Good day, everyone. Welcome to Selective Insurance Group's fourth 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, everyone. Thank you for joining the call. This call is being simulcast on our website, and the replay will be available through March 2nd, 2018. A supplemental investor package, which includes GAAP reconciliations of non-GAAP financial measures referred to on this call, is available on the investors page of our website, www.selective.com. Certain GAAP financial measures will be stated in the call that are also included in our previously filed annual report on Form 10-K and quarterly Form 10-Q reports. To analyze trends in our operations, we use non-GAAP operating income, which is net income excluding the after-tax impact of net realized gains or losses on investments, the deferred tax asset charge that was recognized in 2017 in relation to tax reform, and the results of discontinued operations, if any. We believe that providing this non-GAAP measure makes it easier for investors to evaluate our insurance business.
As a reminder, some of the statements and projections made during this call are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to risk and uncertainties. We refer you to Selective's annual report on Form 10-K and any Form 10-Qs filed with the U.S. Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. Please note that Selective undertakes no obligation to update or revise any forward-looking statements. Joining 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. Good morning. I'll first make some introductory remarks. Then focus on some high-level themes for the full year 2017. Mark will then discuss our financial results. John will review our insurance operations in more detail, providing additional color on key underwriting initiatives. We are extremely proud of our financial results we generated for 2017. Our non-GAAP operating return on equity of 11.4% was in line with our long-term goal of achieving a return 300 basis points above our weighted average cost of capital, an impressive result given the record level of expected industry-wide catastrophe losses, ongoing competitive commercial lines underwriting environment, and sustained low new money interest rates. Our 2017 statutory combined ratio was an excellent 92.4% and on an underlying basis, or after adjusting for catastrophe losses and prior year casualty reserve development, was an extremely strong 91.6%.
In addition, our after-tax net investment income was $119 million, up 20% over last year. For 2017, we've seen estimates of global insured catastrophe losses as high as $136 billion. In the third quarter, the industry experienced hurricanes Harvey, Irma, and Maria, followed by the devastating wildfires causing significant damage in portions of California in the fourth quarter. With the significant catastrophe loss activity this year and ongoing volatility in severe weather, we expect pressure on carriers to raise industry-wide pricing for property risk. For Selective, catastrophe losses accounted for 2.9 points on the 2017 combined ratio, and our 10-year average was 3.6 points, well below industry averages. We've been highlighting for several quarters that the industry needs to generate additional rate in order to produce adequate returns on capital. Remember, if you're not achieving overall renewal pure price increases, then you will not keep pace with claim inflation.
Higher rates must support industry catastrophe loss volatility, expected claims inflation, and continued low after-tax new money yields. We continue to execute successfully on several difficult objectives that will set the table for ongoing sustained performance, including, one, achieving a Standard Commercial Lines written renewal pure price increase of 2.9%. Two, improving renewal underwriting quality while maintaining strong and stable retention. Three, targeted underwriting actions in our Excess and Surplus Lines segment to improve profitability. Four, excellent investment results with after-tax new money rates of 2.1% and strong operating cash flows that were 16% of net premiums written. All these achievements, coupled with lower federal income tax for U.S. corporate taxpayers that reduce our estimated 2018 effective tax rate by approximately 10 points, establishes a strong base for future profitable growth.
Our geographic expansion efforts are on track as, in 2017, we opened two new Commercial Lines states, Arizona and New Hampshire. In January 2018, we entered Colorado, and we expect to add New Mexico and Utah later this year. This will bring our total number of Commercial Lines states to 27 by the end of 2018. The total amount of Commercial Lines premium represented by these five states is close to $12 billion, and our long-term market share of 3% implies an estimated $370 million additional premium opportunity. We're always investing to make Selective the best, a truly unique company in the industry, which should position us for sustained financial outperformance and attract high-caliber distribution partners for appointments. Some of the key competitive advantages of the company are as follows.
First, our franchise model with Ivy League distribution partners, which is enabled by our empowered field underwriting model, a true differentiator in the marketplace. We have among the best relationships with the best agents in the industry, and are focused entirely on providing our distribution partners with the tools, products, services, and resources they need to be successful. We distribute our Commercial Lines product through 1,250 distribution partners, averaging about 50 per state. Our distribution partners rate us 8.8 on a 10-point scale for overall satisfaction. Second, we continue to build out sophisticated Commercial Lines underwriting tools and processes that allow our people to make better decisions faster while enhancing outcomes for our new and renewal business. This is best demonstrated by our market-leading written renewal pure price increases of 2.9%, coupled with an 83% retention.
Third, we are making significant investments focused on enhancing the overall customer experience in an omni-channel environment. Customer centricity is at the heart of Selective, and we recognize that our customers' expectations on how they engage with us are rapidly evolving. We continue to strive towards providing best-in-class customer service in a 24-hour, 365-day environment. Our goals in this area are centered around leveraging technology to improve customer retention rates, which should, over time, lead to higher new business volumes and enhance quality of our business. Our long-term growth plans include, one, increasing Ivy League distribution partner representation, two, higher share of wallet, and three, geographic expansion of our footprints. To date, we are in 25 states, which at a 3% market share, create a corporate commercial lines profile in excess of $4 billion of net premiums written.
In 2017, we had excellent performance in our investment portfolio as our overall after-tax yield was 2.1% on $3.32 of invested assets per dollar of stockholders' equity, contributing 7.3 percentage points to our non-GAAP operating ROE. Our portfolio managers generated significant output during the year without increasing credit or duration risk. The effective duration of our fixed income in securities, including short-term investments, remains relatively low at 3.7 years. Our achievements in 2017 could not have been accomplished without the hard work, focus, and dedication of Selective's best-in-class employees, who strive each day to meet and exceed established targets. The investments we are making today to continually grow and improve while leveraging the latest tools and technologies position us well for the future. I also want to welcome our most recent hire to the executive management team, Chip DiPaolo, as Executive Vice President, Insurance Operations.
Chip has a long history of leadership roles in the industry and will be responsible for our commercial and Personal Lines business segments. As I have stated many times, one, hope is not a strategy, and two, arithmetic has no mercy. When it comes down to improving performance in this industry, the following key drivers must be closely monitored. Overall renewal pure price earned increases versus expected claims inflation, and after-tax new money rates versus the effective fixed income duration. Now I will turn to our 2018 expectations, which are based on our current view of the marketplace and incorporates the following. One, a GAAP combined ratio excluding catastrophe losses of approximately 91%. This guidance assumes no prior year casualty reserve development. Two, catastrophe losses of 3.5 points. Three, after-tax net investment income of $144 million, which includes $10 million of after-tax investment income from our alternative investment portfolio.
Four, an effective tax rate of approximately 17% on investments, inclusive of tax-advantaged municipal securities tax rate of 5.25 and approximately 25% for all other items. Five, weighted average shares outstanding of 59.6 million shares on a diluted basis. A GAAP combined ratio of 94.5 in 2018, inclusive of catastrophe losses of 3.5 points, currently corresponds to a statutory combined ratio of 94. Now I will turn the call over to Mark to review the results for the quarter.
Good morning. Thank you, Greg. For the quarter, we reported $0.51 of fully diluted earnings per share and $0.86 of non-GAAP operating earnings per share, which is up 15% from 2016. Excluded from non-GAAP operating income in the fourth quarter were after-tax net realized investment losses of $700,000 and a reduction in the value of our net deferred tax asset of $20 million, which is the result of the implementation of the Tax Cuts and Jobs Act of 2017, in which the net deferred tax assets will now be realized at a lower federal income tax rate.
Despite the one-time charge, our expectation is for an overall effective tax rate of approximately 18% going forward, a full 10 percentage points lower than our current effective tax rate, and the expected payback period for the one-time charge to book value per share, or for it to be book value neutral, should be less than 12 months. As Greg mentioned, we are assuming a 17% effective tax rate on investment income going forward, although this will move around a bit depending on our allocation to tax-advantaged municipal securities and approximately 21% on all other items. In the fourth quarter, we generated an annualized non-GAAP operating ROE of 12%. For the full year, we generated non-GAAP operating income of $185 million, which is up 14% from 2016, and a non-GAAP operating ROE of 11.4%.
The full-year non-GAAP operating ROE is essentially in line with our financial target of 11.5% for 2017. Going into 2018, our estimated weighted average cost of capital has increased from 8.5% to 9%, and we have therefore increased our financial target to 12%. For the fourth quarter, after-tax underwriting income totaled $28 million and generated 6.5 points of ROE. The investment portfolio generated after-tax net investment income of $31 million, which coupled with our ratio of assets to equity of 3.32 times, generated 7.3 percentage points of ROE. For the full year 2017, underwriting income contributed 6.2 points of ROE, while investment performance generated 7.3 points.
It was a strong quarter of premium growth with consolidated net premiums written up 8% for the fourth quarter and 6% growth for the full year, driven by strong renewal pure pricing, stable retention levels, and good new business opportunities in our 24-state footprint, which includes premium from our two newest states. The consolidated combined ratio was 92.8% in the fourth quarter on a GAAP basis and 93.1% on a statutory basis. On an underlying basis or prior catastrophe losses and prior year casualty reserve development, our statutory combined ratio was somewhat elevated at 94.5% for the quarter compared to 92.8% in the comparative quarter, with the difference driven mainly by an additional 2.1 points of non-catastrophe property losses in the quarter.
For the full year, our underlying statutory combined ratio improved 60 basis points from 92.2% in 2016 to 91.6% in 2017, which is a record underwriting margin for us on an underlying basis. Of the improvement, the majority was driven by a 70 basis point improvement in our expense ratio, which came in about 10 basis points better than our initial forecast for the year. Impacting margins were an elevated level of non-cat property losses in 2017, as well as deterioration of the current accident year for our Commercial Auto line of business. Overall, we are very pleased to have delivered an all-in statutory combined ratio of 92.4% in 2017, or 89.5% excluding catastrophe losses. During the fourth quarter, we experienced $10 million of net favorable prior year casualty reserve development, which lowered the quarter's combined ratio by 1.7 percentage points.
Better-than-expected claims emergence in our Workers' Compensation line of business resulted in $23 million of favorable development in the quarter, which was partially offset by $10 million of adverse development in our Commercial Auto line of business and $3 million in Personal Lines auto, driven by unfavorable trends. For the year, we experienced $49 million of net favorable prior year casualty reserve development. We are pleased with the performance of each of our operating segments during the quarter. Net premiums written growth was solid across Commercial Lines and Personal Lines segments, where premium volume for E&S was impacted by our efforts to increase prices and implement targeted underwriting changes. Profitability was strong in each segment, with Commercial Lines continuing to generate exceptional results. Moving on to expenses. Please note that we've made a change to our reporting, which hopefully makes it easier for you to analyze and project our expenses.
More specifically, we have begun splitting our underwriting expenses between amortization of deferred policy acquisition costs, other insurance expenses, and corporate expenses. The main change is that you can now calculate our expense ratio directly from the income statement, and corporate expenses now do not include any insurance-related expenses, which had been previously allocated to the expense ratio when calculating the segment results. All prior periods presented have been reclassified to reflect this change. Our overall GAAP expense ratio, including dividends, was 35% for the fourth quarter, which is down 20 basis points from the comparative quarter. Included in the fourth quarter were over $5 million of after-tax expenses related to hiring, severance, and several other items that elevated our other insurance expenses for the quarter.
Overall, we continue to seek out areas of efficiency and cost savings while continuing to invest in our employees and in key initiatives around geographic expansion, enhancing our underwriting tools, and the overall customer experience. We are pleased with the progress we have made in reducing the expense ratio during 2017 but recognize there's still more work to be done. For the full year 2017, the statutory expense ratio is down 70 basis points to 33.5%, compared to 34.2% in 2016. We expect to continue to drive this ratio down to 33% over time. Corporate expenses, which are comprised of holding company costs and long-term stock compensation, were up $3 million pre-tax relative to the comparative quarter and remain generally elevated relative to our longer-term expectations.
As stated on our recent calls, this is primarily due to the higher costs related to our long-term stock compensation program arising from the strong appreciation in our share price in 2017. As we highlighted last quarter, we expect expense savings in this line item due to changes in early 2017 that were made to our long-term stock compensation program. These savings will work their way through the corporate expense line item over time and should result in a lower level of volatility as well. We successfully renewed our property catastrophe reinsurance program for 2018 with a very modest exposure-adjusted price increase and an improvement to terms and conditions. We expanded our program to $735 million of limits from $685 million to take into account the lower corporate tax rate and resulting tax shields losses at the sale of the distribution, while we maintained our $40 billion retention level.
We also renewed our treaty that specifically covers catastrophic events outside of our 22-state geographic footprint. This $35 million in excess of $55 million per occurrence treaty reduces potential volatility from catastrophe events that would be specific to our E&S book and also includes our recent geo expansion states of Arizona, New Hampshire, and Colorado. Overall, we are pleased with the outcome of the renewal process and believe it reflects our superior risk management, underwriting initiatives, the benefits of a loss-free account and a heavy cat year, and our long-term partnership approach to managing our reinsurance relationships. Turning to investments for the quarter, after-tax net investment income totaled $31 million and was up 18% from a year ago. Fixed income securities, which represent 92% of our portfolio, experienced an increase in after-tax net investment income, resulting mostly from a higher book yield.
Our fixed income portfolio is highly rated with an average credit rating of double A minus and a 3.7-year effective duration, including short-term investments. The after-tax yield on the fixed income portfolio averaged 2.2% during the quarter compared to 2% a year ago. The new money after-tax yield on the fixed income portfolio during the fourth quarter was 2.1%. The total return on the overall portfolio was a very solid 4.5% for the year. Alternative investments, which report on a one-quarter lag, reported a strong pre-tax gain of $3 million for the quarter. The results were driven by solid performance in our private equity portfolio. Risk assets, which principally include high yield fixed income securities, public equities, and our alternative portfolio, are up modestly to 7.9% of total invested assets at year-end from 7.1% a year ago.
We've been gradually diversifying our investment portfolio and will likely continue to modestly increase our asset allocation over time, depending on market conditions and opportunities. Our balance sheet remains strong with $1.7 billion of GAAP equity. Book value per share was up 11% for the year, benefiting from strong earnings and net unrealized investment gains, offset in part by $0.66 of dividends per share for the year. 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. Our sustainable growth rate, which we calculate as 75% of our operating ROE, is around 9%. We continue to adopt a conservative stance with respect to managing our underwriting risk appetite, investment portfolio, reserving processes, reinsurance buying, and catastrophe risk management.
This allows us to maintain higher operating leverage than the industry as a whole, with each combined ratio point now equating to 110 basis points of operating ROE post-tax reform. This model positions us well to generate superior returns in today's low-interest rate environment. Turning to our forecast for 2018. As Greg mentioned, our underlying GAAP combined ratio forecast for 2018 is 91%. This compares to our 2017 underlying GAAP combined ratio of 92.5%. The 150 basis points of margin improvement is relatively evenly split between improvements in the expense ratio and loss ratio. The loss ratio improvement is driven by a mix of earn rate, underwriting mix improvements, claims improvements, and offset in part by expected claim inflation. Before I conclude, I want to mention that going forward, we'll move from a statutory accounting focus to a GAAP focus.
In conjunction with this change, we'll focus our consolidated segment level and line of business disclosures and discussions on a GAAP basis, and we plan to eliminate the majority of the corresponding statutory accounting numbers and ratios from our commentary disclosures. With that, I'll turn the call over to John to discuss our insurance operations.
Thanks, Mark, and good morning. As we move into 2018, our focus remains to capitalize on opportunities for profitable growth. We look to execute our strategy by leveraging our competitive strengths, namely our franchise agency relationships enabled by our unique field underwriting model, our sophisticated underwriting tools, which allow us to segment and price risk on a granular basis, and the superior customer experience we and our agents provide customers. All of this is in the context of a disciplined underwriting culture that is focused on generating adequate returns for our shareholders on a risk-adjusted basis. We've often talked about our long-term growth plans to achieve a 3% market share within our footprint states for Commercial Lines. We seek to appoint new agents in our current markets to represent 25% of available Commercial Lines premium and growing to a 12% share of wallet with our appointed distribution partners.
During 2017, we appointed 102 new distribution partners in our footprint states, excluding New Hampshire and Arizona. Our current agency market share stands at approximately 18%, and our share of wallet is approximately 8% in our legacy states. In July of last year, we launched our Commercial Lines product in Arizona and New Hampshire. We are extremely pleased with the receptivity and early performance, with both exceeding our expectations for the year at $9 million of premium volume in just six months of operation. Our regional office in Arizona serves as the underwriting hub for our ongoing Southwest expansion. On January 1st, we opened Colorado for Commercial Lines business and are on track to open New Mexico and Utah by the end of this year. We also plan to open Arizona and Utah for Personal Lines business.
Strong receptivity from agents who are actively seeking to do business with Selective in these new markets validates our value proposition and the strength of our reputation. In addition, as we increase our geographic footprint, we are better positioned to increase our share of wallet in our existing states as we are able to compete for multi-state accounts previously unavailable to us. Also integral to our overall strategy is the development and deployment of leading underwriting tools to enhance risk selection. The ability to segment the business on a granular basis allows us to present the right price for a given account. In 2017, we deployed our underwriting insights tool to new business underwriters. In addition to providing model-driven guidance that they've long had, it provides real-time insights into how each piece of new business compares with similar accounts already in the portfolio.
We believe the tool positions us to better grow the business regardless of overall market dynamics. We continue to make rapid strides on the customer experience front. We challenge ourselves as an organization to develop a customer experience model that rivals what customers experience across all goods and services they purchase, not just insurance. Our investments remain focused around providing customers with multiple avenues for accessing information and initiating transactions and ensuring the level of customer experience is consistent across all of them. We are working closely with our distribution partners to ensure we present our customers with a seamless experience. Turning to our operations, our Standard Commercial Lines segment, which represented 78% of total 2017 net premiums written, again produced extremely strong results. Solid net premiums written growth for the quarter of 8% was driven by stable retention of 84% and renewal pure price increases averaging 2.9%.
For the full year of 2017, net premiums written increased 6%. The GAAP combined ratio for the commercial lines segment was 92% for the fourth quarter and 91.6% for the full year. We constantly monitor our renewal pricing 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 1.3% and point of renewal retention of 90.6%. On the lower quality accounts, which represented 10% of premium, we achieved pure rate of 6.6% while retaining 79.8%. This granular approach to administering our renewal pricing strategy allows us to achieve additional loss ratio improvement through mix of business changes while continuing to deliver pure rate increases that equal expected claims inflation.
Drilling down to the results by line for commercial lines, our largest line of business, General Liability, did not experience any reserve development during the quarter. For the full year 2017, we experienced favorable reserve development totaling $48 million, relating primarily to lower than anticipated claim frequencies and severities for accident years 2016 and prior. We achieved renewal pure price increases of approximately 1% for this line in 2017. Our Workers' Comp line experienced $23 million of favorable prior year casualty reserve development for the quarter as a result of lower than expected severities for accident years 2016 and prior. For the full year 2017, favorable reserve development for the line totaled $52 million. Workers' Compensation pricing was flat for the full year, and loss cost filings by NCCI and other individual state bureaus have been trending negative overall.
Commercial auto remains an area of focus as we take steps to improve the overall financial results. For the fourth quarter, Commercial Auto experienced $10 million of unfavorable prior year casualty reserve development, primarily relating to higher severities for the 2013 to 2015 accident years. In addition, we strengthened current accident year reserves for this line by $6 million, reflecting higher than expected frequencies for the recent quarters. For the year, prior year casualty reserve development was unfavorable by $36 million, and the current accident year was strengthened by $13 million. To address profitability in this line, we have been actively implementing price increases, which averaged approximately 7% in 2017. Loss trends remain elevated and should support additional rate in 2018. In addition to price increases, we've also been actively managing the new and renewal books in targeted industry segments, reducing exposures and increasing price on higher hazard classes.
Our Commercial Property line has experienced profitable results over the past several years, despite an extremely competitive pricing environment, and generated an 89.7% statutory combined ratio for 2017. While results have benefited from generally benign catastrophe loss activity in our geographic footprint, we have seen an increase in non-catastrophe property loss activity in the book, which has put pressure on underlying results. As the industry takes stock of the severe catastrophe losses incurred in 2017 and the generally anemic returns offered in this line, we believe pricing will strengthen. Our Personal Lines segment, which represented 13% of total 2017 net premiums written, generated 17% of premiums growth in the fourth quarter and 5% growth for the full year 2017. Underwriting margins overall were profitable, with a 95.2% GAAP combined ratio for the fourth quarter and 96.2% for the year.
The homeowners line experienced strong profitability, with a 77% GAAP combined ratio for the fourth quarter and 88.2% GAAP combined ratio for the full year. We continue to target a 90% combined ratio in a normal catastrophe year, or one that has approximately 14 points of catastrophe losses. Renewal pure price increases across our homeowners book averaged 2% in 2017. In personal auto, we continue to see improved growth driven by new business volume following years of flat or declining premiums. Renewal pure price increases on our book averaged 4% for personal auto liability and physical damage during 2017. We experienced $3 million of unfavorable prior year casualty reserve development for the quarter and $7 million for the full year, primarily driven by accident year 2016.
Profitability for this line should improve with benefits of greater scale and efficiencies, along with generating earn rate in excess of expected claim inflation. Our plans for 2018 incorporate rate filings averaging approximately 7.4%. Our E&S segment, which represented 9% of total year-to-date net premiums written, generated a GAAP combined ratio of 96.5% for the quarter and 103% for the full year. We've been taking deliberate steps to attain price increases where appropriate and let go of business that does not meet our profit targets. Overall price increases averaged 5% in 2017, with significantly higher rate increases in the casualty lines of business. We remain comfortable with the rate adequacy of our new business and are continuing to address the pockets of underperforming segments in our renewal inventory.
Our strategy has been to drive profit improvement and let the top line float down if the market does not support our pricing stance. Heading into 2018, we remain focused on implementing our strategy of generating consistent profitable growth. We continue to invest in strengthening our franchise agency relationships, enhancing our sophisticated underwriting tools, and building out our customer experience capabilities, which together underlie our high-tech, high-touch operating model. With that, we will open the call up for questions. Operator?
Thank you. We will now have the question and answer session. To ask a question, please press star followed by 1. To remove yourself from the queue, please press star 2. One moment please for the first question. The first question is from Arash Soleimani with KBW. Please go ahead with your question.
Hi, thanks. First question I have is, looking at standard commercial, you guys had, I think quite a bit of an uptick in the non-cat property loss ratio. If I back the uptick in that ratio out, looks like you actually had about 50 basis points of improvement in the core loss ratio. I was just wondering what drove that 50 basis points of improvement, especially in light of the strengthening you were mentioning within Commercial Auto in terms of your higher initial loss picks.
Good morning, Arash. This is Mark Wilcox. Why don't I start, then Greg and John can jump in as well. I think what you're referring to is the quarterly underlying combined ratio for Standard Commercial Lines backing out the increase in non-cat property losses. If you do that, I'm pretty close to your number of about a 40 basis point improvement in the underlying combined ratio, which is really driven by the loss ratio. I think what you're seeing there is the current accident year development. In the current accident year, for 2017 in the fourth quarter, we did have an uptick in our loss picks. In the fourth quarter of 2016, we had a higher uptick. The real difference is in both quarters on a comparative basis, we raised the loss pick for Commercial Auto.
In the fourth quarter of 2017, we've continued to see the workers' comp book of business perform better than expected, and we had a slight reduction in the current accident year loss pick for workers' comp, which drove the difference on a comparative basis.
Okay. That makes sense. Thanks. In terms of workers' comp then, is that something where, going forward, the initial loss picks should continue to be lower year-over-year?
Well, yeah. Let me start, and others can add in. I'll tell you, this is a line that as an organization, we're concerned about. You're seeing a lot of highly competitive conditions in terms of commission rates that we're seeing in the marketplace. This is a line that we're just very mindful of. This is the line that has the biggest inflationary tail. This is a line that can turn quickly. I don't think you can expect systematic drops in the ratio because you're starting to see rates. This is the line that we got the least amount of rate in. When John talked to you about the 2.9 that we got, and when you look at comp overall, you would see that for the year it was 0. You can't put out a 0 rate.
You got to remember, we always talk about overall rates. Overall, we got 2.9 in rate for the year. When you get 0 on a line and you look at expected claim inflation, and the fact that the same drivers that you saw in auto at some point relative to employment rates and other matters, can start to affect frequency in this line of business. I would say, if anything, that the comps kind of bottomed out. If anything, you should see ratios actually start to tick up industry-wide.
Ajash, this is John. Let me just add a couple of additional points, but really reinforce everything that Greg said, which I think is exactly right. The competition on this line has really intensified. Commission rates have been increased, in certain cases dramatically, especially for smaller, lower hazard Workers' Comp, at a time where pricing has flattened and gone negative. This is a line where it's harder for us or any other company to really manage pricing like we do on other lines because you're constrained by the underlying loss cost filings that are made by the various state bureaus. Those have been flat to negative and are continuing to move in that direction.
We do anticipate normal medical cost inflation driving the line going forward, and it's hard for anybody to anticipate that frequency and severity trends, which have been negative for quite a few years, will continue and build those into your forward expectations. When we take that all together, we're happy with our book of business. Our performance has been very good. We've been focused on writing on an account basis, a lower hazard style of business. We continue to drive improvements and outcomes through our claims operation, but we're just very mindful of some indicators that suggest that this line may start to deteriorate because of what the fundamentals are moving towards.
No, thanks for those answers. While we're on the topic of the loss ratio, just wanted to touch on the guidance again. I know there's 150 basis points of improvement on a GAAP basis in the core combined ratio, and I think you may have mentioned this in your prepared remarks, but did you say that the 150 basis points will be evenly split between the expense ratio and the loss ratio?
Arash, this is Mark again. That's exactly right. If you look at our combined ratio on a GAAP basis for 2017, we came in at 93.3. If you back out cats and favorable development, the underlying was 92.5. The guidance going into 2018 is 91.0. It's 150 basis points of margin improvement, and it's about equally split on a GAAP basis between the expense ratio improvement, which we continue to expect to drive down in 2018, as well as the loss ratio improvement.
I think if I could add just a little bit more comment. When you think about, and again, I know you guys have heard me say this many times, that you have to look at the effective rate just on the combined ratio, which you just don't get 3 points of rate, and that goes right to the bottom line. You've got to get the fact that you've got variable costs of 20%. Even in your non-variable, you have inflation, you have general wage inflation, you have other matters, because the biggest part of insurance company's non-variable cost is labor, and labor is going higher. Just to get to your core question, and this is something that we are very dialed in. You see this on our waterfall charts.
Basically for Selective, when you just look at loss trend versus earned premium rate, I'm not saying they're neutral, but they're pretty much sitting right on top of each other. When you look at our numbers going from 2017 into 2018, what we're getting in rate pretty much offsets trend. The rest of the improvements are coming from claimant underwriting. As Mark articulated, the things that are happening on expense basis, which obviously GAAP, you're getting a bit of an expense lag. That's actually a little bit more improvement that you're seeing on a GAAP basis than you would see normally on a statutory basis. When you really dig down to it, that's what we're very dialed in on, and that's what's going to drive performance.
That's why I think from your standpoint, earned pure rate is what you need to focus on in 2018. Earned pure rate. Nothing else matters in this business.
When I look at the split between, I guess in terms of the three segments, will that 150 basis points be more E&S driven, or just how would you think about it across the three segments?
I think you'll see E&S a little bit higher because the rate expectation's higher. In Personal Lines, our auto is tracking up, but our home is more thick. I'd say, somewhat you'd get proportionately, maybe a little bit higher in E&S than you would get in the Commercial Lines. If I were ranking them, I'd probably put E&S on the top, I'd put Personal Lines next, and Commercial Lines slightly underneath that. There isn't a huge calibration. I don't want you to think there's some epic calibration among those three different segmentations. I'm just ranking them in the order that you want to understand them, and that's what I'm trying to do.
Okay. That 2.9% rate increase you had in the fourth quarter within Standard Commercial, does that look like it's moving up year-to-date so far? I know we've only been a month into the year, but does that look like it's headed upwards?
Yeah, Arash, this is John. What you saw in the fourth quarter of 2017 was a pretty consistent trend relative to pricing. We have not reported a January price number at this point, but throughout the prepared comments, I think you saw a couple of references on a by-line basis. Pricing on Commercial Property has been one of the underperforming lines for the industry, and for us, it was just under 2% for the year, and about the same for the quarter. With all of the activity on both a cat and a non-cat basis, and all of the industry commentary, we would anticipate that line starting to get a little bit more pricing power going forward, whereas comp has been in that flat to slightly down.
I think the other line of note, we also highlighted this in our prepared comments, is Commercial Auto has had a couple of years now of strong rate. You saw our rate level, we disclosed for the quarter at just under 7%, and commentary that we believe that based on what's happening with regard to frequency severity trends for the entire industry, we would expect that to continue to be the case. We haven't put a number out for January yet, but based on what you saw in the fourth quarter and our commentary relative to market outlook, you could draw your own conclusions on that.
Okay. I had mentioned the non-cat property losses before, and I saw that was up in the ratio across each of your three segments. I'm just curious, what was driving?
Actually, just one clarification. For the year, we saw non-cat property in E&S actually below budget, below expectations. For Standard Personal, Standard Commercial, it was above. There is certainly normal volatility in that line, and fire losses continue to be the biggest driver. Large fire losses continue to be the biggest driver. Again, there is normal volatility, and if you look at our performance over a long period of time, while we've seen a little bit of noise in 2017, we look at the underlying quality of our core Commercial Lines book and feel good about it, but think that the line needs rate overall. That's our focus.
Because of that volatility and a little bit of a tick up in larger losses, we expect to drive some rate in that line, and that's what the industry's talking about on both a cat and a non-cat basis.
When you sit there and you listen to what John just said and what Mark said earlier, and you think about 2018 versus 2017, you can tell by what we've done, you really read under it the fact that we've left this elevated non-cat expectation stay in 2018 and have not dialed that back. We're looking at rate changes. We're constantly monitoring the book, trying to find ways to increase the safety management of the properties that we have, and are systematically driving more rate through the book.
Thanks. My last question, just on tax reform. How are you guys thinking about that? Is that something where you think, even looking over the long term, is that something that you think will fall to your bottom line? Do you see increased competition coming from tax reform that'll kind of make the benefits go away? Just how are you guys looking at that?
Yeah, Arash. Why don't I start, then John or Greg can jump in and comment as well. I think just overall big picture, obviously tax reform is great for U.S. domestic insurance companies. When you look at what the package was that was approved compared to what it looked like a year ago, you go down the list of the benefits and almost without exception, they are benefits. Whereas a year ago, some of the items in the tax package could have been a little bit on the negative side. Just big picture from an overall perspective, we think it's good for the economy, we think it's good for our customer base, and we think that increases exposure and it increases overall industry premiums. We're pretty excited about that. From a Selective perspective, we talked about our effective tax rate coming down from about 28% to 18%.
A full 10 percentage points of additional profitability that we would expect to drop to the bottom line. Over the long term, I think there is some, we can only speculate, we don't have hard data as to how it will all turn out. Our expectation is when you go into 2018, and you look at the overall industry expecting to print about a 7% ROE, that's well below the cost of capital for the industry as a whole. There is an amount of sort of excess profits that could be returned back to customers. We believe that most of our competitors probably have expected returns less than their required returns, and therefore the majority of the benefit should accrue to the shareholders. I think over time
that perhaps could get watered down a little bit, and there'll be a mix between what goes to shareholders, employees, and customers. Time will tell.
I would say it's no different. Look, we start with the core basic of 300 over our weighted average cost of capital. Taxes is one ingredient in the cake. There's all kinds of other ingredients in the cake. What's happening to after-tax yields. There's where's your duration on your portfolio. It's what's happening to your cost of goods sold. There are so many pieces, I will tell you for Selective, the thesis doesn't change. The starting point is 300 over, taxes impact that, our goal is to generate over the long term, hit our target, not every year, but to be 300 over our weighted average cost of capital.
For our standpoint, our cost of capital went higher just because of our market stock price and other things. There are things that push and pull at that performance. Our overall goal to generate the return to shareholders doesn't really change. This is just a different ingredient in the cake that's a little bit for us, as Mark said earlier, very favorable from Selective's standpoint. This tax reform is very positive from our standpoint. It levels the playing field, and it lessens our tax load, and it gives our investment department more product opportunities to look at and to invest in because of the taxable equivalency actually came down from 145 now to 120. When we look at product in the marketplace, this actually increases the bandwidth of opportunities that we can invest in, and our managers were on that trade earlier in the year.
They've been on that trade once this whole thing got crystallized. I think, operator, I'll open up to another. You've gotten more than your fair share of questions in here.
No, I have. Thank you very much. I appreciate it.
All right.
thanks for switching to GAAP.
Not a problem. All right. Thank you.
Thank you. Once again, to ask a question, please press star followed by one. To remove yourself from the queue, please press star two. The next question comes from Mr. Mark Dwelle with RBC Capital Markets.
Good morning.
Please go ahead with your question.
How are you today? I can't wait to see what musical theme you're going to pick up this month.
You'll have to wait for it like everybody else since I don't know either.
All right, I will be waiting. I'll be hanging on. All right. How's it going, Mark? Thank you.
Doing fine. I'd like to talk about a couple of slightly different areas than what we've just been covering. I'm thinking about your expansion into the new territories, both the ones that you've already started and the ones that are underway or soon will be underway. I guess the main question I have there, first, I assume these are all Commercial line expansions. Secondly, you gave the kind of size of the markets that you're addressing. What do you normally think of, and I know there's no singular answer, what do you normally think of as, say, the number of months or years that it takes to get to maybe a 1% market share? Just how you're thinking about it broadly. Obviously, facts and circumstances will tell.
Yeah. Mark, this is John. I'll start on that. Just let me answer a couple of the more direct questions out of the gate and take the more complicated question last. Our expansion to this point in Arizona, New Hampshire, and now Colorado, then soon to be Utah and New Mexico by the end of the year, are Standard Commercial states. I also mentioned we're in the process of investing in some Personal Lines expansion, specifically in the states of Utah and Arizona. We haven't committed to anything beyond those two states at this point, are looking for some states to add to our footprint that give us some diversification from a catastrophe loss perspective, and also present some higher economic growth in some of our existing footprint states.
That's also the logic that drove our Commercial Lines expansion and the choices we made around which states to enter into. In terms of our path to a 1% or ultimately a 3% share, if you look at our approach to opening these states versus how we opened the Midwestern states in the early to mid-'90s, you've heard us talk about our goal of getting to about a 25% agency share of the markets that we're in over time, and our current or legacy footprint is only at 18% at this point, which varies from one state to another, but 18% overall. For the most part, we've opened up these new states in and around that 20%-25% range, which would indicate that we at least have access to available premium that will allow us to ramp up our market share more quickly than we have in other expansions or in our other legacy states. That said, we focus our company on underwriting and pricing discipline. I realize that's a little bit of a statement that may lead you to question, hey, are we going to commit to a timeframe? Generally, we don't put new business targets out for any of our employees that don't include a profitability component to that.
For the most part, we've opened up these new states in and around that 20% to 25% range, which would indicate that we at least have access to available premium that will allow us to ramp up our market share more quickly than we have in other expansions or in our other legacy states. That said, we focus our company on underwriting and pricing discipline. I realize that's a little bit of a statement that may lead you to question, hey, are we going to commit to a timeframe? Generally, we don't put new business targets out for any of our employees that don't include a profitability component to that.
We're pleased with what we've seen so far in Arizona and New Hampshire, our premium per field underwriter, specifically in the state of Arizona, very early is as good as we've seen in a lot of our existing footprint states, which indicates that the agency partners we picked were the right ones, the access to quality new business opportunities at our pricing levels were abundant, and we expect that to continue. I'm not going to put a date out there. You saw the volume we've gotten to this point, and we're going to be disciplined about it. If the market continues to be disciplined in those geographies, I think you're going to see good, solid growth and certainly growth in excess of our overall Commercial Lines growth rate that you've seen over the last couple of years. Let me just add to that, Mark.
If you think of Arizona, let's round it to a $4 billion Commercial Lines market. It's like $3.8, $4 billion for the sake of this conversation. A $4 billion market, a 3% share is $120 million operation. As John went through, we did $7 million in 6 months. I don't want you to just straight line extrapolate that, I just want to make sure that the point's being made that we're doing this greenfield. We've got 3 of the best field underwriters in the marketplace. We are absolutely 100% comfortable with the Ivy League agents that we've got in that geolocation.
We really feel good about the infrastructure that we've got, what we've built, the fact that we haven't gone out and bought another company that now has brought on a whole different culture, whole different level of systems, the integration is clear and the line of sight is clear. Our people at the highest level are the ones that are managing that operation relative to their existing Selective people at the regional level and running the office. When you think about how you want to grow, how you want to do it systematically, how you want to do it rationally, as John's telling you we want to do, this demonstrates to us that we can take our style of operation and do it in other states. More importantly, the agencies there clearly value the unique business proposition that Selective brings to the table.
That's helpful color. I appreciate that. Let me give you a quick, easy one. Are you seeing any particular uptick in claims activity from the various winter weather that we've had so far in the first month-ish of the year?
Mark, this is Mark here. January will be a pretty heavy cat loss month for us. It's just one month in a quarter, we don't really want to comment on the overall level of cat activity with too much specificity. PCS 1811, which was the big winter storm in the Northeast, has created a fair number of property losses within our book of business. We're keeping an eye on that. The claims activity has dropped off at this point. The claims team is on it. January will be a pretty heavy month for us, but that's just one month in a three-month quarter.
Mark, one thing I would just like to point out to you too is we pretty much hold our cat budget at three and a half points of NPE. When you really start to sit down and disaggregate our NPE in terms of our liability and our rate increases, when you start to think about the pure absolute dollars that get put into that pot every year, that actually is getting larger every year, probably faster than other companies who may keep the ratio the same, their earned premium isn't going as high as ours is. I'm not saying that that's anything you should hang your hat on, I just want to make sure that that point gets made. Our three and a half points is stronger in 2018 than it was in 2017 or 2016 or 2015 or 2014.
Okay. Good point on that. Last question is just, again, this is kind of a broad market question, as you approach customers for the 3% average rate increases that you're getting, just some feedback on customer reaction. Are they sort of accepting, they kind of get it? Are people changing their limits or their retentions? How's the customer responding to the 3% pure rate?
Yeah, Mark, this is John. First thing, I'll take the last part of your question first. Our small and middle market customers generally don't negotiate term and condition changes from one policy period to the next. There are occasional additions of coverage in certain areas like cyber or employment practices liability and those sorts of things. You don't see a lot of retention increases in order to manage premium increases. It's just not our style of business. With regard to how the customers are handling it, I think the most direct way to think about it is to look at what's happening with retentions and what's happening with retentions more specifically by pricing cohort, which we see as very strong. I think it depends also on the customer's experience from a loss perspective.
We've certainly gotten a lot more sophisticated as a number of our other competitors, where price change in the upcoming term isn't just driven by that individual's account's loss experience in the last one or three years. We think that's appropriate to better predict future loss experience. Unfortunately, a customer who is loss-free, and on occasion, the agent representing that customer who's been loss-free thinks that should generate a rate reduction, and the customer who had the loss, even though that loss may not be indicative of an issue with the account or profitability challenges going forward, it's easier for that agent to sell an increase to an account that's had a loss. That's where it becomes a little bit of a struggle.
We've pointed to our granular approach, which builds in a number of factors beyond just the loss experience of the account, and our ability to work on a portfolio basis 60 and 90 days ahead with our agents. Our agents' close customer connection and their ability to articulate the reasons why a policy is renewing flat, down, or up. We do have a number of policies, even with a 3% overall rate, that are getting decreases because they've earned a decrease, and others who are getting increases because they've earned the increase. Retention suggests that the message is resonating, but it's a constant struggle, and it's account by account conversation between agent and customer.
Let me just add. In other words, when you think about what John just went through, Mark, think about it this way. 50% of our book got on average of 1% increase. You can't think about, hey, how are you delivering a 3% increase to a customer? Half of our book got a little over 100 basis point increase, and that was even done on an extremely granular level. When your inside underwriters have the ability to have portfolio management conversations with agents that are at the level of specificity that we have is why we're able to achieve the high retention in that. If you were socializing this rate, which when I mean socializing, you were doing 3% across the board, you would have an absolutely different result than what we have. It's the insightful data that we have.
It's the people that we have that can interpret that data and be very agile in terms of what's happening in the market conditions to make sure they're focused around retention on the best end, and where they have to flex in terms of, hey, I'm going to stay hard on this rate increase on this cohort. That's on the worst ends, that you've got to be firm on that pricing.
Appreciate the answers. That's great color.
Thank you. At this time, there are no further questions. I would like to hand the call back to Greg Murphy for any closing remarks.
Great. Thank you very much for your participation. You have any follow-ups, Rohan and Mark are clearly available to answer any follow-up questions. Thank you very much for your participation this morning. Thank you.