Rohan Pai - SVP, IR and Treasurer Greg Murphy - CEO Mark Wilcox - CFO John Marchioni - President and COO.

Arash Soleimani - KBW Mike Doyle - RBC Capital Markets Paul Newsome - Sandler O'Neill.

Good day, everyone. Welcome to Selective Insurance Group’s Third Quarter 2017 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, Rohan Pai..

Good morning and welcome to Selective Insurance Group’s earnings conference call. My name is Rohan Pai, Senior Vice President, Investor Relations and Treasurer. This call is being simulcast on our website and the replay will be available through November 26, 2017.

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 during the prepared remarks 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 operating income, which is a non-GAAP measure.

Operating income is net income excluding the after-tax impact of both net realized investment gains or losses and 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 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 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 statement.

Joining today on the call are the following members of Selective’s executive management team; Greg Murphy, Chief Executive Officer; John Marchioni, President and Chief Operating Officer; and Mark Wilcox, Chief Financial Officer. Now, I'll turn the call over to Greg..

Thank you, Rohan and good morning. First I'll make some introductory comments and then focus on some high level themes for the quarter. Mark will then focus on our financial results, and John will review our insurance operations in more detail, providing additional color on key underwriting initiatives.

The big story in the quarter was the industry's record level of insured catastrophe losses. With some estimates for the three hurricanes, Harvey, Irma, and Marie exceeding $100 billion.

Selective's third quarter results remained solid despite the higher catastrophe losses, benefiting from our discipline underwriting, product risk appetite, and geographic concentration. We continue to execute on our strategy of maintaining underwriting discipline while finding opportunities to drive topline growth.

Our statutory consolidated combined ratio for the first nine months of the year was an excellent 92.2, an impressive result in the context of a projected underwriting loss for the industry in 2017.

Following the third quarter catastrophe losses, on underlying basis or after adjusting for catastrophe losses and reserve development, our year-to-date combined ratio was an extremely strong 90.7. The standard commercial lines and personal lines segments produced excellent overall results.

The E&S generated a loss for the third quarter and we remained focused on addressing loss development and improving underlying profitability. Our annualize operating return on equity was 11% for the first nine months of the year in line with our long-term goal of achieving 300 basis points above our weighted average cost of capital.

On a rolling one-year basis, our weighted average cost of capital is approximately 8.5%. The combined ratio for the first nine months demonstrates our strong commitment to maintaining underwriting discipline in a market that is very competitive.

Our ability to effectively balance the objectives around profitability and growth reflect; one, strong franchise model with Ivy League distribution partners; two, sophisticated underwriting tools and processes; three, efforts to enhance the overall customer experience in an omnichannel environment as customer centricity is at the heart of Selective.

The investments in building out these strategic competitive advantages will enable us to continue to generate financial outperformance over time. We maintained topline growth in the commercial lines personal lines segments, although premium volume decline in the E&S segment.

The lower level of E&S business reflected efforts to improve profitability through price increases and business mix shifts. Slight overall competitive market conditions, we've been focused on obtaining renewal price increases that match or exceed expected claim inflation.

We obtained targeted renewal pure price increases in our standard commercial lines business averaging 2.7% for the third quarter and 2.9% for the nine months. This compares favorably to the 0.6 point increase for the Willis Towers Watson Commercial Lines or CLIPS survey for the first six months of 2017.

We have, in fact, outperformed the CLIPS index in terms of price increases for the past 33 consecutive quarters ending June 30th, 2017 and expect to outperform in the third quarter as well. In addition, we view property pricing which has been under pressure in recent years as another area to drive overall pricing higher.

Our margins in the third quarter remained solid. The various catastrophe events did not meaningfully impact our 24 footprint state for standard commercial and personal lines, although, we did experience some losses in the E&S business which we write across the country.

The losses from Hurricane Irma and Harvey totaled a manageable $14 million on a pre-tax basis net of reinsurance. Industry catastrophe losses however do have larger implications. First they highlight the continued coverage for GAAP for apparel -- such as flood.

Second, will also serve as a reminder that the industry needs to anticipate and price for extreme and tail events. We take a conservative approach to managing catastrophe loss volatility by purchasing a reinsurance program that has a low retention of $40 million dollars per event.

And limit our exposure at the 1 and 250 year return period or 24% that's set to 3% of stockholders equity. Our retention is $5 million per event for the two new states Arizona and New Hampshire and for our non-footprint states.

Turning to our 2017 guidance, we won -- are maintaining our underlying statutory combined ratio excluding capacity losses of 89.5 and 3.5 from catastrophe losses. This forecast incorporates favorable reserve development for the first nine months of the year but assumes no additional prior year -- in the fourth quarter.

Two, increasing our forecasts for after-tax investment income to 115 million and three, maintaining our estimate for weighted average shares outstanding of 59.2 million on a diluted basis. From an overall industry perspective, the return on equity will likely be zero for the full year 2017.

As we think about 2018, you've all heard me say many times that "arithmetic has no mercy" when it comes to improving overall results. I believe there are four key metrics that highlight industry performance as follows.

One, earned renewal pure price changes, two expected claim inflation trends, three, expected after-tax new money rates and four, the effective duration of the fixed income security portfolio. I read a lot of commentary about projected 2018 industry underwriting performance.

However most of the opportunity to impact the 2018 underwriting performance has already passed. The industry has already recorded much of the written renewal pure price on its policy inventory that will be earned next year.

You have to understand that first selected commercial renewal pure price increases are added industry leading 2.9 points versus an expected claim inflation trend of approximately three points. Our year-to-date after-tax new money raised 220 basis points or 20 basis points higher than the rate on the sale of inventories.

The effective duration of our overall portfolio including short-term investments is only 3.6 years. When coupled with excellent operating cash flow running at approximately 17% of net premiums written after-tax investment income should increase.

Before turning the call over to Mark, I wanted to quickly remind you that we will be hosting an Investor Day in New York City on Thursday November 9. You should have already received invitations. If not please contact our Investor Relations team or make sure that you get the details.

Now, I'll turn the call over to Mark to review results for the quarter..

Thank you, Greg. I'll discuss our financial results beginning with some key metrics and trends for the company as a whole and then will also touch on our segments.

For the quarter, we reported $0.79 of fully diluted earnings per share and $0.72 cents of operating earnings per share which is up 16% from 2016 and we generated an annualized operating ROE of 10.1%. Through the first nine months of 2017, we've generated operating income of 133.7 million, which is up 14% from 2016 and an operating ROE of 11%.

This is an excellent result thus far, here characterized by significant catastrophe loss activity continue to lower interest rates and a competitive pricing environment. For the third quarter GAAP underwriting income totaled $21 million after-tax and generated 5 points of operating ROE.

In addition the investment portfolio generated after-tax that investment income of 30 million which coupled with our ratio of invested assets through equity at 3.4 times generated 7.1 percentage points of operating ROE. Consolidated net premiums written were up 4% for the third quarter and were up 5% for the year-to-date period.

The consolidated combined ratio was 94.3% in the third quarter on a GAAP basis and 93.7% on a statutory basis. On an underlying basis, prior to catastrophe losses and prior year reserve development, our statutory combined ratio was 91.3% for the quarter and 90.7% year-to-date.

During the third quarter we increased our launch total for the commercial order line of business for the 2017 accident year.

Which increased our third quarter underlying combined ratio by 1.1 percentage points and our year-to-date combined ratio by about 40 basis points resulting in some modest deterioration in our underlying statutory combined ratio from last quarter. That said our underlying combined ratio is still well ahead from 2016 for the quarter and year-to-date.

After a long -- long stretch of low to moderate catastrophe loss activity for the industry, the third quarter of 2017 was record setting according to some [Indiscernible].

Our result for the quarter included 24 million of net pre-tax catastrophe losses which added 4.1 points to the combined ratios and includes 14.12 million of net losses from Hurricanes Harvey and Irma. All this amount 6.2 million relates to Hurricane Harvey and resulted from losses incurred primarily in our E&S segment.

Hurricane Irma resulted in 8.2 million of losses primarily in outstanding commercialized segment and principally from losses in Georgia and South Carolina. The remaining catastrophe losses relate to other events. We incurred the losses from Hurricane Maria.

During the quarter we experienced $9.9 million of net favorable cash of reserve development which reduces the quarter's combined ratio by 1.7 percentage point. Our practice offsetting loss on the expense reserves is disciplined and for the part the revenues has produced favorable cash for the reserve development.

Continued favorable loss reserve development in our workers' compensation general liability lines were partially offset by this development in our commercial order line of business and in our E&S segment.

Moving to the segments, Our Standard Commercial Lines segment net premiums written were up 5% for the third the quarter and 6% for the first nine months of the year. The quarterly GAAP combined ratio for Commercial Lines was 92.1%. Results benefitted from 19.9 million or 4.5 points of net favorable prior period casualty reserve development.

The commercial line segment also experienced 14 million of catastrophe losses which added 3.2 points from the combined ratio including 7 million from Hurricane Irma. In our Standard Personal Lines segment, net premiums written were up 7% for the third quarter and were up 5% year-to-date, benefiting from increased opportunities Personal Auto.

Personal Auto net premiums written were up 30% for the third quarter of 2017. The Personal line GAAP combined ratio of 88.7% was impacted by 3 points from catastrophe capacity losses.

We are pleased with our personal line book with homeowner's operating costs close to our long-term target on an underlying basis and order position for favorable pricing environment.

Our flood operation contributed $2.2 million of claims handling fees during the quarter with 1.2 million related to Hurricane Harvey and Irma with Harvey driving the majority of these fees. In our E&S segment, net premiums written declined 4% for the third quarter but are up 2% year-to-date.

The GAAP combined ratio of 120.4% including 10 million or 18.4% of adverse prior year casualty reserve development and 7.3 million or 13.5 point for catastrophe losses. The prior year reserve additions principally relate to high expected loss severity fact -- for the years 2015 and prior.

While we are disappointed with the reserves strengthening, we believe the steps we've been taking increased pricing and improved the business mix will result in improved margins over time. The catastrophe losses this quarter included 5.3 million from Hurricane Harvey.

We can also expand this -- our overall GAAP expense ratio was 33.9% for the third quarter which was down 188 basis points from comparing quarter. On a statutory basis the expense ratio was down 130 basis points from the year ago period that's -- 3.2%.

We continue to see category -- full efficiency in cost savings while continuing to invest in our employees and key initiatives around geographic expansion enhancing our underwriting tools and the overall customer experience.

For the first nine months the statutory expense ratio is down a 100 basis points compared to the prior year period reflecting our disciplined approach to expense management.

Other expenses which are principally comprised the holding company costs and long-term compensation were also down relative to the comparative quarter, but elevated relative to our expectations. This is primarily due to higher costs related to long-term stock compensation arising from the strong appreciation of our share price till September 30th.

As we highlighted last quarter, we continue to expect the expense savings in this line item due to the restructuring of a long-term stock compensation plan we completed earlier in the year, although there is some volatility in this line item given the variable accounting treatment for a portion of the plan. Turning to investments.

For the quarter, after tax net investment income was 19% from a year ago. Fixed income securities which represents 91% of our portfolio, experienced an increase in after tax net investment income resulting mostly from higher book yield.

Our fixed income portfolio is highly rated with an average credit quality of AA- and a 3.6-year effective duration, including short-term investments. The after tax yield on the fixed income portfolio averaged 2.2% during the quarter compared with 2% a year ago.

The due money after tax yield on the fixed income portfolio during the third quarter was 2.3%. Alternative investments, we’ve reported on a one quarter lag recorded a very strong pre-tax gain of $2.7 million in the quarter. The results were driven by a solid performance in the private equity portfolio.

Risk assets, which principally include high yield fixed income securities, equities and alternative portfolio are up modestly to 7.6% of total invested assets, went 7.1% at year-end.

We’ve been gradually diversifying our investment portfolio and will likely continue to modestly increase our risk asset allocation over time depending on market opportunities. Our balance sheet remains strong with $1.7 billion of GAAP equity at September 30th.

Book value per share increased 3% for the quarter and plus 10% for the first nine months of the year benefiting from strong earnings and net unrealized investment gains. We have increased our quarterly dividend by 13% to $0.18 per share after taking into account our strong financial and liquidity position.

We are adequately capitalized to support our expected growth and continue to target a premium to surplus ratio of approximately 1.4 times, which is about twice the industry average.

We continue to adopt the conservative stance with respect to managing our underwriting risk appetite, investment portfolio, reserving processes, reinsurance buying and catastrophe risk. This allows us to maintain higher operating leverage than the industry as a whole with each combined ratio point equating to about a point of operating ROE.

This model positioned us well to generate superior returns in today's low interest rate environment. With that, I’ll turn the call over to John to discuss our insurance operations..

Thanks, Mark and good morning. Our focus remains on finding opportunities for profitable top line growth by leveraging our franchise agency relationships, unique build underwriting remodels to sophisticated underwriting tools which allow us to segment and price risks on a granular basis.

We've often talked about our long-term growth strategy within our footprint stage for commercial lines. We see to appoint new agents in our current markets to represent 25% of available commercialized premium and growing to 12% share wallet with our appointed agents.

Together, this target represents an approximately 3% commercial lines market share and an additional premium opportunity of more than $2.5 billion in our 24 state footprint. So far this year, we've appointed 73 new agents in our footprint excluding of our new states of Arizona and New Hampshire that will continue to drive our market share higher.

Effective July 1st, we open two new states on our geographic expansion program with the launches of our product in Arizona and New Hampshire. We opened Arizona with 16 agencies of points and New Hampshire with 10. In each case, these agencies control about 25% of the available commercial lines premium.

We're pleased with the receptivity and performance of these two new markets and expect to write approximately $9 million of net premium by end of the year. Our regional office in Arizona will serve as the underwriting hub for our Southwest expansion which also includes Colorado in early 2018 and New Mexico and Utah by the end of next year.

We continue to invest in tools and technologies that strengthen our underwriting capabilities and allow us to obtain the right price for a given risk.

Our new Underwriting Insights tool which we deployed to our new business underwriter's earlier this year provides real-time insights into how each prospective account compares to similar accounts already in the portfolio.

This tool provides our field underwriters with high quality information at the time of decision and should improve overall risk selection and operational efficiency. Turning to our operations. Our standard commercial lines segment which represented 79% of total year-to-date net premiums written again produced extremely strong results.

Solid net premiums written growth for the quarter was driven by stable retention of 85%, new business growth of 9% and renewal pure price increases averaging 2.7% percent. Overall, competition remains fairly aggressive, especially for larger size new business accounts and low hazard workers compensation.

We constantly monitor our renewal portfolio on a granular level based on profitability expectations using our dynamic portfolio manager underwriting tool. For the highest quality Standard Commercial Lines accounts which represented 49% of our premium in the quarter, we achieved renewal pure rate of 1.2%.

On the lower quality accounts which represented 11% of premium, we achieved pure rate of 6.5%. This granular approach to administering our renewal pricing strategy allows us to achieve additional loss ratio improvement through mix of business change, while continuing to deliver a pure rate increases that equal of expected claims inflation.

Drilling down to by line results for Commercial Lines, our largest line of business general liability reported $11 million of favorable prior year casualty reserve development for the quarter, which related primarily to lower than anticipated claim frequencies and severities for accident years 2015 and prior.

We achieved renewal pure price increases of approximately 1% so far this year. Our workers' compensation line experienced $40 million of favorable prior year casualty reserve development for the quarter, as a result of lower than expected claims severities for accident years 2016 and prior.

Workers compensation pricing has been flat with a 0.3% average price increase so far this year, as loss cost filing by NCCI and other individual state renewals have been trending negative overall. Commercial Auto remains an area of focus as we take steps to improve the overall financial results.

For the third quarter, Commercial Auto experienced $5 million of unfavorable prior year casualty reserve development, primarily relating to higher claimed frequencies and to a lesser extent severities for the 2015 and 2016 accident years.

In addition, we strengthened current accident year reserve for this line by $6.5 million dollars, reflecting higher than expected loss trends for recent quarters We have been actively implementing price increases which averaged 6.7% so far this year and believe the elevated loss trend support the need for additional rate going forward.

In addition to price increases, we've also been actively managing the new and renewal book in targeted industry segments reducing exposures and increasing price on higher hazard classes. In Personal Lines which represented 12% of total year-to-date net premiums written, margins overall have been profitable for the quarter and first nine months.

The homeowners' line experienced strong profitability with an 80.3 statutory combined ratio. We continue to target a 90 combined ratio in a normal catastrophe year or one that has approximately 14 points of catastrophe losses on an annual basis. Renewal pure price increases across our homeowners' book averaged 2% for the first nine months of the year.

In Personal Auto, we've seen greater topline growth opportunities as competitors have been increasing prices to reflecting higher loss trends. A sharp increase in new business volume has resulted in a tick-up in the premium growth of Personal Auto Line in recent quarters after years of flat or declining premium volume.

Renewal pure price increases on our book averaged 3.5% for Personal Auto liability and 3.6% for Personal Auto physical damage during the first nine months of the year. Our 2017 Personal Auto rate filings include a fully earned impact of approximately 6%.

Our E&S segment, which represented 9% of total year-to-date net premiums written, generated a statutory combined ratio of 120.1 for the quarter. Results in this segment were impacted by alleviated catastrophe losses, primarily from Hurricane Harvey aswell as$10 millionof adverse reserve development relating to accident years 2015 and prior.

We've been taking deliberate steps to push pricing where appropriate and let go of business that does not meet our profit targets. Overall price increases averaged 5.5% so far this year with significantly higher rate increases in the casualty lines of business.

We closely monitor pricing by segment and remain comfortable with rate levels on a new and renewal inventories across the book. We also expect changes to our trends operation to drive improvement involve loss and expense outcomes going forward.

Our strategy has been to drive profit improvement and allow the topline to slowdown if the market does not support our pricing stats, that dynamic was clearly present in the quarter. Small low hazard E&S remains an attractive market to complement our core commercial line segment.

We continue to invest in our underwriting, pricing and claims sophistication in order to deliver consistent profitability in the future. As we lookout to 2018 and beyond, we maintain our keen focus on balancing our objectives around growth with our longer term profit targets.

We continue to invest in strengthening our franchise agency relationships, enhancing our sophisticated underwriting tools and building out our customer relationship capabilities which together underlie our of high-tech – high-touch operating model. With that we open the call up for questions.

Operator?.

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

Thanks. I just got the question on the E&S development.

Can you just provide a bit more detail around what exactly drove that I know you said it was severity and accidents year 2015 and prior, but it was a pretty large amount just want to get more color in terms of what that amount of consisted of?.

Arash, thank you for the question. This is John starting and certainly Greg or Mark could jump in as well.

There's not a lot more to tell you other than what you just read back from our prepared comments which it was in fact 2015 actually year prior and it was very driven and I think from our perspective, frequencies have held pretty steady with what our expectation would have been for that accident year.

And the severity is what's driving the movement in the quarter. But I will also reiterate, we've said this in the past relative to our reserve a philosophy overall, which is we do have and knowingly have a tendency to react more quickly to what may be negative news in the in the reserve portfolio and that philosophy continues to acquire E&S as well.

But beyond that let me just make a couple of other comments relative to how we think about this business and how we think about our profitability in the current year and how we think about it going forward.

A couple of points just to reinforce what we’ve talked about in the past and again time is back to the fact is the development came from 2015 and prior. Starting in January 2016 is the point at which we made all the changes in our claims handling process to merge this operation under the management of our overall claims organization.

And that's an important point because at that point in January 2016 to the current accident year is when our claims organization has had their hands on file since day one as opposed to 2015 and prior which were transition files and not that you can improve the outcomes from both the loss and an expense perspective on transfer file, but it's a little hard to do, when you manage the files from day one.

So I think that's important to understand when you think about what provides us context and informs our view relative to how we think about the more current activities and how we think about the future.

Another point I'll make relative to the more recent accident years and this was also referenced in the prepared comments is we very carefully and in a very targeted way measured pricing on new business and the renewal portfolio by geography and by segment and as we've started to talk about dating back to the middle part of 2016.

We've been achieving our target pricing levels pretty much across the book for both the new and renewal inventory. We've also said very clearly in this segment which we've said overtime, we would like to be in that 10% to 15% kind of range for the overall company.

We were willing to take some topline volatility in order to manage bottom line performance on a more consistent basis.

We think we're on track to moving towards that profitability target and what you saw in the quarter and have seen on year-to-date basis is that topline pressure coming through and that continues to be a trade that we're willing to make.

So I have not a lot more specifics relative to that development, but this is fairly straightforward and general liability, its low limits profile and some very lower hazard segments in this industry and that's where the development was. .

I don't really have anything to add to that, other than the fact that what John touched on it and it's really about this is part of that transition.

The transition is like the fact that we want to make sure we address the reserve position for the prior years, nothing's ever final, but we wanted to make sure that as we move into the fourth quarter and into next year, we really felt solid about the positioning of the overall book above average.

Hope we got from John's comments, we do feel positive about the overall book of business. .

Thanks. That's very helpful. And I kind of just extend the question a little bit when I look at the 3Q 2017 quarter, loss ratio for E&S, so backing out the reserves and the cap and also adjusting for I think you guys had 840 basis points decline in non-cap property losses in E&S.

So when I backed that out of 3Q 2016 it implies a still look at about 230 basis points of core loss to ratio improvement in E&S segment. So my question there is that improvement just the function of what you said in terms of January 2016 and forward the changes you've made.

I guess what I'm trying to ask is you're not seeing any signs that would imply that loss ticks should be higher in the E&S going forward it seems like this was really just all the legacy stuff that doesn't really have any bearing on trends you're seeing on business you're writing today, does that make sense?.

So clearly what you're seeing you pointed out to us big part of that is improving relative to non-cap property, but the other point that's driving kind of refers back Greg overall comments in the beginning which is when you think about performance you need to think about on level relative to loss trend and we have been earning rate in this book of business and that will have a positive impact year-over-year on the underlying loss ratios..

Another focus when you start to look at underlying performance I would have to turn this focus more on the year-to-date number. I mean you're going to get lumpiness quarter-to-quarter relative to property activity both favorably, unfavorably and I don't view that necessarily as an indication of either a positive move or negative move.

So again, when you look at this book the underlying combined ratio is about 91 in the overall book and I will tell you that's what I would have a little bit more focus on going forward rather than just the core..

Okay. I guess to ask you differently the stuff that caused you to record the adverse development that doesn't imply any trends that would make you think that initial loss ticks should be higher than you may thought if your money.

We would have adjusted you would have seen changes in the 2016, 2017 year. This was as John mentioned 2015 and prior. .

Yeah.

Just to add to that Arash, it will be good for your math, you're right in and back out if you look at an accident year versus excluding cap and non-cap property in the quarter the sort of the underlying so to speak loss ratio is about 230 basis points better than the year ago period and about 170 basis points on a year-to-date basis and that is John mentioned and Greg as well really reflect the earn rate coming through the book of business.

It doesn't and which would reflect in improved profitability on the underlying book of business.

The reality is the combined ratio in the quarter with 120 which is not something that we're happy with, but from an underlying trend perspective the earn rate is coming three to four and that combined with the focus on the underwriting mix improvement and the claims handling outcomes should help to drive our profitability during the course -- in the future period.

And unlike commercial order where we increase the current accident year, the development provided E&S was 2015 and prior didn’t impact 2016 or 2017. .

And then the only point I will add Arash, this is John. We've talked about this in the past.

Mark made our reference mix improvement just remember this is a business where it is you can drive mix improvement quickly because the typical retention in this segment is in the mid to high 50% range, so you have the opportunity to turn over your yield it’s very more quickly and that helps drive mix improvement.

When you target certain classes of business either for hiding rate or in certain cases back in non-renewal..

Thanks that make sense.

And what's a fair target combined ratio that you say to think about for this book? I don't know if you've put one out there but you know just….?.

What we generally said as we look at this segment running a few points better than our overall commercial lines but that you know we pay a little bit of time to get there. We also told you that this is a business that we're going to manage more by ROE. And as John indicated in his comments the topline flex with market conditions.

So you know favorable market conditions you see this unit grow more rapidly in a highly competitive market. You'll see a trend..

And in terms of the competitive conditions I know you also mentioned in the earnings release. But you know it is highly competitive right now.

So does that imply the next few quarters that you know if that kind of trend persists in terms of the competition the book should continue to shrink near term?.

I would say that looking at it we don't want to point out. I would say there is obviously sub-segments that we're reviewing today. But generally, I would say this market condition is pretty, pretty aggressive right now, pretty competitive when I say aggressive, pretty competitive right now..

And the primary pressure point for us on the topline in E&S has been new business. Year-over-year has been down significantly. And I it should be more to our unwillingness to flex on our pricing stance whereas the renewal of Victoria's as healthy -- steady in with some additional rate going it….

Thanks. And the comment you made about the book should run a few points better than the commercial book.

What's the kind of rough timeline for that? Is that something that you expect?.

I would say that you got to give us a little bit of time for our claim changes to manifest the sales and our picks -- you know these things that we're changing that fundamentally we think reduce pure premium costs going forward have time to really bring themselves.

And so I think from an expense scale standpoint, we're pretty much there today where we bought the book needed to run. And I would say it's a combination of continuing to drive very well. He had a couple of segmentations in there that we want to make sure that we feel we can have our long-term targets.

And then the overall part that will be just in terms of ongoing new business and the new business growth rates. .

Okay. Thanks. That's helpful. And I just want to touch on the guidance real quick. I know on the combined ratio guidance to you know you kept that intact and last quarter on the call you know you talked about how you took it from you know a 90.5 to 89.5 to give credit for the one point a favorable development.

And then if you back out you know point of favorable you've got to a 90.5 core. So should we still think of the core as a 90.5 or you know is there any update to that based on the development the favorable development you had in 3Q.

So I just want to make sure I'm interpreting that guidance?.

We haven't changed anything.

Just remember what you will get always moving from nine months to 12 months there's always a spike of about 50 basis points and our expense ratio as a result of the how premium volume comes in the fourth quarter to our latest premium volume quarter probably represents a little under 23% of the premium that we would normally you know.

So if we look at the quarter at 25% the premium volume in the fourth quarter is lower. We always get a little bit of a of an increase of about 50 basis points from nine months to 12 months in the statutory expense ratio.

I think going forward and I know Mark and Bob to see us do this is just convert all of our guidance to GAAP and that's something that I know we will be looking at. But since the guidance was out in the form of the statutory we've left it that way for the year and that would avoid some of the confusion around the combined ratio movements..

Okay. I was going to ask the same thing. I was going to say going forward it would be actually very helpful, yes. .

It wasn't here or you're just you're just totally up to that..

Thank you. Thank you very much for all the answers. Thank you. .

Thank you..

Thank you. Our next question is from Mike Doyle with RBC Capital Markets. Please go ahead with your question. .

Yeah. It's a last round of questions pretty much exhausted most of what I had..

Okay.

Holloway -- Mike, why are you by the way?.

Doing fine..

I love your pieces by the way I read them religiously. .

Thank you very much. Thank you for that. So I guess since you covered a lot of ground in the last -- the last set of questions. I guess the one item that I feel like still remains out there is you commented correctly that you know a lot of the action that impacts the 18 numbers is kind of already been taken from you know a written standpoint.

But how are you approaching you know the opportunity to try to seek you know broader rate improvements as selective positions such that there is more rate to get. Or is you kind of kept up a good rate increase clip right along the way. Maybe you don't have as much upside to grab as some of your less diligent competitors. .

Yeah. Mike, this is John. I'll take a stab at that. I was -- as well. You know I would say that factors starting in 2009 not that we ignore the marketplace that we are operating but we've really focused on our target combined ratios and the pricing of the hour and the story in a very granular way and tried to manage in that way.

And if you look at our performance we constantly highlight our performance relative to the clubs commercialized pricing survey has been very strong. And we kept retentions high throughout this period of time. Our philosophy is not going to change. We're going to continue to manage the business that way.

We're going to continue to manage it to our target ratios and more aggressively manage that 10 or so percent of our renewal inventory that we think is really driving overall performance in a negative way.

And at the same time make sure we're creating the oxygen in our pricing strategy to protect that 50% of the business every year that actually exceeds our margin targets. So that will be a philosophy. That said you know we highlighted a couple of things in the course of the prepared comments.

Number one would be workers' company pricing continues to be very pressured and it's also a very competitive segment for new business. That's a little bit harder to control company-by-company because in many places you're dependent upon loss cost filings from either NCCI individual state bureaus.

And it's harder to overcome what may be a decline in a loss costs filing. And you're seeing a lot of those come through. So I think that's going to be a negative for the entire market going forward.

Pricing on the other hand we're seeing our property around where you've seen a lot more discussion following the catastrophe activity has been a line in you know more price for the industry. And what you may have seen in the third quarter as a wakeup call for that particular line to start to open more.

And then finally on auto as we expressed in the prepared comments as well when we look at trends in that line, we're getting about 6.5, a little over 6.5 points of rate on that line. But we expect that those trends will support the need for market pricing to continue for the commercial auto line of business.

So you know we put altogether our philosophy and our approach to managing pricing will continue to be the same. .

Hey, Mike here Greg. I would say that there is no company you're going to seek with such tight vertical lens into pricing. And let me just -- on the ground level how really happens as we have our inside folks that work with our agency 60 to 90 days out. They got the inventory as John articulated. They got it by cohort.

Their ability to dial up or dial down pricing is very agile and that agility comes through every single bump. We can see that we can see it by region, we can see it by agency, we can see it by inside underwriter. And I would just answer your question as what I hear is a lot more tailwind and headwind right out. And let's be realistic.

I mean the ROE at zero this year for the industry that's nothing for anybody to be proud of and irrespective of the hurricane that was going to be much better than 500 or 600 basis points without this large activity which has nothing to be proud of either.

So you know thinking about costs and capitals in the 850 range and other things, I mean the industry needs to get a certain amount of discipline. I think this whole tale then scared a lot of people as the mega event that could have come off the sign of Florida could have been extremely as dropping.

This has people thinking of reinsurance programs where they protect themselves. I think people are thinking about counterparty differently retro programs differently but these are all things that they should have been thinking about way before any of this had happened.

But my guess is that -- and I want to make this point if you don't get overall rate then I got no rate. I don't want to hear about commercial auto at 10 and getting it all back G.L. and comp. Overall rate, if you're not getting overall rate then you're getting no rate.

And so when you think about claim inflation in this business, it's all predicated on medical, medical permeates everything that we do and medical trends, if anything, are edging higher, they are not edging lower. And we sit there and go property and everything else this should provide a lot more tailwinds for us.

And you got to remember we're very dialed in on the amount of inventory we want -- we really are touching. So, again, if company's got an agile information, sophistication to do it, and a deployment into a highly franchise model, that's us..

Okay. Very much appreciate the comments. Thanks. That's all my questions..

Nice Mark..

Thank you. [Operator Instructions] Our next question is from Paul Newsome with Sandler O'Neill. Please proceed with your question. .

Good morning Paul..

Good morning. I thought you might want to weigh in on -- a little bit more on the impact of these catastrophes that we've had kind of broadly. And so Mark my question really is this in your opinion has there been a lesson learned from these events. I mean I think back the hard market 9/11 taught us about clash risk.

The hard market in the 1980s taught us about the potential for very, very large corporate lawsuit and labiality side. There seem to be sort of a specific lesson that they're told -- they told underwriters they need to do something different.

And I wonder if there's a lesson here to be learned in your opinion from the industry's perspective and from an underwriters' perspective..

Yes, this is Mark here. Why don't I jump in and then Greg and John can follow-up as well on the topic. Greg talked a little bit about the cat loss activity this quarter and the needs to price further and get adequately compensated for the risk the company to take in.

I think from our perspective when you look at our business model and the way the quarter shook out for us whether the events that took place happened exactly as it did which for us had two big E&S states, Texas and Florida.

It was a good test case relatively new E&S segment for us, the reinsurance programs that we have in place and worked out well for us in terms of a relatively modest impact two and a half points on the combined ratio.

If the storm track has been different, if Irma had that sort of really, really significant impact or in particular with Maria, [Indiscernible] high shipped these and Maria had hit east coast -- call it really, really significant cat event.

I think again for Selective with the reinsurance protection that we buy, the way we think about catastrophe hubris management, I think it really showed the strength of the franchise and the business model that we have -- to have a sort of a lower of volatility underwriting result and good reinsurance program wise.

From a lessons learned perspective, I think there's always lessons that are learned from each catastrophe. And I think time will tell what lessons will come out of this.

I do say staring down that -- those forecasts there's the really bad Hurricane Irma forecast, really caused people to sit back and really think about the business model, really think about the value of reinsurance and how that is part of an overall primary operation and as Greg mentioned the counterparty credit risk.

From a claims handling perspective, we'll see what happens. We saw off good stuff in Ike in 2008, a lot of sort of claims development as the [Indiscernible] Texas and litigation reopened claims. We got issue in Florida and I think that will be exacerbated with Hurricane Irma.

But time will tell what lessons will be learned, but from our perspective, we feel pretty good about the business model the underwriting risk appetite that we have and again, the reinsurance we have that the balance sheet some significant event like this..

The only other point I would add, Paul this is John, is relative to flood exposure and aggregation of flood exposures.

Prior to this quarter, there was a lot of talk about how the private market was going to really step in and provide capacities for flood either in an excess or raft or in certain cases a complete take out of business that's currently in the write your own program through the NFIP.

And based on this experience, I think understanding the aggregation of flood exposure in addition to the wind exposure in some of these geographies that you saw impacted may have some companies rethinking your appetite for that business. Now, we're a significant player in the write your own program.

We think that program can be shored up in certain ways, especially relative to pricing per unit of exposure-to-exposure. But I think you may see some companies reexamine their appetite relative to providing private flood insurance, especially in higher hazard zones..

And Paul, Greg, just -- again, you got a pretty good sense from everybody. To me, it's always been about collateral counter-party retro. I will tell you our folks have been dialed in on that for years; we've been pushing on disclosures, on trying to get into deeper into retro programs.

And I would say our folks did very good at capturing collateral where the opportunities have been out there in the marketplace to better collateralize your reinsurance programs to the extent possible.

So, I would tell you this many companies now that are sitting and looking at attachment points and return periods and questioning whether or not their return periods were adequate relative to an event set that large and it's not only a matter of the property side as reinsurers have become more diversified, you got to cross issues relative to that to the fall out into the [Indiscernible] programs as well.

So, as companies stretch again diversifying their more liabilities as cat writer, that's also another long-term exposure that's not easily truncated..

Thank you very much..

Thank you. At this point, there are no further questions on queue..

Well, I thank you all for attending. I know Rohan is excited about the Investor Day that's coming up as I've indicated you many times, we are really looking for a great day and hopefully, everyone will be here in attendance. So, thank you very much. And any follow-up, please reach out to Rohan and his team, make sure that you get on the invite list.

And thank you very much for participating in today's call..

That concludes Selective Insurance Group third quarter 2012 earnings call. Thank you for your participation. You may now disconnect..