Good day, everyone. Welcome to Selective Insurance Group fourth quarter 2017 earnings call. At this time, for opening remarks and introduction, I would like to turn the call over to Senior Vice President, Investor Relations and Treasurer, Rohan Pai.

Good morning, everyone, and thank you for joining the call. This call is being simulcast on our website and the replay will be available through March 2, 2018. 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 in the call that 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 non-GAAP operating income, which is net income excluding the after-tax impact of net realized gains or losses on investments, the deferred tax asset charge that was recognized in 2017 in relation to tax reform and the result of discontinued operations, if any. We believe that providing this non-GAAP measures 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 object to risk and uncertainties. We refer you to Selective's annual report on Form 10-K and any Form 10-Qs 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 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; and Mark Wilcox, Chief Financial Officer. Now, I'll turn the call over to Greg.

Thank you, Rohan, and good morning. I'll first make some introductory remarks and then focus on some high-levels themes for the full year 2017. Mark will then discuss our financial results and John will review our insurance operations in more detail, providing additional color on key underwriting initiatives. We're extremely proud of our financial results we generated for 2017. Our non-GAAP operating return on equity of 11.4% was in line with our long-term goal of achieving return 300 basis points above our weighted average cost of capital, an impressive result given the record level of expected industrywide catastrophe losses, ongoing competitive Commercial Lines underwriting environment and sustained low new money interest rates. Our 2017 statutory combined ratio was an excellent 92.4%. And on an underlying basis, or after adjusting statutory losses and prior-year casualty reserve development, was an extremely strong 91.6%. In addition, our after-tax net investment income was $119 million, up 20% over last year. For 2017, we've seen estimates of global insured catastrophe losses as high as $136 billion. In the third quarter, the industry experienced hurricanes Harvey, Irma and Maria, followed by the devastating wild fires causing significant damage in portions of California in the fourth quarter. With the significant capacity loss activity this year and ongoing volatility of severe weather, we expect pressure on carriers to raise industry-wide pricing for property risks. For Selective, catastrophe losses accounted for 2.9 points on the 2017 combined ratio. And our ten-year average was 3.6 points, well below industry averages. We've been highlighting for several quarters that the industry needs to generate additional rate in order to produce adequate returns on capital. Remember, you're not achieving overall renewal pure price increases that you will not keep pace with claim inflation. Higher ratings must support industry capacity loss volatility, expecting claims…

Good morning. And thank you, Greg. For the quarter, we reported $0.51 of fully diluted earnings per share and $0.86 of non-GAAP operating earnings per share, which is up 15% from 2016. Excluded from non-GAAP operating income in the fourth quarter were after-tax net realized investment losses of $700,000 and a reduction of the value of our net deferred tax asset of $20 million, which is the result of the implementation of the Tax Cuts and Jobs Act of 2017, in which net deferred assets will now be realized at a lower federal income tax rate. Despite the one-time charge, our expectation is for an overall effective tax rate of approximately 18% going forward, a full 10 percentage points lower than our current effective tax rate and the expected pay-back period for the one-time charge to book value per share. Or for it to be book value neutral, it should be less than 12 months. As Greg mentioned, we were assuming a 17% effective tax rate on investment income going forward, although this will move around a bit depending on our allocation to tax-advantage municipal securities and approximately 21% on all other items. In the fourth quarter, we generated an annualized non-GAAP operating ROE of 12%. For the full year, we generated non-GAAP operating income of $185 million, which is up 14% from 2016 and a non-GAAP operating ROE of 11.4%. The full year non-GAAP operating ROE is essentially in line with our financial target of 11.5% for 2017. Going into 2018, our estimated weighted average cost of capital has increased from 8.5% to 9% and we have therefore increased our financial target to 12%. For the fourth quarter, after-tax underwriting income totaled $28 million and generated 6.5 points of ROE. The investment portfolio generated after-tax net investment income of…

Thanks, Mark. And good morning. As we move into 2018, our focus remains to capitalize on opportunities for profitable growth. We'd look to execute our strategy by leveraging our competitive strengths, namely our franchise agency relationships, enabled by our unique field underwriting model, our sophisticated underwriting tools, which allow us to segment and price risk on a granular basis and the superior customer experience we and our agents provide customers. All of this is in the context of a discipline underwriting culture that is focused on generating adequate returns for our shareholders on a risk-adjusted basis. We have often talked about our long-term growth plans, to achieve a 3% market share within our footprint states for Commercial Lines. We seek to appoint new agents in our current markets to represent 25% of available Commercial Lines premium and growing to a 12% share of wallet with our appointed distribution partners. During 2017, we appointed 102 new distribution partners in our footprint states, excluding New Hampshire and Arizona. Our current agency market share stands at approximately 18% and our share of wallet is approximately 8% in our legacy states. In July of last year, we launched our Commercial Lines product in Arizona and New Hampshire. We are extremely pleased with the receptivity and early performance, with both exceeding our expectations for the year at $9 million of premium volume in just six months of operation. Our regional office in Arizona serves as the underwriting hub for our ongoing Southwest expansion. On January 1, we opened Colorado for Commercial Lines business and are on track to open New Mexico and Utah by the end of this year. We also plan to open Arizona and Utah for Personal Lines business. Strong receptivity from agents who are actively seeking to do business with Selective in…

Thank you. [Operator Instructions] And the first question is from Arash Soleimani with KBW. Please go ahead with your question.

Hi, thanks. So, first question I have is, looking at standard commercial, you guys had I think quite a bit of an uptick in the non-cat property loss ratio. So, if I back the uptick in that ratio out, looks like you actually had about 50 basis points of improvement in the core loss ratio. So, I was just wondering what drove that 50 basis points of improvement, especially in light of the strengthening you were mentioning within commercial auto in terms of your higher initial loss picks?

Good morning, Arash. This is Mark Wilcox. Why don't I start, then Greg and John can jump in. I think what you're referring to is the quarterly underlying combined ratio for standard Commercial Lines, backing out the increase in non-cat property losses. And if you do that, I'm pretty close to your number, about a 40 basis point improvement in the underlying combined ratio, which is really driven by the loss ratio. And I think what you're seeing there is the current accident year development. So, in the current accident year for 2017, in the fourth quarter, we did have an uptick in our loss picks, but in the fourth quarter of 2016, we had a higher uptick. The real difference is we – in both quarters on a comparative basis, we raised the loss picks for commercial auto. But in the fourth quarter of 2017, we continue to see the workers' comp book of business perform better than expected. And we had a slight reduction in the current accident year loss pick for workers' comp which know the difference on a comparative basis.

Okay, that makes sense. Thanks. In terms of workers' comp then, is that something where going forward, the initial loss picture continued to be lower year-over-year?

Let me start. Others can add in. I'll tell you. This is a line that, as an organization, we're concerned about. You're seeing a lot of highly competitive conditions in terms of commission rates that we're seeing in the marketplace. This is a line that we are very mindful of. This is the line that has the biggest inflationary tail. This is the line that can turn quickly. And so, I don't think you can expect systematic drops in the ratio because you're starting to see rates – this is the line that we got the least amount of rate in. So, John talked to you about the [indiscernible] that we got. And when you look at comp overall, you would see that for the year it was zero. So, you can't put out a zero rate. And you've got to remember, we always talk about overall rate. So, overall, we got [indiscernible] in rate for the year. And when you get zero on a line and you look at expected claim inflation and the fact that the same drivers that you saw in auto at some point relative to employment rates and other matters can start to affect frequency in this line of business. So, I would say, if anything, that the comps kind of, I would say, bottomed out. And if anything, you should see ratios actually start to pick up industrywide.

And, Arash, this is John. Let me just add a couple of additional points, but really reinforce everything that Greg said, which I think is exactly right. The competition on this line has really intensified. Commission rates have been increased. In certain cases, dramatically, especially for smaller lower hazard workers' comp, at a time where pricing has flattened and gone negative. And this is a line where it's harder for us or any other company to really manage pricing like we do another line because you're constrained by the underlying loss cost filings that are made by the various state bureaus. And those have been flat to negative and are continuing to move in that direction. We do anticipate normal medical cost inflation driving the line going forward. And it's hard for anybody to anticipate that frequency is the very trends which have been negative for quite a few years, will continue, and build those into your forward expectations. So, when we take that altogether, we are happy with the book of business. Our performance has been very good. We've been focused on writing on an account basis, a lower hazard style of business. We continue to drive improvements in outcomes through our claims operation, but we're just very mindful of some indicators that suggest that this line may start to deteriorate because of what the fundamentals are moving towards.

Thanks for those answers. While we're on the topic of the loss ratio, just wanted to touch on the guidance again. I know that is 150 basis points of improvement on a GAAP basis in the core combined ratio. And I think you may have mentioned this in your prepared remarks, but did you say that 150 basis points will be evenly split between the expense ratio and the loss ratio?

Arash, this is Mark again. That's exactly right. So, when you look at our combined ratio on a GAAP basis for 2017, we came in at 93.3. When you back out cats and favorable development, the underlying was 92.5. The guidance going into 2018 is 91.0. So, it's 150 basis points of margin improvement. And it's about equally split on a GAAP basis between the expense ratio improvement, which we continue to expect to drive down in 2018, as well as the loss ratio improvement.

If I can add just a little bit more comments, so when you think about – and again, I know you guys have heard me say this many times, you have to look at the effective rate just on the combined ratio. We just don't get 3 points of rate and that goes right to the bottom line. You got to get the fact that you got variable cost of 20%. And even in your non-variable, you have information, you have general wage inflation and you have other matters because the biggest part of an insurance companies non-variable cost is labor. And labor is going higher. But just to get your core question, and this is something that we are very dialed in, you see this on our water flow charts, and basically for Selective, when you just look at loss trend versus earned premium rate – I'm not saying they are neutral, but they are pretty much sitting right on top of each other. So, when you look at our numbers going from 2017 into 2018, what we're getting in rate pretty much offsets trend. And then, the rest of the improvements are coming from claim and underwriting and then, as Mark articulated, the things that are happening on expense basis, which, obviously, GAAP – you're getting into expense lag. That's actually a little bit more improvement that you're seeing on a GAAP basis than you would see normally on a statutory basis. But when you really down to it, that's what we are very dialed it on. And that's what's going to drive performance. And that's why I think from your standpoint, earned pure rate is what you need to focus on in 2018. Earned pure rate. Nothing else matters in this business.

And when I look at the split between – I guess in terms of the three segments, would that 150 basis points be kind of more E&S driven? How would you think about it across the three segments?

I think you would see E&S a little bit higher because the rate expectation is higher. And then, in Personal Lines, our auto tracking up, but our home is more a thing. So, I would say, somewhat – to get proportionately – maybe a little bit higher in E&S than you would get in the Commercial Lines. So, if I were ranking them, I'd probably put E&S on the top. I would put Personal Lines next and Commercial Lines underneath. Slightly underneath that. But there isn't a huge calibration. I don't want you to think that there is some epic calibration among those three different segmentation. I'm just thanking them in the order that you want to understand them. And that's what I'm trying to do.

Okay. And that 2.9% rate increase you had in the fourth quarter within standard commercial, does that look like it's moving up year-to-date so far? I know we've only been a month into the year, but does that look like it is headed upwards?

Arash, this is John. So, what you saw in the quarter was – in the fourth quarter of 2017 was a pretty consistent and relative to pricing. We have not reported a January price number at this point. But throughout the prepared comments, I think you saw a couple of references on a byline basis. Pricing on commercial property has been one of the underperforming lines for the industry. And for us, it was just under 2% for the year and about the same for the quarter. And with all of the activity on both a cat and a non-cat basis and all of the industry commentary, we would anticipate that line starting to get a little bit more pricing power going forward, whereas comp has been in that flat to slightly down. I think the other line of note – and we also highlighted this in our prepared comments is commercial auto has had a couple of years now of strong rate. And you saw our rate level that we disclosed for the quarter at just under 7% and commentary that we believe that, based on what's happening with regard to frequency, severity trends for the entire industry, we would expect that to continue to be the case. So, we haven't put a number out for January yet, but based on what you saw in the fourth quarter and our commentary relative to market outlook, you can draw your own conclusions on that.

Okay. I had mentioned the non-cat property losses before. And I thought that that was up the ratio across each of the three segments. I'm just curious, what was driving?

Actually, just one clarification. For the year, we saw non-cat property – and that's actually below budget. Below expectations. But for standard personal and standard commercial, it was about – there is certainly normal volatility in that line. And fire losses continue to be the biggest driver. Large fire losses continue to be the biggest driver. But, again, there is normal volatility. And if you look at our performance over a long period of time, we're seeing little bit of noise in 2017. We look at the underlying quality of our core Commercial Lines book and feel good about it. But think that the line needs rate overall, and that's our focus. So, because of that volatility and a little bit of a tick up in larger losses, we expect to try some rate in that line, and that's what the industry is talking about on both a cat and a non-cat basis.

So, when you sit there and listen to what just John said and what Mark said earlier, you think about 2018 versus 2017, you can tell by what we've done [indiscernible] we've left this elevated non-cat expectation stay in 2018 and have not dialed that back. So, we're looking at rate changes. We're constantly monitoring the book, trying to find ways to increase the safety management of the properties that we have and are systematically driving more rate through the book.

Thanks. And my last question, just on tax reform, how are you guys thinking about that? If that's something that you think – even looking over the long-term, is that something that you think will fall to your bottom line or do you see increased competition coming from tax reform that will kind of make the benefits go away? Just how are you guys looking at that?

Arash, why don't I start and then John and George can jump in and comment as well. I think, overall, big picture. Obviously, tax reform is great for the US domestic insurance companies. When you look at what the package was that was approved compared to what it looked like a year ago, you go down the list of benefits. And almost without exception, they are a benefit. So, whereas a year ago, some of the items in the tax package could have been a little bit on the negative side. So, just big picture, from an overall perspective, we think it's good for the economy. We think it's good for our customer base. And we think that increases exposure and it increases overall industry premium. So, we're pretty excited about that. From a Selective perspective, we talked about our effective tax rate coming down from about 28% to 18%. So, a full 10 percentage points of additional profitability that we would expect to drop to the bottom line. Over the long-term, I think there is some – we can only speculate. We don't have a hard data as to how it will all turn out. But our expectation is when you go into 2018 and you look at the overall industry, expecting to print about a 7% ROE. That's well below the cost of capital for the industry as a whole. So, that isn't an amount of sort of excess profits that could be returned back to customers. We believe that most of our competitors probably have expected returns less than their required returns. And therefore, the majority of the benefit should accrue to the shareholders. But I think, over time, that perhaps could get watered down a little bit and that will be a mix between what goes to shareholders and employees and customers. But time will tell.

And I would say it's still different. Look, we start with the core basic of 300 over our weighted average cost of capital. Taxes is one ingredient in the cake. There's all kinds of other ingredients in the cake. What's happening to after-tax yield. There's where's your duration on your portfolio. It's what's happening to your cost of goods sold. There are so many pieces. And I will tell you, for Selective, the thesis doesn't change. The starting point is 300 over. Taxes impact that. And our goal is to generate over the long-term a target – hit our target not every year, but to be 300 over weighted average cost of capital. So, for our standpoint, our cost of capital went higher just because of our market stock price and other things. So, there are things that push and pull at that performance. So, our overall goal to generate the return to shareholders doesn't really change. And this is just a different ingredient to indicate. That's a little bit – for us, as Mark said earlier, very favorable from selective standpoint. This tax reform is very positive from our standpoint. It levels the playing field. And it lessens our tax loads. And it gives our investment department more product opportunities to look at and to invest in because of the taxable equivalency actually came down from 1.45 now to 1.20. So, we look at product in the marketplace. This actually increases the bandwidth of opportunities that we can invest in. And our managers were on that trade earlier in the year. So, they've been on that trait, once this whole thing got crystallized. I think, operator, we've got to open up to another – you've gotten more than your fair share of questions in here.

No, I have. Thank you very much. I appreciate it. And thanks for switching to the GAAP.

All right. Thank you.

[Operator Instructions]. And the next question comes from Mr. Mike Dwelle with RBC Capital Markets.

How are you today? I can't wait to see what musical theme you're going to pick up this month.

We have to wait for it like everybody else. And so, I don't know either.

Alright. I'll be waiting. I would be hanging on. All right? How's it going, Mark? Thank you.

Doing fine. I'd like to talk about a couple of slightly different areas than what we've been covering. I'm thinking about the expansion into the new territories, both the ones that you've already started and the ones that are underway or soon will be underway. I guess, the main question I have there, first, I assume these are all Commercial Lines expansions. And then secondly, you gave the kind of size of the markets that you're addressing. What do you normally think of? And I know there is no singular answer. What do you normally think of as, say, the number of months or years that it takes to get maybe a 1% market share. Just how you're thinking about it broadly? Obviously, tax and circumstances will tell.

Yeah. Mark, this is John. I'll start on that. Let me answer a couple of the more direct questions out of the gate here and take the more complicated questions last. So, our expansion to this point, in Arizona, New Hampshire and now Colorado and then soon to be Utah and New Mexico by the end of the year, our standard commercial states. But I also mentioned, we're in the process of investing in some Personal Lines expansion, specifically in the states of Utah and Arizona. We haven't committed to anything beyond those two states at this point, but are looking for some states to add to our footprint that give us some diversification from a catastrophe loss perspective. And also present some higher economic growth in some of our existing footprint states, and that's also the logic that drove our Commercial Lines expansion and the choices we made around which states to enter into. In terms of our path to 1% or ultimately a 3% share, if you look at our approach to open in these states versus how we open the Midwestern states in the early to mid-90s, you've heard us talk about our goal of getting to about 25% agency share of the markets that we are in, over time, and our current legacy footprint is only an 18% at this point, which varies from one state to another, but 18% overall. For the most part, we've opened up these new states in and around that 20% to 25% range, which would indicate that we at least have access to available premium that would allow us to ramp up our market share more quickly than we have in other expansions in other legacy states. But that said, we focus our company on underwriting and pricing discipline. And I realize that's a little bit of a statement that may lead you to question, hey, are we going to come into a timeframe? And, generally, we don't put new business target out for any of our employees that don't include a profitability component to that. We're pleased with what we've seen so far in Arizona and New Hampshire. And our premium per field underwriter, specifically the state of Arizona, very early, is as good as we've seen a lot of our existing footprint states, which indicated that the agency partners we've picked were the right ones and the access to quality new business opportunities at our pricing levels were abundant. And we expect that to continue. So, I'm not going to put a date out there. You saw the volume we've gotten to this point. And we're going to be disciplined about it. But if the market continues to be disciplined in those geographies, I think you're going to see good solid growth, and certainly, growth in excess of our overall Commercial Lines growth rate that you've seen over the last couple of years.

If you think about Arizona, let's round it to a $4 billion Commercial Lines market. It's like $3.8 billion, but $4 billion for the sake of this conversation. So, $4 billion market. A 3% share is – I'm just trying to round. And so, a 3% share is $120 million operation. And as John went through, we did $7 million in six months. I don't want you to just straight-line extrapolate that. But I just want to make sure that the points being made that – we're doing this greenfield. We've got three of the best field underwriter in the marketplace. We are absolutely, 100% comfortable with the Ivy League agents that we've got in that geolocation. So, we really feel good about the infrastructure that we've got, what we build. The fact that we haven't gone out and bought another company that now has brought on a whole different culture, a whole different level of systems, and the integration is clear and the line of sight is clear. And our people, at the highest level, are the ones that are managing that operation relative to they're existing Selective people at the regional level, like running the office. So, when you think about how you want to grow, how you want to do it systematically, how you want to do it rationally, as John is telling you we want to do, this demonstrates to us that we can take our style of operations and do it in other states. But, more importantly, the agencies there clearly value the unique business proposition that Selective brings to the table.

That's helpful color. I appreciate that. Let me give you a quick easy one. Any – are you seeing any particular uptick in claims activity from the various winter weather that we've had so far in the first month-ish of the year?

Mark, this is Mark here. January will be a pretty heavy cat loss month for us. It's just one month in a quarter. So, we don't really want to comment on the overall level of cat activity with too much specificity. But PCS 1811, which was the big winter storm in the Northeast, has created a fair number of property losses within our book of business. So, we're keeping an eye on that. The claims activity has dropped off at this point. The claims team is on it. But January will be a pretty heavy month for us, but just one month in a three-month quarter.

And, Mark, one thing I'd just like to you too is we pretty much hold our cat budget at 3.5 points of NTE. And when you really start to sit down and disaggregate our NTE in terms of our liability and our rate increases, when you try to think about the of your absolute dollars that get put into that pot every year, that actually is getting larger every year, probably faster than other companies who may keep the ratio the same, but their earned premium isn't going as high as ours is. So, I'm not saying that that's anything you should hang your hat on, but I just want to make sure that that point gets made. Our 3.5 points is stronger in 2018 that it was in 2017 or 2016 or 2014.

Okay. Good point on that. And then, last question is, again, this is kind of a broad market question, but as you approach customers for the 3% average rate increases that you're getting, how are you – just some feedback on customer reaction. Are they sort of accepting, they kind of get it, are people changing their limits or their retentions? How's the customer responding to the 3% pure rate?

Mark, this is John. First thing – I'll take the last part of your question first. Our small and midmarket customers generally don't negotiate term and condition changes from one policy period to the next. There are occasional additions of coverage in certain areas like cyber or employment practices liability and those sorts of things. But you don't see a lot of retention increases in order to manage premium increases. It's just not our style of business. With regard to how the customers are handling it, I think the most direct way to think about it is to look at what's happening with retentions. And what's happening with retentions, more specifically by pricing cohort, which we see is very strong. But I think it depends also on the customers' experience from a loss perspective. We've certainly gotten a lot more sophisticated as the number of our other competitors were – price change in the upcoming term isn't just driven by that individual account's loss experience in the last one or three years. And we think that's appropriate to better predict future loss experience. But, unfortunately, who is loss free, on occasion, the agent representing that customer, who has been loss three, things that should generate a rate reduction. And the customer who has the loss, even though that loss may not be indicative of an issue with the account or profitability challenges going forward. It's easier for that agent to sell an increase to an account that had a loss. That's where it becomes a little bit of a struggle. But we pointed to our granular approach which builds in a number of factors beyond just the loss experience of the account and our ability to work on a portfolio basis, 60 and 90 days ahead, with our agents. And then, our agents' close customer connection and their ability to articulate the reasons why a policies renewing flat, down or up. And we do have a number of policies even with a 3% overall rate that are getting decreases because they've earned the decrease. And others who are getting increases because they've earned the increase. So, retention suggest that the message is resonating, but it's a constant struggle. And it's an account by account conversation between agent and customer.

And let me just add. In other words, when you think about what John just went through, Mark, think about it this way. 50% of our book got on average of 1% increase. So, you can't think about – hey, how are you delivering a 3% increase to a customer. Half of our book got a little over – a little over 100 basis point increase. And that was even done on an extremely granular level. So, when your insider underwriters have the ability to have portfolio management conversations with agents that are at the level of specificity that we had is why we're able to achieve retention in that. So, if you were socializing this rate – what I mean socializing, you're doing 3% across the board. So, you'd have an absolutely different result than what we have. It's the cycle data that we had. It's the people that we had that can interpret that data and be very agile in terms of what's happening in the market condition to make sure they're focused around retention on the best end and where they have flex in terms, hey, I'm going to stay hard on this rate increase on this cohort, that's on the worst end, so that you've got to be firm on that pricing.

Appreciate the answers. That's great color.

Thank you. And at this time, there are no further questions. I would like to hand the call back to Greg Murphy for any closing remarks.

Great. Thank you very much for your participation. If you have any follow-ups, Rohan and Mark are clearly available to answer any follow-up questions. Thank you very much for your participation this morning. Thank you.

Thank you. And that concludes Selective Insurance Group's fourth quarter 2017 earnings call. Thank you for participating. You may now disconnect.