Good day, everyone, and welcome to Selective Insurance Group's Second Quarter 2018 Earnings Call. [Operator Instructions] Now for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Investor Relations and Treasurer, Rohan Pai. Please go ahead.

Good morning, everyone. And welcome to Selective Insurance Group's Second Quarter 2018 Conference Call. This call is being simulcast on our website and the replay will be available through September 3, 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 and unrealized gains or losses on equity securities. 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 statements. Joining on the call today are the following members of Selective's executive management team: Greg Murphy, Chief Executive Officer; John Marchioni, President Chief Operating Officer; and Mark Wilcox, Chief Financial Officer. With that, 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-level themes that continue to drive our strategy for profitable growth. 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 pleased with the solid results we've generated in the second quarter, benefiting from robust growth and profitability in our Standard Commercial Lines and Commercial Lines segment. The 14% non-GAAP operating ROE we reported for the quarter was well above our 2018 target ROE of 12%. We established a very high bar for our non-GAAP ROE target of 300 basis points above our weighted average cost of capital. We will establish a new target ROE for 2019 and develop a comprehensive plan around both investment and underwriting ROE contributions. We do not make exclusions or adjustments when assessing our annual performance relative to these targets. Our interests, thus, are aligned with those of our shareholders to generate an adequate return on capital. Consolidated net premium written of 7% in the second quarter was robust, driven by renewal pure price momentum that outpaced expected claims inflation and strong retention rates in our standard lines, partially offset by a decline in our E&S segment. We achieved overall renewal pure price increases of 3.5% in our Standard Commercial Lines segment for the quarter, which was up from 3.2% in the first quarter and 2.9% for the full year 2017. In terms of pricing trajectory for the remaining of the year, we expect our pricing to edge higher, particularly in light of the ongoing industry pressures in the commercial automobile and property lines. For the month of July 2018, our renewal pure pricing was 3.6%. Our ability to obtain market-leading Commercial…

Thank you, Greg, and good morning. For the quarter, we reported fully diluted earnings per share of $0.99 and non-GAAP operating earnings per share of $1.01. Both the diluted EPS and non-GAAP operating EPS for the quarter were a record for Selective and resulted in a very strong 14.3% annualized non-GAAP operating ROE. Our results were driven by after-tax underwriting income of $30 million, which generated 7.2 points of ROE and after-tax net investment income of $38 million, which generated 9 points of ROE. We also benefited from lower corporate expenses. As a result of our very strong second quarter results, our year-to-date annualized non-GAAP operating ROE has improved to 10.2%, which positions us well to move towards our target return for the year 2018. For the quarter, we saw a good growth with consolidated net premiums written increasing 7%, driven by 8% growth in our Standard Commercial Lines segment, 7% growth in Personal Lines and partially offset by a 1% premium decline for the E&S segment. The growth in Standard Lines was driven by excellent pure renewal price increases, high retention rates and good new business opportunities, including those within our 3 new Standard Commercial Lines states, which are providing us additional runway for growth. The consolidated combined ratio was a solid 93.7% in the second quarter. On an underlying basis or prior to catastrophe losses and prior year casualty reserve development, our combined ratio was 91.3% compared to 92% of the comparative quarter in 2017, with the improvement largely driven by a reduction to the expense ratio. For the first 6 months of the year, the consolidated combined ratio was 96.4% and the underlying combined ratio was 93.7%. Results in the first half were adversely impacted by the first quarter non-CAT property losses, which we discussed last quarter.…

Thanks, Mark. I'll begin with an overview of some of our strategic initiatives and then focus on the results of our operations by segment. We continue to move forward with various initiatives to drive our profitable growth strategy and position the company for sustained outperformance. Our distribution partner relationships represent the Ivy League of independent agents, and our franchise approach to the business is a true differentiator for us. It means we have an average of approximately 50 agents per footprint state, with each partnership representing a meaningful relationship. The principal drivers of our growth plans are new agency appointments in our current markets, increased share of wallet with our existing agents and geographic expansion into new states. Our longer-term Commercial Lines targets are to build distribution partner relationships representing 25% of their markets and seeking a 12% share of wallet within each agency. This translates to a goal of a 3% market share in Commercial Lines or an additional premium opportunity in excess of $2 billion. We appointed 109 distribution partners in 2017 and an additional 66 so far this year, bringing the total to approximately 1,300 agency partners and close to 2,130 storefronts. Our current agency market share stands at approximately 19% and our share of wallet is approximately 7% in our legacy states. We remain focused on driving both these metrics higher in the coming years. In addition, we are successfully executing on our geographical expansion plans. We opened Arizona and New Hampshire in July 2017 for Commercial Lines business and opened Colorado for Commercial Lines in January with 10 agency partners. Together, these 3 states have generated approximately $21 million of premium volume since inception, which is above our expectation when we developed our plans. Our 3 new states represent an additional $290 million of premium…

[Operator Instructions] And our first question comes from Arash Soleimani from KBW.

First question, I just wanted to get some more color on E&S. I guess I was just a bit surprised there because you I know you guys had done a pretty thorough reserve review in the third quarter of last year, so I just wanted to get just a bit more color on what happened there this quarter.

Arash, this is John, I'll start. And just as reminder, we do our full reserve review every quarter for all of our lines of business. And you certainly saw the impact of that most recent review come through in the current quarter. First, I just wanted to make sure we continue to put this in context, which is, as we said in the prepared comments, on a year-to-date basis, this is about 9% of our premium and, in a quarter, about 8% of our premium, and it's always been viewed as a complementary business. Now that said, we still are focused on making sure we achieve profitability in this segment and are focused on the profitability side before we look to grow the operation. A couple of points I'll make, when you look at the context of the performance we reported for the quarter. Number one, pricing on the in-force book is strong, and we've said that for the last several quarters. It remains strong and our new business is coming in at or above our target pricing levels. And our renewal inventory, while overall is close to our target, we've got a handful of pockets of business in the renewal inventory by segment that are being more aggressively addressed because they're below target from a pricing perspective. In addition to that, and this will really start to take effect in the third quarter when we see our pricing come through, we just fully implemented an entirely new property-rating structure of that is much more granular by protection class, by construction type, by hazard of the exposures in the property, which we think will also -- although, our property book is a smaller percentage, about 25% of the inventory, we think that'll help profitability as well, so that's number one.…

And I would only add to that. I mean, this is the lightest class -- the lightest risk class in the E&S sector. It's much like our small business. So what we do in small business really isn't all that different than the types of classes you're seeing in the E&S sector. And as we continue to refine our small business strategy, our belief is that this is going to fit well into that structure. And as we migrate this more to a class-type structure, I think it'll continue to add more discipline into the pricing and how we manage our new and renewal inventory. So again, did it disappointing us? Yes, but let's not -- 114% combined ratio on a relatively small premium base, these are not huge reserve inventory movements but unfortunately, they -- I agree that we've have -- we hit it last year, we hit it again this year, and our goal is to get this segment where we need to have it.

And just my next question is on the general corporate expenses. Obviously, that approved a lot this quarter. I know part of that was related to the stock price. So looking ahead to the rest of the year, I'm assuming we should expect that to still be down year-over-year, but by a much smaller magnitude, is that the right way to [ think ] of it?

Are we talking just corporate expenses at the [indiscernible] level or overall? I just want to make sure our response to you is targeted. Which one are you referring to?

Just the corporate expenses that are not reflected in the expense ratio.

Yes, Arash, it's Mark. In the quarter, corporate expenses were down as you mentioned. I mentioned it in my prepared comments, we were down $5.2 million on a comparative basis. And year-to-date, we're down about $6 million. Most of that, if not all of that, is driven by the long-term incentive stock compensation plan and a big piece of the reduction in the expense year-on-year in the quarter was driven by a reduction in the stock price. So we started the quarter with a $60 share price, we finished at $55, it's a 9.6% reduction. And with some of the liability of mark-to-market accounting for a portion of that long-term incentive compensation plan, that did drive the expense down and was actually -- came through as a contra expense in the quarter. There was also an element to an adjustment to a key group factor for 1 of the 3 years that rolls the expense then. I would say those are kind of one-offs in the quarter, so call it nonrecurring. It was a benefit that came through. We wouldn't expect that to continue into future periods. But overall, over the last couple of years, we've been running $35 million, $36 million a year in corporate expenses. And as we've talked about in the past, we fully expect to achieve about a $10 million benefit on a run-rate basis once the full effect of the restructuring of the long-term incentive compensation plan takes effect, which won't be until -- fully effective until the end of 2019. But we'd expect to achieve some cost savings in that line item for the full year '18.

And just one other question on non-CAT property losses. I know, last quarter, those were obviously up a lot. But in general, it looks like they've been up 4 of the last 6 quarters overall and 5 of the last 6 quarters within Standard Commercial. So I just wanted to see if I could get some more detail there. What's been driving that?

I would say -- Arash, this is John. I would say we've looked at this closely and looked at the underwriting portfolio to ensure there wasn't a significant shift in the size or complexity or hazard grade level of our property inventory, and we haven't seen any meaningful shift there. So we would view this as normal volatility. You have seen more competitors in the industry talk about a little bit of the same thing relative to higher non-CAT property losses, but we view this as normal embedded volatility in line -- which is why we're focused on making sure that rate level in this line continues to go higher. We told you that our rate on commercial property was 4.2% in the quarter, which is up over the first quarter pretty significantly. And we think this is aligned because of that embedded volatility that needs more rate level. And that's an industry dynamic as well, but we haven't seen any significant change in our core underwriting portfolio relative to the commercial property book.

And I would just add to that. For the quarter, they were pretty much on budget. So on the volatility -- let's make sure we get -- so the volatility that we experienced in quarter 1 was principally in the month of January. There was a little bit above budget that happened in February and March, but not substantially that much out of line with budget. And then for the entire quarter of this year -- for the second quarter, they were pretty much on budget or just slightly elevated. So I don't think it's any different than what you're hearing overall. And then the question really is, at the end of the day, how do companies respond to that increase in volatility? Is it a hope strategy and they're going to constantly discount that volatility, either what they need to do pricing-wise or do they build in an elevated expectation for volatility and start to edge their pricing higher. I think you heard, as John talked about it in his prepared remarks, that's an area where we're edging our price higher. You heard me say that we printed a 3.6% for the month of July in price. That is one of our biggest inventory months. And our 2 largest inventory months of the year in terms of renewal inventory is January and July, so we're 62% through our inventory for the year. And the 2 areas that we continue to focus on are commercial auto and commercial property and then we've also got a very fine eye on general liability, making sure that we are closely analyzing all the trends that could affect severity and/or frequency in the GL line.

Our next question comes from Mike Zaremski from Crédit Suisse.

Focusing on the expense ratio not the corporate expenses, maybe I've thought about it the wrong way, but if I go back historically maybe 4, 5, 6 years ago, you guys ran at a lower expense ratio then it ticked up for a number of reasons, and it's been coming down fairly nicely. So I've kind of -- should we be thinking that you're kind of seeking to get back to historical levels? Or maybe we should bifurcate Personal versus Commercial, because you name some drivers of some of the expense savings in Personal Lines -- sorry, in yes, in Personal Lines that kind of probably weren't part of the playbook back then. Maybe so, if you can talk more about how to think about the expense ratio?

Mike, it's Mark Wilcox here, I'd be happy to address your comments. And then, obviously, Greg and John can jump in as well. But you're absolutely right, if you go back about 5 years, we were closer to the industry average from an expense ratio perspective and we did see that drift up towards -- sort of peaked in terms of a high point or a low point, so to speak, at the end of '16. We've made good progress in '17 in terms of driving the expense ratio down. And certainly in 2018, we've made excellent progress, we're down, I think it's 110 basis points in the quarter and 130 basis points on a year-to-date basis, so making excellent progress there. We are mindful to focus on the long term not the short term. We're not looking to build any expense deficits in terms of the infrastructure and the investments we need to make in the technology to support the strategy and the future growth of the organization, but we have made good progress on the expense ratio. A couple of things I think that are driving it, one is we have benefited from good growth over the last couple years. We've been disciplined in terms of being able to manage our headcount and infrastructure expense growth, and we've grown that at a lower rate than the overall expense ratio -- or the growth rate in premium. And we've been able to drive the expense ratio down. I do think it is good to split the Commercial Lines expense ratio from the Personal Lines expense ratio. Personal Lines does run at a -- from an industry perspective, at a lower expense ratio than Commercial Lines and we're very focused on driving that down. I think overall, going back to your comments, from an industry perspective, we still are at probably a 2 to 3 point expense disadvantage compared to the industry as a whole. There is an element of a higher level profitability for Selective versus the industry and some incentive-based compensation in there, whether that's employee or supplemental commissions, that probably adds about 150 basis points to our overall expense ratio. So if you normalize for that, you'd probably cut that deficit in half. But overall, our goal is to drive the expense ratio down. In the past, we had a target out there, more of on a statutory basis, of about a 33% expense ratio. I think longer term, from our perspective, we would expect to focus on driving our expense ratio down on a GAAP basis closer to the industry average, which is about a -- call it about a 32% expense ratio consolidated.

Mike, let me just kind of weigh in and give you an idea, over of the past few years, what's been the push and the pull. Some of that up-drift you saw until we caught up, relative to rate level and other things, was the very high profit base. So let's just -- I'll give you an idea. So profit base comp in our numbers were for the full year of '17, were around 4.5 points. When we defined that -- and that's not all in the underwriting expense ratio, but what is in there, the profit -- supplemental commission to agents was the high-water mark, and that was 2.6 points in our overall commission rate in '17. And then profit -- annual cash incentive to our employees was about just under 2 points. Now, what you're seeing, some of that in the quarter, what's drifting that down a little bit is the fact that, as I mentioned in my prepared comments, we have a very disciplined process in how our compensation program works. Our target combined ratio that works to pay out a big part -- half of our compensation is benchmarked to 300 over our weighted average cost of capital irrespective of what our budget is. And to the extent that we're not at that, that comes out of everybody sitting around this table right now in terms of performance. And so obviously, we're 1 point over our original forecast that we told you about. And therefore, that has an effect on that side of the compensation. But the other thing is, I just -- where we are from a competitive standpoint, from a technology standpoint, we've done some big lifts in those numbers, we put in a new -- so far recently, just to give you an…

I appreciate it, and I'm definitely going to have to go back and read the transcript because that color is helpful and you guys clearly have been innovating and reinvesting some of the cost saves. Just curious on your retention comments and all the investments you're making to improve retention, is there a kind of a retention goal you're willing to speak to, maybe a long-term goal?

So I would say -- this is John. We have some internal expectations in terms of how we expect to see retention move based on the initiatives we're making relative to increasing switching costs. We're not -- we don't prognosticate retentions to the outside world and there are also market dynamics there. So let's just leave it at we believe that everything we're doing will improve retentions going forward. But there are countervailing forces from a market perspective that make projecting that a little risky.

Yes, Mike, I've got a number in my head, but if I disclosed it, I don't -- I think my car -- I would have to look at my car before I left -- and again, and it's not -- and I want to make sure that the clarity around this is there. I mean, everything we're doing, everything that John is working on, improving the customer experience, what we're doing on that front and then being able to go to an account -- pitch an account with a selective drive opportunity, we would expect our hit ratios, also. And then as our producers that represent Selective start to understand, anyway, my hit ratio has gone up x amount because of that, we expect to get even more and more opportunities on new and that our closure rates would run higher as a result of everything. So we feel that we've got the right strategy in place and we're not going to get pinned down to a number yet.

Okay. Just curious, these initiatives you're taking to make switching costs maybe more expensive or tougher, is this -- are these things that most of the competition is doing? Or this is…

I've not heard -- let's put it this way. We're in the market right now. Now again, these are not telematics products, we're not rating off of it, so this isn't like a rating telematics thing. What we are doing is, we've got, for our commercial fleets, our power units, whether it's a contractor or whatever, we're offering to these -- yet again, I'm going to gate myself. It's in a pilot phase, we're rolling out -- we've rolled it out to our own employees, we've rolled it out to the people our -- the people that have vehicles with Selective. And now, we've got it in pilot mode with some of our agents. But this is a product that's offered free of charge that many of our customers are already paying services for possibly telematics or they don't have any. And then what we're doing is we're offering that as a way for someone to better manage their fleet to get -- so at the end of the day, they know where their vehicles are, they know if they're being idled, they can tell -- game score -- gives game scoring in terms of how is that driver performing. Are they on -- are they driving while they're on the phone? So it detects distracted driving, which we perceive -- we're trying to figure out -- our actuary is sitting across from me right now. He's trying to figure out, have we hit the apex of commercial auto frequencies? And that's what he thinks about every day when he comes to work. Where am I? Where are frequencies going? How will we militate the frequency trends? And a lot of that is around better driving and distracted driving. And I can only tell you, the social issues of people driving distracted, I don't see any change. I see just as many people on the phone, and I see just as many people out there doing whatever they're doing. And that, you've got to find ways to change that. And so we feel that our product is really being presented to, whether they're a contractor, whether they're a manufacturer, as a way to better manage their fleet, better manage their petrol costs, get better driving habits. And that's how we're offering that. And I have not heard of anybody else really in the market. The relationship that we have with this vendor, they -- we're the first in market with them, so I know that they have not really worked with anybody else either.

That's interesting and good color. Lastly, just curious on commercial auto. Is it a different -- do you -- is the distribution a little different than the rest of your Standard Commercial or it's the same -- for the most part, the same agency groups that you're getting your commercial auto premiums from?

Yes, this is John. It's the same group of agents. We write virtually all of our Commercial Lines on a package basis. We write very, very little monoline of any major line, certainly not a lot a lot of monoline auto. So this is packaged business, and it's is reflective of our overall distribution when you think about our mix, which does tend to be a little bit heavier mix towards the various contracting classes, but manufacturing and wholesaling business, community and public services, standard mercantile business. But it is distributed through the same distribution plan and it's not a monoline book of business.

Mike, there's no programs in here.

And as of the moment, speakers, we show no further questions in queue.

All right, well, great. We appreciate your participation in the call today. If you have any follow-up matters, Rohan and Mark are available for you, and thank you very much for your participation on the call today.

And that concludes the conference for today. Thank you for your participation. You may now disconnect.