Good day, everyone. Welcome to Selective Insurance Group’s First Quarter 2017 Earnings Call. At this time, all participants will be in listen-only mode until the question-and-answer session. [Operator Instructions]. For opening remarks and introductions, I would like to turn the call over to Senior Vice President, Investor Relations and Treasurer, Rohan Pai. You may begin.

Good morning, everyone, and welcome to Selective Insurance Group’s first quarter 2017 conference call. My name is Rohan Pai, Senior Vice President, Investor Relations and Treasurer. This call is being simulcast on our Web site and the replay will be available through May 30, 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 Web site, www.selective.com. Certain GAAP financial measures will be stated during the prepared remarks and are also included in our previously filed annual report on Form 10-K and quarterly 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 or 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 risks and uncertainties. We refer you to Selective’s annual report on Form 10-K and any 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 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, I’ll turn the call over to Greg.

Thank you and good morning, Rohan. So I’d like to begin with introductory remarks and focus on some high-level themes for the first quarter. Mark will then discuss our financial results and John will review our insurance operations in more detail and provide additional color on key underwriting and claims initiatives. Selective’s first quarter results reflect continued momentum from the record levels of profitability we reported for 2016. Our consolidated statutory combined ratio was an excellent 89.7. For the first quarter, we continued to grow new business while successfully balancing at a very granular level rate versus retention. Our Standard Commercial Lines segment produced excellent overall results and were complemented with profitable results in our Standard Personal Lines and E&S segments. The improved operating performance in our E&S segment is also a positive given the aggressive measures that we’ve taken to address margins through price increases and shifting the mix of business. Our operating return on equity was a solid 13% from the first quarter on an annualized basis, benefiting from favorable reserve development, a relatively mild weather in the Northeast and strong core underwriting margins. We exceeded our long-term goal of achieving returns that are 300 basis points above our weighted average cost of capital. Selective’s financial results reflect our strong commitment to maintaining underwriting discipline, obtaining targeted renewal price increases, investing in sophisticated underwriting tools and capabilities, as well as efficiently managing our capital. I’d like to highlight three fundamental strengths of our organization, which I believe are key differentiators to our high-tech, high-touch operating model and help drive our financial performance. First, we operate a franchise distribution model, which means that we seek to do business with a select number of the best agents whom we refer to as Ivy League distribution partners. We believe our relationships…

Thank you, Greg, and good morning. I’ll discuss our financial results again with some key metrics and trends for the company as a whole and then I’ll also touch on our segments. For the quarter, we reported $0.85 of fully diluted earnings per share and $0.86 of operating earnings per share. We generated an annualized return on equity of 12.9% and an operating ROE of 13.1%, an impressive result, especially in the context of the current prolonged low interest rate environment and a relatively soft commercial insurance market. Our ROE was in excess of our long-term financial target of 300 basis points above our weighted average cost of capital. For the quarter, both underwriting income and net investment income were ahead of the first quarter of 2016 with GAAP underwriting income totaling $32 million after tax, up 20% and contributing 8.2 percentage points to the operating ROE. The investment portfolio generated after tax net investment income of 27 million, up 17% from the year ago and contributed 7 percentage points to the operating ROE. Our results for the quarter reflect our focus on disciplined profitable growth with consolidated net premiums written up 6% and the GAAP combined ratio coming in at a profitable 91.2%, reflecting 100 basis points of improvement from the first quarter of 2016. Catastrophe losses were relatively low at 12 million and accounted for 2.2 points on the combined ratio. For the quarter, we experienced 14 million of favorable reserve development, which equates to 2.6 points on the combined ratio. Excluding the impact of catastrophe losses and prior period casualty reserve development, the underlying GAAP combined ratio was 91.6%, which compared to 92.7% in the year-ago period. On a statutory basis, the combined ratio was 89.7% on a reported basis or 90.1% on an underlying basis with…

Thank you, Mark. We are excited about the various initiatives we have in place to help drive our strategy of balancing strong profitability with our objectives around growing the business. We continue to invest in technology to enhance the ease of doing business for our agents, enhance the overall customer experience and build out our data and analytics platforms. The rollout of our geographic expansion plans also remains a key strategic priority for the coming years. In an effort to continually refine our sophisticated underwriting and pricing capabilities, we recently rolled out our newest tool, underwriting insights. In addition to the predictive model-driven guidance that our new business underwriters have long had, we now provide them with real-time insights into how each prospective account compares to similar accounts already in the portfolio. This new tool better positions us to acquire high-quality new business at adequate pricing levels regardless of overall market dynamics. On the customer experience front, we continue to build towards an omni-channel experience, providing multiple service options 24 hours a day, 365 days a year. At the same time, we continue to build out the technology platforms necessary to position our employees and agents to deliver an exceptional experience during every interaction. We strive to develop a 360-degree view of our customers to provide them with the most effective insurance solutions. We believe that these investments will position us well as we look to the future in an evolving landscape. Moving on to our operations. Our Standard Commercial Lines segment results were extremely strong for the quarter. Solid net premiums written growth was driven by stable retention of 85%, new business growth of 2% and renewal pure price increases averaging 3% for the quarter. We closely monitor our pricing based on profitability expectations using our dynamic portfolio manager…

[Operator Instructions]. Our first question is from Arash Soleimani from KBW. Your line is open.

Thanks. Good morning.

Good morning.

I just had a quick question. On the guidance, I know you reiterated it, but just given that there was favorable development in the quarter, it almost implies that the core combined ratio would be 91.1 instead of 90.5. Is that something to read into at all, or is this one of the things --?

This is Greg. One quarter doesn’t make a year. And we’re generally a more conservative run organization. So I would say that we did not elect to lower our core, although there’s nothing that John articulated in his comments about frequency, severity or pricing that really modify our expectations about where our core results are going to come in at for the year.

Okay, that’s fair. And I just wanted to double check. Within Standard Commercial Lines where there the core loss ratio was about 30 basis points higher, did you say that was mostly from commercial auto?

I’m sorry. Could you just repeat the question? What was 30?

It was the Standard Commercial Lines as a whole. I think the core loss ratio was up 30 basis points there. I just wanted to know what line was driving that, if it was commercial auto or if it was a different line.

Yes. On the Standard Commercial Lines, the core loss ratio was up a little bit. I think in the grand scheme of things, 30 basis points is a pretty small amount. We did see the combined ratio come in overall better than expected compared – or better than Q1 2016. And on an underlying basis, when you factor in expenses and policyholder dividends, we also saw margin improvement. I think in terms – there is a mix of business in there as well as the non-CAT property losses that have an impact on the underlying core loss ratio as well.

Okay. Is there --

I would say that probably one of the things that you may want to look at though, there was a fair amount that – so comp did not have a reserve release in the first Q of 2017 and our combined ratio and the comp was 96 versus an 81.1 last year. So that’s where most of it is. It was 0.5, 0.5 [ph], GL was an 83 and that went down to a 70. So you’ve got a little bit tradeoff between what’s happening in general liability one way down and what’s happening in comp, which is going up.

Okay. And then has comp been trending up for you guys, I guess generally or was it just this quarter?

I would just say comp last year reflected a more favorable position on terms of where we were at the end of the first quarter. I would say that 95, we are – there’s nothing that we see in comp yet. Obviously, John could go in this. There was a fair amount of pressure on rates. There’s a lot that we’ve done in the claims area to lower our loss cost. But right now, we’re not seeing anything negative there.

No. I think that’s absolutely right. I think it’s been a fairly stable environment and the frequency severity trends that we’ve seen over the last few years have continued. I think we certainly look after the market. I’ve seen that line become fairly competitive. Broadly, especially on the smaller and lower hazard classes and when you look out from a rate perspective or pricing perspective across the country, whether it’s an NCCI state or an individual state rating bureau, you’re seeing a fair amount of negative hardwire rate changes coming through in addition to those frequency severity trends that have been favorable have reduced experience mods across the market, which also puts downward pressure on rating per exposure unit. So that, plus the fact that we’ve all benefited from lower medical inflation over the last few years then we’ve seen for the longer-term history, and not that we’re seeing that reverse but to the extent that starts to change going forward, I think the performance of that line for the entire industry could start to move in the other direction. So we feel good about our book. We feel good about the actions we’ve taken. But we need to remain diligent because the market could quickly turn that line unprofitable again.

Okay. Thanks for that thorough answer. And then I had a numbers question. General corporate expenses, is that seasonal in nature? I know it was 11.9 million this quarter, which was pretty much in line with 1Q last year, but 4Q '16 was only about 6.8 million. So is there seasonality in that number? I just wanted to make sure I understand how it moves.

Yes, Arash, this is Mark again. That’s a good question. There is some seasonality related to that number. As you might recall, on our last call, we talked about $10 million of expected corporate expense savings over the next 12 months, mainly related to our mix of long-term incentive compensation. The way that our corporate expenses roll out throughout the year, there is some seasonality more heavily related to the first quarter, and part of that is just the way the accounting works for long-term incentive compensation for folks that have reached retirement eligibility. So there’s a little bit of a heavier weight to Q1 and then we see that number come down throughout the rest of the year.

Okay. And then on an expense basis, like aside from general corporate, you did have expense ratio improve. So what was driving that expense ratio improvement there? Because I know you did mention the 10 million but does the 10 million go into the underwriting entities, or is that something that would be reflected in a different line?

So a couple of questions there. Let me start with the last one first. The 10 million goes into fully company expense. It does not go through the expense ratio, so that’s in that sort of other or corporate expense line item. As it relates to the underlying expense ratio, if you recall on the call last quarter, we talked about 170 basis points of margin improvement in 2017 versus 2016. Included in that was two-thirds sort of underwriting mix in claims improvement and about a third or 60 basis points on a stat basis of expense improvement. And what you’re really seeing there is our expectations of growth and disciplined expense management. So while our expenses continue to be a little bit higher as we invest in our business, as I mentioned, our underwriting tools, our customer experience and our employee base, we’re growing the top line at a faster rate than we’re growing our expense ratio. So the 60 basis points on a stat basis that we achieved this quarter versus the year ago is right in line with expectations. On a GAAP basis, because there’s – that metric is based on written premium, it takes a little bit longer to come through the results. So we saw 40 basis points of expense ratio improvement in the quarter versus the year ago.

Thanks. And just lastly, the premium growth you’re seeing in personal lines seems to be improving. So is that just related to specific initiatives there with bundling policies, or – I just wanted to get more color on that please.

Yes, this is John. We grew the overall segment at 4% for the quarter and that was driven by very strong new business growth, as you’ve noted. And I would say, for the most part, that’s driven by – with the pricing that’s really started to move in the marketplace, our hit ratios have really started to ramp up and that’s helping us grow the overall. We continue to rate predominantly multiline business with both the auto and the home, which is our most attractive segment. And as we talked about in the prepared comments, home profitability is very strong. So I would say it’s largely driven by hit ratio improvement as the market has started to move and we have maintained our discipline relative to our pricing philosophy and continue to do that as we talked about our intent to file rate increases this year that will earn in, over the course of '17 and into '18, at about 6% for auto and we feel that’s very much in line with where the market’s going to be.

Okay. Thanks. And I just realized the fixed income yield. So that was – is that improving because of a change in mix shift with higher-yielding securities?

Yes. There’s a couple of things going on there. First, you might recall, last quarter we talked about a refocus on the investment portfolio, hiring some new fixed income managers and trying to get our portfolio to work a little bit harder for us without taking on additional credit risk or extending duration. We did benefit in the fourth quarter with rates picking up a little bit. And as we were turning over the portfolio, we were able to put new securities on at a higher book yield and we saw that happen again in the first quarter. We also have a little bit more of the portfolio shift into floating rate securities. And we saw an uptick at the front end of the curve in the first quarter that had an impact on new money rates that increased the book yield as well. So it’s really a combination of factors. But overall, I’d say we’re trying to generate high yields from the fixed income portfolio but not taking on additional risks.

So to give you an idea of that, so – about 17% of our fixed income inventory is now floating rate. And you would look at LIBOR – 90-day LIBOR movements to see changes in investment income as a result of interest rate changes.

Okay, perfect. Thank you very much for the answers.

Great. Thank you.

Our next question is from Mark Dwelle from RBC Capital Markets. Your line is open.

Good morning, Mark.

Good morning. I’ll have to say this is probably one of the best top to bottom quarters I’ve seen from Selective in all my 16 years covering it. So let’s start with by saying a good job. And you know I don’t say that very often on these calls.

We truly appreciate that coming from you, by the way.

I’ll still find a couple of things to pick on though.

So does everybody else. There’s always a scab out there somewhere that someone has to pick on, right?

Let me start with the E&S business, a question that I have there – it was obviously a very good quarter. The question I have is are you making any changes fundamentally to the underlying type of customer that you’re pursuing there, maybe different size of limits, different classes of business, geography, what have you? I guess what I’m getting at is, are you doing the same thing better or are you doing a slightly different thing and getting better results?

So Mark, this is John. I’ll start. I would say for the most part, what you’re seeing in that performance is we’re doing the same thing but we’re doing it better. I’ll come back and talk a little bit of a modification to the business we’re pursuing, but I would emphasize it’s just really a slight shift in the type of accounts. Our limits profile continues to be very low. So 98% of our business continues to be $1 million limits or lower. Our average premium size continues to be right in that $3,000 range, and that’s really our core. It’s what we do well in this segment and continue to improve upon, and that’s been our focus. The improvements you’re seeing are really driven by the fact that we’re getting significant price increases now flowing through that book. As we’ve talked about in prior quarters, new business has been coming on the books for the last several quarters at our desired rate levels, but the renewal inventory needed a little bit more focus. And you’ve seen that in the quarter. As I mentioned in the prepared comments, a little over 7% rate increase, which has in fact impacted the top line a little bit. You saw the 4% growth rate, which has been down from where it’s been running. And as we’ve always said, this is a business we view as one in which we want to get to our target margins and stay there and allow the top line to float a little bit up and down depending on where the market conditions are. So I would say that’s the major driver along with what we’re starting to see now in terms of our claims initiatives that we’ve talked about for the last several quarters starting to bear…

Mark, this is Greg. So I think John covered it extremely well. So the only thing I would really add to that is, also a part of that is significant tuning in how the rates are done relative to managing it in a more granular – more in a class light plan. And I think that’s where we’re better matching our rate relative to the exposure, whether it’s hazard type, whether it’s certain types of property exposures, in certain geo locations. I think we’ve also enhanced a lot of the technology, particularly on the quoting side. And I think we’ve got some things still yet to come on that side that will make further improvements. And then on the claims side, what you should really closely watch too is the loss adjustment expense side where we’ve made, in addition to changes in the claim process, a lot of changes on the panel council arrangements. We’ve instituted staff council in many areas. So you’re going to see some real significant reduction in costs as a result of that. And we would expect better and quicker outcomes on our claims as a result of that. So there’s a lot in there, but we feel that this business is a business we want to grow based on margin. And when I say that, I’m meaning that if the market gets really tough, we are saying that we’re willing to shrink it and when it’s an opportunity to grow and get your margins, we’re going to do that as well. So that’s the one part of the business we always remind analysts that if you see our business start to shrink in there, if we’re not getting our rate at that class plan kind of level, you’re going to see that business shrink. So that could introduce a little bit more volatility relative to changes in NPW overall.

Okay. Thank you. That’s a very thorough answer. Obviously, good start to the year so see how it unfolds. The second question I have is really for you, Greg. Your results have been very strong over the last several quarters. A lot of your nearest competitors have reported similarly good results. What’s different? How has the tone of the market changed? Have you guys all collectively gotten smarter than the last cycles or better data? What are you seeing on the ground that’s kind of accounting for generally better success across kind of the regional commercial standard insurance market?

Well, I would say it’s still a bit of a mixed grill. Not everybody is printing, in my mind, great numbers and exercising maybe the discipline in the market you would expect to see. But you and I have chatted about this in the past. I think the number one change relative to years ago is the fact that people, to the extent that they reported precisely as renewal price changes, so that’s something that the analysts are very dialed in on now and that’s the leading indicator of change, whether it’s in the commercial lines area or it’s in the personal lines area that John touched on, or on the E&S segment. So that now is a leading indicator and that’s an indicator that is a disclosure now that’s become part of the core fabric of overall activity. Some report it with more specificity than others, which is a question left to you guys to mull over. But I would say that our success – and I’d like to focus more on what we’re doing, touches on the points that John made and I made in my commentary. Just think about how we’re opening up Arizona and New Hampshire. So not many agencies – 20 to 23 to 25 in Arizona, New Hampshire was a handful, maybe a dozen at the end of the day, maybe going to 15, but yet 25% market share. We’re out there truly hitting those agents, protecting their franchise and then helping them grow their business, new, new business with what we’re doing with our field underwriting, field claim, field safety management and the fact that we push agents to really think about the market differently relative to the omni-channel experience, the rest that’s brought on by other larger carriers and maybe even regional carriers that are contemplating going direct on the small end of the market, and the level of connectivity that we’re building to the end customer, whether that customer is small, medium or large in my mind is still critically important and part of what we’re doing. So I know it’s kind of a long answer, but it’s the whole process and also the fact that agents say they really like working with our people. And whether it’s their field underwriter, their inside regional team, the overall corporate initiatives that we have and the people that they interact with, they feel that we’re truly invested and have a path that is similar to our distribution channel.

Thanks very much for the thoughts and keep up the good work.

Thank you.

Thank you. [Operator Instructions]. Our next question is from Bob Farnam from Boenning and Scattergood. Your line is open.

Hi, there. Good morning.

Good morning, Bob.

Just touching on the omni-channel capabilities, can you just provide more color as to what you’re looking to do there and how it might impact your agents?

Sure. This is John. I’ll start. So when we talk about omni-channel, what we’re referring to is our commitment to providing customers with the ability to choose the manner in which they access information and the manner in which they engage with us and with their agencies, and then ensure that regardless of what form of interaction that is, whether it’s traditional face-to-face meeting with an agent, whether it’s a call to our 800 number or to their agent, or whether it’s the use of a self-service platform, that the level of service experience they receive in every one of those communication vehicles is at the same very high level and that they can seamlessly navigate across any one of those communication channels should they get hung up. So that’s sort of the vision for what we’re building here. And then in terms of how it impacts our agents, we’ve said quite clearly the investments we’re making are designed to improve our performance relative to our customer experience and our agents’ performance relative to the customer experience, because it’s a shared one. And our agents are interacting with both of us. We share the customer and we need to make sure that we’re removing every friction point possible that exists between – with the handoffs that take place between our agents and us with regard to our customers. So that’s why the investment’s in a self-service platform, which we’ve had for a number of years and continue to enhance for the customers that choose that route as a big part of our investment. That’s why getting that 360-degree view of our customers across all transaction types that I referenced in the prepared comments, and then making that information available in real-time to our customer-facing employees and our agents will allow…

And Bob, this is Greg. I would say also, in all of that we sell a product that doesn’t have an enormous amount of switching costs to it. And we want to be able to deliver things through this connectivity. We’re looking at other things right now that provide our end customers that find a way to build this level of touch points and data and information and whatever it is that we’re doing that when they try to shop the account, the competition would not be able to offer that same very high level of activities that we’re doing. I don’t want to go into all the activities that we’re doing, but there are numerous things that we are working on right now to build that in – that brand into the customer. So they sit there and they think about our agent, they think about Selective as part of the claim experience, as part of the safety management services and all the things that we’re doing. When it comes time to possibly move that account, there’s a lot more on the table for them to consider than what’s currently being offered generally in the marketplace today by most of the competition.

Right. Thanks. And is this directed more towards the small commercial, or is this personal as well or even --?

It’s everything. I would tell you that our ability to have what we call the golden record and tie every customer together in the organization and build that level of connectivity, it’s into every segment of our business that we’re going to do that.

And I would say that also what we’re seeing in terms of demand for the services that we’re offering, especially on the self-service front, we’re seeing strong demand in both personal and commercial lines up and down the size spectrum in commercial lines as well.

Okay, great. Thanks for that.

Thank you.

Thank you. At this time, we have no further questions.

Well, I want to thank everybody for participating on the call. As far as I know, there’s a lot of busy activity. If you have any follow-up items, Mark and Rohan are here to help service whatever questions you’ve got. So thank you very much.

That concludes today’s conference. Thank you for participating. You may now disconnect.