised full year assumption.

A statutory combined ratio between 99 and 100.

GAAP combined ratio between 100 and 101.

After tax, catastrophe losses of $19 million or $0.36 per diluted share.

After tax investment income being flat to down 2%.

Diversified Insurance Services revenue decrease of 1% and a return on revenue of approximately 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) You first question comes from David Lewis with Raymond James.

Thank you.

Hi, David.

A few questions.

Greg, if I could start with you.

Can you talk about whether you are starting to see any more rationality start to come into the pricing?

I mean, everybody's well aware that if you don't start to stabilize pricing, we will probably have at least another 18 to 24 months of deteriorating combined ratios.

So if we wait until we get to 2010 it might be somewhat dire if we don't see it sooner.

I think Marketscout indicated that June was the first month they saw at least a deceleration in downward pricing trends.

In your overall book what are you experiencing?

Right now our pure price trends are down, right around 3% for the year and we are very comfortable with the fact that we've maintained our retention at a solid and stable 78%, and we're very comfortable with the job that our inside underwriters are doing relative to the type of business that we are renewing.

We want to make sure we are protecting based on our business analytics the best business and making sure the business that isn't as good is getting price increases or finding another home.

Overall, just in terms of tone, I mean, I have started to read and I have heard from various folks out in the field, we spend a lot of time in the field as a management team.

So we are pretty close to what our competition is doing.

That some of the tone and rhetoric has started now to change at the top from some of our competitors about cleaning up some profitability issues and some general under-performance.

I think holistically you'll see a second quarter that will probably be problematic for most companies and will continue as I articulated the five or six different items in terms of what will put pressure on, I think that clearly will put some pressure on, trying to get some price increases out there.

Dale, your price trend's down 3%.

That's on renewal business, is that correct?

That's correct.

So if we look at business that you are not taking, or is going off to somewhere else, dollars, what would you say?

Are those prices still down in the 10-20% range?

Some of the business that we're losing in some cases is way less than our expiring premium.

It's hard for us to actually-- we don't actually have the number it was lost at.

But in many cases, it is moving at prices way below our expiring.

We do not have any formal statistic.

I know John-- .

That's accurate.

We don't have a formal number.

We track it, sort of anecdotally, and generally speaking our agents are going to get the last look at most of the business that we are trying to renew.

In many cases you won't know what the actual number it goes for, but there are there is no tracking system that's consistence across all lost accounts.

I understand.

Greg another question.

What do you think the impact ultimately is going to be from your commission change on July 1?

Is that going to put you at a competitive disadvantage?

I understand it's probably the right move to make.

But what is the sense that your getting for some of the producers on that?

Yeah.

I will tell you that I believe our total compensation package is still very strong in the marketplace and remember where we took those changes for the most part-- one of the largest allocations in there was New York GL, where we have had some profitability issues.

And we were actually paying commission above market there.

Our modification in terms of straight commission puts us more in line with the market factors.

So we don't believe it is going to be that big of a negative effect on Selective.

Okay and just finally and I'll come back and requeue with some additional questions.

But the M&A environment, you have seen a number of transactions announced here in recent months.

And some of those values getting somewhat lofty.

What are you hearing out there in general?

Either as potential acquire or merger partner from the Selective standpoint?

We have heard nothing with respect us.

What we do hear in general is that there are a number of foreign buyers that are now starting to look at the US industry.

Other than that, we have no comment on it.

Would you be opposed if the right price-- obviously you have got to focus on shareholders, but, if you could become an attractive platform for a foreign insurer it would allow you maybe some greater capital capacity to grow the business on a capital basis?

Our board always has to look at every opportunity and assess it on its merits and that is just something that they have a fiduciary or we have a fiduciary response to shareholders to do that.

Very good.

Thank you.

Your next question comes from Mike Grasher with Piper Jaffray.

Hey, Mike.

Thank you, good morning.

Just wanted to follow-up a little bit with some of the things you touched on there.

I think, Dale, you were mentioning the aggressive behavior from monoline leaders on Workers Comp creating some issues there.

Can you give us some more details around that, because it seems like everyone says that.

But can you sort of differentiate in terms of what examples you may be seeing?

John, do you want to?

This is John Marchioni.

My comment along that-- you can't be overly specific about any individual competitor.

But generally speaking when the market was different a few years back what you would have is accounts that tend to be largely attractive on the package side of the business and from our underwriting stand point we'd like to write the package but just are not willing to write the comp and many of our agents had monoline markets who would write that.

What you are seeing now is not only mono line markets getting more aggressive, we're actually seeing multiline markets getting more aggressive on comp in terms of commission paying but also their underwriting standards.

So what happens is your ability to write the comp and have the agent place the comp-- I'm sorry, your ability to write the package and have the agent place the comp elsewhere is limited.

So if you're not willing to take, in many cases, unattractive comp, you lose the opportunity to take the package or write the package and that's-- I think that is more accurate of what we are seeing right now in the market.

Okay.

Thanks, John.

That's helpful.

And then the favorable development within that line, Dale, Greg, I don't know who wants to comment on this.

But how much of this would you attribute to the investment you have made?

Or the investments you have made in the back office with the Knowledge Management and that?

I would tell that you most of our Knowledge Management efforts to date have all been focused or substantially focused on the underwriting area.

We are just starting to develop a number of initiatives on the claims side, so I think those benefits will be out in future periods.

Okay.

But nonetheless, we -- you have had success in driving down that combined ratio in workers comp that has generated from the investments you have immediate, correct?

Absolutely.

That is a byproduct of the fact that we are now attracting and writing the best business and they are generating less losses.

And we still are looking at the other end of the cost of goods sold element in our equation to drive further improvements but I just want to make sure you understand the distinction on this, is the business now that we are harvesting, when you look at the profile and you look at the negative ROEs that one diamond business generate, relative to the best performing five diamond which generates hugely positive ROEs, what you are trying to do is better balance your inventory and write less of the one diamond and more of the four and five.

That then drives your loss ratio down and starts to have the capability like John mentioned now that we can actually pre score accounts and we are being a lot more selective in our ability to go out and go after a good account that we know we are going to be competitive on the comp and go out and try to write that package account.

So we are actually now turning it into a positive and more of an aggressive marketing opportunity for us.

I would also add, Mike, that generally the way we reserve here is that, as we make underwriting improvements, the actuaries wait until we really see that starting to come through the numbers before we really reflect that within our overall reserving methodology.

So to the extent we make underwriting improvements and did make improvements in Worker's Comp it wasn't until we started to see those benefits come through in the numbers before we recognized them.

So definitely there is a correlation there between making underwriting improvements and ultimately seeing some favorable development in that line.

Okay.

So it sounds like early on here the improvement has been more about the culling than it has the actual underwriting?

Well I call that underwriting.

On the claim side I just view that as how you manage your cost of goods sold than how can you better, more effectively manage your cost of goods sold whether it be on the loss side or on the loss adjustment expense side.

That is different-- that is a different opportunity to harvest savings than what we are talking about.

I want to make sure we are clear on this.

We are talking about a better identification of business that generates less losses and therefore, that's what's generating your fundamental improvement.

The other part of the equation will be a deeper dive into some of the other claim aspects.

Better triage claims better manage your integrated outcomes and all the different things that we look at making sure we are maximizing our PPO discounts.

Make sure we are best utilizing the buying power of our panel council firms.

All those things are other opportunities to lower your infrastructure costs in the claim side of the equation.

Okay.

That is helpful.

Thanks for that background.

I wanted to move over to a different topic in terms of capital management you mentioned 1.7 million shares remaining.

I do want to ask sort of why we weren't more aggressive in the quarter in buying back shares, given the valuation.

I think valuations were much lower here during the 2Q than 1Q, yet there was fewer share repurchase executed during the quarter.

Actually a couple of things on that, Mike.

If you look at the particularly low evaluations during the quarter, they occurred during the period where we had to be out of the market.

So that inhibited that to a certain extent.

If you look at, the average repurchase price that we had during the second quarter was $21.35.

But obviously the stock closed the quarter down in the $18 range.

So there would have been, I'll be honest with you.

Personally I was chomping at the bit wishing I could be in the marketplace to buy at that kind of a number.

But, basically we have to be good stewards of our capital.

We have never been shy about returning capital to shareholders via a share buy back.

We also need to make sure we have the appropriate capital around to take advantage of opportunities that exist in the marketplace.

So it's an ongoing, balanced analysis that we do on a quarter by quarter basis and we buy back as we feel it to be appropriate.

Okay.

So it is more to do with the timing than it was feeling a sense that you are pushing the ceiling here in terms of your risk to capital?

It was definitely we were unable to take advantage of the low prices that you saw in the June time frame.

Okay.

Thanks very much.

Congratulations on the quarter.

It was a very good quarter, I thought.

Thank you.

Your next question comes from [Rohan Pai with the Banc of America].

Hi.

Rohan.

Hi.

The question has to do with the contractor liability line.

If you can just talk through maybe some loss trends.

What are you seeing in workers comp and GL in terms of inflation?

Is any higher claim frequency a severity you might be noticing?

Really on -- one of the things as you noted in our previous comments the severity statistics right now aren't very valid because we've got some ongoing claims initiatives that involve putting up reserves in a more timely basis and those are inflating the severity statistics.

So those aren't really valid at the present time.

On the frequency side we are seeing good frequency improvements really across all lines and generally in that down 4 to 5% kind of range.

So we are comfortable with our claims trends.

Maybe add to that, Rohan, relative to pure price trends, although our overall pure price was down about 3 - 3.1%.

for the quarter, contracting has only been around the 2 - 2.2% level, which actually is a little bit surprising.

And-- and you've got to understand, 45% of our business is in the contracting area and I think our inside underwriters have done a tremendous job balancing that up because that's a generally tougher end of the sector of the marketplace and to sit there and say on that space we gave up less price than we did on the average and to kind of tie it together, to answer your question, the lines that we've been giving up, the most price on, has been commercial auto just generally due to overall competitive pressures that has put more pressure on that combined ratio.

The Work Comp has only been down like 2 - 2.5%.

And then the other line that's got the most amount of price reduction is in the commercial property and that was down 5.5%.

But obviously the line that's driving the contractor could be driving the contracting is the comp and the commercial auto.

So I think it's been a very good story for us, relative to a difficult economy.

Okay.

Good.

Thanks for that color.

Just a quick clarification question.

You said there was no net reserve releases addition in the second quarter?

That's correct in total.

In total?

Okay good.

Thanks a lot.

Your next question comes from Doug Mewhirter with Selective Insurance.

Actually with RBC Capital Markets.

I don't think I've joined your company.

We weren't sure about that, either.

Hey, Dale, could you just refresh my memory.

I think you probably went over this before.

I've just forgotten.

The nature of your alternative investment return portfolio seemed to have another quarter of soft performance, that could be an occasional spike.

Is it a fund to funds, or a (inaudible) portfolio, or private equity portfolio?

I'll have Kerry Guthrie give you some color on the alternative investment portfolio.

Yes, I would not characterize the performance as soft.

I mean, relative to very strong comparative quarters, it's down.

But, our overall alternative performance was positive in the quarter, versus an equity market that was down 12%.

So we actually saw significant out performance in the quarter relative to the kind of financial markets.

It is a diversified portfolio with a variety of private equity, hedge fund, real estate, mezzanine financing.

It's quite diversified.

So and has not really been completely correlated to the overall financial markets, bonds and stocks.

But I personally believe it was a very good performance relative to the market.

But obviously the impact on a year over year basis to investment income was negative.

Okay.

Is it internally managed?

Or do you have an external manager that sort of consolidates all those different funds?

Those funds are managed externally.

But the decisions to commit capital, those are made internally.

Okay.

The other color I'll provide is there are about 20 different investments that total about $176 million in market value on the balance sheet.

The largest one that we have currently is about $17 million.

So substantial diversification there.

Okay.

That's helpful.

And Greg, also, refresh my memory, when you say the return-- the diversified services return on revenue in your guidance assumptions, is that pre-tax or after tax?

After tax.

After tax.

Okay.

And also, Greg, if you could just comment or you had an underwriting comment.

Are you concerned about maybe unexpected or maybe expected Worker's Comp claims trends turning a little more adverse because of the economy?

Because of the quote unquote mysterious soft tissue injuries from an employee right before he is laid off?

That kind of thing?

There is a survey.

I think Jennifer has it at her fingertips in terms of that, that do indicate that in some cases, when the market turns down, actually claims go down relative to the economic conditions.

So, it seems some conflicting things on this.

What I can tell you, though, is that we have a very disciplined claim process.

We investigate claims thoroughly.

And I think, making sure that-- that claims are proper and we do have an SIU area that does follow-up on anything that looks suspicious.

But--- and we do manage that process very well.

Okay.

But you haven't seen any unusual trends from that?

No.

In your own experience I guess?

Okay.

Thanks.

That's all my questions.

Next question comes from [Amit Kumar with Fox, Pitt, Kelton]

Thanks.

Most of my questions have been answered.

But just two quick questions.

Recently there has been a lot of discussion on gas prices and the impact it is having on personal auto results.

Do you have some color on that?

You know, other than, I mean our frequency -- hold on a second.

Let me just pull that out.

Sorry for this.

It's buried way back here.

So -- what I could tell you generally, and it is hard.

One quarter does not-- does not make a trend.

But generally speaking, the frequency rates in our automobile line are down.

And on the commercial lines, in the commercial line suit as you would expect to see a little bit of that cascade into that line, they are down as well.

But that's on a fiscal year basis.

Quarter to quarter it's hard to really-- in our book-- relative to the size of our book it's hard to get super credible data like that.

But, I gotta tell you-- you generally look-- you see less people on the road, you see less boats on the water.

You see people looking at $4 and $5 petrol prices that-- that they drive less and they consolidate their runs.

And therefore, there is less miles driven and when there are less miles driven there is less probability for an event to happen.

So I mean, I wouldn't tie that with our numbers.

Because I just think that our statistic base isn't that big to do that.

That's helpful.

And I guess just going back to the discussion on your old investments, previously I think you have given guidance of maybe 8%.

And I did not see any guidance in this quarter's earnings release.

Is it still unchanged?

Or obviously it has gone down a bit.

We have just folded all of those factors into one overall investment guidance.

There were a number of things that we changed and we just -- there was just too much volatility in some of the alternative performance to sit there and specifically give you a return.

So what we have done is we have just lowered the overall investment income guidance.

That diminishment in that number reflects some changes in the dividend-- dividend expectations with regard to what we expect from mutual funds as well as underlying performance in our alternative portfolio, somewhat counterbalanced by higher and better performance on our bond portfolio.

We are investing more in the bonds and we're getting better yields relative to our expected new money rates when we did the budget.

A whole host of factors.

We just felt like it was just too complicated to continue to disaggregate those.

That is very helpful.

Finally just going back to the discussion on the competitive scenario, I know you talked about mono line in the competition and Worker's Comp.

But I guess, overall , you have talked about several competitors who are being very aggressive.

Are we talking more so about companies-- the publicly traded ones, the larger companies, or indeed the smaller, nonpublic names?

I'm just wondering I've been listening to some commentary and everyone seems to be talking about how competition is being aggressive and they are not being aggressive.

I'm just trying to get some more color as to who these players are who are being super

What I would tell you that it's generally larger organizations, both public and nonpublic.

And I think the only way that you really can get behind that is to figure out, how do they measure their pure price relative to their inventory?

How do they look at the quality of the new business that they write?

And how are they pricing it?

And I think until you guys can start to dig down on that information on a company by company basis you won't really know who's being-- who has the analytical tools, who doesn't.

What the talk at the top level, does it match what's happening at the street level and I'll tell you that just from our standpoint, our planning process is very integrated.

It is updated on a monthly basis.

Our actuaries are responsible for our planning model and they update pricing claim trends and then, they are in constant contact with the field and they are managing that process on a month to month basis and these are the same people that ultimately have responsibility for doing pricing reviews in the states.

So they are all integrated very, very well.

And I'm not so sure that many companies have that integrated and the budget process is something that's done at the beginning of the year and then they develop multi-year loss picks and those loss picks stay on the current year for long periods of time.

And I think that that's where, if you are not tracking closely what's happening to price and other things like that, is where you can get some clear dislocation in future years relative to expectation.

It is hard to answer that question other than that.

But unfortunately you guys have got to ask the question in terms of what are the companies doing.

Is people talk the fact they are not doing it but yet we see it.

Pretty widespread.

That's very helpful.

I guess just based on a comment, a quick follow-up, obviously you have talked about your platform.

And in my mind this goes back to the initial M&A question.

Is there anything that ties down your model to US?

Or is it sort of scalable enough that maybe over the longer term it can be expanded?

Let's say if you expand into other countries, it is easily replicable because you have spend so much time and effort in sort of building it?

I think part of the issue there is I am not an expert on how other countries distribute their insurance products.

Our model is designed around the US model, based on the independent insurance agent and developing a tight relationship with that agent and providing decision making right at the front line.

Obviously, decision making at the front line I think would be important in any kind of a marketplace.

I'm just really not familiar enough with all of the different foreign markets and how precisely those work.

So you would have to find a better expert to answer the question about our model and how it may apply in a different mark place.

Clearly there are elements of the model that are transferable and that are universal no matter where you are.

Some of it is the amount of data we extract and the various sources of external data we pull in and the question is, is that type of data available in other places?

So there-- there is-- this is all about incremental knowledge base and so the question is what part of it's transferable?

What part-- do you have that kind of external data available in other locations?

So like Dale said, it's very much a mixed bag.

That's very helpful.

Thanks so much.

(OPERATOR INSTRUCTIONS).

Your next question is a follow-up from Mike Grasher with Piper Jaffray.

Thank you, just a couple of follow up-- I was trying to go back and remember which quarter it was where I think some of the commentary was flowing where there would be more of a push on the personal line side.

And I think it was back first quarter earnings of '07.

But I'm just wondering how much growth we have actually seen from then until now and what the impact may have been in terms of the CAT or the storm losses.

Was there any increase, I guess, because of the focus on the-- on the personal line side?

Let me just sit there and hold on a second.

First of all on the CAT side, on a quarter to quarter basis, our CATs were virtually identical at approximately $2 million each.

And for the six month period actually $3 million up against the $2.7 million number.

So nothing discernibly different there.

We are starting to ramp up more market share outside as Dale articulated more outside the state of New Jersey.

And we have stabilized the lost units in New Jersey.

We now stabilize at about 70,000 cars.

From our standpoint, we've got a very concentrated effort on increasing price.

And now with our new MATRIX product, we are very comfortable with the type of business that we're writing in terms of how it's scored and also how it's performing.

So, we are continuing TOgrow-- Dale, have you got some non-- non New Jersey growth statistics right there, or--

Well, I can tell you on an overall basis we are up 5% on a year to date basis.

We are growing nicely outside of New Jersey at about-- in our expansion states we are growing at about a 10% clip.

The other thing is given that growth, as Greg indicated, the CAT losses were virtually identical.

Actually they are a little bit less even in the quarter, for the 2008 time frame.

And only slightly more on a year to date basis at $2.7 million last year and $3 million this year through six months.

So again definitely did not have an impact on the CAT burden.

But certainly showing growth.

And part of that, too, I think is if you remember our core states where we were originally operating with personal lines, had a little bit more coastal exposure, yet now where we are adding-- the states that we are adding have much less in terms of that kind of coastal exposure.

So you are not seeing that and the hurricane, excuse me-- the tornado activity didn't have a big impact on us at this point in time.

Okay.

That's helpful.

Appreciate that background.

Then with the M&A question that was addressed earlier, I think you spoke to the sell side by not so much on the buy side.

How interested are you in taking on another balance sheet?

Or are there any lines of business or properties which could give you more scale that maybe you are interested in?

From our standpoint holistically, from a strategic standpoint, we look at a commercial lines property where we are going to garner most of the benefit of our knowledge based tools and be able to make a lot of improvements, makes a lot of sense for us.

I would sit there and say highest priority would be a commercial lines opportunity that expands our footprint, would be a great opportunity and then I would put as a second tier, obviously would be commercial lines inside our existing footprint.

So I would put at the highest part of the list a footprint expansion and mainly in commercial lines would be the best from our standpoint.

Okay.

Yes we need more-- operating at a $1.6 billion premium level for us to the extent that we can get more scale, use the heavy technology investments that we have, use the big intellectual investments that we have, the IP that we've got, relative to that, gives us the best opportunities to leverage that.

Okay.

Thank you for that.

And then just if you could give us an update on what management's current ownership is?

Approximately 4%.

Approximately 4%.

Okay.

Thank you very much.

At this time there are no further questions.

Are there any closing remarks?

Yes, sure.

Thank you.

Thank you for participating in our call this morning.

The market environment continues to be challenging, but we are optimistic about our long-term success as an organization.

If you have any follow-up questions, please give Dale or Jennifer a call.

Thank you very much.

Thank you for participating in today's teleconference.

You may now disconnect.