Jennifer DiBerardino - SVP, IR & Treasurer Greg Murphy - CEO John Marchioni - President & COO Dale Thatcher - CFO.

Vincent DeAugustino - KBW Scott Heleniak - RBC Capital Markets.

Good day everyone. Welcome to the Selective Insurance Group’s Fourth Quarter 2014 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, Ms. Jennifer DiBerardino. You many begin..

Thank you very much. Good morning, and welcome to Selective Insurance Group's fourth quarter 2014 conference call. This call is being simulcast on our website and a replay will be available through March 2, 2015.

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. Selective uses operating income, a non-GAAP measure, to analyze trends and operations.

Operating income is net income excluding the after-tax impact of net realized investment gains or losses, as well as the after-tax results of 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 that will be made during this call are forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties.

We refer you to Selective's Annual Report on Form 10-K and any subsequent Form 10-Qs filed with the U.S. Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. Please note that Selective undertakes no obligation to update or revise any forward-looking statements.

Joining me on the call today are the following members of Selective's Executive Management Team; Greg Murphy, CEO; John Marchioni, President and Chief Operating Officer; Dale Thatcher, CFO; and Ron Zaleski, Chief Actuary. Now, I'll turn the call over to Dale to review fourth quarter and 2014 results..

Thanks, Jen and good morning. The fourth quarter marked the conclusion of an excellent year for Selective as we delivered on our very aggressive three-year plan that we established in 2012. We entered the year with 92.5% statutory combined ratio, excluding catastrophe losses, in line with our 92% expectation.

Catastrophe losses add 3.2 points to the combined ratio, compared to our original budget of four points. After-tax net investment income finished the year at $104 million, 4% above our original guidance. For the quarter, operating income per diluted share was $0.72, up 60% from $0.45 per share a year ago.

There were few items in the quarter that impacted results in both directions as follows. Catastrophe losses in the quarter were actually negative as they included an unexpected $8 million reinsurance recoverable from over 10 years ago, which resulted in a net benefit from catastrophes.

When compared to the fourth quarter of 2013, were favorable by $0.24 per diluted share. Non-CAT property losses were elevated when compared to the fourth quarter of 2013, resulting in an unfavorable impact of $0.10 per diluted share.

The remaining favorable variance of the fourth quarter of last year was largely driven by our insurance operations, where we continue to benefit from earned rate in excess of expected claims inflation and the success of our underwriting and claims initiatives.

These operational improvements were partially offset by $5.5 million in current year cash casualty reserve pick increases. The net impact of both is a favorable 1.3 points on the combined ratio or $0.07 per diluted share.

The fourth quarter statutory combined ratio was 93.2% compared to 99.6% a year ago and our underlying combined ratio excluding catastrophes and prior year casualty development improved by 1.5 points to 96.6%.

The catastrophe loss benefit in the quarter was 1.5 points due to aforementioned reinsurance recoverable, compared to 3.2 points of losses in the prior year period. Favorable prior year casualty reserve development in the quarter was $9 million or 1.9 points, compared to $7.5 million or 1.7 points a year ago.

For the quarter overall statutory net premiums written were up 7%, driven by growth of 7% in standard commercial lines and 28% in excess and surplus lines. In standard commercial lines, we achieved quarterly renewal pure price increases of 4.7% while retention improved 84%.

The standard commercial lines statutory combined ratio for the quarter was 96% compared to 100.2% a year ago, on an ex-CAT basis results were essentially flat. Ongoing rate versus trend improvement in commercial lines continued, however non-CAT property losses were approximately four points higher than the prior year period.

Workers Compensation generated a combined ratio of 112.1% in the quarter, a 15.2 point improvement over the same period of last year, reflecting our continued efforts to improve the profitability of this challenging line.

We're pleased with our early successes and improving results, which are reflected in the fact that over the course of 2014 there was no prior year casualty development in the Workers Compensation line either favorable or unfavorable. In commercial auto, our statutory combined ratio in the quarter was 104.4%.

This reflects a higher accident year liability expectation for 2014, which added 5.9 points to the combined ratio. Despite this action, which is reflected of what has been seen in the broader industry for this line of business, the full year commercial auto combined ratio improved slightly to 96.2%, compared to the 96.4% reported in 2013.

All other standard commercial lines of business generated profitable combined ratios in the quarter. Personal Lines net premiums written declined 5% in the quarter as we continued the strategic non-renewal of dwelling fire business and reduced monoline homeowners.

As a result of these initiatives, retention declined 80% from 85% in the fourth quarter of 2013. The statutory combined ratio of 78.2% included a catastrophe benefit of 4.6 points compared to the fourth quarter of 2013 when the statutory combined ratio was 94.9% including 3.6 points of catastrophe losses.

Homeowners had an exceptional quarter with a statutory combined ratio of 55.3% including 9.2 points of catastrophe benefit and strong renewed pure pricing of 9.4%. For the year homeowners recorded a statutory combined ratio of 96.9%, while achieving renewal pure price of 9.4%.

In personal auto, the statutory combined ratio for the quarter was 104.8% an improvement from the prior year period of 115.1%. In the quarter, Personal Auto achieved renewal pure price of 4% and had $2 million of favorable prior year casualty reserve development, reflecting a continuation of positive reserving trends.

We expect Personal Auto to continue its improvement through a combination of rate increases and aging of the book. Excess and surplus lines net premiums written grew 28% in the quarter to $45 million with a statutory combined ratio of 96.6% including 1.1 points of catastrophe losses.

Adverse prior year casualty reserve development of $2 million added 5.4 points to the E&S combined ratio in the quarter. The unfavorable development is related to updated actuarial assumptions as the book matures and we gather more of our own experience.

We successfully renewed our 2015 property catastrophe treaty with the program remaining at $685 million in excess of a $40 million retention. Like last year, the top $250 million layer is 77% collateralized as we look for ways to minimize the credit risk inherent and reinsurance transactions particularly for long tail events.

Pricing on the program decreased similarly to the pricing reported broadly in the market for January 1 renewals. We also placed a new treaty in January that specifically covers catastrophic events outside of our 22 state standard lines footprint.

This $35 million in excess of $5 million for current treaty reduces potential volatility from catastrophic events that will be specific to the excess and surplus lines book. Turning to our investment portfolio, after-tax investment income in the quarter declined 7% from a year ago to $25 million.

The decline was driven by lower returns in the alternative investment portfolio when compared to a strong fourth quarter of 2013. The year-to-date after-tax yield on the portfolio declined by six basis points to 2.2%, while invested assets increased 5% from year end to $4.8 million.

Reflecting the continued decline in rates in the fourth quarter, after-tax and new money yields were 1.67% in the quarter and 1.97% for the year, both below our full year budget of 2.25%. The overall pretax portfolio unrealized gain position increased from $79 million at year-end 2013 to $124 million at the end of 2014.

Also the pretax unrecognized gain position in the fixed income held in maturity portfolio was $16 million or $0.18 per share on an after-tax basis. Our fixed income portfolio continues to be highly rated with a credit quality of AA minus and a duration of 3.7 years including short term.

Surplus and stockholders' equity each ended the year at $1.3 billion and book value per share grew 9% from year-end 2013 to $22.54. Our premium to surplus ratio remained at 1.4 to 1. Invested assets per dollar and stockholders equity declined a $3.77 compared to $3.97 at the end of 2013.

The investment leverage decline with a result of the strong profitability in 2014, which increased stockholders equity at a greater rate than the growth in invested assets. Benefiting from this profitability our operating ROE for the year was 10.3% and total ROE was 11.7%, both in excess of our weighted average cost of capital of 8.9%.

Now I’ll turn the call over to John Marchioni to review insurance operations..

Thanks Dale. We accomplished a great deal on operations over the past three years and with all three insurance segments generated combined ratios under a 100% in 2014, which set the stage for continued improvement in 2015. In 2014, standard commercial lines represented 76% of our net premium generated a 95.5% statutory combined ratio.

Personal lines at 16% of our net premium performed at 94.5% statutory combined ratio. Excess and surplus lines, which represents 8% of our net premiums generated a 99.2% statutory combined ratio for the year.

These results reflect our efforts to balance rate and retention; implement claims and underwriting improvements across the organization and maintain strong relationships with our distribution partners.

For over 20 years, our power field model and deep relationship with our agency partners have been important points of differentiation for Selective in the marketplace. Over time we've made adjustments in our structure, to best position our organization for growth, profitability and efficiency.

Our agency management specialist or AMS's continue to be a central focus of the field model with responsibility for managing the growth and profitability of their territory and underwriting new commercial accounts.

In an effort to increase the capacity of our current AMS's and improve our responsiveness to agents, we will be broadening the scope of our small business teams to include more accounts that fall outside of our automated underwriting platform.

We expect to expand its scope that the small business teams will improve our underwriting efficiency while allowing AMS's to increase their focus on middle market opportunities and boarder agency management and strategic items.

With the addition of more than a dozen AMS territories and the change to the small business team, we expect AMS productivity to improve significantly and translate to increased share of wallet with our agency partners.

We conducted our annual agency road shows in November, making stocks in 16 different states and seeing over 2,500 agency principals and producers. This is a great opportunity for us to lay out our plans for the future and get feedback from agents.

Overall they give us high marks for how we've managed the pricing environment over the past few years and they also continue to view us as one of their top new business markets. As the commercialized market remains competitive, we remain focused on achieving pure rate increases, exceeding expected client inflation.

With the overall renewal pure price increase of 5.6% in 2014, we anticipate margin improvement in 2015 as our earn rate outpaces expected claim inflation trends while we continue to execute on claims and underwriting improvements.

For 2014, on our highest quality standard commercial lines accounts, we achieved renewal pure rate of 4% and point of renewal retention of 89%. These accounts comprise 54% of our standard commercial lines renewal book. Our lower quality accounts, we achieved pure rate of 11% and point of renewal retention of 74%.

These accounts represent 9% of our standard commercial lines renewal book. In addition for the benefits of commercial lines pricing, we've seen profitability improvement in our book as a result of focus, claims and underwriting initiatives.

Efforts to improve our hazard mix in Workers Compensation targeting specific classes of business for re-underwriting and managing rate and retention levels through our dynamic portfolio manager, have contributed to improvements in our underwriting results.

We've also seen significant improvements in claim outcomes as a result of our recently formed strategic case management unit, Workers Comp escalation model and fraud detection and recovery models.

While there is still more work to do, the improvement in our Workers Comp combined ratio and the stability of our loss reserves with no prior year causality development in this line for 2014 are evidence of the progress being achieved.

The underwriting initiatives to move our book to lower hazard Workers Comp risk along with claims initiatives are expected to provide five points of improvement in this line in 2015. When combined with the effects of earn rate and other expense initiatives, we expect our Workers Comp line and combined ratio below 103% for 2015.

Excess and surplus lines statutory net premiums written grew 16% for the year to $152 million and achieved renewal pure price increases of 3.4%. The 2014 statutory combined ratio for excess and surplus lines was 99.2% and included 4.3 points of unfavorable cash free reverse development.

In spite of this development, the reported combined ratio in E&S improved by 3.7 points compared to 2013. We expect the improvement to continue in the 2015.

Having to burden our excess and surplus lines operations on to a single underwriting platform and investing in our technology infrastructure, we believe we are well positioned for continued growth and profitability in this line of business.

Few areas of opportunity, already a greater share of our retail agents E&S business and aggressive growing the business through our wholesale agents across our 50 state footprint.

In 2014, we continue to see profitability improvement in personal lines with both the statutory combined ratio including and excluding catastrophes improving by more than two points when compared to 2013.

Premiums declined year-over-year as a result of our strategic non-renewal of dwelling fire polices and targeted non-renewal actions on underperforming auto and home business. Going forward, we should less premium impact on these actions and anticipate growth from our new Selective Edge product.

Personal lines renewal pure price increased 6.5% for the year with retention of 81%. Excluding the impact of the underwriting actions we took over the course of 2014, retention would have been 84% for personal lines.

We have successfully launched the Selective Edge in 10 of 13 personal line states with the remaining three to be completed in the first quarter. Also during our agency road shows, we received very positive feedback from agents on the product changes we've already implemented in personal lines and those we still have in the pipeline.

In conjunction with the changes to our small business teams, we've redeployed some members of those teams to focus solely on personal lines marketing. Overall, we believe we're well positioned for growth and continued profitability improvement in personal lines. Now I'll turn the call over to Greg Murphy..

an ex-capacity statutory combined ratio of 91 which includes no prior year casualty development, 4 points on catastrophe losses for the year, after tax investment income of approximately $105 million and weighted average shares of $58 million. Now I'll turn the call over to the operator for your questions..

Thank you. [Operator Instructions] Our first question today comes from Vincent DeAugustino from KBW. Your line is open..

Hi good morning everyone..

Good morning Vincent..

I guess the first thing in order is just congrats on making a long dated call on the 92 and getting there. So, the non-CAT weather headwinds certainly didn’t make it any easier, so good to see the guidance moving in the right direction beyond that.

So I guess, on that topic to start with John if I heard the numbers right, on the assumed 5 point improvement on Worker's Comp.

if I think about that as far as moving the aggregate combined ratio, it should be about 70 basis points and then comparing that to the 92 guide for 14 and then some summarization of that higher elevated non-CAT weather that kind of leaves about 30 basis points left for just rate and other non-rate underwriting actions otherwise.

So just thinking about those two buckets it just seems like the one point guide to guide ex-CAT margin kind of movement there might seem to be some level of conservatism into that. So I just want to see if my math is right and then just any color you guys may have on thoughts there..

Your math is right, but there are a lot more moving parts than just those that you have articulated. So, obviously as you pointed out in your initial lead-in, we did have some higher non-CAT property losses this year. You have to make some allowance for expectations around that.

So basically, it is just an overall view of what we believe to be a realistic estimate of what we are going to be able to achieve. We may be a little bit better. We may be a little bit worse at the end of the day..

And then, this is Greg and the other thing I just wanted to, you know there in 2013 there is also an elevated, there is a little bit of higher expense ratio. We got along very big initiatives as an organization, you know the company very well.

You know everything that we do in terms of modeling and there isn’t a lot that the larger organizations do that we aren’t doing as a company and we are making some infrastructure investments in our IT area that I have added a little bit more to our expense ratio that are planned that will start to round out all of our major systems as you know we are doing in the billing system this year.

And I might say this year that started 2014 there is a lot of rearchitecture that happened both our commercial lines underwriting system and the first one is underwriting system and so there is a lot that we have that just started to impact.

The other side on expense ratio is, we will be hitting at full strive some of our profitability product gets to our profit base compensation has gone up and then the other squirrely thing even though we have truncated our pension plan and not adding anymore years of service or age effective in April 2016, based on the very low interest rate environment there is a much larger pension charge in the 2015 number versus 2014.

So I dare mention there's a lot of what we, I just wanted to show you the comps street. So you mentioned our constant running at about 10 and like John said there are 500 basis points attached with one part, but overall we expect comp to be at or below box rate. So it's 7 full points down and like you say, you got the math right.

It represents approximately 20% of our premium. So you do have that right..

Okay good color there, thank you.

And then just one quick follow up, on the reinsurance renewal, any notable changes on terms and conditions, I mean anything either from a CAT window standpoint or included, excluded coverages or anything of that side? Secondly on the sort of new CAT coverage, I guess in the last few years how often would you have tapped of that coverage if it had existed prior?.

Well on the new CAT we would not have tapped to that at all and in fact in the history of the enterprises that we purchase it wouldn’t have tapped that. But I will say that the attachment point of $5 million for the CAT or for the E&S business attaches at the same probability point as our $40 million attachment point for our standard lines program.

So it's roughly a similar style of event for the E&S and it is as we said for those events that hit outside of our 22 states footprint. As far as the CAT renewal, it came in as we said similar to what you're seeing in the marketplace where rates were down a little bit and we were able to extend our average cost from 96 to 120 hours..

Okay, thanks very much guys..

Thank you. [Operator Instructions] Our next question comes from Scott Heleniak from RBC. Your line is open..

Hi. Good morning..

Good morning, Scott..

Just a couple of questions here, first you touched on your comments about adding new agencies over the next few years and I was wondering if you could kind of expand on that a little bit and is there any specific geographies that you're targeting as you're going through that.

And I would assume it would be agencies that carry commercial and personal lines, but anything you can share on the new agency plans?.

Yes sure, Scott. This is John. So I think Greg had laid out the key drivers that we think about in terms of maximizing our market share in each of our 22 primary operating states, the two levers being the share of the overall market controlled by our agents and then our share of wallet of that agency premium.

So we look at those two metrics and where we currently stand, we do have some of our states and they tend to be the states who have been in for a longer time, where our agents already control close to that market share and our real focus is just on driving share of wallet higher.

But in a lot of our other states, we do in fact have agency groups that control a lot less than that number. So for us, this is a reaffirmation of our franchise value model.

So that maintained -- remains the core of our philosophy, but we think with that, there is a lot of headroom to add agents to get them to that sort of -- to get our overall agency plan to that 25 kind of target over the next several years. This is not the sort of thing that happens in a year or two.

You build into this and make sure you got the staffing in place to support it and then at the same time, you drive the share of wallet higher, but we think this is opportunity we're well positioned for.

It doesn’t take a lot of additional investment and it allows us to really better capitalize on the capacity and the new business production capacity we think we already have, but there are, I would say few states excluded from the opportunity when we think about what we're -- how we're currently positioned..

Okay. And then I was just curious -- I know on the Brown & Brown call, they were pretty upbeat about their kind of core small middle market customer recovering -- just seeing better trends benefitting from the economy.

Just wondering if you guys are seeing the same sort of positive trends, what are you hearing from customers and do you feel like creating a bigger benefit from the economy, the past few quarters compared to what it was maybe a year or two ago..

So I think, Scott, this is John again, one of the key measures to look at what's happening with the economy with our customers, is what's happening with order premium and we've seen a pretty consistent trend of positive order premium, which is a big change from just a couple of years ago.

So I think that's the best indication of what's happening in the economy and how we would expect to see that impact our premium on a go-forward basis..

Okay. Do you have that by chance for the quarter? If not, I can get it later..

We saw order premium total for the quarter was $5 million..

$5 million, okay..

And [over] [ph] it was zero in the fourth quarter of 2013. And then Scott, just to add to that, the other item to look at and we certainly measure very closely is endorsement premium as well.

So both the personal and the commercial line side you see endorsement activity where our vehicles and properties are being added for schedules and I think that's also been a nice favorable trend for us over the last couple of years..

Okay.

And then anything you can share on some of the early claim accounts that you're seeing from the winter storm, so we can know -- New England and some of your states in New York and New Jersey, but if there was any detail you had on that early on?.

No detail on this line, obviously it's pretty early in the process..

The one thing I would point out on that was having at least in New Jersey and New York and states of emergency that were declared, certainly maintained or roads were clear, so in terms of auto accidents and other things, there weren’t a lot of people out on the road. So that was a major benefit in terms of reducing our auto frequency..

Yes, well -- but also the storm could have been a lot worse in a lot of places too, but -- and then the other thing I just….

Remember, don't write personal lines in Massachusetts..

Right. Yes, okay. And then just last question on Personal Lines, I think you guys talked about just how the over the past few years, the fine and monoline homeowners you've kind of been reducing that -- that's been reduced a little bit just because of the -- you're certainly not renewing those.

Just wondering how -- I guess it sounds like you're pretty much done with that and then if you could touch on that and then just the Selective Edge product, what kind of -- when exactly was that launch and what kind of early reception you're seeing there?.

Scott, this is John again. So on the targeted non-renewals, strategic non-renewal arising from the dwelling fire line that is largely complete at this point. So don't anticipate a significant impact, which -- New Jersey is the one state that will continue a little bit into 2015.

But we see a much more normalized retention because the impact there will continue to be diminished and I would say the same thing applies to some of the targeted monoline home non-renewals in particular that really could happen in 2014, but we don't anticipate a significant impact going forward. So that's the retention side of your question.

With regard to the Selective Edge, that wasn’t that launch on January 1 in 10 of our states and the remaining three states have been improved and they're finishing up the programming and they'll launch in the first quarter.

That's really designed to provide some coverage enhancements and additional charge, but coverage enhancements for the consumer that's going to package up and buy both the auto and home from us, we've gotten very positive feedback on it.

I think the only reaction has been very good by our agency partners and we think that's going to really help us target the customer that we really believe is a great fit for us from a value proposition perspective and the customer who doesn’t necessarily view the personalized product as a commodity.

And we think those opportunities are up and down the wealth scale. This is not just a high net income target. We think there are folks in that consultative buyer category up and down the wealth spectrum..

All right. Appreciate the answers, thanks..

Thank you. And at this time, I am showing no further questions. [Operator Instructions] I am showing no further questions..

Okay. All right. Just want to make sure no one punched in later. All right. So thank you very much for your participation and if you have any follow-up questions, please contact Dale or Jennifer. Thank you very much..

Thank you. That does conclude today's conference. You may all disconnect at this time..