Good day, everyone. Welcome to Selective Insurance Group’s Fourth 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. Thank you, sir. You may begin.

Good morning, everyone and welcome to Selective Insurance Group’s fourth quarter 2016 conference call. My name is Rohan Pai, Senior Vice President of Investor Relations and Treasury. This call is being simulcast on our website and the replay will be available through March 3, 2017. A supplemental investor package, which includes GAAP reconciliations of non-GAAP financial measures referred to on this call, is available on the investors page of our website, www.selective.com. Certain GAAP financial measures will be stated during the prepared remarks that will also be included in our annual report on Form 10-K and is in our previously filed Form 10-Q reports. 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 and losses and discontinued operations. We believe that providing this non-GAAP measure makes it easier for investors to evaluate our insurance business. As a reminder, some of the statements and projections 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 risk 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 statement. Joining today on the call are the following members of Selective’s executive management team; Greg Murphy, Chief Executive Officer; John Marchioni, President and Chief Operating Officer; Mark Wilcox, Chief Financial Officer; and Ron Zaleski, Chief Actuary. With that, let me turn the call over to Greg.

Thank you, Rohan and good morning. Before I get into the quarter, I’d like to take the opportunity to welcome Mark Wilcox, our new Chief Financial Officer, to the Selective executive management team. Many of you already know Mark from his prior experience at RenaissanceRe. We are extremely happy to have him on board. Mark started with us in the New Year and while he has had a very busy first month, he has already been adding a lot of value to our organization. I will begin with introductory remarks and focus on some of the high-level themes from the fourth quarter and the full-year 2016. Mark will then discuss our financial results and John will review our insurance operations in a bit more detail and provide color on some of our underwriting and claim initiatives. We are very proud of the financial results we reported in 2016. The fourth quarter rounded out another record-setting year in terms of underwriting results and operating earnings driven by excellent results in our standard, commercial and personal lines operations. We reported an overall statutory combined ratio of 91.8% for the year, which was about 9 points better than A.M. Best’s industry forecast for 2016. Our stock price hit an all-time high of $44 in 2016 benefiting from the strong results we continue to generate. For 2016, our operating return on equity was a solid 11%, reflecting the years of hard work to drive our renewal pure price higher, generate new business and improve the underlying profitability of our book through various underwriting and claim initiatives. It was an impressive result given the prolonged low interest rate environment of recent years. Our commercial lines net premium written growth of 9% in 2016 was significantly higher than the 1% industry commercial lines net premium written…

Thank you, Greg and good morning. I’d like to start by saying that I’m extremely pleased to have joined the Selective team. I look forward to helping the company, execute on its strategic plan and objectives, including continuing to drive disciplined profitable growth over the coming years. I have come to know many of you on the call in my prior role and I look forward to meeting with you over the coming weeks and months. Moving on to our financial results, I will focus on some key metrics, some trends for the company as a whole and then we will also touch briefly on our segments, our focus on the quarter, but we will also hit some of our full year financial highlights. For the quarter, we reported $0.67 of fully diluted earnings per share and $0.75 of operating earnings per share. We generated return on equity of 10.1% for the quarter and an operating ROE of 11.4%. For the year, we generated a 10.8% ROE and an 11% operating ROE. As a reminder, our long-term financial target is to generate an operating ROE that is 300 basis points over our weighted average cost of capital, which we believe will generate solid growth in book value per share and strong shareholder returns over time. Selective’s GAAP combined ratio was a solid 93.6% for the quarter. For the year, we recorded a GAAP combined ratio of 92.9%, which generated $98.8 million of after-tax underwriting profits. This contributed 6.7 percentage points to the full year operating ROE. For the year, the investment portfolio generated after-tax net investment income of $98.4 million and also contributed 6.7 percentage points to our full year operating ROE. So there was a pretty even split between underwriting and investments in terms of contribution to our ROE…

Thanks, Mark and good morning. Our results for the year reflected various initiatives we have implemented to balance strong profitability with our strategic objectives around growing the business. We continue to invest in technology to enhance the ease of doing business for our agents, the overall customer experience and our data and analytics platforms. We believe all three will be key success factors in our industry for many years to come. Our core standard commercial lines results were extremely strong for the year. Solid top-line growth was driven by a stable retention of 83%, new business growth of 5% and renewal pure price increases averaging 2.6% for the full year. In fact, renewal pure price increases averaged 2.7% in the fourth quarter and 2.4% in January of 2017. We closely monitor our pricing based on profitability expectations using our dynamic portfolio management underwriting tool. For the highest quality standard commercial lines accounts, which represent 50% of our premium, we achieved renewal pure rate of 1.5% and point of renewal retention of 91%. On the lower quality accounts, which represent 10% of premium, we achieved pure rate of 7.3% and point of renewal retention of 78%. Drilling down to the bottom-line results for commercial lines, our largest line of business, general liability, reported a statutory combined ratio of 83.8% for the full year of 2016, which included $45 million or 8.5 points of favorable prior-year casualty reserve development. Favorable reserve development relates primarily to lower-than-anticipated claim severities for the 2010 through 2013 accident years, as well as the accident year 2015. Worker’s Compensation continued to benefit from the recent improved loss trends. The steps we have taken in recent years to obtain adequate pricing, improve the business mix and enhance claims outcomes have resulted in solid underwriting margins. This includes initiatives…

We will now open it up to the questions. [Operator Instructions] Thank you. We have three questions on the phone as of the moment. Our first question rather is for Paul Newsome, Sandler O’Neill. Your line is now open.

Hi.

Good morning, Paul. How are you today?

I’m doing very well. Probably not as good as you’ve given the quarter’s results, very good quarter. I wanted to focus on the guidance of the combined ratio and that 1.7% improvement that you expect over the course of the year, which I think is remarkable competitive market out there?

Yes. I’m sorry, Paul. You have a handset or whatever; you are very choppy, but so far we’ve gotten a lot of bit. But keep going on your question.

Okay.

Yes, it’s over, but thank you.

Hopefully, this is better. So I wanted to focus on the 1.7% improvement and if you could walk me – and us through the components of that. Is that simply improving the profitability on personal lines in E&S, or does it include a much broader improvement in underwriting performance for the year?

Yes. I will start with it and then I will kick it over to the rest of the team to add more color to it. If I were to break it into its core sets, the 1.7 points of improvement, I would say, about a third of that is expense-driven as a result of some of the initiatives we have and two-thirds of it is on the underwriting side and that’s really – it gets back to the three legs of the stool that we’ve always discussed on the underwriting side. One is rate versus trend, earned rate versus loss trend. The second is claim improvement and the third is underwriting improvement. So when you think about that, I would say it’s two-thirds core underwriting improvement, one-third expense improvement.

Should we see that in a particular segment or is it broadly-based?

So what Greg gave you – This is John. What Greg gave you is on an overall basis, but as we have talked about and gone through the results, we gave you the rate expectations specifically for personal auto rolling forward. Personal auto and E&S we would expect to see more significant margin improvement from rate over trend and underwriting and mix improvements, but we also have some targeted improvement for our standard commercial lines as well. So all three we expect to see improvement, but the bigger improvement should be on E&S and personal lines.

So Paul, the only other thing I would add to that, just remember you always ground our commercial lines for an account underwriter. So obviously the goal is to drive commercial auto rates higher and lower GL, so – because you are just kidding yourself if you do that, so we are trying to also fundamentally improve our commercial auto line of business. So I think you are going to see more improvement maybe in that specific line relative to the commercial lines overall, but just remember we are always an account underwriter and we are looking for performance holistically.

Great. Fantastic. Thank you very much.

Thank you. Our next question is from Arash Soleimani of KBW. Your line is now open.

Hi, thanks and good morning.

Good morning.

Good morning.

So on the guidance, just to be – so if I look at the 90.5% guidance for 2017, it’s ex-CAT, ex-catastrophe. 2016, it looks like ex-CAT, ex-catastrophe, was 92.2%. So is that 1.7 points of improvement you are referring to, the difference in those two?

Yes.

Okay.

Let me make sure I’ve got this right. So when you look at how we roll forward our combined ratio ex-CATs to ex-CATs, yes, that’s where it is.

Okay, okay. And it was in 4Q 2016, was the – I guess there was the core combined ratio uptick, so was that mainly a commercial auto issue? Is that the way to think of it?

I’m sorry, can you repeat that question one more.

Yes, that’s exactly right and you have the numbers correct. When you are looking at the guidance for 2017, the 90.5%, it’s on a stat basis ex-CAT and on an accident year basis and that compares to the 92.2% for the full year 2016, and as Greg mentioned, he, on the prior question, walked through the 175 basis point improvement. In the current quarter, we did see a little bit of a deterioration in the underlying loss ratio on an accident year basis, excluding CATs and that related to the increase in the loss pay that I mentioned for the 2016 year related principally to commercial auto and that was about a 170 basis point deterioration on the overall loss ratio for the fourth quarter.

Okay. Thanks. And the two-thirds/one-third, I guess, split that you just gave Paul earlier, can you just remind me that the two-thirds was from claims and underwriting initiatives?

So the two-thirds that come out – all right, there’s always three legs to that stool that we talk about. The first is earned rate versus trend and then there’s underwriting improvement and claim improvement. Collectively, those three things together will account for about two-thirds of the 1.7 point improvement.

Okay.

Let me just address the expense ratio very quickly, add a little bit more color on that to follow onto Greg’s comments. When you take a look at our expense ratio on a stock basis, it has been a little bit elevated, a little bit under pressure as I mentioned in my prepared comments in part driven by the strong profitability that has resulted in higher supplemental agent commissions, as well as incentive compensation. But expenses are an area that we are highly focused on going into 2017 and our goal is to bring our expense ratio down over the next couple of years. So we have some existing initiatives in place, as well as the restructuring of our long-term incentive program that I mentioned, which should result in about a $10 million benefit to expenses in 2017 versus 2016. But, again, as I mentioned, that $10 million benefit actually does not come through the loss ratio. That’s in other expenses at the holding company, but overall included in our improved margin forecast for 2017, about a third of the 170 basis points is from a reduction in the expense expectation for a reduction in expense ratio.

Thanks. And I guess in terms of looking by segment, that 170 basis points of improvement, is that largely going to come from E&S or is it standard commercial?

I think it gets back to what John mentioned. I mean obviously, the expense ratio is coming through universally. The underwriting improvements where you get into the conversation that John had relative to personal auto or E&S, obviously, where rate is well over trend, you are going to see more improvement weighted to that line versus where we are. Now, remember, our long-term goal for E&S is to generate somewhere between 4 and 6 points better than our commercial lines performance. I will tell you that we are still working on that and we feel very comfortable about it. So over the long term, you should expect to see the E&S operation improve faster than any other area and as we’ve always told you on the personal lines segmentation, we’ve been very, very aggressive on the home side of the equation. Auto, we always told you guys that we were going to lay into that over a longer period of time and the comments that John had was that we feel that the market has really started to move. There will be number of rate increases coming through. We will not be so out of touch with the market relative to our rate structure and actually will have an opportunity to drive more rate on that side of the equation.

Okay, thank you. And on the standard commercial lines for that segment specifically looking at ex-CAT, ex-prior-period development, loss rate, do you expect that ratio to improve in 2017?

A little bit, yes. It’s not a tremendous amount, but, of the relative improvement, is there some improvement in commercial lines? Yes, because the auto line, as I talked earlier, we’ve got a lot of focus on that auto line, the commercial auto line, excuse me and no, you are going to see some improvement in that line, but what we are saying is proportionately you are going to see more improvement in E&S.

And the other point I would also add is it’s not just about the lines from a claims perspective that are performing above our target; we’ve got some very focused initiatives that are rolling out relative to property claims handling that we would expect to benefit us both on the commercial property and the homeowners lines. So as you know us over the years, we are focused on improvement across the board and we think there are opportunities even in lines that are performing better than our target returns at this point to continue to drive improvement on both the underwriting and the claims side.

And if I could, obviously, I think the sense of the question, if I could step back a little bit broader, and when I look at the industry and I look at the CLIPS survey and I understand that you guys are looking at our relative underlying performance relative to what you are hearing from our peers and I guess what I would point you guys to the most is the fact that John mentioned, hey, we have a 270 basis point increase in pure price in commercial lines in the fourth quarter and that is up against an industry that’s probably, on CLIPS, about 50 basis points and from some of our competitors to the extent that they report it is around 50 or 60 basis points as well. And then when you look at our January – and January, just remember that our two biggest inventory renewal months of the year, one is January and one is July, so that is – in terms of inventory, there’s a lot of inventory that renews for us in the month of January and for us to print a 240 on that says a lot and so when you think about the things that John mentioned around – I don’t want to say around the edges because I don’t think that’s giving it nearly enough weight, but there’s enough there in core price to help offset trend and then the things that we are doing on underwriting and claims end up coming through more in terms of profitability and I think that’s why you are seeing our core ratio drop 170 basis points versus Best’s estimate of only 60 basis points and maybe what you are hearing out in the community relative to principally commercial lines writers. So I just want to make sure that that all hangs together for you guys when you look at our performance and where our earned rate – most of the earned rate for 2017 has already been written. So that’s the way you guys have got to think about it. What you work on for 2017 in rate affects more 2018, but what we are going to earn in 2016 has already been written

All right. Thank you very much for the answers. That’s very helpful.

Thank you. Next question is from Scott Heleniak of RBC Capital Market. Your line is now open.

Yes. Good morning.

Good morning John and good morning Scott.

First, I want to touch on commercial auto, if you could talk a little bit more about what you are seeing there. I know you mentioned some of the severity that you have seen throughout the year in Q4. If you could just talk about the appetite for that book. You are obviously getting rate increases and we hear mixed pictures from different insurers where they feel like they are getting enough rate or they are not getting enough rate. I know you guys gave some detail on some areas that you are pulling back on, but if you could give just a little more detail on how you are viewing that line and if you feel like rates are where they need to be.

Scott, this is John. I will start and others can fill in. So we have been getting higher average rate on that line of business than we have in other lines and we do think that’s sustainable because the market – as you have seen the results come out, the market continues to struggle on that line and in many cases, because it is probably driven more by macroeconomic forces, overall rate level is a big driver of that need. For us, we continue to be an account underwriter. I think that’s an important part to think about. We don’t write very much if any monoline auto and we write it as an overall package. So our focus is on making sure that as we try to bring it higher on the auto line, it’s not getting subsidized by lowering rates on other lines of business. It’s got to be viewed in the overall context of the account pricing and we think at the rate levels that we have and the targeted underwriting and mix improvements that we have, we can continue to hit our overall new business targets on a packaged basis. The other point I do want to clarify, you referenced frequency and severity trends. What we have seen in recent times that have driven our results and some of the development has been much more of a frequency-driven issue than a severity-driven issue and again, we view that in large part being driven by some of the macro forces that are impacting higher frequencies than you have heard us talk about in the past.

Okay. Just next on – you guys mentioned the expansion into Arizona, New Hampshire. Is that going to be in both commercial lines and personal lines and if you could just talk about the opportunities and how you decided on those states?

I will start on that as well. This is John. So we are opening both Arizona and New Hampshire for commercial lines only at this point. We will evaluate going forward whether it makes sense for us to open up in personal lines, but at this point we are on target to open them in the second half of this year for commercial lines only. We will use our same approach in terms of how we open states; and we last opened new states in the 2007 and 2008 timeframe when we opened Massachusetts and Tennessee and we will take a franchise value approach, which means fewer agency partners and deeper relationships with fewer agency partners. We will take the same approach to underwriting and pricing discipline, the same appetite and product portfolio that we offer. So we don’t have aggressive growth plans in those states. We have plans to grow based on where the market is and where the opportunities are that are in line with our pricing and underwriting expectations. So we don’t expect you will see a significant impact in 2017 or 2018 in terms of the overall top line of the organization, but as we build that out, we think those are two very good opportunities for us. New Hampshire is as much about that state as it is about being able to have a broader share of wallet with our agency partners in Massachusetts and Rhode Island and Eastern New York State where they write a lot of cross-over business and then for us New Hampshire, we are looking at as the start of opening up over a several year period a full Southwestern region, which we think gives us a couple of things. One of which is to be in an area of the country that has a little bit higher than average economic growth, but also presents us from a property catastrophe exposure perspective a little bit of diversification and while you have exposure to wildfires, you don’t have the same type of wind exposure that we see across our footprint on the East Coast and the Midwestern part of the country.

And just remember, that is always a complement. This is adding extra runway for us, but again our driving factors are around share of wallet and market share in our 22 states. We’ve always told you guys that, for us, share of wallet in our existing states is a $1 billion opportunity in the 22 states. Additional agency appointments in our 22 states is a $1.8 billion opportunity and obviously we will be focusing on those, but this is just extra runway to add and to continue to build out an organization that we’d like to see over the long-term be 50 state capable from a commercial lines standpoint.

Yes, no question about the catastrophe exposure in Arizona too being different and that being an advantage. Greg, you mentioned the 15% in premiums came from agencies appointed in the last three years. It seems like you’ve been appointing more agencies over the past few years, so is that typically a higher number than you have seen annually over the past 10 years or so?

I will tell you, and I will let John weigh in on this a little bit, but, yes, we are getting more disciplined in terms of – we look at every state and every territory within a state in terms of capacity. What’s the premium available in that state and then for our AMSs or field underwriters what do they have to have in terms of suppliers or agents or distribution partners, whatever words you want to put around it, in that geolocation to be able to get the level of premium that we want to have. So this approach from us in terms of what’s the available premium, how do we access that and then the appointment structure around that has been much more disciplined with the state plans and process that we work through that I think is yielding more aggressive appointments than in the past.

This is John, just add to that. The 50% that Greg cited in his prepared comments, I would say over the last two to three years has been fairly consistent in that range because we’ve been at a similar pace in terms of adding agencies over the last few years, but I do want to reinforce that our franchise value model, which is fewer agency partners and greater share of wallet for each agency partner is still our philosophy. So we’ve set a target of 25% of that state’s market share being represented by the agencies that we have appointed and we are not there yet and where our starting point is will vary state to state. So the appointments we are making are in the context of achieving that overall 25% agency representation in each state and that’s generally spread geographically across that state. So we would expect that pace to continue as we move into the next couple years.

All right. Thanks for all the answers.

Thank you, speakers. [Operator Instructions] At this time, there are no more questions on the phone.

Thank you very much for participating on the call this morning. If you have any follow-ups, you can contact Rohan and Mark and thank you very much for participating today. Thank you.

Thank you everyone. That concludes today’s conference. Thank you all for joining. You may now disconnect.