Good day, everyone. Welcome to Selective Insurance Group’s Third Quarter 2016 Earnings Call. At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Investor Relations and Treasurer, Rohan Pai.

Good morning and welcome to Selective Insurance Group’s third quarter 2016 conference call. My name is Rohan Pai, Senior Vice President, Investor Relations and Treasury. This call is being simulcast on our Web site and the replay will be available through November 28, 2016. A supplemental investor package, which includes GAAP reconciliations of non-GAAP financial measures referred to on this call, is available on our Investors page of our Web site, www.selective.com. Certain GAAP financial measures will be stated during the prepared remarks that will also be included in our quarterly report on Form 10-Q. To analyze trends in our operations, we use operating income which is a non-GAAP measure. Operating income is net income excluding the after-tax impact of both net realized investment gains or losses and discontinued operations. We believe that providing this non-GAAP measure makes it easier for investors to evaluate our insurance businesses. As a reminder, some of the statements and projections 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 report 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 on today’s call are the following members of Selective’s executive management team. Greg Murphy, Chief Executive Officer; John Marchioni, President and Chief Operating Officer; Tony Harnett, Chief Accounting Officer; and Ron Zaleski, Chief Actuary. With that, I’ll turn the call over to Greg.

Thank you, Rohan, and good morning. Before getting into the quarter, I want to take the opportunity to welcome Rohan Pai, our new Senior Vice President of Investor Relations and Treasurer. Many of you already know Rohan from his prior experiences. We’re delighted to have him on our team. I’d also like to thank Brad Wilson who handled HR matters on an interim basis. He did an excellent job. I will begin with introductory remarks and focus on some of the high-level themes for the quarter. John will discuss our insurance operations and provide color on some of our underwriting initiatives. Tony Harnett, who is our Chief Accounting Officer, will then discuss our financial results in a little more detail. In the third quarter, we continued the trend of strong profitability that we reported in recent years. Our underwriting results were solid with very profitable margins across our standard commercial lines and personal line segments, as we continue to execute underwriting and claim managements to improve our E&S operating performance. Year-to-date, our operating return on equity was 10.5% which is in line with our long-term target of generating a return of 300 basis points above our 7.9% weighted average cost of capital. Our net premiums written were up a solid 8% for the first nine months and book value per share increased 12%. We are particularly pleased that earlier this week, Standard & Poor’s recognized our strong operating performance and capital position and upgraded our financial strength ratings to A from A minus, which continues to demonstrate how we’ve successfully executed on our financial and strategic objectives. There are four themes that I’d like to highlight this quarter. The first theme is that our overall top line growth remains robust, driven by solid 9% growth in our core standard commercial…

Thanks, Greg. Good morning. We remain focused on delivering strong profitability while balancing this goal with our strategic objectives around retention and top line growth. For the first nine months of the year, we achieved an overall statutory combined ratio of 91.2 and net premiums written growth of 8%. Our strategy for profitable growth remains on track with plans to increase our geographic distribution and also our share of wallet with our existing distribution partners. While catastrophe losses were relatively benign, we experienced higher-than-expected non-catastrophe property losses, mainly from fire-related damage and a number of unique events. For the third quarter, non-catastrophe property-related losses accounted for 14.5 points on the overall combined ratio, which was approximately 2 points above our expectation. On a year-to-date basis, non-catastrophe property losses accounted for 13.1 points on a combined ratio which was only 60 basis points above our expectation. As we look across our portfolio, we cannot point to any unifying reason for the increase in non-catastrophe property losses this quarter and believe these were largely idiosyncratic claims. Our core standard commercial lines results remain extremely strong. Year-to-date growth in standard commercial lines through September 30 was a solid 9%, driven by stable retention of 83%, new business growth, and renewal pure price increases averaging 2.6%. Our commercial lines statutory combined ratio was 90.1, a 0.7 point increase relative to a year ago. On an underlying basis, the year-to-date combined ratio, excluding catastrophes and prior period development, increased by 0.5 points compared to the prior year period. For our renewal portfolio, we continued to use our dynamic portfolio manager underwriting tool to implement targeted underwriting and pricing initiatives while balancing retention and profitability objectives. For our highest quality standard commercial lines accounts, which represent 50% of our premium, we achieved renewal pure rate of…

Thanks, John. For the quarter, we reported net income per diluted share of $0.66 and operating income per diluted share of $0.62 compared with $0.81 per diluted share of operating and net income a year ago. The results were driven by strong profitability across our standard commercial and personal lines operations. With nine months behind us, we are well on track to significantly outperform the industry on a combined ratio basis. The drivers of our financial results include ongoing renewal to our price increases, strong premium growth, favorable net prior year casualty reserve development and generally benign cat losses. Our statutory combined ratio in the quarter was 92.9%, a 2.4 point increase relative to the same period last year. Catastrophe losses added 1.9 points to the combined ratio for the quarter and 2.1 points on a year-to-date basis. This is better than our full year guidance of 3 points. Non-catastrophe property losses added 14.5 points to the combined ratio for the quarter. Our reserve position is strong and we’ve recorded favorable prior year casualty reserve development in the quarter of 19 million, equating to 3.5 points on the combined ratio. This compared to 15 million or 3.0 points a year ago. In the quarter, reserve releases were driven by favorable claims trends in the general liability line of business which reported 11 million of favorable prior year casualty development and the workers’ compensation line of business which reported 15 million of favorable prior year casualty development. Partially offsetting this was 7 million of unfavorable prior year casualty development in commercial auto. Also in the quarter, we increased our current year loss reserve estimates for commercial auto by 7 million to reflect higher-than-expected claim frequencies. Top line growth was solid and overall statutory net premiums written increased 6% in the quarter.…

Thank you. Operator, would you please open the line for questions? Operator?

Apologies, sir. My line was on mute. [Operator Instructions]. The first question on the line is from Arash Soleimani with KBW. Sir, your line is open.

Thank you. Good morning.

Good morning to you sir.

Starting with excess and surplus, can you talk a little bit about the – I know you mentioned some of the growth and loss ratio metrics there, how should we think of the growth there over the next few quarters? Should we expect it to be more in line with 3Q or more in line with the quarters before that? And then I don’t know if you already mentioned this, on the core loss ratio for E&S it looked like that has gone up quite a bit excluding cat or prior period development. I just wanted to dig into that a bit more.

All right, so let me start with this. So some of the E&S movement in the core non-cat loss ratio year-on-year is we did establish for 2016 a little bit higher expectation in terms of where our loss ratio is. The biggest issue we have relative to this is there is an enormous amount of claim and underwriting improvements that are working their way into the book. Our actuarial folks and our claim people are working hard together to try to better understand and how to measure those improvements to be able to establish a better loss cost expectation for 2017. But I can tell you it’s going down and it’s going down on a number of fronts. It’s going down from a loss adjustment expense as we move the handling of that inventory from panel firms to our staff counsel, a re-architecture of our panel firms, particularly in California and other metrics and then a way more aggressive handling of the larger inventory to our existing complex claim unit that handles these types of claims all the time. So it’s a matter of how much actuarial benefit you put into a number based on what you’re actually seeing. So that will be – it’s hard to specifically target a number on that yet, but I certainly have a number in my head.

This is John. Let me just add some additional commentary relative to your question around new business or growth in the E&S segment going forward. The first thing I’d say is we don’t prognosticate about top line growth in any one of our segments or overall. But let me just provide you with some additional color relative to E&S. So as we noted in the prepared remarks and have talked about in prior quarters, we have taken some very aggressive actions relative to our pricing on both our new and renewal inventory targeting specific segments. I would say in the quarter, our renewal inventory held up fairly well with those increases and there were pockets of new business that dropped off significantly because of the pricing actions we’ve taken. We view this as a segment that we know what our target rate levels are and we’re going to acquire new business at those rate levels and in segments that we cannot do that, we’re going to let that business drop. And I think you saw some of that in the quarter. That said, we look at the opportunity in front of us and look at our pricing by segment, there are plenty of segments across the country that we think our pricing will allow us to grow new business opportunities. We focused our marketing and underwriting resources on those segments and fully expect to see new business rebound as we go forward.

Thanks for those answers. In terms of fee income from flood, what line item does that show up in?

It shows up in personal lines in other, principally as a loss adjustment expense reduction. That’s where you’ll find it.

Okay.

So what we’re looking at this year is about 2 million in the third quarter from the Louisiana event and then 1 million coming through in fourth quarter relative to the flooding that we had in North, South Carolina, parts of Georgia and Florida.

Okay. Perfect. And in terms of some of your new states like Arizona that you were mentioning, can you talk about the strategy there in terms of getting or forming agent relationships? I know in your existing states, you’re focused on the 1,100 agents and the 1.7 million per agent. How do you get the new agents to I guess fit into that same type of mold?

Great question. So the first comment I would make is that we’re opening up our new states with the same exact operating model that we have in our existing state; so based on our regional office with delegated underwriting authority and also using a franchise value approach to our agency appointment. So if you think about the 1,100 we have across our footprint, existing footprint and the target of getting representation that has access into at least 25% of the market, we intend to take the same approach over the first couple of years in those existing states. We are in fact leveraging some of our national and regional broker relationships that we already have in place in our existing footprint who happen to have offices in our expansion states because we’re a known quantity to them, we’ve got a great relationship and a significant premium volume with them and that gives us a great entree into those states. The other point I’d add, and this applies not just to new appointments in new states but new appointments in existing states, we are very clear in the prospecting discussions about our expectations coming in. We expect to very quickly move into one of the top couple of spots in terms of their commercial lines relationships overall. We secure that commitment from that agent to do so and then we hold each other accountable over the course of the first few years to make sure we’re both delivering on our end of the promise. So that philosophy will be the same for every one of our new expansion states.

Thank you. And lastly, was there anything unusual with the personal lines expense ratio? It looks like it was up a bit year-over-year, so I just wanted to ask about that.

Nothing specific that really is that unusual in there. I would just tell you that part of our creeping expense ratio when you disaggregate our combined ratio between loss and loss adjustment expense and underwriting expense ratio, our expense ratio has creeped up a little bit mainly because of the volumetric drop in the top line. And I will tell you that we fully expect to get that personal lines back into growth. You’ve always heard me describe our personal lines division as a tale of two cities. One is very aggressive home rate increases, as John mentioned. We are within 1 or 2 points of achieving our target ex-cat combined ratio which when you boil all that math down is 76 is where we want to get to. And we are not that far from there. And we’ve been aggressively implementing rate increases. And then as a result of doing that, obviously, we lost a little bit of auto business along the edges. It’s a very, very competitive pricing in the marketplace. But that started to come back to us now. You’ve seen the automobile results reported industry-wide. You hear of the frequency severity challenges that they had. Our book overall has maintained a very stable structure in terms of our performance in total in terms of loss trend. I think it’s because it’s a mature book and it doesn’t face a lot of acquisition cost in the book overall and that’s what you’re seeing. So I think as the market starts to come back to us, we can grow that, make some expense and efficiency structural improvements and knock a fair amount of combined ratio points off that number.

I would also just add that each year in the fall, we do expense allocation studies and during the last – within last year’s 10-Q, as well as it will be in this year’s 10-Q that we file later today. In that expense study, we shifted some expenses between personal and commercial lines and that altered the expense ratio probably by about a 2 to 3 point variance when you compare year-to-year.

Thanks. That makes sense. And how much of the business in personal lines does Selective Edge account for?

It’s between 25% and a third of our new business.

Okay. And should we expect that to grow just with some of the, I guess new initiatives you have in place?

We certainly expect that to be the case. As we mentioned earlier, our philosophy, our strategy is around targeting the consultative buyer. And the buyer who is going to package up their auto and their home we would expect would lead to a higher percentage of Edge for new business and for the overall inventory over time.

Okay great. Thanks very much for the answers.

Thank you.

Thank you. [Operator Instructions]. The next question is from Scott Heleniak with RBC Capital Markets. Sir, your line is open.

Good morning, Scott.

Thanks. Good morning. Just first question I had was on the non-cat property losses from fire. I know you touched on that a little bit. So you’re saying that you really hadn’t seen that all year and you saw that as more of just a Q3 thing. And were those pretty much – were those a few large losses or higher frequency or both?

It was a few large losses. And if I were to give you the number, we’ve always reported to you our non-cat property as a percentage of total premium and this clearly identifies it for you, Scott. So in the quarter, our non-cat property was 14.5 points of our overall combined ratio and for the year, it was 13.1. So when you think about where we were relative to our budget, quarter was over by 2.1 points and the year was over by 0.7. So that virtually tells you that we were – everything that we were perfectly on track through the first six months of the year. All of the overage came in the quarter and it was principally severity based.

And Scott, this is John. Just a couple of additional comments. Number one, with any large loss we do a full underwriting review of those accounts by our corporate underwriting group and you do a lessons learned on that. And I would tell you that generally speaking, these were quality accounts when you look at the underwriting in hindsight. And then the second piece is we’ve done an overall review of the property book to make sure there’s no underlying change in hazard or exposure type and are comfortable that there’s not been a significant shift in that inventory that would lead to more volatility or more large loss activity going forward.

Okay. And I just want to touch on workers’ comp and casualty too; obviously really good combined ratios for the quarter. I know some of that was helped by a favorable development. But what are you seeing on the claim side there, frequency and severity and any kind of major changes relative to the last couple of quarters?

Not really. Obviously, what we’ve seen is a decrease in frequency at a pretty good CLIP. And I think part of that is due to the underwriting. You heard me mention what we’ve changed in terms of the reduction in some of the higher hazard business. That’s where a lot of the frequency. So we’ve seen, when you look at it on a calendar year basis, our frequency is down around 10%, 11%, which is a lot to be down. Our severity is not up on an unusual basis, more in line with our medical and medical trends and expectations. And I would say generally our severity is running lower than our long term – what you would on a long-term bake-in for hospital, physician services, Rx is running actually below that. So it’s been a good improvement in terms of what we do. But I think it reflects everything that we’ve done on the claims side in terms of the re-architect of the claim department, consolidating as we’ve mentioned in prior calls, all that now down in our Charlotte operation and we’re getting much better outcomes, particularly on the more severe claims. And I think it’s just holistically all those things coming together is why you’re seeing the results.

And just one additional point I would make to that is we continue to see a shift in our mix of business on both the new business side and the overall inventory towards lower hazard classes. And as we measure them NCCI [ph] hazard grades A through D and less on the hazard grades E through G and that also we believe contributes to lower average severities, and that mix shift will continue going forward.

Okay. And then just finally speaking of mix shift on the E&S, I know you touched on it a little bit, but can you talk a little bit more about some of the mix changes, more specifically kind of areas that you’re sort of backing away from or you expect to back away from? And I don’t know if you can give anything on retention ratios. I know you’ve mentioned in the past kind of what that was this quarter versus the last couple. It seems like, obviously, you must have not renewed more business this quarter. So just anything you can give would be helpful.

Yes, Scott, actually retentions were relatively stable on a year-over-year basis. So that wasn’t a driver. The driver of the top line drop was almost entirely based on new business. The one segment I would highlight in terms of drop-off would be California contractors. And California contractors which has been a long-term segment for us is one that we felt needed some significant pricing action. And we’ve taken that on both the new and the renewal inventory and that really drove the drop-off in new business. Restaurants, bars and taverns I would say are also a class that we’ve really started to drive up our new business pricing expectations, and we saw a little bit of a drop-off there as well. So, again, I would reiterate the earlier point which is we view this as a segment that we determine our adequate pricing levels and we either acquire business at those pricing levels or we don’t. But those are the two segments that I would highlight. But don’t want to give the sense that that’s going to drive the overall new business performance going forward. Those are two targeted areas and there’s plenty of opportunity within the business that is in our appetite and that we think we can get adequate new business pricing levels on.

Yes, the only other area that you can add to that possibly would be Texas property where we also took a much firmer stance on that. But like John mentioned, it’s not shotgun approach. It’s very specific where we feel we need to get the right rate level to support where our long-term targets for this operation, which we’ve told you we expect this operation over the long term to perform 4 to 6 points better than our commercial lines operation. We’re working hard to do that.

All right, good color. Good luck. Thanks.

Thanks.

Thank you. The next question is from Jay Cohen with Bank of America Merrill Lynch. Sir, your line is open.

Good morning, Jay.

Thank you. Rohan, nice to hear your voice at a new shop. A couple of questions. I guess first on the workers’ comp side, obviously the improvement here is pretty dramatic and that frequency number you cited is also pretty significant. One would assume though if you’re moving towards lower hazard classes, the premium per unit of risk should come down. Will that at least on the surface make it look like premium growth is slowing simply because you’re writing different kind of business?

Yes, Jay, this is John. You will certainly see our average policy size for new business and ultimately to work this into the renewal inventory drop and that will drive your new business writing on a premium basis overall. But the frequency severity trends that Greg gave you still roll up to a loss cost change that’s well below our drop in average premium. So when you look at the gap between average earned premium and frequency times severity or loss cost, you want to see a favorable gap there and we continue to see that. So I think that points to a positive result.

Yes, most definitely. That clearly is kind of what you’re aiming for. Just for modeling purposes I wanted to make sure I understood it. And then on the commercial auto side, that business, you’re not alone. Obviously, it’s been struggling for a lot of companies. The combined ratio did pop up this quarter relative to the past couple of quarters. Are you seeing an incremental worsening of the claims environment that you had to deal with from a loss ratio standpoint?

Jay, that’s a great question. Nothing that I would say that is out of line. I would tell you that what we experience is pretty systematic of what you see overall, which is more miles driven due to higher employment, lower gas prices, so on and so forth that put more power units and more miles on the road. But nothing – I would say the biggest issue that I would say we face as an industry is distracted driving. And you don’t have to do much but drive down Route 80 on a busy day and see the level of distracted driving is unbelievable in some cases. And that’s what – in my mind that’s the overarching risk management that needs to be dealt with. In my opinion, it’s no different than any other hazardous driving that you see on the road whether it’s drunk driving or anything else. But when you’re not minding the road properly, you have a very heavy piece of metal traveling at a very high rate of speed overall. But let me also just touch, Jay, relative – our performance relative to the industry and I think this is where when you go back over time and look at the consistent 27 quarters and the 1,600 basis points over CLIPS and you look at the fact that that rate level that we’ve gotten consistently over that timeframe is sitting in principal lines like general liability and commercial auto. And because of that tremendous outperformance, at least we’ve gotten our premium per policy, our premium per power unit as we like to refer to it internally at much higher levels than the industry. They still need to go higher when we look at the specificity of our price increase relative to the type of unit relative to how it scores in Diamond scores and there’s more work that we need to do, and we’re pressing our folks very hard to make sure we do that. But at least we have some core premium in the margin to cover some of this higher-than-anticipated claim activity.

Got it. That’s a helpful answer. Thanks, guys.

Thank you. [Operator Instructions]. At this time, we have no questions on queue.

Well, thank you very much for participating in the call today. If you have follow-up questions, please contact Rohan or Tony. We look forward to a great fourth quarter. So thank you very much.

That concludes today’s call. Thank you for your participation. You may now disconnect.