Selective Insurance Group Inc (SIGIP) 2009 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Selective Insurance Group second quarter 2009 earnings release conference call.

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

Jennifer DiBerardino.

Thank you.

Good morning, and welcome to Selective Insurance Group's second quarter 2009 conference call.

This call is being simulcast on our website, and the replay will be available through August 27th, 2009.

A supplemental investor packages, 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 in 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.

Greg Murphy, CEO; Dale Thatcher, CFO; John Marchioni, Chief Underwriting and Field Operations Officer; Mary Porter, Chief Claims Officer; Ron Zaleski, Chief Actuary; and Kerry Guthrie, Chief Investment Officer.

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

Good morning.

We are pleased to report solid insurance results in the second quarter, with a statutory combined ratio of 98.8%.

We had excellent commercial lines property results and some favorable casualty reserve development.

The best news in the quarter was commercial line's renewal pure pricing of plus 0.6%.

This is the first reported positive renewal pricing since the first quarter of 2005, a full quarter ahead of our expectations.

We are very encouraged by the pricing trend and believe it reflects our dedicated field underwriting team leveraging excellent agency relationships and predictive modeling capabilities in a continuing competitive marketplace.

For the second quarter, we reported strong operating income per diluted share of $0.43, down 17% from a year ago, mainly due to lower investment income.

Of note in the quarter is a net tax benefit of $3 million.

Recall in the first quarter, excess taxes of $4 million had to be booked due to the application of APB-28.

We indicated then that this accounting anomaly would reverse in future quarters, and we're seeing the majority of that here.

You can see the full tax reconciliation in the 10-Q we file later today.

Alternative investments generated a loss of $5.8 million aftertax compared to a $0.2 million aftertax gain in the same period 2008.

Commercial real estate valuations continue to be challenged.

Although only 14% of our alternative portfolio, real estate strategies generated a third of our overall alternative investment losses for the second consecutive quarter.

We expect commercial real estate will continue to be challenged until global economic conditions improve.

We began investing in limited partnerships a decade ago as part of an overall equity strategy to diversify away from the public equity markets while achieving higher risk-adjusted returns.

We have consistently achieved this objective, even in recent quarters, as evidenced by the S&P 500 index, which decreased 11% in the first quarter, while the alternative portfolio declined only 6%.

Alternatives represent only 4% of invested assets.

As the financial markets improve and stabilize, we would expect our alternative portfolio valuations to do the same.

Investment assets were up 2% at June 30th, 2009 compared to December 31st, 2008, reflecting fair value increases on our available for sale portfolio.

Unrealized losses on our available for sale securities improved $23 million aftertax, largely driven by fixed maturity securities.

The net impact of the improvement was $0.43 per outstanding share.

Market to book values improved in the quarter to 99.5%.

The valuation improvement, along with higher net income, contributed to the 4% increase in book value from the previous quarter to $17.85 per share at June 30th.

Other than temporary impairments, or OTTI, in the quarter were recorded at $8.1 million aftertax, primarily reflecting our intent to sell several securities that are currently in an unrealized loss position.

As required, we adopted the new FSP for recognition and presentation of other than temporary impairments.

The cumulative affect of the accounting change was not material, amounting to $2.4 million net of deferred tax, which decreased accumulated other comprehensive income and increased retained earnings.

Our insurance operations performed very well in the quarter.

Our 98.8% overall statutory combined ratio was essentially flat with the year ago quarter.

Pretax catastrophe losses were $5.3 million, or 1.5 points compared to catastrophes a year ago that were $13.4 million, or 3.5 points.

Overall casualty prior year statutory loss and LAE favorable reserve development on a pretax basis for the quarter was approximately $6 million, or 1.5 points on the combined ratio, compared to immaterial develop in the second quarter of 2008.

This quarter's favorable development was primarily driven by Worker's Compensation for accident years 2004 through 2007.

As we continue to maintain our focus on expenses, the GAAP expense ratio for the second quarter improved 1 point from last year to 31.4%, and remained flat with the first quarter.

This expense discipline in a declining premium environment reflects the many initiatives that we have implemented over the past year and a half to remain competitive.

In 2009, we initiated a vendor consolidation project in which we will enjoy savings of approximately $1 million over the next year.

Earlier this year, we eliminated retiree life insurance benefits for current employees for a one-time benefit of $4 million, and we initiated controlled hiring practices that continue today.

Commercial lines reported a profitable 98.3% statutory combined ratio for the quarter, a half point improvement from a year ago.

This improvement was driven by commercial property, which recorded a 78.6% statutory combined ratio, 15.8 points better than a year ago.

Commercial lines statutory net premium written declined 8% in the quarter, driven by economic downturn and its impact on audit and endorsement premium.

We had approximately $20 million in net returned premium in the quarter compared to $6 million a year ago.

Returned premium is being driven largely by higher levels of unemployment and its impact on Worker's Compensation and general liability.

We expect this negative trend to continue until unemployment rates stabilize.

Commercial lines new business increased a strong 12% in the quarter, reflecting our appointment of 200 new agents over the past two years, proactively assisting agents to identify new business opportunities through our leads program and the broadening of our small business pipeline.

As we have said previously, there will be some volatility in our personal lines results.

The statutory combined ratio for the second quarter came in at 102.1% versus 98.1% a year ago.

The change is largely attributable to unfavorable casualty development of approximately $1 million in private passenger auto, or 1.9 points on the overall personal lines combined ratio, compared to immaterial development in the year ago quarter and property results that were $1 million or 1.5 points worse than prior year.

We are committed to our stated goal to achieve a profitable personal lines combined ratio run rate in the latter half of 2010, and expect to achieve that goal with the pricing improvements we are seeing.

We successfully completed negotiations of our July 1st, 2009 excess of loss treaties for property and casualty.

The property treaty was renewed with a same terms and a rate increase of 2.8%.

The casualty treaty renewed with a 6.1% rate increase and it continues to cover $88 million in excess of a $2 million retention.

However, we sought to reduce volatility from shock losses by decreasing our co-participation in the first layer of the treaty.

85% of the $3 million in excess of $2 million has been placed at July 1st, compared to 65% in the prior year.

The financial strength of the reinsurers on our treaties is strong, with a weighted average AM Best rating of A.

At June 30th, the premium to surplus ratio was 1.7, down from 1.8 at March 31st.

We continue to take actions to improve profitability and reduce volatility in order to organically generate surplus.

We are encouraged by the strength of personal lines pricing and the positive turn in commercial lines pricing.

We're mindful of the balance of capital to satisfy rating requirements and the ability to take full advantage of opportunities in a hardening commercial lines market.

Now I will turn the call over the Greg.

Thanks, Dale, and good morning.

I'm very pleased with the second quarter results and the start of commercial lines pricing power a full quarter ahead of our expectations.

Commercial lines renewal pure price rose 0.6 points for the quarter.

However, the marketplace continues to be very competitive, and the successes we are achieving are based on the following operational and corporate strategies for long-term profitable growth: One, the granularity of pricing achieved through predictive modeling for all lines of business, facilitating risk selection and pricing for both new business and renewals; two, commercial lines price increases, which turned positive ahead of our expectations; three, ongoing diversification of our commercial lines book of business into non-contracting segments that we have successfully written since mid-1990s -- specialty, manufacturing, and mercantile and service; four, personal lines improvement plan, including rate increases and growth outside of New Jersey; five, focused on the best-in-class claim practices to reduce loss costs; six, leveraging our excellent agency relationships for profitable growth opportunities; and seven, focused expense management, as Dale just mentioned to you.

Now I'm going to turn the call over to John Marchioni to walk you through our pricing and growth strategies in our insurance operations.

Thanks, Greg.

Good morning.

Insurance operations is focused on profitability fist and foremost; but we're also taking full advantage of growth opportunities when appropriate, as evidenced by our strong second quarter commercial lines new business increase of 12% and personal lines new business increase of 14%.

We believe we can grow with confidence due to our strong agency relationships and field underwriting model, supported by our predictive modeling capabilities that drive disciplined underwriting and pricing decisions.

The diamond score distribution of modeled and new business has improved as intended in 2009, with the best performing four and five diamond business increasing from 58% in June of 2008 to 65% in June 2009, and the worst performing one and two diamond business decreasing to 9%.

Field underwriters are also focused on writing new business at the best possible price.

Pricing on new commercial business in the second quarter was down only 0.9%, a significant achievement when considering the strong improvement and mix of business.

Diversification of our commercial lines book of business away from contractors has been an ongoing focus, and we are experiencing significant success.

Our contractor's mix stands at 41% of commercial lines premium at June 30th, down from 43% at year end 2008.

While we repeatedly evaluate our underwriting appetite and make changes accordingly, our success in writing new business in 2009 has been driven by a greater emphasis on growing classes of business that we have been successfully underwriting for ten or more years.

Manufacturing, representing 16% of our commercial lines book, has a three-year direct accident year combined ratio of 91.7%.

Specialty, which includes segments such as public entities, golf courses and social services, represents 20% of commercial lines with a 93.2% three-year direct accident year combined ratio.

Mercantile and service represents 23% of our commercial lines premium, with a 94.4% three-year direct accident year combined ratio.

New business success in these classes demonstrate bid the following statistics for the first half of 2009.

New manufacturer and wholesaler business was up $9.8 million or 50%.

New specialty business was up $4.7 million or 40%.

New mercantile and service business was up $1.6 million or 5%.

The 960 agents that make up our strong franchise work with us to drive price on renewals and write the best new business at responsible pricing levels despite the tough competitive and economic environment.

We have provided our agents with numerous programs such as sales developmental training and active leads for writing good new business within our appetite and support our commercial lines diversification efforts.

These leads have been pre-scored through our models, and target pricing has provided the best insurer profitability.

Overall, new business was as follows for the first six months.

One and Done automated small business was up 11% to $38 million.

Middle market, or AMS generated business, was up 9% to $92 million.

Selective Risk Managers, our large account business, was up 55% to $11 million.

We continue to enjoy success in our small business production, with the average premium written per work day increasing to nearly $320,000 in the quarter.

We have a competitive product for artisan contractors and continue to write that business.

However, consistent with our diversification efforts to grow the non-contractors book, 55% of the new small business year to date is coming from the manufacturing, specialty, and mercantile and service SBUs.

While the middle market continues to be competitive, our field underwriters have been successful in taking advantage of new business opportunities that meet our underwriting appetite and can be written at profitable rate levels.

The Knowledge Management tools that we have put at the underwriters' fingertips facilitate the new business process.

In spite of the competitive market, we are seeing more good opportunities to write large account new business, and submissions are up considerably over last year.

We are maintaining our underwriting discipline by turning away the business where we cannot achieve actuarily sound pricing.

The sales meetings we have held over the past year have provided many of the new business opportunities that we are seeing.

Consistent with our diversification efforts, non-contractors new business accounted for 66% of Selective Risk Managers production to date.

Our inside renewal underwriting teams are working hard to balance price increases with retention.

Overall, we achieved commercial lines renewal pure price increases of 0.6% in the second quarter, while retention dipped slightly to 76%.

The granular capability to obtain price on our renewal book is largely due to our predictive modeling capabilities.

These increases, which we believe to be ahead of the majority of the industry, do not yet outpace loss cost trends, but will demonstrate a glide path to long-term profitability.

We view the slight dip in retention as something to watch carefully, but believe that it demonstrates the discipline our underwriters are employing in a difficult market.

We are confident in our ability to match price to risk at the individual account level, and are managing the balance between rate and retention accordingly.

Our worst performing business is receiving the largest rate increases and retaining at much lower levels.

In personal lines, our MATRIX models for both homeowners and automobile create organic growth opportunities with precision pricing capabilities.

We grew new business outside New Jersey by 35% in the quarter, demonstrating that our diversification efforts are working.

We are also seeing significant improvement in the quality of both homeowner and automobile business into higher scored sectors that have better claim experience.

As Dale said, we are committed to making personalized profitable.

We have implemented 14 of our anticipated 21 rate increases of 3% or more in the first six months of 2009.

These increases equate to $9 million in additional rate on top of the $15 million we achieved in 2008.

The rate of success is demonstrate by the 8th consecutive quarter of personal lines net premium written growth, with a 4% increase in the second compared to 2008.

We believe that predictive modeling through MATRIX, along with the additional $24 million in rate on this $216 million book of business, will allow us to achieve our goal of being profitable on a run rate in the third or fourth quarter of 2010.

Now I will turn the call back to Greg.

Thanks, John.

As John described, we are focused on profitable growth to achieve long-term outperformance.

Our predictive modeling and pricing strategies for both commercial lines and personal lines are demonstrating success in a tough market.

We are willing to give up growth in the short run to drive higher levels of profitability.

The tools we are utilizing have been in development for over the past four years; and as these strategies have become fully integrated into our underwriting process, we are seeing their power.

Litigation management, including the effective use of both staff and panel counsel; two, ongoing of vendor management and improved vendor panels under construction for all regions to ensure that we have the highest quality vendors at the best price, and to add expertise to our claims adjustment process; three more affective integrated outcomes in the resolution of claims in Worker's Compensation and other casualty lines.

In casualty, we are looking to reduce cycle time through timely and proactive claims adjustments, focused litigation management and file review initiatives.

In Worker's Compensation, we believe we will produce better outcomes through changes in case management utilization, centralized bill review and increased PPO penetration and return to work initiatives.

Fraud is garnering a lot of industry attention lately, and as always monitoring for any signs of increase.

The biggest industry uptick has been in personal lines; but that represents only 15% of our business.

Given the state of the economy, there is a heightened fraud diligence in -- throughout our corporation.

We have excellent agency relationships, and those relationships are working for us in the current challenging environment.

The average agency is $2.2 million in premium, with 22% of our agency plant writing $3 million or more annually.

We provide our premier agents with ease of doing business through an unmatched field model, leading technology and superior service standards.

We have been rewarded by garnering the first, second or third spot in 63% of our agency plant in agents that have been with us for at least five years.

This degree of penetration provides us the best opportunities.

We met with 75 agents at six Producer Council meetings during June.

We went through a series of analyses with each group of agents, identifying Selective's and our peer companies' strengths and weaknesses.

Agents tell us across the board that our top three strengths are our field model, relationships at all levels of the organization and responsiveness across the board in underwriting, claims, safety management, and technology.

They also identified areas for improvement, which for the most part create new opportunities for us to grow market share.

Although we expect higher loss and expense ratios in the second half of the year due to increased loss costs and the impact of earning in the affects of negative rate, we are positively revising our full year 2009 combined ratio guidance to below 101.5% on both a GAAP and statutory basis.

This change reflects the improved profitability we have seen year to date and includes our assumptions for catastrophe losses of 1.4 points for the balance of the year.

It does not assume any reserve development, either favorably or unfavorable.

And now I would like to turn the call over to the operator for your questions.

(Operator Instructions).

And your first question comes from the line of Francisco (Inaudible) with Piper Jaffray.

Good morning.

Hello?

Hi, good morning.

Hi.

It's Mike Grasher with Piper Jaffray.

Hey, Mike.

Yes, thank you.

I'm not sure about Francisco -- but anyhow.

JPMorgan, actually (Laughter).

Okay, Greg, so just to start, I guess the change in your combined ratio guidance is more or less a result of the performance in the quarter and just getting to numbers by year end, is that the case?

Yes, and I think basically the fact that -- that includes that, as well as we are about a quarter ahead of our pricing on the commercial lines, and I think taken into all the underwriting things that we have achieved, and where we are through six months; yes, that's what it reflects.

Okay, and then also, just a question around the frequency of claim, in case I missed it.

Are you seeing less claim frequency, is it about the same?

Yes, our frequency has been down -- the frequency actually has been down in the commercial lines and the liability sector, that's what we are talking about -- mainly liability.

In personal lines, it actually took a little bit of an uptick; but overall when we look at it, liability in aggregate on a fiscal year basis as we look at frequency, it's down just under 5%.

Okay.

That's continued to track fairly well.

Okay.

And then with regards to the new reinsurance pact July 1, what kind of an impact might that have on the premium to surplus ratio or your amount of excess capital?

Well, the reinsurance program is similar to the reinsurance program that we've had in the past, so there is nothing new designed in the program to impact the premiums to surplus.

There is no kind of additional quota share or anything like that in there.

It's just the standard excess of loss treaties that we renewed.

Okay, but didn't you lower your exposure to some degree?

We did place a little bit more of the three x of two first casualty excess of loss treaty.

It went from a 65% placement to an 85% placement; but that really doesn't have a material impact on any premiums to surplus kind of issue.

But what it will do, Mike, though, it does take a little bit more of the volatility out on that layer.

Right.

We felt, given the trade that we had in front of us, that that was advantageous to us to increase the trade.

And I think what you are seeing overall -- and I tell you, the folks that negotiated those treaties of 7/1 contracts did a great job, in terms of we were -- personally, I was expecting much higher rate increases, but we were very encouraged about what we got.

Okay.

And then final question, I appreciate the disclosure on all of the investment portfolio.

Question I did have around the Alt-A exposures.

Yes.

Any sense of subordination levels on those Alt-As?

Yes, I'll turn that over to Kerry.

Obviously, we look at the Alt-A's, we're pretty much -- and I'm very comfortable with how we've sized our exposure down and where we stand in all three areas that we look at, which as a management team we are kind of very focused into the private labeled RMBS, the private labeled CMBS, and the Alt-A; and the ALT-A is basically in the 2006 year, both -- they are very much focused into on the 30 year and hybrid on that.

But I will let Kerry Guthrie kind of provide a little more color on that.

Okay.

All of the Alt-A exposure in the portfolio that remains was originally all AAA-rated.

So it's not a subordinated triple -- Alt-A exposure.

Okay.

Then with regard to issuer or the originator on those transactions?

What do you mean by issuer or originator?

I mean, who actually originated the loans?

Do you have that granularity or is that available to us?

I have that, but I don't have it with me.

It's not something that we've publicly disclosed before.

We didn't get into that level of detail.

Okay.

Well, Mike, just to let you know what we do do, the folks in the investment department, utilizing Intex and other things, they look inside every one.

They can see every mortgage, they know where it is.

They have delinquency rates, they have LTV's, they have -- so that's really how when we look inside a traunch we can tell where is the geo locations of the properties, how delinquent are they.

And then we run our stress test, we are looking at a whole host of factors when we go through that process.

Okay, that's good to know.

So we do look at -- we can see every mortgage inside the portfolio and we know how that mortgage performs and we know where it is.

Okay, very good.

Congratulations on the quarter.

Thanks, Mike.

And your next question comes from the line of Allison Jacobowitz with Bank of America-Merrill Lynch.

Hi, thanks.

Just a couple of numbers questions.

I just want to make you repeat yourself just a little bit -- I'm sorry, there was static on the line.

But the reserve development, for the total Company it was 6 million, right?

I was just wondering if you could quickly give the breakout again on what that was -- the line sort of kicked out.

Sure, Dale is pulling that through.

Most of it was in Worker's Compensation in the older years, and the rest was kind of sprinkled around, but Dale is pulling it out right now.

All right, so for the first quarter we had $7 million of -- or excuse me, for the second quarter,we had $4 million of favorable development in Worker's Comp, and about a $1.4 million in general liability.

And there was a $1.5 million in commercial auto liability, but then we had $1 million unfavorable in personal auto.

Okay.

Thanks.

And then I was just wondering also, in your other income and other expenses, could you just talk a little bit about that?

I know it bounces around and there's a lot of stuff in there, but just how we should be thinking about that going forward a little bit.

Yes, I'll let Dale comment on that.

One of the biggest movers that's in that other line is the tax adjustment regarding how -- the requirements to record income tax.

And I will let Dale talk about how much that impacted the numbers in the quarter.

Right, so that's the major impact that you have in there that makes it bounce around.

The other thing that you find in there is the compensation with regards to restricted stock compensation also is in there.

So as the underlying stock price moves, that will change the mark to market on the compensation expense that we have there.

So those are the things that make it jump around a bit.

I'm not sure which other you are looking at, too -- that's the other thing that we always struggle with, is that the other on the face of the full income statement, or if its the other within our investor packet.

Kind of depends.

Different analysts concentrate on different pieces there.

But the effective tax rate adjustment in the quarter was a $2.1 million favorable within the other.

Okay.

I will take a look at it again, and if I need you --

And understand that those were taxes that we did not take the full benefit for in the first quarter that are now kind of semi reversing in the second quarter.

Exactly.

All right, great.

Thank you.

Thank you, Alison.

And your next question comes from the line of Doug Mewhirter with RBC Capital Markets.

Hi, good morning.

Morning.

Just follow up on the tax rate issue.

Do you think that will there is any, I guess, residual benefit that may flow into the third quarter, or I guess the reversal of the non-benefit?

However you want to characterize that.

Well, we had about $4 million worth of additional expense recorded in the first quarter, and then we had about a $2.1 million benefit recorded in the second quarter.

So you do have about 1.8 million of remaining benefit.

And again, the way that works is at the beginning of the year, you have to make an estimation for the overall tax rate, and that's what you have to book your taxes to over the course of the year.

Obviously, given the volatility that we have seen in our alternative investments, that kind of causes that overall rate to jump around a bit, and that's why you are seeing a bit more volatility there than you've maybe seen in the past.

But that's something that has been out there -- as you can tell from the fact that it's due to APB-28, that's been out there for a very long time.

Okay, that sounds good.

The second question is, I understand your alternative investment funds report on a one quarter lag.

Have you gotten any indications of how their performance is, do you basically just wait until the end of the quarter and collect them all?

Well, that -- obviously, we are in constant contact with the various partners that we do business with.

But what we are saying, obviously, is in terms of the economy has stabilized, and we expect to see some of these stabilize as we move forward -- and I would tell you that obviously the real estate sector is probably going to be under still a little bit of ongoing pressure.

But we do not put out any prognostication on that.

Okay, and I guess, Dale or Greg, you said that the investment funds were a third of the losses, if I'm not mistaken.

What's the percentage of investment funds or investment-related funds as part of your overall alternatives portfolio?

I'm sorry --

Real estate represents about 14% of the alternative portfolio, and it's been accounting for roughly a third of the losses from that -- the overall alternatives.

Okay.

And my last question -- I guess more of a conceptual question --it looked like your new business really picked up on the large accounts.

Do you think that -- and also your submissions have gone way up.

Do you think the troubles with AIG, or whatever it's called now -- Chartis -- and maybe Hartford -- have you seen any tangible affects from that?

Or is it just the large account business is just sort of swinging around in more of a macro way across the board?

John will answer that question.

This is John Marchioni.

I would say that those two companies in particular aren't really having an impact on the business that we are seeping.

Keep in mind, for us our large accounts business is generally in the $250 to a $1 million on a guaranteed premium basis -- guaranteed cost basis -- which is not really where AIG in particular played.

I just think for us, it's as a matter of continuing to get us a similar or slightly stronger number of opportunities.

That business is almost all rated up on the casualty lines through an actuarial rating model; and in situations where we can get our price, we are going to take those opportunities.

In situations where we can't, we are going to walk.

And in the quarter, we just had more cases where whoever else was competing on that account wasn't forcing the pricing down below technical pricing levels, and I think we had a higher success rate as a result of it.

The other thing that I will point out is that remember last year, you had new business declining over the course of the year in the large accounts.

So you are increasing on a smaller base than we've had previously, so that makes the percentages look a bit larger.

Okay, great.

Thanks, that's all my questions.

(Operator Instructions).

And your next question comes from the line of Peter Seuss with Lincoln Square Capital.

Yes, hey, guys.

Just a couple of quick questions.

The first, I was hoping you could provide a little bit more color on the paid loss improvement.

I think it was $198 million this quarter, while it's been kind of in the $200 to $235 million range for the past five quarters.

So was that related to the improvement in frequency that you mentioned?

Or if you could just give us a little bit more.

Yes, I would say when you start to look at paid claim volume, there's a lot of things that push that around.

Some of it is a result of the claims that are -- that we are looking at in terms of trying to reduce cycle time.

So it's very hard to peg that number on a quarter to quarter basis or look at any kind of sequential growth or downtick in that number because that gets moved around by a whole host of initiatives, which include more proactive settlement day, conferences with both panel and staff counsel firms; and so there is just a lot of movement that happens within the paid to sit there and make any holistic comments about it.

Okay.

Got it.

And then I think this might have been asked a different way earlier, but I kind of missed it.

On the alternative portfolio, you kind of made a comment in the opening remarks that it should stabilize and improve with the markets.

Was that comment based on what you've seen so far out of the second quarter performance?

It's based on the fact that if you just look at the sequential quarter here, that we had a $20 million loss that we reported in the first quarter, and we are down to an $8.9 million loss in the second quarter that we recorded within the financial statements.

We don't have any reports from our alternative investments for the third quarter, so that's not based on any information that we have received.

It's just kind of a general commentary on the marketplace and what we have seen in terms of what we have reported.

Okay, okay.

And then lastly, just in the commercial lines' top line, do you anticipate kind of a sequential improvement if the economy rebounds, as consensus seems to think it will in the second half of the year?

How I would look at that is our commercial lines NPW is down about 8%, and half of that is coming from lower audit and endorsement -- approximately half of that is coming from lower audit and endorsement premium.

I still think that when we go back and look at the amount of premium track -- and I mean, we track it a whole host of ways -- but my sense is that you will still see a little bit more of a headwind in the third quarter relative to that.

It's not until I think you get in the fourth quarter where the comps start to level out -- where when we got to the audit and endorsement premium in the fourth quarter of '08 is where you started to see a pick up of that -- and we track it and audit it and endorse it.

We track premium that's booked more than three months behind the current month activity; and when you look at a lot of those indications, a lot of it shows that it's not going to be the third quarter, it will be more in line with the fourth quarter when headwind will start to diminish.

And then I think holistically over all, our numbers -- I think the economic effect of our numbers won't really stabilize until we see something in unemployment stabilize.

So whether we're going to settle in at ten or settle in at eleven, once we get to that steady state, then you will see a more top line growth as we move forward, because we will not have that headwind, we will be moving from minus rate to positive rate; and at some point when you get some stabilization in there, you will see some positive growth in exposures.

But I still think you are going to see the drag in the headwind in the third Q.

I think it's more in the fourth quarter -- remember, in the fourth quarter, we don't book an enormous amount of commercial lines premium anyway; but that's probably when it starts to turn from that standpoint.

Got it.

And then lastly, the other operating expenses were down 3.3 million sequentially to 16.4 million.

But it was down significantly year-over-year.

And I guess you mentioned you had a $2 million tax benefit within that number, so should we kind of view the normalized number as like 18.4 million?

Dale is kind of pulling through that right now.

Yes, I mean, I know it's volatile from quarter to quarter; but just kind of on average over time.

And it's tough the peg that, as Dale articulated before.

Yes.

You've got stock price movements that affect anything that's -- compensation that's based on stock.

So that moves around a bit, but --

I can't say that we really provide any prognostication, other than what we can tell you is just that, that the two major components that introduced volatility into it are the APB-28 tax adjustment, and then also the compensation expense component that moves based on how our stock price moves.

What was the stock -- sorry, what was the stock comp in the quarter?

In the quarter, the employee compensation expense -- let's see, I got a year to date number here.

Let me track down the -- year to date, it's $4.6 million.

I don't have the quarterly number right here.

We can get back to you later on.

Yes, sure.

Okay.

Thanks a lot, guys.

(Operator Instructions).

And there are no further questions at this time.

Okay.

Well, thank you very much.

We are very encouraged by the pricing trends in the commercial lines market.

We have been successful in getting rate increases in personal lines.

We are pleased with how the quality of both our commercial lines and personal lines book is improving and believe that our strategies will provide us with long-term industry outperformance.

Thank you for participating on the call this morning.

Please give Dale or Jennifer a call for any follow-up questions that you might have.

Thank you very much.

Thank you, everyone.

This does conclude today's conference call.

You may now disconnect