Selective Insurance Group CEO Discusses Q3 2010 Results - Earnings Call Transcript

Selective Insurance Group CEO Discusses Q3 2010 Results - Earnings Call Transcript
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Selective Insurance Group, Inc. (



Q3 201- Earnings Call

October 28, 2010 8:30 a.m. ET


Jennifer DiBerardino – Senior Vice President, Investor Relations & Treasurer

Gregory Murphy – Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Dale Thatcher – Chief Financial Officer, Principal Accounting Officer and Executive Vice President

John Marchioni – Executive Vice President, Insurance Operations

Ronald Zaleski – Executive Vice President, Chief Actuary


Doug Mewhirter - RBC

Caroline Spears – Macquarie

Bob Farnam – KBW

John Grostad [ph] – Piper Jaffray



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Good day, everyone. Welcome to the Selective Insurance Group’s Third Quarter 2010 Earnings Release Conference Call. At this time, for opening remarks and introduction, I’d like to turn the call over to Senior Vice President, Investor Relations and Treasurer, Ms. Jennifer DiBerardino. You may begin.

Jennifer DiBerardino

Thank you. Good morning, and welcome to Selective Insurance Group’s Third Quarter 2010 Conference Call. This call is being simulcast on our website and the replay will be available through November 29


, 2010. A supplemental investor package, which includes GAAP reconciliations of non-GAAP financial measures referred to on this call is available on the Investor’s page of our website at


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, as well as the after-tax results of discontinued operations. 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 Reports on Form 10-K and any subsequent Form 10-Qs filed with the U.S. Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. Please note that Selective undertakes no obligation to update or revise any forward-looking statements.

Joining me today on the call are the following members of Selective’s Executive Management Team: Greg Murphy, CEO; Dale Thatcher, CFO; John Marchioni, EVP of Insurance Operations; and Ron Zaleski, our Chief Actuary. Now I’ll turn the call over to Dale to review the quarter results.

Dale Thatcher

Thanks, Jen, good morning. It’s another competitive quarter in the industry, and improving underwriting results were amassed again this quarter by catastrophe losses totally $12 million. This included $5 million in losses that occurred from prior quarter cats. Including hail damage, which tends to have a longer discovery period.

For the quarter we reported operating income per diluted share of $0.35 as compared to $0.44 a year ago. While earnings were reduced by catastrophe losses and lower investment income, this is partially offset by favorable prior year reserve development due to ongoing positive claim trends.

The third quarter statutory combined ratio was 10.3%, about flat with a year ago. Catastrophe losses accounted for 3.4 points on the quarter’s combined ratio, and current year Workers’ Compensation deterioration accounted for $10 million or 2.9 points. These were offset by prior year favorable Casualty Lines reserved development of $13 million pretax or 3.7 points.

Commercial Lines growth continues to be a challenge given economic and competitive conditions. Commercial Lines net premium written declined 6% in the quarter, driven mainly by $13 million in return audit and endorsement premium. While this return premium is still significant, there was improvement from the $18 million average return premium we’ve seen in each of the last six quarters.

We believe that the size of our construction book of business in conjunction with the soft economy is driving this trend.

New Commercial Lines business declined 22% in the quarter, while renewal pure price was up 2.8%. Policy retention held firm at 75% as we continue to push for positive Commercial Lines pure price. Retention is strongest for small business while large and middle-market accounts are seeing the most pressure.

We reported a Commercial Lines statutory combined ratio of 99.8% in the third quarter. Catastrophe losses contributed 2.4 points to this combined ratio. Commercial Property, ex-catastrophe performed very well with a 78.9% statutory combined ratio.

Commercial Auto results also had a good quarter reporting a statutory combined ratio of 88.3%. Commercial Auto results were positively impacted by favorable prior-year development of 14.3 points as a result of lower than anticipated severity, primarily in the 2008 and 2009 accident years.

Similar to the rest of the industry, our Workers’ Compensation business continues to show the negative impact of a soft economy. The third quarter statutory combined ratio for this line of business was 130.2%. Workers’ Comp continues to be substantially affected by the return audit premiums. The combined ratio also includes about 5 points of adverse prior-year reserve development, related to severity of 2008 and 2009 accident years. And 16.7 points from revised loss expectations for the current accident year. We’re seeing severity as a result of the economy and the ability of workers to legitimately extend their medical and indemnity benefits while job prospects remain scarce.

Personal Lines net premium written grew 13% in the quarter to $70 million. The Personal Lines statutory combined ratio for the quarter was a 103.2%, which included 8 points of catastrophe losses. In a more normalized cat environment, personal lines results would be at the sub-100 run rate.

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