Harleysville Group, Inc.Q1 2008 Earnings Call Transcript

Harleysville Group, Inc. (HGIC)

Q1 2008 Earnings Call

April 23, 2008 8:00 am ET

Executives

Mark R. Cummins – Chief Investment Officer, Executive Vice President & Treasurer

Michael L. Browne – President, Chief Executive Officer & Director

Arthur E. Chandler – Chief Financial Officer & Senior Vice President

Robert G. Whitlock, Jr. – Senior Vice President & Chief Underwriting Officer

Thomas E. Clark – Senior Vice President Field Operations

Allan R. Becker – Senior Vice President & Chief Actuary

Analysts

Stuart Johnson – Philo Smith

Robert Glasspiegel – Langen McAlenney

Marc Dwelle – Ferris, Baker Watts, Inc.

Unidentified Analyst

Elizabeth Malone – Keybanc Capital Markets

Unidentified Analyst

Presentation

Operator

Welcome and thank you for standing by. At this time all participants are in a listen only mode. After this presentation we will conduct a question and answer session. (Operator Instructions) Today’s conference is being recorded. If you have any objections you may disconnect at this time. I would like now to turn your meeting over to Mr. Mark Cummins, Chief Investment Officer. Sir, you may begin.

Mark R. Cummins

I’d like to welcome everyone today to our first quarter 2008 conference call. Our complete news release and financial supplement are posted in the investors section of our website at www.HarleysvilleGroup.com. A replay of this morning’s presentation will be available on our website later today. During this call Harleysville Group, Inc. may make remarks about future expectations, plans and prospects. These remarks constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from those indicated via these forward-looking statements and our first quarter earnings release as a result of various important factors including those discussed in the 2007 Form 10K which has been filed with the Securities & Exchange Commission.

You will hear us talk about operating results. Operating income is a non-GAAP financial measure defined by the company as net income excluding net after tax realized gains and losses on investments. For further definition we’ve included a chart titled reconciliation to operating income on the financial highlights page of our earnings release. Leading off the call today will be our President and CEO Michael Browne, Art Chandler our Chief Financial Officer will follow with some highlights of our financial results. Rob Whitlock, our Chief Underwriting Officer will follow with some comments on line of business results. I’ll return to provide some remarks on investments and then Michael Browne will then offer his closing comments. Tom Clark, Head of Field Operations and Allan Becker our Chief Actuary are also here to help us address your questions at the end of our planned remarks.

With that I’ll turn it over to Michael.

Michael L. Browne

Good morning everyone. I’m pleased to report that we’ve begun 2008 with another strong quarter as we continue to see ongoing steady improvement in our operating earnings. We posted our 13^th straight quarter of double digit percentage growth in operating income as our operating earnings grew by 14% to $0.80 per share in the first quarter. In addition to meeting our ongoing goal of improving earnings we also continued to meet our other long term financial objectives of achieving both underwriting profitability and a return on equity greater than 12%. Specifically, our first quarter statutory combined ratio adjusted to excluding the non-recurring impact in our recent pooling change was 98.1. In addition, our accident year loss ratio excluding catastrophes improved by a half point compared to last year’s first quarter. We also generated an operating return on equity of 13.9% for the trailing 12 months.

As we announced previously on January 1 we amended our interim company pooling arrangement to increase the aggregate share of the pool of the insurance subsidiaries of Harleysville to 80% from 72%. To assist you in looking at our performance this quarter versus that of a year ago on an apples-to-apples basis the impact of the pooling changes is broken out in our financial supplement this quarter.

In a few minutes Art Chandler our Chief Financial Officer will provide further information on our financial results as well as additional comments on the impact of the pooling change while Bobby Whitlock our Chief Underwriting Officer will comment on our underwriting results. Before I turn the call over to them let me touch on a few of the quarters highlights. Commercial line net written premiums were up 12% in the quarter substantially reflecting the additional premium dollars moving in to Harleysville Group from Harleysville Mutual because of the change in our pooling agreement. This is seasoned business that we know well because we already had it on our books. If you take out the effect of the change to the pooling percentage commercial line net written premiums were up 1% reflecting our commitment to underwriting discipline. The overall profitability of our commercial line of business continues to remain strong at 99% which is adjusted for the non-recurring impact of the pooling change. We historically have had higher property losses in the first quarter because of winter weather and this year was no exception.

Looking at our personal line results we reported a first quarter combined ratio of 94 which also was adjusted for the non-recurring impact of the pooling change. This marks the 12^th straight quarter we reported a combined ratio under 100 in personal lines and generating a first line underwriting profit for a full three years now is evidence that we are achieving our long term goal of sustained first lines profitability. In the first quarter personal lines also grew by 12% and again, grew substantially by the pooling change. Excluding the impact to the change of the pooling percentage personal lines premiums were up about 1%. I should note that with this increase personal line premiums have showed positive growth for four consecutive quarters, is indicative of our desire to deliberately grow our personal lines business now that it is generating consistent profitability for a sustained period. We look to continue to build upon that positive trend throughout 2008.

Another highlight from the first quarter is the fact that we continued to retain a high percentage of our quality business. Policy retention in both commercial and personal lines has improved steadily quarter-to-quarter and the first quarter was no exception which is true testimony of our agent’s ongoing support and our strong relationships with them, one of our key attributes that really differentiates Harleysville in the market. We continue to maintain our solid capital base and strong balance sheet and modest debt to capital ratio of 14%, a high quality investment portfolio, an increase in our book value and a premium to surplus ratio of 4 to 1. I should have said an 11% increase in our book value as this is what it was. All of which provide the sound financial position for us to write our agents’ best business.

With that, I’ll ask Art Chandler to provide some remarks on our first quarter financial results and then I’ll come back later to offer some additional comments.

Arthur E. Chandler

My comments will relate to the core page financial supplement included with the press release. Starting with the first page you will note that we had operating income of $0.80 per share in the first quarter of 2008 compared to $0.70 per share in the prior year’s first quarter. The first quarter included catastrophe losses of $0.06 per share compared to catastrophe losses of $0.04 per share for the first quarter of 2007. The statutory combined ratio for the first quarter was 96.6. It should be noted that the increase in the intercompany pooling percentage had a 1.5 point non-recurring favorable impact on the statutory expense ratio for the quarter as a result of the $45.7 million in unearned premium transferred from Harleysville Mutual which was partially offset by an $11.4 million seating commission paid at the January 1, 2008 effective date of the change. This impact which again was 1.5 points in the first quarter will diminish throughout the course of the year and we expect the full year impact to be about a half a point.

Adjusting for this pooling change the statutory combined ratio was 98.1 or about flat with the 97.9 result noted for the first quarter of 2007. Both quarters were adversely impacted by property losses which is typical of the first three months of the year. The GAAP combined ratio as well as earnings per share as noted in the press release exhibit is not affected by this non-recurring aspect of the pool change. Favorable prior year development of about 3.3 points was noted in the quarter compared to the four points noted in the first quarter of 2007. Catastrophe losses from all accident years contributed 1.3 points to the first quarter combined ratio this year compared to the one point impact to the first quarter of 2007. The underlying current accident year loss ratio excluding catastrophes improved by about a half a point in the first quarter of this year versus the prior year first quarter due to slightly better experience in casualty lines partially offset by moderately higher loss experience in property as compared to last year. Bob Whitlock will comment on line of business results in more detail in a few minutes.

The first quarter statutory expense ratio of 32.2 including the 1.5 point non-recurring favorable impact as a result of the pool change. Adjusting for the pool change the expense ratio of 33.7 improved by two tenths of a point from the result posted in the first quarter of 2007. Staffing levels declined by approximately 6% over the last 12 months.

First quarter operating cash flow was $32 million. Excluding the impact of the pool change paid losses did increase about 4% compared to the first quarter of last year. However, the ratio of paid losses to incurred losses remained at a solid level of 88% on flat earned premiums. Pre-tax investment income increased $1.8 million or 7% in the first quarter. Continuing strong operating cash flow from 2007 and prior and the pooling change were the principal drivers of the higher investment income.

Turning to premium production first quarter net written premiums excluding the non-recurring impact of the pooling change increased about 12% in the first quarter. The increase in net written premiums on a basis unadjusted for the pooling change includes $45.7 in unearned premium reserves transferred to Harleysville Group from Harleysville Mutual Insurance Company as of January 1, 2008, effective date of the change. Furthermore, the increase of Harleysville Group’s percentage of the pool on a going forward basis resulted in $23.2 million in additional written premiums during the quarter. Excluding both impacts from the pooling change for one-time unearned premium transfer and the change in the pooling percentage, net written premiums increased 1%.

Lower assumed business from involuntary markets which is a positive item in terms of profitability continued to have a dampening effect on premium production. Direct written premiums sourced from the agency for us were up about 1.4%. For commercial lines renewal pricing was down 3.5% for the quarter or about 1% lower than the pricing declined observed from the fourth quarter of 2007. Written premiums were up about 12% including the pool share change and 1% excluding the impact of the change to the pooling percentage. Again, production was constrained as a result of lower involuntary premiums. Direct written premiums writing from the agency force were up about 1.4% as compared to the level noted in last year’s first quarter.

Our personal lines premium volume was up about 12% including the pool share change and 1% excluding the impact of the change to the pooling percentage as compared to last year’s first quarter. Growth was largely price driven in the homeowners’ line as a result of our insurance to value program.

Our balance sheet remains strong. Our GAAP book value was $25.55 per share up 11% from the first quarter of 2007. Our premium to surplus and debt to total capital ratios both remain conservative at 1.4 to 1 and 14% respectively. During the quarter we repurchased approximately 670,000 shares at an average price of $34.24.

With that I’ll turn the call over to Bob Whitlock.

Robert G. Whitlock, Jr.

Good morning everyone. I’ll be discussing the line of business results that are on the last page of the financial supplement. All the figures I discuss will relate to results excluding the impact of the change of the pool and I’ll start with commercial lines. Commercial lines produced a combined ratio of 99% the first quarter. That is slightly higher than the 97.9% result we posted last year’s first quarter. Both periods include the favorable impact from prior year development, 2.8 points in 2008 and 3.1 points in 2007. And, 2008 had a slightly higher impact from catastrophe than 2007, 1.1 points versus 0.9 points. Higher property losses impacted the commercial lines result business this year and I’ll come back to that in my commercial multi [inaudible] comments.

Commercial auto produced a profitable 93.7% combined ratio in the first quarter. Improved liability experience in the quarter was offset by a higher fiscal damage loss ratio. Paid bodily injury frequency trends were favorable and the severity was better than expected leading to favorable development in the quarter that was comparable to what we recording in the first quarter last year. We did see an uptick in property damage liability and physical damage frequency in the quarter which is attributable to winter weather activity. Competition remains challenging for commercial auto and pricing has declined reflecting those conditions. With the benefit of predictive modeling we’ve been able to direct our best pricing to the highest quality business.

Our commercial product multi apparel combined ratio was 102.6% in the first quarter. We saw higher property losses in the quarter as compared to last year. It’s not unusual to see elevated property loss activity in the winter months and that activity can be unpredictable in the short run. Catastrophe losses were higher for CMP in the quarter as compared to 2007. They contributed 2.3 points to the CMP combined ratio in 2008 and 1.8 points in the first quarter last year. Prior year loss development for the line was comparable in both periods. Both liability and non-cap property paid frequency trends are stable.

Our workers’ compensation experience once again showed improvement. The 111.7% combined ratio in the first quarter was about one point better than we posted in the first quarter of 2007. Prior year development was negligible in both periods. Loss frequency improved again continuing a long term trend. Paid medical severity increased while indemnity severities have trended downwards over time. These indicators suggest that our book quality is solid and our strategy to increase profitability is having an impact. Predictive modeling plays a very important role in the strategy to continue to improve our workers’ compensation results particularly in states where Bureau filed rates and loss costs have fallen our models give us a view of risk quality that allows us to select and price those risks more appropriately.

Turning to personal lines, our overall profitability remains strong in the first quarter at a combined ratio of 94%. That represents a 4.5 point improvement over the first quarter of 2007. Losses from prior action years have developed favorably in both auto and home owners. That development contributed 5.8 points to the first quarter compared to 8.1 points for the same period a year ago. Catastrophe losses added 2.3 points in this quarter and 1.4 points to the first quarter last year. Our growth remained the strongest in the states we’ve targeted. In those states our direct written premium was up 3.1%.

The personal auto combined ratio for the first quarter was 97.9% compared to 104.5% at this point last year. Favorable development was slightly higher in the current period as liability severity was better than expected. Similar to commercial auto, physical damage loss ratio was higher this year. We saw an increase in paid frequency in the quarter that contributed to that result but with the seasonal impact of winter weather it’s likely it was a short term phenomena. Bodily injury liability and property damage liability frequency trends remain favorable.

The homeowners’ combined ratio for the first quarter was 93.8% compared to 92.6% in the first quarter of 2007. Although favorable development occurred in both periods, the development was higher last year. Catastrophe losses were also higher in 2008 contributing 4.7 points compared to 2.5 points in the first quarter of 2007. Adjusting for both impacts, the 2008 active year combined ratio including cash was 91.4% compared to 99.8% in the first quarter last year an 8.4 improvement. Although last year’s first quarter was influenced by a few large claims, we’re happy with the level of profitability we’ve seen so far this year.

At this point I’ll turn the presentation over to Mark Cummins to comment on investments.

Mark R. Cummins

The yield curve continued to shift downward during the first quarter of 2008 and this had a favorable impact on our fixed maturities portfolio as our market value, the amortized value increased from 101.4% at year end 2007 to 102.5% at 3/31 of 08. Our fixed maturities portfolio duration moved up to 4.2 years at 3/31/08 compared to 3.9 a year ago. As you can see from the balance sheet our total investment portfolio amounted to $2.6 billion and had a market value in excess of costs of $56.1 million at 3/31/08 up from $40.3 million at year end. Our investments are high quality, 97% of the fixed maturity portfolio is rated A or better and 81% AA or better. Our average credit ratings are AA1 by Moodys and AA plus by S&P. It is important to note that our investment portfolio has been managed for quality and after tax investment income and is very well positioned for this difficult environment.

Our after tax investment income was up 8% in the first quarter. This increase was impacted by the $86.3 million of cash used for share repurchases during 2007 and the first quarter of 2008 but benefited from our pooling change which I’ll describe shortly. Pre-tax yield excluding short term investments was 4.85% down from 5.04 a year ago. Our after tax yield was 3.54% versus 3.62. For the shifting of assets due to the pooling change we expect investment income to increase in the mid single digit range in 2008. At the time of the pooling change in early January, 2008 we shifted about $190 million in assets and liabilities from Harleysville Mutual to Harleysville Group. About $36 million of these assets were equities. We also allocated an additional $25 million to equities during the first quarter 2008.

These changes resulted in an increase in our equity exposure to 16% of stockholders’ equity at March 31 compared to 10% at 12/31/07. We found this to be an opportune time to add to equity. To our tax position we’ll continue to purchase primarily tax exempt securities and I’d like to point out that we took advantage of the turmoil in the tax exempt market and had some very advantageous purchases during the quarter. This is one of the most attractive times in history to buy tax exempt securities.

With that, I’ll turn it back to Michael.

Michael L. Browne

Let me summarize this portion of the call with just a few key points. First, the ongoing steady improvement in our operating performance and the positive momentum we generated last year have carried over in to 2008 resulting in a 98.1 statutory combined ratio adjusted to excluding the non-recurring impact of the pool change and a 13.9% operating return on equity for the trailing 12 months. Second, our operating earnings of $0.80 per share for the quarter were 14% higher than 2007 and that marks our 13^th straight quarter of double digit percentage growth in operating income.

Our policy level retentions have shown a steady improvement quarter-to-quarter, reflecting our agents’ continuing support. In personal lines we posted our 12^th consecutive quarter with underwriting profit and we continue to generate positive production in states we target for profitable growth. Our strong cash flow increased loss reserves coupled with a solid paid to incurred ratio of 88% all continuing to drive a high quality of earnings. As we progressed through 2008 and the longer term we will remain focused on the basics of our business as we seek to consistently produce the kind of quality results we are reporting today. Improving earnings, profitable underwriting and an operating ROI of over 12 while always maintaining a healthy balance sheet.

We do believe we are well positioned to accomplish these goals. Our confidence is based on a number of key factors that we believe serve to differentiate us in the market as well as in the minds of our agency partners. These include our use of predictive modeling to enhance the quality of our underwriting which we are applying to the overwhelming majority of our commercial business both new and renewals. The ongoing roll out of our new commercial lines and personal lines technology and enhanced product platforms enable us to compete effectively for our agents’ quality business. Our regional field structure which enables us to be even more responsive and accountable to our agents, our commercial and personal lines territory managers who are in our agents’ offices on a consistent basis to strengthen our business partnerships to retain their most profitable business and our ongoing attention to reducing expenses and enhancing our overall efficiency in large part through the introduction of new technologies and improved business processes.

I will say that the insurance marketplace remains challenging and we are committed to retaining our best businesses as well as generating responsible, profitable growth. But, let me conclude my remarks with the point you’ve heard me make many times over the last several years and I’ll continue to make it. That is, we’re not going to compromise underwriting quality to chase a near term growth goal. Instead, we will remain disciplined despite the current soft market conditions as we focus on our goal of maintaining a long term underwriting profits and continued improvement in our performance that will continue to differentiate us throughout 2008 and beyond.

With that, let’s open the call to questions. We’re ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) One moment please for our first question. Stuart Johnson from Philo Smith, your line is open.

Stuart Johnson – Philo Smith

I have a question for Bob Whitlock on the commercial lines. You mentioned that the commercial auto competition was up there, I was just wondering about the other three commercial lines you have especially the multi parallel, what did pricing look like here?

Robert G. Whitlock, Jr.

Pricing overall as pointed out was about 3.5% down and a very similar number for commercial multi parallel.

Stuart Johnson – Philo Smith

It seemed given the pressure and pricing your commercial top line was fairly strong. Can you comment on how you did that? Keeping the top line fairly consistent given the pricing pressures?

Michael L. Browne

Well, you know part of it is staying close to our agents. Quite frankly, our mid market business was flat, most of the increase in our business came from writing more small commercial lines and one of the things that we’re seeing and we’re very pleased about is you’ve heard us talk about the roll out of our new system for both commercial lines and personal lines and that mainly is on the commercial lines side directed to writing for small business. Then, where we have had the new system roll out long enough to see an impact we’re really seeing an impact in terms of writing more small commercial business. One of the really attractive things about that is that small business is much less price sensitive than mid market business and so we really think that’s going to help us in this soft market.

Stuart Johnson – Philo Smith

Then a question on your reinsurance, you used excess of loss, were there any changes in the terms in terms of the retention levels and so forth?

Michael L. Browne

No, there were not.

Stuart Johnson – Philo Smith

And what about pricing? Did you see any benefit this year versus last?

Michael L. Browne

We have seen some benefit in pricing and pricing has been coming down for us.

Stuart Johnson – Philo Smith

Has that affected your use of reinsurance at all?

Michael L. Browne

No, it hasn’t.

Stuart Johnson – Philo Smith

Then my last question just has to do with the changes in the intercompany pooling agreement. Generally, these are used to produce a more uniform or stable underwriting results, what was the thought internally in terms of making the change that you did?

Arthur E. Chandler

Our real reason was very confident about the book of business and the underlying profitability and we thought that was a prudent change to increase the public company share of the book of business results and it’s actually benefited not only the public company but also to the mutual as well. So, it was really based upon our confidence of the performance of the book and the seasoned nature of the business that is part of the overall operation.

Operator

Bob Glasspiegel from Langen McAlenney, your line is open.

Robert Glasspiegel – Langen McAlenney

Could you bring us up to date a) where acquisitions stand in your arsenal sort of flat, no time growth macro environment, are you stepping up the acquisition team to do more analysis here? And, do you think there’s going to be more acquisitions in two or three? Is there any potential for any mutual/mutual deals in that context?

Michael L. Browne

Let me take that. We certainly are on the lookout for acquisitions that we think would be strategic for us. I would tell you that right now there are a lot more buyers out there then there are sellers and we’re going to be very careful about any M&A activity. My experience in this is that if you make the right acquisition it can be very helpful to your organization but a lot of these acquisitions don’t work so you’ve got to be very targeted and very strategic. Again, right now there are more buyers than sellers and quite frankly, the prices that have been paid in recent acquisitions are pretty steep. So, we are interested, we are looking, it is something we are spending more time on but we are going to be very, very targeted and very strategic about it. In terms of I think you mentioned mutual to mutual kind of acquisitions, certainly given our structure with our mutual that is a kind of acquisition that we could readily accomplish but I think there you have an issue which is a lot of times some mutuals don’t have much of an incentive to do a deal or be acquired because they don’t have the public pressure of being held publically. The only time they are really interested in doing a deal is if they get in trouble with rating agencies. So, that is a possibility, it’s something we’re looking at but again I would just say overall in the M&A environment I still think right now that you have a whole lot more buyers than sellers and I think if you want to do a good deal you’ve got to be patient.

Robert Glasspiegel – Langen McAlenney

Have you had any silver medals?

Michael L. Browne

I’m sorry, any silver medals?

Robert Glasspiegel – Langen McAlenney

Yeah. I mean have you been bidding on anything in the last year or two where you have been close? Or, is this just way out there in blue field?

Michael L. Browne

No. We usually don’t comment on that kind of thing but we haven’t.

Operator

Mark Dwelle from Ferris, Baker Watts, your line is open.

Marc Dwelle – Ferris, Baker Watts, Inc.

I’ve got a few questions, firstly I guess related to the pooling transaction, I don’t want to spend too much time on that but I do want to make sure I understand with respect to the unearned premiums that came over, it was $45 million for the quarter, how much will come over for the balance of the rest of the year?

Arthur E. Chandler

The $45 million was a one-time impact so there will be no more. That all occurred in the first quarter and that particularly aspect of the pooling change is non-recurring. Obviously, as we go forward here the 8% increase in the pooling percentage now attributable to Harleysville Group will increase the written premiums this year versus what was observed last year.

Marc Dwelle – Ferris, Baker Watts, Inc.

So your comment that the 1.5 points of combined ratio impact that shows up in the first quarter related to the unearned premium transfer will decline is just simply because that $45 million will become a smaller and smaller portion of the full year results as the year unfolds.

Arthur E. Chandler

That’s absolutely correct. The same question I had, you commented related to the prior year favorable year reserve development, can you say which accident years were the primary years from which you were releasing these reserves?

Allan R. Becker

It’s the more recent accident years, it’s not from the older years.

Marc Dwelle – Ferris, Baker Watts, Inc.

So by recent like 05 to 06? 04 to 05?

Allan R. Becker

I would say the period 03 to 06.

Marc Dwelle – Ferris, Baker Watts, Inc.

Okay. Mark you commented briefly, or I’ll say rapidly on the portion of equities that came over with the pooling transaction. Can you just say that figure again?

Mark R. Cummins

Yeah. It’s kind of a two-fold change in the equities. The $36 million of some of the cash from the pooling change we put in equities and then we allocated an additional $25 million.

Marc Dwelle – Ferris, Baker Watts, Inc.

Okay. So that explains the full 50ish uptick in that.

Mark R. Cummins

Correct.

Marc Dwelle – Ferris, Baker Watts, Inc.

The last question I had was you commented that you had done 670,000 shares of share buybacks in the quarter. Where do you stand with respect to your remaining authorization?

Arthur E. Chandler

We have about 600,000 shares still remaining under the current authorization.

Operator

Unidentified Analyst, your line is open.

Unidentified Analyst

I just had a question on predictive modeling, I was just wondering how much does that contribute to the favorable results? What I mean, is it possible to quantify the effect?

Michael L. Browne

I think it’s very hard to separate out the impact of predictive modeling. We certainly think of it as having an impact. We have been very careful about really watching the results, we validated the fact that the predictive modeling really is working through analysis of the frequency of claims we’re seeing in our business. And, if you think about it, it is a very powerful tool in a soft market because even though our pricing is down 3.5% we believe we’re getting a better book of business through predictive modeling. So, if pricing is going down modestly but you’re getting a better quality risk it actually can help your results and we were very pleased to see for example that actually our accident year loss ratio actually improved in the first quarter over the first quarter of last year. We now put over 80% of our business both new and renewals in to our model. We think it is having a powerful impact. We haven’t really tried to quantify exactly how much of it is flowing from predictive modeling. Bob Whitlock who is our chief underwriting officer who was really the architect of this, I’ll ask Bob if he wants to comment on that.

Robert G. Whitlock, Jr.

To give a little more detail around that you figure how the market is behaving and I could tell you that for the better business we’re getting 3.5% overall decrease, the better business that’s being allocated to those risks so we’re actually getting increases on the risks that have predicted scores that are on the high end. Similarly, our retentions are better on the better predicted scores and the retentions are lower on the higher scores. So, you put all those things together and as to Michael’s point we have a higher quality business. On small business in particular we are still getting increases on that small business and a lot of that is being directed by the modeling efforts. So, I think it’s a great tool in a market like this to be able to really more accurately allocate the pricing capacity you have to the right risk.

Unidentified Analyst

Thank you that was helpful. Just to clarify the reserves in the quarter, I think I missed it, what were the lower reserves relative to [inaudible] in this quarter?

Mark R. Cummins

The total for online was $7.5 or $7.6 million or 3.3 points.

Operator

Beth Malone from Keybanc, your line is open.

Elizabeth Malone – Keybanc Capital Markets

I just have a question on the personal lines, I know it’s not a big line for you but I was curious as to what you’re really specifically seeing in terms of pricing competition among mostly the auto in your market?

Michael L. Browne

Pricing for our personal auto is pretty stable right now. On the homeowners’ side it is up because of insurance [inaudible] I would say it’s very stable for us right now.

Elizabeth Malone – Keybanc Capital Markets

Also, are you seeing any trans commercial or personal lines in the inflation or severity due to replacement costs above what you might normally see?

Michael L. Browne

No, we’re not.

Operator

(Operator Instructions) We do have one more question.

Unidentified Analyst

My apologies if you’ve already answered this question, I’ll take it off line but, I was curious about the roll out of your personal line system, did you discuss how extensive that roll out has been and your success so far?

Michael L. Browne

No, we did not discuss that. We talked a little bit about our new commercial line system. We’re still in the process of rolling out the personal line system. It’s going extremely well in states where it is being used now. We’re seeing a growth in business and we’ve seen not only an uptick in business quota but in business revenue and we’re getting a lot of favorable feedback on our new personal line system.

Operator

At this time there are no further questions.

Michael L. Browne

Thank you very much everybody. You have a nice quarter.

Operator

This concludes today’s conference. Thank you for attending.

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