Greg Murphy - Chief Executive Officer John Marchioni - President, Chief Operating Officer Dale Thatcher - Chief Financial Officer Ron Zaleski - Chief Actuary Jennifer DiBerardino - Vice President, Investor Relations, Treasurer.

Vincent DeAugustino - KBW Mark Dwelle - RBC.

Good day everyone. Welcome to the Selective Insurance Group’s First Quarter 2015 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. Ma’am you may proceed..

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 the first quarter results..

Thanks Jen and good morning. We are off to a good start in 2015 despite another difficult winter throughout our footprint. For the quarter we reported operating income per diluted share of $0.48, up from $0.23 a year ago.

Our statutory combined ratio for the quarter was 93%, improving from 100.8% a year ago and our underlying combined ratio excluding CATs and prior year causality development improved by 4.5 points to 91.9%.

As you analyze the results for the quarter, I’d like to remind you that last year’s first quarter included a $0.09 EPS benefit and a 1.7 point statutory combined ratio benefit from the sale of our self insured group business. While CAT losses were elevated due to winter weather at 5.3 points, they were lower than the 7.5 points reported a year ago.

Non-CAT property losses were also elevated due to weather at about 2 points above expectations for the quarter, but about 5 points lower than first quarter 2014. Favorable prior year casualty reserve development in the quarter was $20 million or 4.2 statutory combined ratio points, compared to $14 million or 3.1 points a year ago.

The development was related to the benefits of our underwriting and claims initiatives over the past several years, while our overall reserve position continues to be very strong. For the quarter overall statutory net premiums written grew by 9% driven by steady retention levels, renewal pure price increases and higher new business.

Standard commercial lines premiums were up 9% benefiting from renewal pure price of 3.5%, steady retention of 84% and a new business increase of 28% to $88 million. For the quarter this segment generated a statutory combined ratio of 89.7% compared to 100.3% a year ago.

The improvement was drive by eared rate exceeding expected claim inflection, favorable reserve development and low CAT and non-CAT property losses. Including 7.3 points of favorable development, workers compensation reported a 90.7% statutory combined ratio in the quarter, improving approximately 15 points from a year ago.

The favorable development is largely attributable to continued lower than expected frequencies. We are also beginning to see some decreases in severities, resulting from the claims initiatives we have instituted to address workers comp results. Generally liability also reported strong profitability with a 73% combined ratio.

This line benefited from 17.4 points of reserve releases, also largely driven by continued favorable claim frequencies. Our strong pricing in recent years is also contributed with these improved results.

Partially offsetting the overall favorable reserve development was adverse development of $1 million and $3 million in commercial auto and BOP respectively.

The change in commercial auto is reflective of trends being seen in the broader industry, while BOP was driven by a few large claims in recent years that were responded to and our reserving process. Standard Personal Lines statutory premiums declined 3% in the quarter as targeted non-renewals and lower new business impacted production.

Retention remained at 82%, while renewal pure price was a strong 6.4%. The statutory combined ratio in personal lines was 105.1%, including 8.7 points of catastrophe losses. In the prior year period the statutory combined ratio was 104.5%, including 11.1 points of CAT losses.

Overall the reported combined ratio of 113.7% in the quarter compared to 121.7% a year ago, as extreme winter weather impacted both periods. On an ex-CAT basis the combined ratio improved 3.1 points in the first quarter of 2015. Renewal pricing in this line remains strong at 9.9%.

Personal Auto combined ratio in the quarter was 106.7%, up from 100.9% a year ago. This quarter no development was recorded in this line compared to over 5 points of favorable prior year casualty development in the first quarter of 2014. Renewal pure price for the quarter was 3.5%.

Excess and surplus lines continue to generate strong growth with a 26% increase in statutory net premiums written. The E&S statutory combined ratio in the quarter was 102.1% compared to 97.9% in the first quarter of last year. Adverse reserve development of $1 million added 2.6 points to the combined ratio this quarter.

Also included is the impact of the catastrophe losses and two large fires in the quarter, which together increased the combined ratio by 0.9 points compared to a year ago. Moving to the investment portfolio, after tax net investment income declined to $21 million from $26 million in the first quarter of 2014.

The decline was largely driven by losses in energy exposed limited partnerships that were negatively impacted by declining oil prices in the fourth quarter of 2014. Strong alternative income in the first quarter of last year also made for a difficult year-over-year comparison.

As a result of lower alternative investment income and the continued low interest rate environment, our earned after tax portfolio yields declined to approximately 1.7% from 2.3% a year ago. The after tax new money yields averaged 1.8% in the quarter as we continue to invest in high quality fixed income products.

Cash flow increased in the quarter as new money yields hedged higher from the fourth quarter despite the decline in treasuries. However new money yields were still below our 2% expectations for full year 2015.

Our fixed income portfolio continues to be highly rated with an average credit quality of AA minus and a duration of 3.7 years, including short term investments. Within the overall portfolio the pretax unrealized gain position increased to $128 million from $124 million at the end of 2014.

The pre-tax unrecognized gain position in the fixed income held in the maturity portfolio was $15 million or $0.17 per share on an after tax basis.

On the income statement you will notice a higher that usual realized gain in the quarter, which reflects the sales from equities as we transitioned our equity portfolio to better diversify exposure, while still focusing on a dividend income strategy. Equities remain at 4% of invested assets and the portfolio continues to be limited to U.S.

Listed Securities. Surplus and stockholders equity each ended the quarter at $1.3 billion, while book value per share grew 3% from year end to $23.11. Annualized operating ROE was 8.5% in the quarter, in line with our weighted average cost of capital of 8.5%. Now I’ll turn the call over to John Marchioni to review Insurance Operations. .

Thanks Dale. Insurance Operations delivered solid overall statutory results in the quarter, a combined ratio of 93% and ex-catastrophe combined ratio of 87.7% and net premiums written growth of 9%. These results are evidence of our strong position in the market and ability to properly growth our business.

One of the company’s strategic imperatives is to grow, but not at the expense of overall profitability. Last quarter we announced structural changes to our small business needs. The purpose of these changes was to improve our underwriting efficiency on smaller accounts, while allowing the AMS’s to increase their focus on new-market opportunities.

We also told you of our intention to increase our share of wallet with existing agents by deploying more agency management specialists or AMS’s. In the first quarter 12 new AMS’s where hired and we added 25 agencies within our footprint.

These changes contributed to the new business growth of almost 30% as both submission and court activity increased in the quarter compared to last year. We are pleased with these early successes.

The market seems to be acting in a rational manner, as the low interest rate environment dampens overall returns and pressures companies to generate better underwriting margins. In this context strong distribution partner relationships, technology and superior underwriting capabilities provides Selective with ample opportunity to grow profitability.

On the renewal portfolio, we continue to balance rate and retention by providing our underwriters the tools they need to make informed decisions. During the first quarter standard commercial lines retention remained strong at 84% and renewal pure price was 3.5% on a written basis.

This is approximately 50 basis points above our expected claim inflation, while earned rate is about 200 basis points above claim inflation. For our highest quality standard commercial lines accounts, which represent 53% of our premium, we achieve renewal pure rate of 2.3% and point of renewal retention of 91.3%.

On our lower quality accounts which represent 10% of our premium, we achieved pure rate of 7.6% and point of renewal retention of 83%, which offers an opportunity moving forward to push for additional rate even if retention levels decline.

It is important to have this level of pricing sophistication to survive and thrive in this more competitive market. In addition to pricing an excess of expected claim inflation, underwriting and claim improvements are contributing to our profitability.

Workers compensation which has been a challenging line for us and the industry has been an area of emphasis. On the underwriting side, we are targeting specific classes of business for re-underwriting and increasing our mix of lower hazard grade business.

In claims we are seeing significant improvements and outcomes as a result of our strategic case management unit, workers compensation escalation model and fraud detection and recovery models.

These efforts have us well positioned to achieve the guidance that we laid out in the beginning of the year for our workers compensation combined ratio below 103%. As Dale mentioned, our combined ratio for the quarter was 90.7.

In excess and surplus lines we see opportunities to write a greater share of our retail agency E&S business and aggressively grow through wholesale agents across our 50 state footprint.

Having introduced a new rater in the fourth quarter of 2014, we intend to leverage this technology with our distribution partners and will continue to invest in our technology infrastructure by implementing a new policy issuance system. We write contract finding business on the small end of the E&S spectrum with an average policy size of $3,100.

Given our experience in writing high volumes of low average premium accounts and the fragmented manner in which this business is currently placed in the market, we believe we are well positioned for continued growth and profitability in this line of business.

In standard commercial lines production was impacted by several factors that resulted in a 3% decline in statutory net premiums written. First as we’ve implemented ongoing rate increases and made updates to our rating models, there has been some expected disruption to renewals.

Despite the disruptions, these are important actions to improve the quality and rate accuracy of our book. Second, the strategic non renewal of dwelling fire policies and targeted non-renewal actions on underperforming business, although diminishing continue to provide a headwind to production metrics.

While dwelling fire and non-renewal started at the beginning of 2014, we began non-renewing the Jersey policies in July. This was the biggest part of our dwelling fire book and as we progress through the year, we will see less premium impact from these actions. And third, new business has declined due to our overall competitive position.

We feel the new product rollout of The Selective Edge and future rollouts planned for this year will strengthen our competitive position as we target the cost effective buyer. In fact The Selective Edge rollout continues to be well received by our agents as we held sales meetings across our footprint and use of our enhanced endorsement is increasing.

On the other side the combination of our Edge and Summit endorsements accounted for 25% of new business, up from 15% that Summit represented in the first quarter of 2014. For Home we now offer four levels of coverage, and in March our Edge product accounted for 20% of new business.

Overall, we are very pleased with our underwriting progress and momentum. Now I’ll turn the call over to Greg Murphy..

Statutory combined ratio ex-catastrophes of 91, not including any additional reserve development either favorable or unfavorable; catastrophe losses of four points 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 comes from the line of Mr. Vincent DeAugustino from KBW. Sir, your line is open..

Hi, good morning everyone. Thanks for taking the questions..

Good morning Vince..

Good morning Vince..

So, fun topic here, workers comp schedule pay.

If we look at the closed claim ratio, in accident year ’14 we see that drop off pretty substantially and I was hoping to get some color on to what extent some of those claims initiatives in the investigative aspect of those; might be they are keeping the claims open longer or from the other side of any of the claims consolidation as far as physical location and staff, if that’s had any temporary delay on that metric.

And then on the flip side, if we look at the average paid claims metrics, we see that go up about 25% on accident year ’14 and so I just wanted to see if we can get some color on those two trends and then connect that with some of the severity comments that you had this morning. Thanks, I know that’s a lot..

Yes, I know, it is a lot and I would say that the kind of crowd us a little bit – obviously moving all the claims to Charlotte, I don’t think created any outrageous dislocation relative to settlement patterns, because I think we had done very orderly by a very seasoned group of people that we have in that operation now and I would say that our intent ultimately is to increase disposal rate and you should see that in terms of number of claims being settled earlier, but I think it’s a little early to sit there and start drawing absolute 100% conclusions either way.

I do think you will see the data pushed around a little bit relative to the new staff and I would comment overall that some of the increases obtained, some of the savings that your starting to see on a claim-by-claim basis is really a result of our strategic unit and the benefits that they are having on the more serious claims or potentially serious claims, and your starting to see that flow through.

But the true benefits of having a medical only unit, having some of the things that we’ve done, I think you’ll start to see those more so as we move through ’15. So I wouldn’t draw too much conclusions either way right now on the data.

It’s just too early relative to when all these changes are done and you need more time for this to manifest itself through..

Okay, fair enough. There’s certainly a lot going on there. And John, on your AMS comments for this morning, I just wanted to make sure I understood or at least caught the comments right.

So the new business improvement, you would attribute more to the AMS strategy than the increased agency deployment strategy or is that really just one of the same and comprehensive kind of between the two..

Yes, that’s a good question. So the overall agency appoints are not all that significant in the overall picture and when you think about the time that takes to ramp up a newer appointment, that’s not a major contributor in the quarter. I think the major drivers you pointed to and it’s not just the addition of AMS’s and their focus on middle market.

Its moving more small accounts into these small business teams, giving them a little bit more authority to get business written than they have had in the past, which has the double effect of increasing our performance and efficiency and throughput on small, but also allowing AMSs more time to focus on what’s a little bit more of a longer time term sales process of acquiring middle market business.

So I would say both of those are generating performance and the other point would be new AMSs take some time to get up and running in the territory and we think that that provides us some real opportunity going forward as these folks start to mature in these roles and really help us drive greater market penetration with our existing agents and make strategic appointments across our footprint where it makes sense..

And this is Greg. I will just say that John articulated those two levers that we look at in the business. The first is the agency share and estate, which is currently 14.

Your question to John is that 14 as we’ve indicated, we want to push that up to 25 over time, that will happen much slower, but the share of wallet aspect which is around seven country wide, the goal is to push that to 12.

I think you’ll see the benefits of that measurement come through NPW [ph] much quicker than you’ll see the benefits of premium coming through by increase in the agency representation from 14 to 25 for the reasons John just went through.

For the share of wallet you should start to see the benefits of that coming through NPW way quicker than the agency representation in the state..

Okay, great, thanks for that and then just one last one. On the 3.9% kind of rate trend this quarter versus the 4% plan, if that were to continue to decelerate throughout the year, can we assume that a lot of the other initiatives that you have going on can pick up the slack and that’s why we get the affirmation on the 91 ex-CAT goal there..

Right, this is John. I think we certainly look at loss ratio improving year-over-year as a combination over the past couple of years.

The earn rate over trend has been a big driver, but as we’ve transitioned through ’14 into ’15 and look forward, we do expect to continue to get a bigger contribution on the loss ratio side from the underwriting initiatives, as well as the claims initiatives as we see rate come under a little bit more pressure and we continue to focus on driving rate right around the loss trend target, but we think there is more improvement on the loss ratio for mix and claims..

And there’s again just overall I would say that we don’t expect any weakening of price in the personal lines area, particularly on the whole front, so you got to remember the three, the four is an aggregation of all three segments. So we don’t envision any weakening of that price at all and then the same thing is true, E&S price needs to improve.

That needs to uptick and I need your comments that are more directed around the commercial lines aspect and obviously when you weight them out, that’s at the lowest level of the three segments, is the expected level of the commercial lines pricing. .

All right. Now, thank you very much and a nice quarter guys. Congrats. Thanks..

Thank you..

Thank you very much. [Operator Instructions]. Our next question comes from the line of Mr. Mark Dwelle of RBC. Sir your line is open. .

Yes, good morning. .

Good morning Mark. .

Good morning Mark..

I apologize if you guys covered this earlier; I was little late getting under the call. The 4.2 points of favorable development, can you allocate those between the – you probably already did, between personal and commercial and was there any meaningful amount that was in the comp line. .

Yes Mark, basically the comp line has $5 million of favorable development, the general liability line had $20 million of favorable development, and then we saw the BOP and commercial auto each had adverse development of $3 million on the BOP and $1 million on the commercial auto and then E&S also had $1 million of adverse development, so none showing up in the personal lines.

.

Okay, that’s helpful, thank you. On the workers comp, I mean that’s the best number I’ve even seen; it’s probably a record. What do you – how do I ask this question.

What do you think the real sustainable long term rate is there? Do you think there were anything in the quarter that kind of made that number better than expected or is it just the cumulative fruits of the long period of labor that has kind of finally gotten us to a very good place?.

I would reiterate our guidance that we expect to deliver below 103 combined ratio for workers comp for the year. Obviously a single quarter can have different volatility in it.

So clearly it’s the culmination of a lot of hard work that we’ve been putting into the works comp line and it’s early yet, but all signs are favorable and we are encouraged by that. .

On the underlying trends, is there anything noticeable in either loss frequency or loss severity that you might be enhancing the results or I’m just trying to get an understanding of the number?.

We are seeing decreases in both frequency and severity. The frequency side, we attribute that this state is again to the fact that we made a big push to modifying the underwriting side of things to go the lighter hazard classes and that’s really showing some positives in terms of the frequency of claims.

And then the centralization of the claims handing in Charlotte with the strategic case management unit seems to be having a real positive impact on the severities of claims. So on an overall basis as I said it’s earlier, but all signs are very encouraging. .

Its good stuff. In the commercial auto, the adverse development there, is that older accident years or more recent. .

It’s a little bit more recent. It’s in the ‘13 and ‘14 kind of timeframe that we are seeing that. But again, it’s only a $1 million adverse development.

So it’s not a big number for a very big line of ours, but as you know us well, we like to stay ahead of any kind of negative trends and we react much more quickly than anything that we see that even has a whiff of negativism. .

No worries, it’s defiantly I was just trying to get some sense of there was something old that boomerang done here or something that you are being proactive on. I think I’ll stop there. That’s all are my questions. Thank you..

Thank you very much. [Operator Instructions]. And speakers, at this time we don’t have additional questions. You may proceed..

Well, thank you very much for your participation this morning. If you have any follow-up questions, please contact Jennifer or Dale. Thank you very much..

And that concludes today's conference. Thank you all for participating. You may now disconnect..