Selective Insurance Group Inc. (NASDAQ:SIGI)
Q1 2008 Earnings Call
April 25, 2008, 8:30 am ET
Jennifer DiBerardino - Vice President of Investor Relations
Dale Thatcher - Chief Financial Officer
Greg Murphy - Chairman and Chief Executive Officer
Ron Zaleski - Chief Actuary
John Marchioni - Chief Field Operations Officer
Ed Pulkstenis - Chief Underwriting Officer
David Louis - Raymond James
Rohan Pai - Banc of America Securities
Michael Grasher - Piper Jaffray
Amit Kumar - Foxx Pitt Kelton
Doug Mewhirter - Ferris, Baker Watts
Susan Ross - Wachovia Securities
Good day everyone, welcome to the Selective Insurance Group First Quarter 2008 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would now like to turn the call over to the Vice President of Investor Relations, Ms. Jennifer DiBerardino.
Jennifer DiBerardino - Vice President of Investor Relations
Thank you, Merian. Good morning and welcome to Selective Insurance Group First Quarter 2008 Conference Call. This call is being simulcast on our website and a replay will be available through May 23, 2008. A supplemental investor packet 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 in non-GAAP measure to analyze trends and operations, operating income as net income excluding the after tax impact of net realized investment gains or losses. We believe that providing these non-GAAP measures makes it easier for investors to evaluate our insurance business.
As s 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 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 Officer, Ron Zaleski Chief Actuary and Kerry Guthrie our Chief Investment Officer.
Now I turn the call over to Dale to review the quarter results.
Dale Thatcher - Chief Financial Officer
Good morning. First quarter financial results didn’t meet on our expectations and there are several contributing factors. Premium growth was a challenge in the quarter, due to the competitive insurance market place and the slowing economy. Statutory net premium’s return decrease 6.4% to 2007, reflecting a decrease in commercial lines of 8%, while personnel lines grow 6%.
Commercial lines competition continue to intensify was the major focus of agents and carriers with the maintaining of renewal books, as they try to lockup accounts sometimes sixty days in advance of the expiration date. In spite of difficulties there are also some positive signs. First, our commercial lines retention remains strong at 78%. Second with renewal pricing including exposure was down only 0.4%, while peer price decline only 3%. Sequentially, both measures improved from fourth quarter 2007. Greg will share more with you on premium growth later in the call. Despite relatively flat pre tax capacity losses are $4.7 million. Overall losses in the quarter were higher than anticipated.
Looking at the selective income statement that exhibit in our inverter packet on page seven, the $0.12 per share year-on-year decline in insurance operations is due to the following; $0.04per share for the restructuring charge we announced in February, and $0.08 per share mainly reserve a voluntarily in commercial auto physical damage in property results, as well as some casualty deterioration, due to the comparative pricing trends in commercial auto and general liability, all partially off set by improvement in the workers compensation.
Commercial property was impacted by increased severity in the quarter relative to longer term expected averages and also by pricing. Property losses by the very nature are volatile. Despite the volatility of the experience in the quarter, our commercial property results remain profitable at 96.6% statutory combined ratio.
The commercial auto combined ratio increased by 12 points in the quarter, reflecting price decreases which contributed 3 points to combined ratio, and physical damage severity which added another five points. In addition 2007 included favorable prior year development of $3 million or 4 points.
Workers compensation continues to demonstrate the benefits of the predicted modeling and our other strategically under initiatives, as well as favorable development in the quarter. We reported a statutory combined ratio of 94.5%, a 3 point, 7 point improvements from a year ago. We anticipate that these results will fluctuate somewhat as we move to 2008. As softening economy has putting some pressure on a contractor book which represents 45% of our book of business. Although new business counts are only down about 1% from last year, order and endorsement premiums decrease approximately $5 million for a quarter from a year ago.
Overall statutory loss of LAE reserves, develop favorably by approximately $3 million in the first quarter driven by continued improvement in workers compensation.
In the first quarter of 2007, prior year results develop favorable by $4 million. After tax investment income was down $1.8 million a year ago. Primarily driven by a decrease of $1.2 million after tax or $0.02 per share associated with the implementation of FAS 159 for through a high quality separately managed investment account. A trading portfolio can create greater volatility as any mark to market adjustments now run through income statement. Historically this portfolio has been a solid performer and we have already record $1.2 million of our losses in April.
Another contributing factor to investment income in the quarter was the opportunity cost of our decision to hold a larger average cash balance of $236 million due to the turmoil in financial markets.
Under normal circumstances, particularly given the current yield curve, the company would have held approximately $90 million plus cash. The elevated short-term position with lower investment income by $0.8 million after tax or $0.02 per diluted share.
The combined impact on the quarter from the establishment of the trading account and the opportunity cost of short term investing activities was approximately $0.04 per share. We will however benefit going forward from higher tax of the energy yields which are currently approximately 4%. This is our budgeted expectations of about 3.3%.
Over the course of the year we expect to continue to add tax advantage fixed income securities to portfolio. The other expense category from the Selective income statements that data exhibit shows an increase of $0.05 which is largely result of taxes booked on the first quarter based on the full year expected tax rate which equal to the $0.03 per share. This would normally occur when there is a quarter early in the year would have out of line with the profitability expected later in the year. We expect this to equalize as the year progresses.
We continue to deploy our long term strategies to produce a profitable personnel lines business and we’re seeing some signs of improvement. Results in this line continue to be driven by our New Jersey auto business. Although this book has stabilized as we currently insures 70,300 cars, while account retention improved approximately 7.4 points to 80%.
Over the past four year as New Jersey transitioned from a highly regulated environment toward much greater rate flexibility. Overall pricing reached in an adequate levels. The marketplace has begun to change putting us in a better competitive position to take additional rate, and therefore, we filed a 6.8% rate increase in New Jersey that will become effective May 15. New business written under the Matrix personal lines rating point increased $2.6 million in the quarter from the year ago, largely driven by personal order.
Business written under the old rating plans and our expansion states is receiving average rate increases of 7% over the course of the year, on top of the 7% received last year. We expect the turnaround personal lines will take sometime to develop, but feel positive about our strategies to improve profitability, by aggressively pursuing rate increases for both auto and home, implementing targeted underwriting initiatives and working with agents in our expansion states to diversify and grow our book of business.
As a result the company wide restructuring and other expense initiatives announced last quarter. We improved our net premiums written per employee productivity measure in the quarter to $823,000 from 797,000 in the year end. While restructuring will be annualize pretax savings of approximately $7 million.
Additionally the commission reduction we announce the year end are expected to generate another $7 million in annualized pre tax savings as it will take effect July 1st. In the quarter we repurchased 1 million shares on an average price to book of 1.2 times. We have 2.5 million shares remaining on our current authorization and we will continue to opportunistically repurchase shares, while also monitoring the market in balancing liquidity needs. Now I turn the call over to Greg.
Greg Murphy – Chairman and Chief Executive Officer
Thank you Dale and good morning. We can plan to the soft market for some time by implementing modeling and rolling out our world winning xSELerate technology that makes it easy for agents to do business with us. The current commercialized market place continues to be difficult to navigate as new business in the first quarter was down 17%. With the agent scoring and pricing tools our AMSS are able to make important decisions about writing business that have the best opportunity for profitability. New business by market segment for the quarter demonstrates that larger accounts are under the most pressure, while small business afforded greater opportunity. One & Done automated small business is 17 million up 23%, Middle market or AMS generated business 42 million down 22%, Selective risk managers are on a large account business 4 million down 50%.
Small business continues to be switch part of the market and we have expanded our capabilities to increase volume. Our growth in small business is partially driven by an increase in the number of new classes of business eligible coordinative processing through One & Done, as well as predicted modeling capabilities. New business per work day was $271,000 and new classes accounted for 15% to the total.
At the other end of the spectrum large account business which represents only 11% of our total premium is the toughest, most competitive segment of the market. As a 50% declined in SRM new business indicates, large accounts are hard to find as pricing in the segment has become reckless. Our hit ratio which is historically between 45 and 50% dropped to 22% for the quarter largely due to the weak fields overly aggressive pricing by the competition. We tell our underwriters don't chase stupid. Opportunities for new business in the middle market remain difficult that our agents office everyday tell us they’re not getting as many add back to right quality business. Agents are coactively reaching out to incumbent carriers before renewals to obtain the best pricing. Predictive modeling tools our AMS have at their disposal are critical to ensure that we’re only writing quality business in the current market conditions.
Our commercial lines renewal pricing was down only 24% in the quarter and over the past three years has averaged an increase of 2% while the industry decreased 4% over the same timeframe based on the advice and survey. In addition, new commercial lines pricing declined only 4.1% in the first quarter, while we are hearing from competitors that their new pricing has been decreasing by as much as double digits. Predictive models work best for business under 50,000 and we believe this business which represents about 65% of our book will perform better over the long timeframe (audio cut) the implementation of our predictive models. We have seen the quality and distribution of new business under 50,000 changes dramatically.
Our best performing four and five diamond business has increased from historic 50% of our book to 58%, while our worst performing business the one and two diamond accounts have decreased from 20% of our book a business to 11%. Our focus is on long-term profitability and modeling is just one tool to meet our goals. We have implemented a number of other cost savings and underwriting initiatives many of which we’ve shared with you. We’ve always been focused on our claim operation, and during 2007 we undertook a number of initiatives to improve an already strong claims organization. We’re experiencing yearly benefits of these efforts in 2008 with the reduction in cycle times, lower legal expenses, and quicker establishment of case reserves. We expect to realize these benefits over the course of the next two years. We remain confident in our direction and our strategic initiatives to successfully navigate this soft market. As we have previous cycles, based on a strong agency relationships, a superior field force, excellent technology, and underwriting tools to grow profitably.
Due to the more challenging industry and financial market environment, we’ve updated our earnings guidance to a range of $2 to $2.30 based on the following assumptions. A statutory combined ratio of approximately 98.5, a GAAP combined ratio of approximately a 100, after tax catastrophe losses of $14.4 million or $0.27 per share, growth in after tax investment income of 1% including an 8% pretax yield on alternative investments, diversified insurance services revenue growth of 5% and return on revenue of 10 and the weighted average shares of 52.5 million. Now I will turn the call back to the operator for your questions.
(Operator Instructions). The first question comes from the line of David Louis of Raymond James.
Thank you good morning.
Good morning David.
Good morning David.
Couple of questions, first, can you talk a little bit about the pricing. Some of the brokers out there and I know you deal with some of the intermediate large middle market brokers, but a lot of those are saying we’re seeing an accelerating downward trend in overall pricing is that what you saying some of the other underwriters are saying they’re not seeing that and I understand that they want to renewal a piece of business they’re going to have to try to do it at down double digit rates, but maybe your comments on that. And secondly if you can just kind of talk where some of the biggest pricing pressures are outside of the large account and I understand that’s going to be the most competitive environment and also maybe just talk a little bit about the contractor or pricing business for this.
Great sure. I will handle this among the folks here, but pricing I want to tell you on a quarter-over-quarter if you look pure pricing, its I think really is the right way to look at pricing, our pricing was only down 3% in the quarter, and if you look at that relative to last year, that’s improved, so we are down about 4% for the year and we have improved in terms of – we’re giving up less price and still meeting our retention target which is telling us that all field folks are doing a right are inside underwriters are doing a right job in terms of the balance of maintaining retention and price together. So we are not seeing those years double digit price increases that you’re articulating and we’re trying to make sure that we protect our best business and our pricing actually improved in a sense on the quarter versus the year runt rate. With respect of pricing pressure overall, I would just tell you from business and I know you’ve asked it relative to the large account area, from a line business obviously we are seeing the most price on a pure price basis still down in the commercial property and commercial auto lines and I think that’s why you continue to see little bit of margin compression in both those lines of insurance. And then just from an overall standpoint, on the contracting, our contracting book which you would think would be under a little bit more pressure with respect to price, virtually match our average price reduction of 3%. So there wasn’t any dislocation in the contracting book with respect to getting our price. Now, we are seeing in the contracting book obviously is less additional audit premium as referred to, we’re seeing some return premium or RPs versus additional premiums or APs we have seen in prior years. So we have seen a little bit of tightening in the audit area year-on-year with respects to our contracting book, but overall it has performed very well in the market. And I guess Dale any other comment?
I think we will ask (Inaudible)
Well just followup on that, a lot of companies obviously the renewal business what you’re willing to except might be down only in the low single digit. What are you hearing that business is going forward that you are losing of that 22%, and do you have any sense of what you’re losing that business toward the regional toward the nationals?
That covers the water front and I have heard some from pretty scary stories out there of accounts that, I was on the phone recently with AMS at Wisconsin and we had a renewal on a fine dining account and our expiring premium was 16,000 and premix all of the credits on that account, we could get it down know maybe the 12 and that account went for 9000. You know and it’s across the board at some cases, it’s the national players in some cases, it’s the local regional or mutual players and that all depends on know how aggressive someone who has to be on that trade and I think, I'd let John comment a little more about just the general market conditions.
I think, this is John Marchioni, that's a fair assessment of what we see out there. It certainly depends on the class of business you’re talking about. So, if it is a contractor versus a manufacturer, or a golf course, you said a competitors is going to be different and is going to vary by states. So, clearly, anecdotally, we see some stories where you're going to lose renewals for pricing levels the we just can't justify and the ability that we have now through modeling to provide true pricing ranges, we really are underwriters and our new business underwriters gives them a much better sense as to what a technical pricing level is for each individual account. So they know where the line is and how far they can push that before they are just going to let that walk.
We also look at our renewal book and measure as Greg mentioned in his comments earlier diamond score to make sure that the business we're losing is in fact the business we're more comfortable losing and the business we’re are propounding to keep or getting more aggressive on. So, that's another important measure for us that points the longer term profitability.
Okay, thanks for the comment. I'll follow up with an additional couple of questions.
Okay and your next question comes from the line of Rohan Pai of Banc of America Securities.
Unidentified Company Representative
Hi. I guess Greg and Dale; I'm trying to reconcile your commentary after the fourth quarter results where you seemed substantially more upbeat on the growth prospects relative to right now. What has changed in the environment the most in your view, I mean, it doesn't seem like pricing has fallen off a cliff or anything?
Well, when we talk pricing, remember the only benchmark that you have out there that's somewhat legitimate is the renewal pricing and I'll tell you there is a lot of surveys out there and obviously we follow the CLIPS survey which we put the highest degree of credibility in with respect to renewal pricing. And in some cases that's a very different story than what you hear relative to new. And I think in some cases, when you look at our budget and our mix in premium last year, that was focussed more with respect to renewal inventory and this year it is a different story. It’s more focused on new business and I think we've seen a lot of carriers very aggressive in the marketplace to write new business to me whatever premium objectives that have been set within their organization. So I would say that there is a pretty ferocious appetite out there for some carriers to write business in the first quarter that's clearly evidence itself, I think, more so in this quarter than in the fourth quarter or the third quarter of 2007.
Is it possible that so much of your competitors are using your new agent compensation strategy against you even before it goes into affect, that's hurting your premium volume?
No, I'm going to tell you our compensation structure first of all wasn't even rolled out till February and you've got to meet the business recorded in January from the most part was booked in November and December. So, you know most of that business was two months ahead of time. So, now my belief is that did not have an affect on our premium levels.
Okay. I guess on commercial property you sighted higher severity. Was that in your near views one-time related, weather-related, or was there anything that might not recur, or do you think that was just because of….
I'm going to let Ed Pulkstenis address that question.
Yeah, just if I could ask on the question; you mentioned commercial property. The severity comment was in relation to the auto-physical damages, is that where you were on the property?
I interpreted as being commercial property losses were higher than expected due to severity reasons, was there any thing with commercial property that…?
Yeah, I can talk to you about property a little bit. I think one of things that we have to start with is when you look at our results relative to the industry, we do track that. And if you go back to 2000, we've outperformed the industry in our property book by about 19 points. Now if you take out 2001 and the impact of September 11, then we were within about 0.5 point of the industry. So, our results for property over a long period of time really kind of track on par with the industries. One of the things that you see when you look at both the industry numbers and then our numbers is the volatility that is just inherent in this book of business; for the industry it's on a base of billions of dollars of premium and then at our annual base you continue to see volatility and then as you start to break that down to look at the results for, individual quarter or four other metrics that we look at then you really start to look at number that do tend to bounce just by the very nature of the business. Just to give you sense that when we do look at a number of different matrix on the property side we track overall frequency and our severity trends; we track our predictive modeling matrix, we track results by construction, by age of building, by hazard grades and we really do not see anything across a wide range of matrix that would cause us to believed we see any trends or that we need to make any changes in what we are doing. Some of the increase in the property was simply due to the continued pricing pressure that we’ve seen as Greg mentioned earlier. So -- we do feel like we have a very, very good understanding of where we are in the property and at this point we don’t see any trends.
Okay. And then since you mentioned commercial orders that’s been historically or at least over the last two three years a very profitable business plans field. What suddenly changed in terms of severity and the competitive environment that lead to the margin deterioration there?
Yeah I think that’s another line where we do track a number of matrix on the auto side there we look at our experience across our various product lines, we have different products with different price points, different underwriting criteria, different coverage levels, we look at our experience across different hazard levels within the commercial auto line. We look at business that was written more recently versus business that’s been on the books for the longer period of time. We looked at things like a size of account which is important because our One & Done small business program is growing very well right, and again that’s another area where when you look at across the broad matrix, you really don’t see trends that indicate that we should be changing what we are doing or indicate one area is performing much better or much worse than any other area. I will tell you for the first quarter we did see a couple of physical damage losses in our volunteer fire company book which is a very profitable book of business for us, it is book of an area where we are an industry leader, and its been very successful, but with that we will have to pay physical damage losses on a fire engine from time to time those are expensive and we did experience a couple of those in the first quarter and that’s a little bit of unusual, but again no trend, really nothing that we see that that indicates a trends and nothing that what we see we that w would need to change.
And well just on a actual year basis I kind of just round out Ed’s comments, the physical damage for the quarter added to our overall combined ratio and commercial logo is somewhere between four and five points. So you know on a year basis we expect that line to level out into the 90, lets call the 96 range which is where the liabilities running. Now when you look at it irrelative to the prior year obviously it shows like a 12 point with difference in terms of combined ratio, some of that is just a price compression that’s been given up in commercial auto over the last two years which line is been under a lot of pressure. And then the other thing is that in the first quarter of 2007 we had about $3 million reserve releases in that line that also improve that combined ratio by about four points. So, when you kind of level it out and we expect that line to run in about the 96 range and taken out the unusual physical damage activity that Edward just refereed to. You know it does get into that level of expectation.
Okay great those are the questions I had thanks a lot.
Your next comes from the line of Mike Grasher of Piper Jaffray.
Good morning everyone.
Good morning Mike
Just a several questions here, with the predictive modeling in place I think that was in the press release, would that implies, is the expected impact from that worked within your guidance Ed or not?
There are some aspect of that within our guidance in terms of our improvement, I mean because I have to tell you, when you look at our combined ratios and you look at the year-on-year change, I mean, obviously we drive those combined ratio year-on-year, our price changes, it changes severity, it changes in underwriting and if you don’t have changes in underwriting that are significant those combined ratios year-on-year are going to go higher. So our current year expectations do reflect a certain amount of improvement, and as you know they have tendency to be much more measured in terms of how they worked that credit in and that’s the part of normal process. And I will tell you in terms of our planning and efforts I mean, we have a very, very sophisticated planning model and we disaggregate business new renewal and there are new business aspects in terms of how that business is expected to perform and those have weightings on them that are different in just an overall rating in terms of expectation and loss ratio.
Okay. I am wondering if certainly allowing you to decide on certain accounts whether to go with them or not, particularly on pricing. But in the area, the actuary analysis, are you putting up a different level reserves of exchanging your multipliers and thinking about how you reserve for these accounts with the new modeling?
In terms of overall terms, in terms of how they figured into the current year, yes there is.
Okay. I am just trying to reconcile here the combined guidance that you gave in the press release as well, and if I look at the first quarter results its pretty much I think, would this be a pretty much reflection for the rest of the year in terms of what you anticipate on a line-by-line basis?
Well, I am not, I did not (Inaudible) what we anticipated wrong, we believe that the property obviously, there is a lot of volatility and property in the first quarter we expect that property which -- I want to make sure we are talking about the OF and EC line now or the property line itself, and then you’ve got the same kind of things to a larger extent going in the commercial physical damage line. So we expect those areas to normalize more as we forward, and that will happen overtime. But some of the guidance change obviously as you saw we reduced our investment income projection partly due to a change in expectations. On our alternative investment portfolio expected performance we had a 10% expectation there, we file that back to 8, we felt that that was prudent given the fact of the M&A slowdown and what may happen in terms of realization in that portfolio. So that changed our investments. So that's the part of the reason why the guidance came down. In addition, in the quarter you had the restructuring charge, and that would think that our non-recurring you had this tax situation of $0.03 in there. But when you look at it facing on a line by line basis, in every liability line its going to be a little bit of volatility in among the lines. But generally speaking we expect the property lines to more normalized as we move to the rest of the quarters.
Okay. And then a couple of more, obviously the economy is slowing down here. Is that impacting your workers comp business at all or is there any change in headcount and then also on the loss side?
Yeah we are definitely seeing that impact as a matter of fact lot of our new business mix was relative to a shortfall in workers compensation premiums and not only was it is in large accounts space but it was also on the fact that we didn't ride as many workers compensation accounts we thought we were, in some cases . In some cases the pricing for that by the mono line carriers have been extremely aggressive. And then with respect just our general l pressure, yeah, obviously you see it, employee, number of employees per site, per location at everyone of our insured obviously is under certain amount of pressure, I mean, so our bonuses which we generally insure are under pressure, I don’t think they are under as much pressure as the larger enterprise is, but sure you’re going to see payrolls in a lot of cases go down because of less employees.
Okay. And then what trends are you seeing in terms of severity frequency, and then do you sense impact from inflationary loss cost?
Now right now of frequency its been pretty stable for us, severity is actually gone higher in the quarter mainly because we’ve been more quick to establish reserves than we have in the past as I mentioned in my prepared comments. But with respect to inflation and everything else like that on the medical side our actuarial folks are using multiyear inflationary estimate and we feel very comfortable of those. Ron if you have any comments you want to make about inflation that you’ve got in there?
Yeah our inflationary estimates are good. We’re seeing the improvement of workers comp really in the frequency side, even this latest quarter the frequency continues to decline, and on a year-on-year frequency is down about 4%?
But the only thing I will point as you’re building your model and things like that, when – in the first quarter here we have got one point of combined ratio is impacted by the restructuring charges means every line of business has roughly one point of restructuring charge in it. But as you go about out you have factor that in.
Okay, that’s helpful. Thank you.
Your next question comes from the line of Amit Kumar of Foxx Pitt Kelton.
Thanks, I guess just going back to your commentary on reserve releases and I think you mentioned there weren't any in Q1 '08 and there were some in Q1 '07. Could you just talk a little on it but more about that and whether there any of the pluses or minus or net-net there weren't any reserve adjustments in the quarter?
Actually Amit there were - for the quarter we had favorable reserve development of $3 million in the first quarter of 2008. So that’s 3 million in first quarter of '08 and we had 4 million in favorable development in first quarter of '07. So comparable in that regard.
Okay that’s helpful. I guess just moving on and I guess going back to the discussion on your model and I know that you spend a lot of time explaining to us how it sort makes Selective different from others. I'm just wondering at this stage of the cycle especially when everyone talks about having a model. Does it really end up making that much of a difference over the longer time I guess as we go forward from here?
Yeah I would tell you – lets just talk about, I am (Inaudible) the Selective Insurance brand really is high touch high tech. And the touch points make us really different I don't care whether we are talking about safety management services, claim services or the fact that we have AMS and agents office. That’s what I think really gives us – why we've been able to grow our long term premium rates on a compounded annual basis much better than our competition and that’s held across the boards. I don't want anybody just – one quarter does not make a year and I want make sure that that’s clear. What I think and some cases what modeling gives for you is to stay clear maybe of what would perceived in my mind as the most toxic of the toxic business. And I think that is where we get a more informed decision about the type of business we want to be competitive on and I think that helps us steer clear of that - lets say the worst 5% in the industry or the worst 20% in the industry, that’s where we want to make sure our folks are guarded on, I tend to give up some price rise in piece of business. You want to make sure you're doing on a good quality account. And then any near do you get 2, 3, 4% get another 2, 3 4% on that account you can do that. But I am going to tell if you are writing that volunteer diamond business now, it’s not going to be good today and it’s not going to be good in three years from now. And I think that’s the difference. And again we are not immune from the cycle. I don't think there's any carrier that can tell you they are immune from the cycle. Everyone one has a certain amount - in terms of aggressiveness in their pricing structure. But I think when you look at how that worst 5% business drives higher loss ratios and to the extent that you can mitigate that in your new business selection and continue to migrate it down in your renewal inventory you have a much better opportunity to spring back from the market when conditions do change. That’s the difference in my opinion.
That’s helpful I'm just wondering if you sort of look at your guidance going forward. Had your models been you know like fully I guess online. How much of an impact on the combined ratio would the model have compared to maybe the overall market or your peers now in terms of points on loss ratio?
Yeah, I got to tell you that’s information we're not really comfortable giving out. But there's something we clearly analyze internally and make long term strategic decisions around that type of information.
Okay that’s helpful. I guess my final question would be on M&A. Recently we saw the Cisco deal, and previously we've seen other deals in this space. Maybe you could just comment about that. And would you be a willing seller at this time or would you explore opportunities with other carriers? That’s my final question thanks.
Unidentified Company Representative
With respect to M&A, overall I think everytime there is M&A activity, we benefit from that. We benefit just on a whole host of issues in terms of changing dynamics, changing concentration inside independent agencies, and I think that provides us opportunity in the market place and we try to seize that as best possible.
With respect to Selective – our goal is to maintain and generate good solid long-term returns for shareholders and obviously our board is not immune from making their fiduciary executing their fiduciary responsibility, but our goal is to maintain our independent position in the market place.
Okay, that’s helpful. Thanks very much.
Your next question comes from the line of the Doug Mewhirter of Ferris, Baker Watts.
Hi, good morning.
Unidentified Company Representative
I guess the question I had was on personal lines regarding actually more specifically the home owners’ line. I see you guys have had a kind of a rough go with it recently. And I was wondered – is it also as competitive as may be the personal line, because I realize all of the big national carriers are not and I think (glycol) in progressive don't write home owners insurance and that was sort of we see with much fanfare when we entered the New Jersey auto market. Are you just having lot of weather-related losses or is there a lot of pricing pressure in that market as well? And what is your plans for, I guess, gaining that back to profitability?
Yeah, okay John Marchioni will answer that question.
Yeah just a couple of comments on that. Generally on overall basis, the competitive levels in the home owner market are not nearly as aggressive as they are in the auto market. You mentioned the players is different there, that certainly drives some of that. We've actually seen, if you look at our ExCap combined ratios for the quarter, a fair amount of improvement and specifically on the loss ratio side. So we are seeing some improvement there. But longer term, we talk about this a little bit in prior quarter as we're in a process of deploying a predictive model for home owners. We built it, we’ve actually deployed it in a couple of our brand new expansion states which is Minnesota and Iowa and that really sets us apart from the vast majority of competitors. There is only a couple of other competitors out there at this point who are deploying predictive modeling for home, again because those modeling leaders that exist on the auto side don't exist on the home side, and actually begin to add in some of the rating factors specific to the occupants of the home as opposed to purely rating on the attributes of the property itself. So, that's rolling out as we speak.
In addition to that the pricing environment overall for personal lines has already started to turn in our ability to take some overall base rate changes, and there is also something that we built into our plan for this in subsequent years. And then the final piece is over the last 12 or so months, and then totally going forward, we have started to build in additional way in our wind-exposed territories, specifically in New Jersey and South Carolina which we think will help profitability going forward as well.
And Doug just to give you some numbers for the quarter where home-owners line had 5.6 points of catastrophe losses when compared to 3.9 points of catalog.
Okay, thanks a lot. It was very helpful.
Your next question comes from the line of Susan Ross of Wachovia Securities.
Good morning and my questions have been answered. Thank you.
At this time there are no further questions.
Well thank you for participating in our call this morning despite the challenges we faced in the first quarter, we’re optimistic our long term success. And please give Jennifer or Dale a call on any follow-up questions that you might have. Thank you very much.
Thank you for participating in today's conference. You may now disconnect.
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