Selective Insurance Group, Inc., (SIGI)

F3Q 2010 Earnings Call

July 29, 2010 8:30 a.m. ET

Executives

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

Jennifer DiBerardino – Senior Vice President, Investor Relations & Treasurer

Analysts

Mike Grasher – Piper Jaffray

Scott Heleniak – RBC

Caroline Spears – Macquarie

Alison Jacobowitz – Bank of America Merrill Lynch

Presentation

Operator

Good day, everyone. Welcome to the Selective Insurance Group’s Q2 2010 earnings release conference call. At this time, for opening remarks and introductions 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 Q2 2010 conference call. This call is being simulcast on our website and the replay will be available through August 27 th, 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 www.selective.com.

Selective uses operating income, a non-GAAP measure, to analyze trends and operations. Operating income is net income excluding the after-tax impact of net realized investment gains or losses, 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 United States 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 member’s of Selective’s executive management team: Greg Murphy, CEO; Dale Thatcher, CFO; John Marchioni, EVP of Insurance Operations; and Ron Zaleski, Chief Actuary. Now I’ll turn the call over to Dale to review the quarter.

Dale Thatcher

Thanks, Jenn. Good morning. Q2 results were strong despite another high catastrophe quarter due to severe storm activity throughout our footprint. Catastrophe losses totaled $16 million in the quarter, including $3 million in additional development from Q1 catastrophes related to the last storm on March 31 st. For the Q2 we reported operating income per diluted share of $0.41, as compared to $0.42 a year ago. While earnings were reduced by the high catastrophe losses, offsets included positive alternative investment income due to general financial market improvements, and favorable prior year reserve development due to positive claim trends.


The Q2 statutory combined ratio was 101, 2.2 points higher than a year ago. Catastrophe losses accounted for 4.5 points on the quarter’s combined ratio, partially offset by favorable Casualty Lines reserve development of $11 million pre-tax, or 3.2 points on the combined.

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 $18 million in return audit and endorsement premium that was essentially flat a year ago as the economy and unemployment continue to impact audits. New Commercial Lines business declined 21% in the quarter, while renewal pure price was up 3.3%. Policy retention declined a point to 75%, as we continue to push for positive Commercial Lines pure price. We are mindful of the delicate balance between price and retention, and we monitor it very closely. We reported a Commercial Lines statutory combined ratio of 99.9% in the Q2. Cat. Losses contributed 3.7 points to this combined ratio.

Commercial Property x catastrophes performed very well with a 79.8$ statutory combined ratio. General Liability also had a good quarter, reporting a statutory combined of 93.5% as did Commercial Auto with 87.9%. Commercial Auto results were positively impacted by favorable development of 13.7 points as a restful of lower than anticipated severity, primarily in the 2007 to 2009 accident years. General Liability results included 11.9 points of favorable development in the quarter, related to 2008 and prior accident year.

The Q2 Worker’s Compensation statutory combined ratio was at 127.4. This line continues to be negatively impacted by return audit and endorsement premium and also includes about 12.9 points of adverse prior year reserve development related to severity in the 2008 and 2009 accident years. There’s also some pressure on the current 2010 accident year; however frequency continues to trend lower.

We rolled out the first predictive model for the Worker’s Compensation line in 2006 and the second generation model for this line in 2009. Given that the models are primarily predictive of the probability of frequency, they did not predict the level of severity development that we experienced. The economy and unemployment levels continue to weigh on this line of business the most. Worker’s Compensation is also the most regulated line of business, and while we increased pricing 2% in the Q2 it is more difficult than other lines to raise price. Additionally we are seeing some very aggressive competition for Worker’s Comp, as some carriers use flat 10% commissions, making it even more competitive.

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