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

Scott Heleniak - RBC Capital Markets Mike Zaremski - Balyasny Alison Jacobowitz - Bank of America Merrill Lynch.

Good day, everyone. Welcome to the Selective Insurance Group’s Second 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. .

Good morning and welcome to Selective Insurance Group's second quarter 2015 conference call. This call is being simulcast on our website and a replay will be available through September 1st, 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-Q 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 today on the call 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 the quarter's results..

Thanks, Jen, and good morning. We are very pleased with the results posted this quarter which reflect the benefits of the strategic underwriting and claims initiatives we have implemented in our insurance operation. In the quarter we recorded operating income per diluted share of $0.62, up from $0.46 a year ago.

Our statutory combined ratio for the quarter was 93.5% including from 97.5% a year ago. The underlying combined ratio excluding ratio excluding catastrophes and prior year casualty development improved by 2.7 points to 92.7%.

Cat losses for the quarter were 4.9 points in line with our second quarter expectations and lower than 5.9 points reported a year ago. Non -Cat property losses were one point above expectations in the quarter, or 1.3 points lower than second quarter 2014.

Favorable prior year casualty reserve development in the quarter was $20 million, or 4.1 statutory combined ratio points, compared to $17.5 million or 3.8 points a year ago.

A favorable development is related to the benefits of our underwriting in claims initiatives of the past several years while our overall reserve position continues to be very strong. The quarter overall statutory net premium written grew by 11%, driven by steady retention levels, higher new business written and renewal pure price increases.

Standard Commercial Lines premiums were up 13%, strengthening from renewal pure price of 3%, steady retention of 83% and our new business increase of 39%. For the quarter this segment generated a statutory combined ratio of 90.1% compared to 95.5% a year ago.

The improvement was driven by earned rate exceeding expected loss inflation, favorable reserve development and lower non-cat property losses, including 11.3 points of favorable development, workers compensation reported an 89.2% statutory combined ratio in the quarter, improving approximately 23 points from a year ago.

The favorable development is largely attributable to the continued lower than expected frequency. We also continue to see a decrease in severity resulting from the claims initiatives we have instituted to address workers' comp results. General liability also reported strong profitability with a 77.6% statutory combined ratio.

This line benefited from 13.4 points of reserve releases, also largely driven by favorable claim frequencies. Earned renewal pure price increases exceeding expected loss inflation have also contributed to the improvement.

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 continued to be strong at 6.7%. The Personal Lines statutory combined ratio was 105.4% for the quarter, including 11.5 points of catastrophe losses.

In the prior year period, the statutory combined ratio was 106.1%, including 17.1 points of cat losses. Homeowners reported a combined ratio of 114.3% in the quarter compared to 124.5% a year ago, due to lower cat activity. On an ex-cat basis, the combined ratio at 90.7% was essentially flat compared to 90.5% in the second quarter of 2014.

Renewal pure price in this line remains strong at 9.2%. The personal auto combined ratio in the quarter was 106.4%, up from 100.2% a year ago. This quarter, no development was recorded in this line compared to over five points of favorable prior-year casualty development in the second quarter of 2014. Renewal pure price for the quarter was 4.4%.

Excess and Surplus lines continue to generate strong growth with a 20% increase in statutory net premiums written. The E&S statutory combined ratio in the quarter was 102.7% compared to 99.9% in the second quarter of last year. Adverse prior year casualty reserve development of $1 million added 2.4 points to the combined ratio this quarter.

We successfully completed placement of our July 1st, 2015 excess of loss reinsurance treaties which now include coverage for our E&S business. We renewed both the casualty excess of loss and property excess of loss fees with some enhancements in terms and conditions, and the same structure is expiring.

The casualty excess of loss treaty provides $88 million of coverage in excess of $2 million retention while our property excess of loss treaty provides $38 million of coverage in excess of $2 million retention. Rates on the program were reflective of the soft conditions in the reinsurance market.

Moving to the investment portfolio, after-tax net investment income declined to $25 million for the quarter from $27 million in the second quarter of 2014. The decline was largely driven by lower interest income from the fixed income portfolio and lower returns from the alternative portfolio.

The alternative portfolio continues to be impacted by the portfolio's exposure to energy exposed limited partnerships, which report on a one-quarter lag. As a result of lower alternative investment income and the continued low interest rate environment our after-tax portfolio yields declined to approximately 1.9% from 2.3% a year ago.

Year- to-date, the after tax new money yields have averaged 1.6%, as we continue to invest in high-quality fixed income product. Operating cash flow has increased this year while new money yields remain below our 2% expectation 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 decreased to $71 million from $128 million at the end of the first quarter.

The pretax unrecognized gain position in the fixed income held to maturity portfolio was $11.8 million or $0.13 per share on an after tax basis. Equities are 5% of investment assets and the portfolio continues to be limited to US listed securities which generate after-tax dividend yields of 3.4% on average.

Surplus and shareholders' equity each ended the quarter at $1.3 billion while book value per share increased 2% from year-end 2014 to $22.95. Annualized operating ROE was 11% in the quarter, which is above our weighted average cost of capital of 8.6%. Now I'll turn the call over to John Marchioni to review insurance operations..

Thanks, Dale. For the quarter and for the first half of 2015, our insurance operations have performed extremely well.

For the first six months we had an overall statutory combined ratio of 93.2, an ex-catastrophe combined ratio of 88.1 and net premiums written growth of 10%, as we leverage our strong position in the marketplace to profitably grow our business.

New Commercial Lines business growth has been very robust year-to-date, increasing 34% as both submission and court activity increased compared to last year. In fact, $90 million of new business production in the second quarter was an all time company record for new business booked in a single quarter.

We attribute this success to strong distribution partners working with our empowered agency management specialists or AMSs, as we continue to benefit from the ramp up of 12 new AMS territories added at the end of 2014. We closely monitor the quality and pricing levels of new business and remain very comfortable with both.

On the renewal portfolio, we continue to balance rate and retention by providing our underwriters the tools they need to make informed decisions. For the first half of the year, Standard Commercial Lines retention remained strong at 83% and renewal pure price was 3.3% on a written basis.

For our highest quality Standard Commercial Lines accounts which represent 55% of our premium, we achieved renewal pure rate of 2.1% and point of renewal retention of 91%.

On our lower quality accounts, which represent 9% of premium, we achieved pure rate of 7.8% and point of renewal retention of 80% which offers an opportunity moving forward to push for additional rate even if retention levels decline on that segment. Having this level of pricing sophistication is critical to be successful in the competitive market.

Competitive pressures are increasing but the market seems to be rational as a low interest rate environment dampens overall returns and pressures companies to generate better underwriting margin. No P&C Company is immune from declining yield, making disciplined pricing in the marketplace more important than ever.

As a case in point, the CLIPS survey for the first quarter of 2015 showed commercial renewal pure pricing remaining positive at 2% versus the 3.5% Selective reported in the first quarter. And we achieved second quarter renewal pure pricing in line with expected loss inflation.

We are earning renewal price increases about 140 basis points above expected loss inflation. In addition to rate, our underwriting claims initiatives also contributed significantly to our profitability improvement, as the benefits of these initiatives work their way through underwriting results.

In particular, we are very pleased with the progress we have made on our Worker's Compensation line of business. In Workers' Comp, we are targeting specific classes of business for re-underwriting and increasing our mix of lower hazard grade business.

We are seeing significant improvements in claims outcomes as a result of our strategic case management unit, workers' comp escalation model, and fraud detection and recovery model. Our results are ahead of our expectations, so we are revising our 2015 guidance to now achieve a combined ratio in Workers' Comp of under 97%.

Growth in our Excess and Surplus lines business has been very robust year-to-date with 23% increase in net premiums written which is largely attributable to new business growth of 39%. The recent implementation of a new rater is a key factor in driving new business.

We are comfortable with new business pricing levels while there are targeted segments in the renewal inventory where we would like to drive more rates.

As we roll out the pricing analytic capabilities for E&S that we have successfully implemented in our standard lines, we expect renewal pricing to move closer to targeted rate levels and E&S profitability to be more in line with Standard Commercial Lines.

Growth in Personal lines year to date has been negatively impacted by the ongoing strategic non-renewal of underperforming business and a decrease in new business. While dwelling fire non-renewals started at the beginning of 2014, New Jersey, which represents the biggest part of our dwelling fire book, began non-renewing policies in July.

The positive news is that we are experiencing stabilization in Personal lines retention. We are optimistic about the improving take up rate in the Selective Edge product, and believe this business will ultimately perform and retain better than the non Edge business. In the second quarter, 17% of our automobile new business was in the Edge product.

For homeowners, 23% of new business was issued with Edge. Effective July 1st, we rolled out enhancements to the Edge for auto including diminishing deductible, accident forgiveness, newer car replacement, and selected choice replacement cost. These enhancements to the Edge product line up nicely against our key competitors.

We are very pleased with our overall insurance operations performance, and believe we have the momentum for further improvement. Now I will turn the call over to Greg Murphy..

Thanks, John. And good morning. The strong results delivered to date demonstrate the hard work accomplished by our employees and distribution partners to achieve profitable growth.

Year-to-date top line growth of 10% reflects the additional commercial lines production capacity we've created to grow our middle market business through the expansion of our small business themes and increasing the number of AMSs These measures provide us with commercial lines new business capacity exceeding $400 million.

We are confident that we can leverage our business model to achieve this level of high quality premium production while maintaining profitability through the use of our sophisticated underwriting tools that drive pricing discipline.

Selective's organic commercial lines growth opportunity is significant by increasing our market share through the expansion of distribution partner market share and share of wallet. As we increase our distribution force over time to represent 25% of the market share in each state, a $2 billion premium opportunity will be created.

Increasing share of wallet within our distribution force to about 12% will generate another $1 billion of premium opportunity. Year-to-date, E&S net premium written growth of 23% was driven by new business which increased 39% to $47 million. The growth is coming primarily from contractors, habitational and mercantile service sectors.

At a recent E&S Producer Council meeting, our distribution partners told us that the new rating system implemented earlier this year is very easy to use and helps facilitate the flow of business. Our renewal pure price increases year-to-date was 3.8%, which was above our expected loss inflation of 3%.

Use of our dynamic portfolio manager tool to balance rate and retention on an account level resulted in Commercial lines renewal pure price increases of 3.3% for the first six months. Personal lines rate was strong at 6.8% with homeowners achieving 9.5% rate increases. Our E&S price increases were below expectations at 1.5%.

However, we anticipate driving more rates in the next two quarters. With our ongoing success in increasing rate in Commercial and Personal lines, we expect to achieve overall renewal pure price increases of just below 4% in 2015.

The commercial lines marketplace is in transition as P&C carriers with profitability are aggressively pursuing new business opportunities, while less profitable companies are trying to improve their combined ratios.

Many of these companies do not have sophisticated underwriting and pricing tools necessary to granularly price and identify underperforming business which makes the renewal inventory vulnerable as they attempt to socialize rate changes. The industry pressure on underwriting performance is intense due to the low interest rate environment.

The industry expected ROE from its investment portfolio is approximately six points, and we believe the industry wide book yield will continue to be under pressure for the next three year period. To compensate for lower ROE contribution from the investment income, companies will need to be forced to generate profitable combined ratios.

We feel we have an advantage in this environment with our underwriting and investment leverage, as well as the superior underwriting and pricing tools we use to manage and monitor profitability at a very granular level.

As we reflect on the strong first half results and our expectations for the second half of the year, we offer the following 2015 guidance.

Statutory combined ratio of 90%, an improvement from the previous guidance of 91%, excluding catastrophes and any further prior year casualty reserve development; catastrophe losses of four points, after tax investment income revised from $100 million to a range of $95 million to $100 million; weighted average shares of 58 million.

Now I'll turn the call over to the operator for your questions..

[Operator Instructions] Your first question today comes from Scott Heleniak, RBC Capital Markets. Please go ahead with your question..

Yes, good morning. Just wondering if you could touch a little bit more on the Commercial lines growth is up double digits which was nice. And I know you talked last quarter and this quarter again about the new AMSs and the new agents.

Wondering how much of the growth is actually coming from just getting more business, gaining share with your existing agency base as well. I don't know if you could touch on that a little bit..

Yes, Scott, this is John. I can start and then Greg can certainly jump in. We don't separate out the growth -- we don't disclose the growth between new stores, new storefronts and existing storefronts. We monitor that internally and our regions plan in that regard.

And you would attribute in most part but not entirely the growth from existing storefronts to track with growth with existing AMSs. Now the new AMS territories we've created aren't entirely new agency appointments. They've got some of the existing agents being moved. But there's clearly the combination of those two factors.

The addition of AMSs, the ramp-up of new agencies as well as better penetration of existing agencies which we track between business they control and business that's new to the agency are all driving that increase in new business.

Now as Greg indicated when he referenced the capacity number, we think we have additional capacity with the resources, the agents, and the appetite and product portfolio we've got deployed. So we continue again assuming the market continues to be rational, I think that there's more upside for us in each of those areas ..

Yes, I would say, Scott, again when you look at our production obviously -- and John went through it in his prepared comments the addition and the strength of the small business game and the staffing levels that we focused on that are creating more throughput from our agency base on a more consistent basis.

And then adding another 12 AMSs is just providing more middle market opportunity. So the immediate focus is around share of wallet and then we will follow that through market share expansion through additional distribution, and that takes a little bit longer. That is a little bit slower developing as you add new agents on and we've done that.

We have increased our agency count now to -- we are now sitting at 1,130, and that's up a few. So I think it's like John said more of it is coming from share of wallet at this time, and I believe that's where you will continue to see it.

And then over time you'll see more migration and more addition of new business coming from new agency distribution..

Okay. And I know you mentioned I think this is just E&S about the contractors' class.

Are you seeing growth ramp up in there as well in commercial lines because I know that had been a big line for you in the past? And is that something that's starting to come back as well?.

Yes so we are seeing strong -- we are seeing strong growth across the board in all of our strategic business units, industry verticals in Standard Commercial but clearly contractors has rebounded a fair amount across our footprint. We continue to focus on being more diversified in our new business than we have in the past.

But we are seeing strong growth for open contractors in both Standard and Excess and Surplus lines. We view that as a class that we've been very successful in terms of growth and profitability in the past and we also view that as a class that helps diversify our catastrophe exposure because it's a very casualty driven class of business.

But that has certainly come back..

There is also an embedded growth capability just within our existing contractors in that as the economy got worse, the contractors shrank and eliminated employees. And now as the economy has begun to show a little bit of a spark you do see some addition of employees.

So you are seeing positive audited endorsement premium with the existing employees -- and some definite growth out there across the board..

Right, exposure growth. Yes, I got you. And then on the expense ratio, I noticed that ticked up a little bit those mostly in E&S. So I was just wondering if there is any kind of one timer in there just what sort of drove that. Because I would've thought there'd be some leverage and that would probably start to improve..

In the E&S, you see a little bit of an uptick because we reevaluated some of the longer-term agents' bonus compensation there and had to book some additional dollars into that. But remember E&S traditionally runs at a little bit higher rate anyway.

If you look at our peer group, they are running at about the 34.7% kind of range, and so it is -- we are not too far off of what is expected within the E&S realm. But yes, there is a little bit more in this particular quarter..

And then the only other thing I would add to this -- this is Greg. Obviously, we saw an elevation in the pension costs in 2015 over 2014 which will add approximately $8 million to our overall expense level. That's split in between both LAE and underwriting, most of it being in the underwriting side.

And I view that as just a reflection of low discount rate that we got this year. So there was a big pop this year. And then I would say just to dovetail to Dale's comments, we are as a result of higher level of profitability and the way we compensate our agencies on profit sharing, there's a one year and three year component.

So the one year is obviously a solid year and then the three year performance continues to improve as well. So again our goal is to compensate our best performing agents for the relationship and the profitable business that they share with us.

And remember, when we demonstrated our 2015 plan with you, we actually showed expense ratio in that plan going higher as a result of the pension, higher compensation to employees and agents, as well as some of the ongoing IT investments we continue to make..

Okay, that's fair. And then I think, John, you made a comment about the E&S combined ratio over time getting better and sort of getting toward the standard, closer to standard market combined ratio.

Is that something that you expect to see signs of that in 2016? Is there anything left, any initiatives you have left to sort of get where you need to be profitability wise there?.

Yes. We haven't put out guidance overall for 2016 or by individual segments. But what you have in that line is about 2.5 points in the current year of prior year adverse development.

And as we indicated, we see the opportunity that you are referencing coming in some targeted areas on the renewal portfolio that need to be addressed through more aggressive rate and/or non renewal action. That's where that management team is focused.

We expect that to start to move through their performance relatively quickly, and our expectation is in all three of our segments in the relatively near term deliver to our target return on equity..

The only other thing I would add to that too obviously that how we process our claim activity in there is an entire section that's being visited by our corporate claims group, and that's now folded under that operation.

And just like you saw us manage whether its comp or how we are looking at our GL and what we've done in GL and commercial auto, we are going to provide that same level of discipline. And I think there's opportunity on the claims side regarding lowering our cost of goods sold and that's both on the LAE side as well as the loss side..

If I could just add as well, remember that that business has a much lower retention level typically than standard business. So new business pricing levels are equally important, and we measure that closely as well. So that mix will continue to improve based on where we're seeing new pricing levels on that side..

Okay. And finally surprised to not hearing commentary about M&A, so thought I'd just throw it out there. You guys entered -- you did M&A entered E&S a couple years ago through M&A. Just if you'd give an update on how you are viewing M&A and what kind of impact you might experience from some of the M&A that's going out there..

I'd say clearly it is a frothy marketplace right now in terms of M&A. We are always looking at opportunities, but obviously with the full prices that are occurring out there in the environment, it probably somewhat lowers the likelihood that we would be a successful bidder since we are not inclined to overpay for any enterprise.

So we are watching with great interest as everybody who is a student of the insurance marketplace. It's quite fascinating..

And I would add to all of this, consolidation inside our distribution plan I think provides Selective with some unique opportunities because we've got a lot of agents that want to up their market share or their share of wallet, as we like to refer to it with Selective.

And consolidation in the market I think provides or puts a lot of agents into a highly concentrated market situation, and I think agents generally try to avoid big concentrated positions, obviously unless they are with us. That's why that's confusing.

So our opportunity I think for expansion capability, whether it's something that we are looking at for a team of people in either our E&S division or maybe in some of our Commercial lines capability, or just the fact on the agency side, ability to get a bigger agency commitment to place more of their best business with us, I think provides us with opportunities.

So I think all the noise is good for Selective..

[Operator Instructions] Next question comes from Mike Zaremski of Balyasny. Please go ahead with your question..

Hi, good morning, gentlemen. A question on the four points of cat load guidance. If I look year to date it's running above 4%, obviously winter season just started. And I hadn't thought that there were a lot of -- if I looked at PCS data -- a lot of activity in some of your states this past quarter.

I guess also if I just look at last year, it ran close to four points as well so and I didn't think last year was a particularly active year.

So I guess how do you get comfort four points is the right level?.

Well, obviously, we spend a lot of time every year in trying to budget the right number but clearly that is the one number within our guidance that always has greater volatility around it since it so dependent on not only the events themselves, but also the way PCS may code them.

I would say that although last year and this year, you think of as having lower activity only because there aren't a lot of big name occurrences, but there are -- is a great frequency of catastrophe losses that you see in both of those years. So you do have a lot of particular events that have occurred.

If you look at how we arrive at our budget number, quite frankly if you go back a few years we very rarely had greater than an average of 1.5 points on the combined ratio. Over the last few years, we've averaged between the 4 and the 6 kind of a range.

So you are either double a historic average or you are somewhat slightly less than the current average. So we think that four makes sense. We closed the year last year with 3.2 points on the combined ratio for the full year, so four points felt like a reasonable number for this year. Clearly, we're just starting wind season.

Hurricane season on occasion has a big impact on us if something large hits us in one of our particular states, but also that's an uncertainty too. In years where they all hit Florida and the Gulf Coast, we have very little in the way of losses. So we still feel pretty good about our overall cat estimate.

But clearly if a hurricane hits South Carolina or New Jersey, we will have to revisit that estimate..

Got it, that's helpful. And lastly regarding alternative investment, if I look at the absolute level of alternatives it looks like it's been decreasing over time.

Should we expect you guys to continue lowering your allocations to alternatives?.

Basically what's happening right now is the existing alternatives are returning cash quicker than we're able to find new alternative investments that we find attractive. So there's not a distinct desire to shrink our commitment to the class. It's really more a matter of opportunity compared with return of cash from those.

So it's really dependent on us identifying new opportunities that we feel good about that we are able to provide appropriate returns and also appropriate volatility; so i.e. not too much volatility in the overall scheme of things. So that's kind of the overall view of that..

Your next question comes from Alison Jacobowitz with Bank of America Merrill Lynch. Please go ahead with your question..

Thanks so much. I was wondering if you could talk about a little bit about the growth in commercial property and what you are seeing from pricing there. I think we've been -- some of our steam declined, so we just wanted to hear your color on that..

Yes. We don't view property as an outlier. We are an account underwriter, and we write business on a package basis. We write very little if any mono line property on the Commercial line side, and certainly don't write any large property on the mono line side.

The pricing that we've seen has been relatively in line with the other major lines of business, and that has been the case throughout this cycle.

So the style of business we write and the manner in which we write it, there's really nothing that would make property an outlier in either direction from a pricing perspective or from a competitive perspective.

At this time, we have no additional questions..

All right. Well, if you have any follow up items, please contact Dale and Jennifer. Thank you very much for participating in the call this morning..

Once again, this does conclude today's conference. All parties may disconnect at this time..