Good morning, everyone. Welcome to Selective Insurance Group's 2017 Investor Day. We appreciate you taking the time out to come listen to our story and strategy today. We know it's a very busy period for everyone. This event is being webcast. Welcome to everyone who is also connected via the webcast link. We have a busy agenda for this morning. As you can see, the theme for the day is Setting the Stage for Sustained Outperformance. In terms of the agenda itself, Greg Murphy, our Chairman and Chief Executive Officer, will provide an introduction to the story and also lay out why we believe we're extremely well-positioned in the current evolving marketplace. Mark Wilcox, our Chief Financial Officer, will come provide an overview of the business operations, the financial position, and the business model. Greg will come back on and provide a strategic overview.
We will have a 10 or 15-minute break. We request that you please put your cell phones off for the duration of the presentation. When we reconvene after the break, John Marchioni, our President and Chief Operating Officer, will host three panel-style discussions with some of our senior leaders where we will do a deep dive into certain investments and initiatives we are making to position us for sustained outperformance. We will have all the Q&A after the presentation. We request that you hold your questions until that point. When asking questions for the benefit of people on the webcast, we request that you announce your name, your affiliation before asking the question. We will have a lunch following the presentation here. The lunch will be in the next room over. I believe it's called the Mirus.
We have assigned seating, please check which table you're on before heading into the next room. I'd like to make a few brief introductions before we start the presentation. We have a number of members of our board here and also our senior leadership team. I'll start with some of our board members. We have John Scheid. If you can please just wave your hand. I think that might be helpful for the investors. Paul Bauer, Bill Rue, Brian Tebo, and Steve Nicholson, all in attendance here today. I hope I haven't missed anyone. In terms of our senior leadership team, I'll make a few brief introductions. Many of them will not be on the stage today, hopefully you get a chance during the break or during the lunch to introduce yourselves and meet with them.
I know a lot of them are very excited to get to meet you and interact with all of you. I'll just quickly, as I see them, I'll name them. George Neale, who heads our claims operation. We have Vincent Senia, who's our Chief Actuary. We have Tony Harnett, who's our Corporate Controller. James McLain, who'll be presenting. We have Jana Hupka and Angelique Tarble heads our HR department. Joe Eppers, our Chief Investment Officer. Jana Hupka is our Chief Risk & Reinsurance Officer. Allen Anderson heads our Personal Lines group. Chuck Mucilli, who is the head of our agency operations. I think I have captured everyone who is not presenting. The rest, I think you will get to see them on stage.
With that, I just have to remind you that we will be making forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. We direct you to risk factors as listed in the 10-Ks and the 10-Qs, and I believe we are covered from a legal perspective. With that, I will turn the mic over to Greg Murphy, our Chairman and Chief Executive Officer.
Thank you, Rohan. Good. Very good. Thank you. Thanks. All right, welcome. It's great to have everybody here today, and I think this demonstrates a little bit of your commitment to better understand this Selective story. Our expectation is that when you walk out of here, you'll clearly understand our competitive advantages. You'll know how we feel about the market and how we look at navigating a market that's in a little bit, I would say, transition. Let's start with Selective. You know we're the 31st largest property casualty company in the world, right? We are, in my mind, a very special property. By that I mean we have the capabilities of a national, but the relationships and the uniqueness of a regional that brings in a lot of nimbleness on our part. In total, we write about $2.4 billion in premium.
That is up about 6% from a year ago. You've got to understand, we're principally a commercial lines writer, we're growing at 3x the expected commercial lines growth rate in terms of our ability to grow in our markets. We have a 24-state footprint, and that includes two newly minted states of Arizona and New Hampshire that you'll hear about during the course of today. A very aggressive, I would say, very aggressive expansion plan laid out that you'll get a little bit better insight to in terms of our overall desire to grow. 90 years of financial strength, and I think that's important. I don't think you see what you find in the industry, companies doing well. We get compared against that company, and then the reserve charges start.
If you put those numbers back into the years, that competition didn't look so good over the long term. I think when you look at our Stable overall performance. It's extremely good. $3.4 billion market cap and $1.7 billion of overall equity. I'll point to this, a 92 combined ratio through nine months, which is a full 18 points better than the forecasted overall industry. That's something to be, in my mind, very, very proud of the hard work that this entire team has done and will continue to do as we move forward. I'll turn to the next slide in terms of, part of our plan has obviously been diversification, providing a more stable base for growth and profitability. You can see that the principal core business that we have is the commercial line segmentation, 24 states, 1,250 agencies.
In my mind, a very strong part of our business. Personal lines, on the other hand, you can see is only in 13 states, and you can see that where we are is almost as important as where we're not. We're not in very regulatory unfriendly states, which we want to make sure that we're in a state that we can generate a profit. We have about 700 distribution partners on the personal line side. That represents approximately 12% of our premium. Our E&S division, which represents about 9% of premium overall, is in 50 states. The advantage of that segmentation is it gives us geo-diversification. It's principally a liability book overall. Our flood book, and that has about 80 wholesale distribution partners.
Our flood book, which is a great hedge to catastrophic activity has 5,000 distribution partners across the country. You're going to hear a little bit more of each one of these segments as we move forward. When you think about how diversification drives overall performance improvement, and I think that's part of the reason when you look at, hey, why are you 18 points better than the industry? Or more importantly, why are you printing a 92 when everybody else is generating combined ratios that are principally commercial lines riders well north of that? Part of it is the very uniqueness of our commercial lines model. I will tell you that the linchpin of our success is our field model, and that starts with field underwriting, field claim handling, and field safety management. What does that really mean?
That means one of our underwriters that you'll hear about, sometimes we call them field underwriters, sometimes we call them AMSs, but they're the people that have basically a 10 to one span of control with agencies. They have 10 agencies that they would generally represent. They're responsible for all of the new business that that agency writes. The harvesting of that, the development of the producers, the development of the business plan with that agency, all is on the shoulders of the field underwriter in our model. When you think about why are we able to successfully print much higher renewal pricing than the industry does, and that's really a main attribute to our inside underwriters that carry an inventory of about $13 million in premium. They work that inventory. They work it 60 to 90 days in advance.
They're working with specific groups of agents that represent that $13 million of inventory. I'm in with you talking to you about the accounts that are coming up, which cohort are they in? How much rate do I need to get? Where can I be a little bit flexible? In all of that's why we yield a retention in the 83-84 range for commercial lines and continue to print pricing well north of what the industry has in total. When you think about that profitability, to me, that's the key ingredient in generating ongoing profitable results, is getting rate in excess of trend. When you think about our personal lines division, it's 12% of our premium. Again, it complements the commercial lines business that we write.
Many of our agents need dual capability for both personal lines and commercial lines, and we think that that's a better fit. I also feel that those cycles run a little bit differently between commercial lines and personal lines. That helps on the long term generate a little bit more consistency in terms of return on equity. Then when you think about that line, you know I've talked to all of you consistently throughout the years, is that we were going to be mercenary-like in the home book, and we were, and we have. Our target to you, what we said we were going to do is to get our home book to a 90 combined ratio in a normal cat year. That's virtually where we are right now.
For us, a normal cat year is about 14 points, and that's where we are on that book. Then we also said that the auto side would be more of a leg-in strategy, of which we've been doing, is legging in price relative to trend, working on our expense initiatives, but feel like there's a little bit more of a tailwind now on rate firming in the personal lines that maybe give us a little bit of opportunity to make more improvement in that line of business. Then the flood is a great part of that division. It provides about 70 to 80 basis points of return on equity overall. And the advantage of it is when you get flooding, like we saw in Harvey, particularly more so a little bit than Irma, we actually make more money as a result of the operation.
That gives you a little bit about the three segments. The underpinning of all of those that you're going to hear a lot about today is our customer experience initiatives that will continue to push us and our agencies to a best-in-class level in terms of success. Now, there is a lot on this slide. It's a little bit heavy, but I think it's important to walk through some of these because it gives you a sense of our competitive advantages. It gives you a little bit more sense of where the industry is in terms of, well, why do you think we're going to generate a number next year versus the competition? What's the challenge that the competition has? Let's kind of deal with this from an industry standpoint.
Franchise value, what does that really mean, and how does that give you an advantage in the marketplace? Remember, there's 38,500 agents. I'm not saying every company deals with 38,500 agents, but there are a lot of agencies in the network, and it's hard for companies that have a lot of agencies to be able to get a deep penetration in that agency and be able to develop a business plan with that many agencies for long-term success. That becomes problematic. You take a lot of these companies, they've got agents, but they're dealing with an agency in New Jersey, and that business is being handled out of Maitland, Florida. And when they call, they get a different person on every account that they call in.
They're dealing with somebody different for new, and they're dealing with somebody different on renewal every time they have a contact about an issue in their agency. When you think about that in terms of an advantage, it's enormous. I'll tell you, it's gotten some of our competitors in terms of how do they look at the market? Are they going to split the market and say, "You know what? Agents can't really do small business in a 24-hour-a-day environment, so we'll solve that problem for them, and we'll sit there and put that business in service centers or other initiatives, and we'll reduce commissions or eliminate commissions and go direct." Yet for the large and middle market, that customer still needs an experience with an agency in the middle, so we're going to do that the way we used to do it.
Versus when you think about solving that problem, you have to holistically solve that problem. I don't care whether it's a small account, a medium account, or a large account, you need to be able to solve that business issue in a 24-hour-a-day environment. That's what you're going to hear from us. We are solving that issue holistically in terms of that. When you think about where we are, at 1,250 agencies, that is in 24 states, that's 50 agencies per state. That is not a lot of agencies to have on average in our overall footprint. When we talk high franchise, that's what we're talking about. We're talking about doing business plans with every one of those 1,250 agencies. How are we getting to our share of wallet? What are we doing in terms of growth?
Our capabilities to do that in terms of our nimbleness and agility and sophistication are the reasons we're able to properly deploy that at the agency level. That's a little bit about how the industry stacks up, how we stack up. Unique field model, you've heard about me talk about it. For the industry, things are centralized. They're not responsive. They're more socialized. When you have that many agents in those many locations, how are you solving a pricing problem in North Carolina? You're just socializing rate across the board, and that you cannot do in this market. You can no longer socialize pricing. What I mean by socializing, you're coming out with North Carolina, and the direction to whoever's running North Carolina is get me six or get me five or get me four, and that's the direction that that manager has.
You cannot execute a strategy like that successfully. You've got to have the granularity to come in and look at business by cohort, look at business by how it performs, and figure out how you want to deploy that very tactically to keep your retention high because you will be eaten alive by the competition if you socialize anything in today's environment. The buyer-supplier dynamics are changing. I want to make sure that you guys understand the changing. You've got this enormous amount of private equity money in the market. You've got a lot of other non-private equity consolidators. Well, this whole deal about the company then had agencies, and agencies were there. We've got to deal with them. The buyer-supplier power through all the consolidations change. These entities control an enormous amount of premium.
Do you think they're going to let somebody that they've invested in buying properties at 10x EBITDA, 12x EBITDA, sit there and go, "Hey, wait, you're going to eliminate a big part of my business model that I just invested 10 to 12 and hoping of flipping it at 16 times EBITDA, and you're going to take that away from me?" They control. The buyer-supplier power has hugely changed in our business from companies to agencies just because the fragmentation has been eliminated. I think that's an important concept for you to understand. When you think about how we have to be best in class, we have to be to the point that everybody wants a Selective contract, but I'm not going to give it to you because you're not Ivy League. Unless you're Ivy League, you're not going to get a contract from Selective.
When you think about the uniqueness of our business model, they want us to have a Selective product because they know if they don't, they're going to lose business to other agents that have the Selective contract, that have the full face and capability of what we offer in terms of an organization. Let's drop down to superior service. Obviously, the larger companies have multiple technology platforms for commercial lines. Many of our competitors could have three, four, five, six different commercial line systems, multiple personal line systems, multiple billing systems, multiple claims systems. When you think about integrating what John's going to talk to you about, and his team, about an omnichannel experience where it's a shared experience and we're developing the golden record. We have all of these systems and everything connected with a CRM system in front of it.
It is very difficult to try to execute that strategy when you have multiple different systems in line. That's a little bit about the customer experience and the holistic and the feedback loop, because we have people in the field. We understand exactly what we need to do, how we target our pricing, and then above average returns. I think when you think about the industry and where our leverage is, I just want you to think about this. The industry will print about six points of ROE from its investment portfolio. They have about $2.56 of invested assets per dollar of stockholders' equity versus our 336.
When you think about it, for the industry, because they write at about a 0.7 to 1 and we write at a 1.4 to 1, one point of return on equity for the industry is a half a point of return on equity. One point of combined ratio for us is one point of return on equity. We're getting twice the leverage, the industry has to write at 2x the margin we do to generate the same amount of ROE, because for every one point of combined ratio, they're only getting a half a point of ROE. That obviously generates an enormous amount of leverage for us going forward. When you think about where we are and the tailwinds and the headwinds, let's talk a little bit about the headwinds in the industry.
Low interest rate environment, I'll tell you, we love the low interest rate environment. Absolutely love it. I hope it stays like this because what it does, low interest rate environments means that you can only make money if you underwrite. When your competition doesn't underwrite well and you do, you want to keep that. You want to keep the foot on the throat of every CEO to generate underwriting results, and that's a competitive advantage that we have in the marketplace. Obviously pricing is an issue and reinsurance costs are going to go higher. I think that reinsurance pricing overall, you've read enough about it to know that the general pricing environment there has just gotten a little bit too thin and you need to be able to deal with this. New entrants, digitization's happening. The buyer-supplier dynamics are changing, which I've already articulated to you.
This whole issue about how do you deal with a customer in a 24-hour-a-day environment, and how are you going to do that? What's your strategy as an organization to execute that? Because in my mind, if you cannot do that, you have opened yourself up to be attacked by the new entrants that will figure out a way to do that to you. You have to solve that Rubik's Cube if you're going to be successful long term. Some of the tailwinds, zero ROE for the industry. Zero. The donut, the bagel, absolutely zippo in terms of return on equity. What does that mean? That means you're going to have to generate return through underwriting results. That means you need some pricing power in commercial lines to be able to do that.
Anything that happens more in pricing and the dynamics of the market only provide an enormous tailwind to us as an organization. Obviously, favorable tax environment. Depending on what happens with tax rates, at the end of the day, any equalization in taxes between U.S. and non-U.S. organizations in terms of ceding premium to affiliated companies, whatever happens in the marketplace, we view all of that. Anything that levels the playing field, we look at that as an enormous advantage overall because it makes people price the product the same way we have to price it. I think tailwinds will be anything that you could do to increase what we call the switching cost of the product. Right now, an insurance product is too fungible. It's too easy to move from carrier to carrier to carrier as a customer.
We've got to find ways to build connectivity into a customer base, so it makes it very hard for them to switch in terms of where they are. With that, I'm going to turn it over to Mark, who's going to walk you through some of the financial results, and thank you very much.
Thank you, Greg. Good morning, everybody. As with Rohan and Greg, I'd like to extend a warm welcome to everybody participating today. We certainly appreciate your time and attention, and we believe we have a great story to tell, and we hope you leave with a better understanding of our business and our future plans and expectations. I've got a lot of ground to cover. I'm going to spend quite a bit of time going through our financial results and operating model and balance sheet capital management and things like that. Before I jump in and go through all the details, what I'd like to do is just tee up three key themes that I'd like you to think about as I go through our results and my part of the presentation.
First, you heard it from Greg, 2017 has been a very challenge year for the industry as a whole. The cat loss activity, the anemic commercial lines pricing environment, and the low interest rate environment has made it very difficult for the industry as a whole to make any money. That said, the second point is Selective has had a very strong year in 2017. When you go back to 2016, we had a record year in 2016. A record year in terms of operating income and a record year in terms of statutory combined ratio. We had a high bar coming into 2017, and we believe we've been able to continue that momentum and have had a very good year on a year-to-date basis.
Most importantly, when you think about our result, think about it, and as I go through the numbers, think about it not just on an absolute basis, but on a relative basis compared to our peer group, and think about how well-positioned we are going into 2018. We believe we're exceptionally well-positioned to compete effectively as we go into the new year. The third point I'd like to make, I'm going to go through a lot of statistics that are very positive, a lot of good trends that we've had in our financial results over the time series that we're going to go through. I don't want to gloss over some areas of opportunity we have to improve our operations. You heard about it on our third quarter conference call. Our Excess and Surplus lines business is a relatively new business for us.
This will be our sixth full year of operations, and the margins in that business haven't met expectations, there's some work to be done there to improve that. Secondly, commercial auto is a line of business that's significant for us, and the profitability there hasn't met expectations either. We're working hard. We believe we have a good tailwind in terms of the industry pushing price and rate adequacy to get that line to a profitability that's acceptable, there's more work to be done there. Then thirdly, from an expense perspective, while we believe we have an efficient organization, we believe we have room to improve the efficiency overall of our operation. You've seen it come through the results this year. Our expense ratio has come down.
Overall, our expense ratio is a little bit elevated versus the industry as a whole, and we believe we've got some work to do to improve that over time. All those areas will take a little bit of time to improve the result, but I just don't want to gloss over these areas. We're hard at work, focused on improving the operations in these three areas. You can see on my overview slide there, the areas that I'm going to cover. I won't read the bullets. They're all self-explanatory. Let me just start with the overall business model. On the right-hand side, you can see the financial strength ratings. That's the price of admission in our business, and we believe we have strong financial strength ratings. On the left-hand side, you can see a depiction of our business model.
We believe we have a lower risk profile than the industry as a whole, and that starts with our underwriting appetite. We write a low to medium hazard book of business, and we believe that has resulted in less volatility in our underwriting result. We back that up with a very strong balance sheet, a conservative approach to managing the investment portfolio, significant reinsurance buying, and a disciplined approach to reserving. I have slides on each one of those points that I'll walk you through each one of those in a little bit more detail shortly. That lower risk profile and the financial strength ratings allows us to operate with higher operating leverage in the industry as a whole. We believe that although that's not unique, it can be replicated.
We do believe it's differentiated and really helps us compete in a tough environment, like Greg mentioned. Just to provide a little bit more color on that, you can see our statistics in terms of premiums to surplus and investments to surplus compared to the industry as a whole. You can see on the right-hand side of the chart what it means to be able to generate a point of operating ROE, what we need to do from an underwriting margin perspective and from a book yield perspective. Just to make this a little bit more real, I'll give a very brief and simple example as to how this really works.
If you're in our industry and you want to generate a 10% ROE, I pick a round number because it's easy, and let's say you do have a little drag at the holding company in terms of financing costs and holding company expenses and call that two points. You need to generate 12 points of operating ROE to hit your 10% target. To keep it simple, let's say you're going to get half of it from underwriting and half of it from the investment portfolio. For us to hit that target, we need six points of underwriting margin or a 94% combined ratio. The industry as a whole needs an 88 combined ratio. Clearly, in the competitive environment we're in today, a lot easier to hit a 94 than an 88.
With the 50% extra leverage we have in the investment portfolio from investments to surplus, in today's low interest rate environment, to hit that 6% operating ROE for our portfolio on a pre-tax basis, you need 240 basis points of investment yield versus the industry as a whole at 360 basis points of yield. When you think of the 10-year still at a very low rate at about 2.3%, you can see how we're very well-positioned to continue to deliver strong financial results. How have we done this year? You can see our operating ROE on a year-to-date basis. We're at 11%. We believe that's a very strong result. We have a target, a stated financial target, that's 300 basis points over our weighted average cost of capital or 11.5%. We're a little bit below our long-term expectations.
It was a tough year or has been a tough year in terms of cat loss activity. When you look ahead to the fourth quarter, the wildfires are going to be a significant event for the industry, less so for Selective. In terms of the contribution of the operating ROE, you can see the components there. The bar in red is that holding company expense that I mentioned, as well as interest expense costs. We've worked hard to bring those numbers down. If you were to look at those numbers on a year-to-date basis in 2016, that would have been about a 2.8% drag on the operating ROE, and now we're down to 2.2%. We've made some improvement there. For us, our goal from a financial perspective is to hit that long-term target over time. We're in a volatile business. It's driven by the cycles.
Over time, our goal is to hit that target. There'll be some peaks and valleys, but we believe if we hit that financial target over the long run, we're going to drive growth in book value per share. Not only growth in book value per share, but growth in tangible book value per share plus accumulated dividends. We believe that's highly correlated to total shareholder return over the long term. If we work hard, put our head down and deliver growth in tangible book value per share plus accumulated dividends, we believe over the long run that will result in strong total shareholder return for our shareholder group. Just shifting to the segments, I want to just spend a few minutes talking about our segments. Greg teed up Standard Commercial Lines.
It's our most significant segment, 79% of the business. It's been a profit engine for the company. You can see the growth in net premiums written, 7% compounded annual growth rate over the time series. You can see the improved underwriting margin over time. We've continued to drive profitability in this book of business. On the slide, you can see the points that we make to how we've been able to accomplish that. I can read through them. They're easy to say. They're hard to execute. The company's done a very good job in terms of driving profitability through these items. One of the key areas that we focus on is rate in the renewal book and rate in new business. We've been able to generate rate above loss cost trends over that time series.
For the year-to-date basis for us, as of 9/30, our rate increases were about 2.9%. They dropped off a little bit in the third quarter to 2.7%. We had a very strong October and delivered 3% pure renewal rate increases in the month of October. The momentum's picked back up a little bit from a pricing perspective. We believe if we continue to focus on these areas, we can continue to maintain strong margins in our core segment. From a business mix perspective or from a hazard perspective, we're in the small and mid-market commercial segment of the market. We're not in the very small side of commercial lines, and we're not a very large account writer. While we do write some accounts with premium over $250,000, you can see the distribution of the premium by account size.
For that, on average, our average account size is $11,000, and from a limits perspective, 80% of our commercial property book and 87% of our casualty book has limits of $1 million or less. That just hits home the point that I made earlier on in terms of our business model about writing the lower to medium hazard book of business. We believe over time, that will result in a little bit less volatility in our overall combined ratio. We have very strict underwriting guidelines in terms of limiting coastal exposures. We believe our expansion state that John will talk a little bit more about later, diversifying out into the West to the Southwest of the U.S., will continue to diversify our book of business away from the peak perils on the East Coast in terms of hurricane exposure.
In terms of the type of business, the book of business is casualty focused. It's predominantly a casualty book of business. We're a, call it a whole account underwriter or a packaged underwriter. We have a lot of significant expertise from a corporate oversight perspective that supplements the AMSs that are in the field. Our corporate underwriting group is focused on strategic business units and lines of business. It's customer centric. They're focused on delivering a package policy that meets the needs of our customers, and they do a great job doing that. You can see the lines of business that we operate in, general liability, commercial auto, workers' comp, et cetera, the composition of the book of business. Over the last few years, general liability and workers' comp for us have been very profitable, and our commercial property results have been excellent as well.
Again, as I mentioned in my opening comments, the commercial auto results have been a little bit challenged. We believe we have a little bit of pricing momentum behind us and are working hard to improve the profitability in that line of business. Shifting to the standard personal lines segment, we have three principal lines within personal lines, homeowners, personal auto, and flood. Greg talked about our margin expectations in homeowners, and we believe we've been able to get rate through that book of business to get our target margins to where they are now to our target. We continue to diversify that book of business. A little bit more work to do on personal auto. Then flood is a significant contributor to our overall results.
It sort of gets subsumed in the background a little bit, but it's a nice business within our personal lines book of business. We're the fifth largest writer of FEMA's NFIP Write Your Own Flood program, and it provides significant fee income for us. We're not in the underwriting business, so we're not out there writing standalone flood policies. We're not doing a wraparound or writing excess flood like many in the market are. We're not in the underwriting business for flood per se. We're a partner with the government and collect fees for doing that work. Just by way of example, and Greg talked about it does provide a nice hedge in a quarter of cat loss activities.
If you go back to 2012, Superstorm Sandy, if you're a primary company, or Hurricane Sandy, I guess if you're a reinsurer, or maybe it's the other way around, a regulator. You go back to 2012, big losses in the state of New Jersey, an area that we have a high market share, high concentration. That was a reasonably significant loss for us, and I'll walk you through the cat loss activity in a few minutes. We incurred about $55 million of net losses before tax, about $35 million after tax. We booked $16 million of fee income that quarter related to claims handling fees related to the NFIP program that ultimately developed to $19 million or about $12 million after tax. A nice hedge in a quarter when we had significant cat loss activity. Shifting to E&S.
Again, as I mentioned earlier on, we got into the business in late 2011. We've been in it for six years now. It's been a growth opportunity for us. We've grown the book of business significantly. Our focus is profitability in this book of business. The margins that we've generated in E&S have not met expectations, and there's work to be done to drive that down. We got off to a good start in 2017. We were running below 100 combined ratio through June 30th, in the third quarter, we had the impact of Hurricane Harvey, which was well within expectations. It was about a five, $6 million loss for the E&S book. Texas is a huge E&S state, and we write a significant amount of premium in that state. We also had some adverse reserve development.
From a year-to-date perspective, we're at about a 105 combined ratio in E&S. There's work to be done to bring that down. Our expectations is to have consistent margins in this book of business. It's a nice add-on to the Standard Commercial Lines book that we have, we'll be a little bit more opportunistic from a growth perspective. We'll let that top line go up or down based on market opportunities. This book of business is more transactional than our Standard Commercial Lines. It's less of a relationship business. About 55% of it is retained, about 45% of it turns over every year. We have great opportunities with that turnover to reposition the book of business and re-underwrite it and drop some of the areas that have been a little bit more challenged for us.
We like to refer to our E&S business as E&S light. By that I mean it's a lower hazard book of business. It's not your traditional large commercial property taking on cat exposure, whether it's California quake or wind or flood, or writing large limits in big open areas like New York City or cranes and things like that. Our average premium size is $3,000. That's very modest. 98% of the policy limits are $1 million or less. It is, as Greg mentioned, a casualty focused book of business. 75% is casualty, 25% is property. We do exclude the major perils in significant cat exposed states like quake in California, wind and flood in Florida, and flood in Texas, and that really served us exceptionally well in the third quarter of this year. Shifting to the investments, I mentioned we have a conservative investment portfolio.
95% of it is in fixed income and short-term investments, AA minus average credit quality, 3.6 year effective duration. We do look at risk assets as an opportunity to have a little bit of a boost to book value growth without taking on too much risk. We have an allocation target of about 10% to risk assets. Risk assets for us are high yield, which is about 3% of the fixed income portfolio, public equities and alternative investments. The alternative portfolio is principally private credit and private equity investments, limited partnership type investments. We started the year about 7.1% in terms of risk assets. We're up to 7.6.
The risk asset side of the equation is relatively expensive at this point. We're going to take our time and be disciplined in terms of deploying more capital into our risk asset portfolio, but we'll be a little bit more opportunistic and increase that over time as the market opportunities present themselves. From a yield perspective, we've worked hard on the investment portfolio. That leverage is meaningful for us, and every basis point increase in investment yield results in operating income for us. We've worked really hard to get a little bit more yield out of the portfolio, but we haven't stretched for yield in terms of taking on additional duration or interest rate risk, and we haven't gone down the credit spectrum to get that yield. About a year ago, we implemented a targeted plan to onboard three new core fixed income managers.
We own the investment portfolio, but we hire world-class investment managers to help execute our strategy. That strategy over the last 12 months has worked exceptionally well. You can see the runoff in the book yield over time going back to 2012, sloping down as we had sales and maturities of the portfolio and new money rates were coming on at lower rates than they were rolling off. We reversed that trend this year and it's had a meaningful impact on our financial results. We think that trade is largely complete and we're going to be more subject to the increase in interest rates as a whole as we go into 2018. That said, one of the things we've done from an investment perspective is we have repositioned the portfolio from a duration perspective.
On the long end, we use munis as a way to gain access to duration. On the short end, we're taking on more floating rate exposure. 19% of the portfolio today is in floating rate securities, and that's been beneficial for us this year. You've seen the Fed increase interest rates. 90-day LIBOR is up about 40 basis points year to date, there's an expectation that the short end of the yield curve will continue to rise as the Fed continues to raise interest rates, that will be beneficial to our portfolio as a whole. From a reinsurance perspective, we are big buyers of reinsurance. We like to protect the balance sheet from a solvency perspective. We like to sleep well at night when Hurricane Irma and Hurricane Harvey are staring you down into your footprint. Our reinsurance program has worked well for us.
You can see from a PML perspective, hurricane is our single largest peril. On the different return periods, you can see the impact a one in 250 or one in 500, one in 100 year return period hurricane would have from a net perspective on our balance sheet, which one in 250 is about 3% or about $50 million, which call it right around a quarter or so's worth of earnings. A very manageable number. We buy a lot of coverage, up to $685 million, the top layer of our program we buy on a collateralized basis. We use the traditional highly rated balance sheets for that structure, we ask for collateral on top of their strong ratings, we have also tapped into the alternative market as well to use that source of capital for the top layer of the program.
When you are staring down the barrel of a Hurricane Irma, which is significant, it could have been a very different storm than it was, that could have resulted in some impairments to some of the reinsurers' balance sheets, it's nice to know that that money's in a lockbox, so to speak. Also from a volatility perspective, we've bought additional treaties that we have in place to protect the income statement as well as the balance sheet. As we're expanding, our expansion states as well as all of our E&S states outside of our core footprint have a retention that drops down from $40 million to $5 million. A state like Texas, a state like Florida, our retention on our cat cover drops from $40 million to $5 million. It provides a significant amount of earnings volatility protection.
From a severe loss perspective, we buy on a per risk basis an excess of loss treaty for property and casualty that caps our losses at $2 million each, which is very beneficial to us. From a cat loss perspective, this has been the year of the cat. Lots of discussion. The cats continue with the wildfires, like I mentioned earlier. You can see over the time series, the last 15 years, the volatility in the cat loss ratio. These one in 100 events seem to happen sort of every five or six years these days. If you go back in time, you can see back in 2004 when we had Charley, Frances, Jeanne, and Ivan. 2005, we had Katrina, Rita, Wilma. 2008, we had Gustav and Ike. The industry as a whole took some pretty big hits, Selective had a very low cat loss ratio.
That's not an accident. That is by design and as expected. As Greg mentioned, we decide where we write business, we decide the types of perils we take, and we want to write a low to medium hazard book of business. That means we stay away from states like Florida, Texas, and California, and those high exposure states. Not to say there aren't good opportunities, a lot of premium in those states, and it's good for others to take that volatility. For our book of business, our business model, we like to avoid that cat loss activity. 2012, I talked about Sandy. That was a different result. That hit us right in our most concentrated area. Part of the geographic expansion has been to diversify the book of business. Again, move out to states that have less U.S. hurricane cat risk.
For the industry as a whole, 4.9 points of cat losses over this period, 2.9 points for us. If you were to shorten up the time series a little bit, our 10-year average cat loss ratio is about 3.4% on a mean basis and about 2.9 on a medium basis. We have very strict guidelines in terms of the exposures that we take from a coastal perspective. From a reserve perspective, we have a very disciplined approach to reserving. We do quarterly actuarial reserve reviews. We're ground up. Every quarter, we look at the whole reserve base and do a very detailed reserve review of our overall reserve base. Twice a year, we have our independent auditors, KPMG. They come in and do independent reviews of our reserve base, and they sign our actuarial opinions once a year.
We believe they have good insight into the industry as a whole and provide some good information to us to think about from a reserving perspective. It's useful to have that deep dive from an independent party coming in to look at our reserve base. We have had favorable trends. We've had 47 consecutive quarters of that favorable reserve development. Just to be precise, there is one quarter in there that was zero. If you'll just give us the benefit of the doubt, we'll call it 47 consecutive quarters. It's a little easier to say, but there was one quarter that rounded to zero. A good track record from a reserving perspective. Clearly, we reserve to our best estimate.
We don't budget or forecast favorable development or adverse development, but we've had trends that have come in better than expected, and as a result, we've had favorable runoff on the reserve base. From a combined ratio perspective, as I mentioned, we had a very strong year in 2016. We had a 91.8% combined ratio statutory calendar year. If you back out 3.2 points of favorable reserve development and 2.8 points of cats on an underlying basis, and we get paid on the actual combined ratio, not the underlying combined ratio, but it's useful to level set and think about trends going forward. On an underlying basis, we finished 2016 with a 92.2. Back earlier this year, late January, early February, we went out with some expectations from a margin perspective for what we thought our combined ratio would be for 2017.
We said we thought we could deliver about 170 basis points of margin improvement. Again, we came off a record year in 2016. We said about two-thirds of that improvement would come from the loss ratio and about a third from the expense ratio. Our expectation was for a 90.5 for the full year. As of September 30th, we were at a 90.7. A little bit higher than our expectations, but relatively close. I will say going into the fourth quarter, based on the seasonality of our premium, there is a little bit of pressure on the expense ratio. We wouldn't be surprised if that 90.7 would tick up a little bit and be closer to 91 than it would be closer to 90.5 by the end of the year. Overall, significant margin improvement coming off of a record year.
You can see the bullets on the side as to how we've been able to achieve that margin improvement, I won't go through that in any more detail. Putting all the segments together and looking at the underwriting portfolio as a whole, you can see the growth. For us, it's about disciplined and profitable growth. We've grown the top line at a compounded annual growth rate of 8% from 2011 through 2017. We've been able to drive the combined ratio down. The red bar is the stat combined ratio, or the red line is the stat combined ratio with cats. The cat loss ratio for us in 2017 is manageable, but it is higher than 2016. We're at a 3.8% cat loss ratio through September 30th. Our guidance, though, for the full year is to come in at 3.5.
It's always dangerous to predict the future of what might happen. There's obviously some volatility in what that loss ratio might be from a cat perspective, but that's our expectation. The fourth quarter for us traditionally has been a lower cat loss quarter. I think on a 10-year average basis, the cat loss ratio for us has been about 2.3 points. We believe it's reasonable to think, barring unforeseen circumstances, that we could come in at the 3.5. From a net investment income perspective, when we set out our guidance for 2017, we said we had an expectation of $110 million of net investment income, which was up from $98.4 million in 2016, and we've upped that guidance to $115 million. We're having a strong year from a net investment income perspective.
As I mentioned earlier, we're very focused on holding company expenses. We restructured the long-term incentive program, the stock-based compensation. There's a component that's variable. It's based on the stock price that gets marked to market every quarter. There is some variability and volatility in that expense line item. We restructured the percentage of long-term incentive compensation related to the variable component and brought that down with an expectation that we'll have about $10 million of expense savings coming through the holding company over the long term. That goes through other expenses, not through the combined ratio, so that's some additional lift for us. This year, we've had very strong TSR, the expense savings haven't been as significant as we had hoped they would.
If we hadn't made that change, the expenses would have been a lot higher than they would have been had we not made the change. From a capital and liquidity perspective and also focusing on expenses, we believe we have a very strong capital and liquidity position and plan going into 2018. You can see from a debt to capital ratio perspective, 20.5%, well within our threshold, and we have plenty of dry powder there if we need to use it, if we needed to raise some debt. From a premium to surplus perspective, we do target a premium to surplus ratio between 1.4 and 1.6. That's sort of our internal threshold. We've been higher than 1.6 in the past, but where we are today, 1.4 to 1.6 is our range.
Our expectation is to continue to ride at around 1.4 to 1, but if the opportunities were there, we could grow a little bit quicker, and that ratio could tick up a little bit. From a sustainable growth rate perspective, we like to talk about the sustainable growth rate, and that's really a function of the forward ROE and our dividend payout ratio. Depending on what your expectation is of our forward ROE and considering a dividend payout ratio, we've historically averaged between the earnings a little bit volatile, but between a 20% and 25% payout ratio, and you saw we increased our quarterly dividend last quarter by 13% to $0.18 a share. That puts us in a sustainable growth rate of 7%-9%.
We can grow using internal funds at that growth rate and keep that 1.4 to 1 net premiums written to surplus ratio exactly the same. Again, not to say we couldn't ramp that up a little bit if the opportunities presented themselves. For us, from a capital management perspective, we believe the most attractive use of capital at this point is to deploy it into our business. We're generating returns well in excess of our weighted average cost of capital, and we believe as stewards of your capital, that's the best deployment of the capital at this point in time. From an expense perspective, I mentioned there's some work to be done there. Our expense ratio, it runs a little bit higher than the industry average.
We don't believe we have a more expensive business model despite the agency model that, the field model that Greg talked about. We don't believe it's an inherently more expensive model than the industry as a whole. We believe we've got some opportunities to drive our expense ratio down by leveraging our infrastructure and becoming more efficient. We're going to continue to make the significant investments in the future, and you'll hear about that from John and his team in a few minutes time. We're going to continue to make those investments. We're not going to build up a deficit of IT projects and talent and succession planning and infrastructure, borrowing from the future to pay for today. We're going to make those investments, but we're going to manage our expenses judiciously and with the growth opportunities we have ahead of ourselves, hopefully leverage the infrastructure.
Our expectation is to drive the statutory expense ratio down to 33% or perhaps a little bit lower over time. That's not going to happen overnight. That's going to take a period of time to get there, but that's our expectation. Finally, my last slide, then I'll turn the podium back over to Greg. It's not always the case that hard work results in success. You can work very hard and be very unsuccessful. In our case, when we were with you last from Investor Day perspective, 5 years ago, we talked about a pathway to a meaningful operating ROE. That, for us, was a pathway to a 95% combined ratio. It was a different interest rate environment back then. We had a little bit more lift from the investment portfolio, but we talked about rate adequacy, underwriting mix, focusing on expenses, and better claims outcomes.
We believe we've worked hard and been able to deliver on those expectations we set 5 years ago. I think the hard work has resulted in success, and you can see that with our financial performance. Sometimes success isn't always recognized. In this case, I think when you look at our total shareholder return, whether it's for the year at 39% or over the time series that you see up there compared to the industry as a whole and the S&P 500 index, I think you can see that our shareholders have been well rewarded for the hard work and the success the management team's been able to deliver over the last few years. With that, I know there's probably a lot of questions. Again, we'd love to answer all of your questions. We'll have plenty of time before lunch.
With that, I'll turn the podium back over to Greg.
All right. Thank you, Mark.
Thank you.
Hopefully you got a good sense from Mark in terms of what we've done and the heavy lifting that the company's really, I think, in my mind, embraced throughout the organization. You kind of transition now to a little bit more of where we're going relative to some of the initiatives and how we're going to grow, why you should feel comfortable in our ability to deliver continued profitable growth. Profitable growth in this industry don't always go together. I see many of our competitors sometimes make a lot of acquisitions. They get a lot of acquisition growth, and then they have to retrench in terms of profitability over time. What you're going to hear in the story from us as we move forward is the fact that most of our growth is greenfield. Most of our growth is organic.
When you think about our top-line numbers, it doesn't mean that there aren't other opportunities out there, but you really have to start to think as investors about how is the company or property that you buy, how are they going to grow? That's number 1. Number 2 is what are the strategic competitive advantages that that organization has today, and what makes you believe they'll continue to create new advantages down the road? I think that's the part that you're going to really get a good, heavy set of presentations on as we move forward. When you think about our overall ability to grow and can you just advance that for me, Harry, or no? We're out of business.
Okay, when you think about the risk and how we assess risk relative to growth, relative to everything we've got going on, we kind of assess them, and we look at lower to higher growth strategies. First, I want to point you to that. Look to that, call it the nine, 10, and 11 timeframe. All right? The management then sat there and said, "You know what? We went to our board members and said, 'Look, we have to shrink the organization because of the fact that we could not write new business at levels that generated profitable results in our mind.'" That's a tough statement to make relative to that because no one wants to see their top line go down.
In this market where you sit there and say, "I can't put a price out on a product for a risk that I can generate an adequate return on, then we're not going to do it." That was really part of our strategy. We're willing to shrink the organization, but you can see that we've been in a nice growth path since then. Part of it is the fact that we feel really good about our balance sheet. We feel really good about our inventory in terms of how our renewal business is priced. I want you to understand that if your renewal inventory isn't priced right now, there is nothing that you're going to do as a management team that's going to change your 2018 performance. All right.
If your renewal inventory isn't priced right today, there's nothing that you're going to do as a management team that's going to change your 2018 combined ratio because that number, that's what you're going to earn in next year is what you've written this year. When you think about our growth drivers, you hear a lot of share of wallet, market share. Those are the things that we talk to our agency plant about consistently, our Ivy League distribution partners that we do our planning with. We feel that by getting a share of wallet in our existing agents in states that we know well is the least risky way to grow. Adding new agencies or new storefronts into our existing states is the next most least risky way to grow. Those two together are about a $2.5 billion premium opportunity. All right.
We could double the size of the organization from a commercial line standpoint just by focusing on those 24 states that we've ID'd. Now we're going to add new geo-locations. Geo expansion comes with a little bit more risk, but I think you'll have an opportunity to hear from our folks about how do we open a new state? How do we penetrate a state and the agency plant and the analytics that we have to look at the quality of the business that we're writing new so we can instantly make course corrections. Because that's part of your strategy. How agile are you? How insightful is the data that you get? Do you have the talent in your organization to be able to work through those two things to make course corrections that are necessary to drive performance improvement?
Obviously new products or M&A is not totally out of the question with us. You could see we added the E&S operation several years ago. I view that as a new SKU to sell within our agency plant and to open up new geo-locations through wholesale agents. Anything that we can do as a new product opportunity that fits and makes sense are something that we would strongly consider. Obviously, as you go down the spectrum, it increases the amount of risk that you're willing to take. I think when you look at our track record, you look at how we address problems, whether it's the comp, whether it's the home. Pick the issue and then look at the specificity that we deal with any issue that we have as an organization. You'll find a tremendous amount of correlation to what we tell you.
Also just pick up our proxy and look through our proxy. Look at the things on how we're incented as a management team, and look at the specificity in there. That's already been watered down by I don't know how many lawyers along the way before you guys read it. The specificity that's in there relative to what we get done. I know this is a little bit, you get the picture. I'm afraid of heights. Yet, you got a picture. This is John looking vertically down through the entire organization. He could see every car on the street.
This picture of vertical integration, I want you to have a clear understanding of, at the top level of the organization, we can see all the way down into our organization, into the regional management team, down to the next layer, into the field underwriter or inside underwriting desk, down into what's happening in an agency. We could sit and have a phone call with an agency today about, "Hey, geez, I saw your October pricing. It really wasn't as strong as I would like to have." Or, "This is the issue that we have in the agency about growth." We could tell you right now, our October price was 3 points. All right? We're not talking low to mid-single-digit price increases.
300 basis points, renewal pure price. We know exactly where we are, we know exactly how to tune the dials. Because of the vertical integration, we could turn the dials with unbelievable specificity and, in my mind, not really change the overall retention or other things in the company meaningfully because we're attacking it so granularly by cohort. That's what we mean by all of this in terms of also being able to see new business, and we're looking at a host of metrics relative to new business, new business quality in what we're writing right now in Arizona, and in New Hampshire, but also what we write across the country. Many companies do not have any lens into the new business that they write. Ultimately, that new business will be incorporated in their renewal inventory.
If it's not properly underwritten, if it's not properly priced, it's going to put more drag on their inventory than they had before. That's a little bit on some of what we do as a management team. Then in terms of how we're positioned well for 2018, I know this is a little bit maybe of a redundant point, you know what? I like it, we're going to continue to hit it. You've always heard me say that arithmetic has no mercy, right? That's my line, and I'm sticking to it. I will tell you, it doesn't have any mercy, and I will also tell you, if you're not getting overall rate, you're getting no rate. Don't talk to me about how much you're getting in commercial auto. I don't really care.
If you're not getting overall rate, you're not getting any rate. If you're getting 10 in commercial auto and you've given it back in comp, you've given it back in GL, you've given it back in property, then you've given it all back. That's something I want to make sure that you are very focused on in terms of analysts. You'll hear a lot about headline numbers overall in terms of, "Hey, we should feel great because we got 10 in commercial auto." No, what did you get overall? That's what really walks the dog, in my mind, overall. Then, in terms of overall, this is a point that I'd like you to have to understand. You can write this down. All right, write this down, and there'll be a test. 10 points of rate earned. Forget about written, earned.
Three points of claim inflation. All right? What's the combined ratio improvement on that on a 65% loss and loss adjustment expense ratio? If you're sitting there thinking 10 minus three is seven, you're wrong. When you go through the math and the rendition, that's about four to four and a half points of combined ratio improvement. I want to make sure that you understand how significant the lift is in rate to yield improvement in combined ratio. 10 points of rate, if you wanted the formula, it's 10 times 1.03 divided by 65 times 1.03 divided by 1.10. That's your formula. Write it down. Work it out. If you take a 65% loss ratio, go through the math, that's what you end up with.
I think that's important for everybody to understand how much rate you really need to drive if you're going to generate underwriting improvement. Now how's that? Is that enough? I think that's good, right? I'm good. All right. Mark touched on this, I also want to make sure that when you hear our guidance and you say, "Murph, what's No loss development in the number." All right? Our number that we'll print for you later on, when we get into the January results, in terms of the budget process, we'll print that number without any favorable development or adverse development. It is what it is. Now you got to understand, you guys, a lot of you have 200 basis points have already seen it, 200 basis points in our 2018 number in terms of favorable development.
That will not be in our combined ratio, the 200 basis points that many of you have already prognosticated for next year. Our guidance also will not include a big tailwind relative to rate, although, as I've gone through and articulated with you, many of our competitors are going to have to do something. That something, as we know, it will be in the rate level. Investment income, let's touch on that. Understand that the investment income, in terms of the overall industry versus us, industry's got $2.26 of invested assets per dollar of stockholders' equity because of how we write the business. We've got $3.36, and we've got great cash flow, 17% of net premium written is our operating cash flow for the first nine months of the year, we'll continue to build the base.
Mark touched a little bit on the fact that our yield after tax, new money was like a 330, 20 basis points over the inventory that was running off. We've got a 3.6-year duration. When you think about the trough, we're already starting to trough up. Many of our competitors in the industry have a four, 4.5-year duration, which means they're still going to be running off product at higher rates than probably their new money rates. You should see some lift in terms of where we are relative to our yield and in terms of that overall. ROE, obviously having above average leverage, particularly when you look out and see that book yield will be under pressure for years.
You can look at changes at the Fed, Powell coming in, and other things, there's nothing really hugely that's going to change at the Fed relative to interest rates, and anything that does will take a very long time before they work at the book yield. A company in the insurance business for property and casualty is going to have to make their ROE on underwriting, and that's how they're going to have to do it going forward. Which when we get one point of ROE for every one point of combined ratio, we're in a fantastic market position because as I mentioned earlier, the competition has to write it at 2x the margin. They've got to price it at 2x the margin we do. Forget about any expense differential that we may have.
They got to price it at 2x the margin we do to generate the same amount of return on equity that we have. With that, Harry, go ahead, flip it over one more. Thank you. We're going to take a break. We're right on time. Let's call it just short of 10:00 A.M. Be back for the second part of the presentation, which I will guarantee you is going to be very exciting. With that, thank you very much. Thank you.
All right, grab your seats please. We're going to start back up. Thank you for coming back. I'm going to try to live up to the hype that Greg created at the close there before we went on break in terms of how exciting and stimulating the second half will be. We're going to pivot a little bit, and talk more about our focus on the future, where we're making a number of our investments to secure that the performance that you saw earlier, that Mark and Greg took you through earlier, that we're positioned to continue to deliver outperformance relative to the industry for the long term.
This is not to suggest in any way that we're abandoning the strategy that got us to this point, but in fact, we're building off of that strategy, recognizing the core of what we're all about, leveraging that to the greatest extent possible, but recognizing that if we're going to continue to outperform, we've got to think differently about the future. That's really been our focus as an organization, is that we're going to continue to focus on getting the fundamentals right. That's what's driven our success. At the same time, we need to recognize that there are things in the world around us and the markets that we play in that are changing. The first two that you see on the list here, I think are the most dramatic, which is consumer expectations are changing, technology advancements are driving that, and the change is rapid.
We've really challenged ourself and our organization to say that you can no longer, from a customer experience perspective, compare yourself to other insurance companies, because that's not what our customers are doing. Our customers have experiences in every other service and good that they buy, and that's what their expectation is. The bar in the industry that we're in is fairly low, and we're not comparing ourselves to other insurance companies now. We're saying we need to deliver to our customers that superior omnichannel customer experience that they've come to expect in every provider that they do business with. There's also a changing demographic out there. We need to make sure that our organization and our distribution partners better reflect what the folks that are buying our product look like.
We also need to recognize that there are competitors in the marketplace, some traditional, some non-traditional, and they're becoming more aggressive. Our focus is the best way to protect yourself from disruption, no matter where that disruption is coming from, is have the greatest customer centricity you could have. When your customer sits back and looks at other alternatives, they're going to recognize that there's value they're getting from you that they're not going to get from somebody else, and that is our absolute focus. You heard this over and over again this morning, margin pressure continues to be there in our business. The low interest rate environment will keep that on, and we love that environment. We've got a demonstrated track record of delivering underwriting performance, and we see no reason why that shouldn't continue for us.
We did for our organization to say that when we think about that case for change, that changing dynamic that's out there, we need to really focus our organization around five strategic imperatives. When we think about where we're investing our time and energy and resources, how we're allocating our resources across the organization, it's got to advance one of these five imperatives. The first one for us is about creating a highly engaged team. We talk a lot about technology as do a number of our competitors. In the commercial line space especially, this is still very much a business about people and relationships, people on the underwriting and the claims side that are exercising judgment every day. For us, people have been a huge point of differentiation, and that will continue to be the case.
We continue to invest in making sure we acquire the best talent, retain the best talent, and develop the talent for future leadership opportunities. That will continue to be our focus. Also making sure that our employees continue to have customer focus at the front of their minds, because our customer centricity platform, our omnichannel experience platform is not just about technology, it's about making sure our employees are constantly putting the customer first, because that is the only way to secure your future. Second imperative I'll highlight here is about optimizing operational effectiveness and efficiency. This is not saying that we're going to win in the future by being a low-cost provider. That is not what we're attempting to do here.
We want to make sure that we drive as much ease of doing business as possible, take as much frictional cost out of the transaction between us and our agents, us and our customers, and the customers and the agents. Create those efficiencies to the greatest extent possible. Also, make sure that we are running as efficiently as possible because of all the things we need to continue to invest in. We've got to make sure we're operating at full capacity in our underwriting organization, in our claims organization, to free up those resources to be able to invest in those other areas. Make sure that as we continue to grow and continue to expand our footprint, we've addressed all of those underlying areas that need to be addressed to make sure we're scalable from a people, process, and technology perspective.
Are you identifying and addressing the areas that could potentially break down as you get bigger as an organization? The next three imperatives that you see highlighted here, I'm going to hit very briefly because what we're going to do in the rest of the second half is go through each of these three in a little bit more detail. The first one you see is aligning resources for profitable growth. That imperative is about making sure that we continue to focus on the fundamentals of our business. If we're going to win in the future, we need to continue to be a great underwriting company, a great pricing company, a great claims company. Focus on improvement in every one of those areas.
Make sure we're maximizing the performance in our existing footprint as we build out our agency partnerships and build out our geographic footprint, getting it right from a fundamentals perspective. The one in the middle there you heard me highlight earlier, delivering a superior omnichannel customer experience. Again, what do we mean? This is no longer a business where you can say to customers there's only one way to interact with us and only one way to get information. This is about offering customers multiple means of communicating, whether it's the old-fashioned way or it's a self-service platform or a 24-hour call center. You've got to offer them those multiple choices and let them choose.
More importantly, make sure that the level of experience they have in every one of those communication channels is at the same very high level, and they could seamlessly navigate across those channels with ease. That's the focus of that imperative, and we're going to talk more about that as well. Finally, the third imperative, which is the one we're going to get into first in a little bit more detail, is about leveraging data and treating information as a valued corporate asset. What I'm going to do is ask Brian Sarisky and Brenda Hall to come up and join me while I tee up this segment. Brenda, to my immediate left, is our Chief Strategic Operations Officer, amongst other responsibilities. One of her primary roles is to lead our business intelligence and advanced analytics group.
To Brenda's left is Brian Sarisky, who is a senior leader in our corporate underwriting operation on the commercial line side. Let me just highlight this imperative a little bit more specifically. What do we mean by leveraging data and treating information as a valued corporate asset? For those of you who has followed us for a long time know that we've always taken pride and invested heavily in sophistication on the underwriting and the pricing side. We're into our third generation of predictive models, underwriting and pricing models for commercial lines. 12 plus years we've been in that. Also been in it for a long time on the claims side. Traditional sophistication from an underwriting, pricing, and claims perspective.
This is now about making sure that we take the enormous power that we have in terms of analytics and business intelligence and information, and use it in new and different ways, more creative ways to grow the business, in addition to those fundamentals that we focused on to this point. More importantly for us, it's not just about building these tools in order to give us the answer, but these tools are deployed in a way that our employees become more effective. That's where the real power in this is. The easy part is building the models. The hard part is deploying them. We have certainly built the track record of deploying those models. We're going to talk more about some of the investments we're making and some of the areas we're exploring relative to advanced analytics.
Every company you talk to will probably tell you, yes, we're a very sophisticated organization. We're very good at analytics. We're very good at modeling. I think the question becomes, where's the proof? For us, you need to look no further than our performance relative to pricing. Every quarter you hear us talk about our rate level and our retentions by cohort. You hear us talk about that overall very specifically, very targeted. Mark and Greg referenced the October number as well as the year-to-date number. This is the track record that you see up here of our performance in those blue towers dating back to 2009. The best industry survey information that's out there, most accurate survey is that orange tower, which is the CIAB Survey. You can see the consistent outperformance.
More importantly, again, if you want to look for proof that you know how to build and execute on these models, you need to look at the pricing performance alongside of the retention performance. That's the green line that you see at those same data points, those same time series. You actually see a very steady increase in retention, which tells you that you're managing your inventory the right way. We really think there's two primary drivers for our ability to execute at this level. Number one is the underlying sophistication and the granular approach that you hear us talk about over and over again. Number two, and you have to have both, is very good agency relationships so that the communication is there to support the execution of this strategy.
We talk every quarter about our pricing on our best business and our retention on our best business and on our lowest quality business to show you the granularity. We disclose it every quarter in our earnings call. On the left-hand side, you see the chart that shows you. If you focus on the left-hand side, that is our renewal inventory that we view as having the worst expected performance on a go-forward basis. It's only about 10% of our inventory. Our focus is making sure that's where we're aggressively getting more rate, and retentions will be, as a result of that, a little bit on the lower side. You're getting mix improvement there.
More importantly, that 50 or so percentage of the book that's on the far right tower there, which is the business we expect to perform the best going forward, you're going to manage to a lower rate level and a higher retention. With that, I'm going to ask Brenda to just provide a little bit more insight. We show these results every quarter in terms of how we actually manage through this tool to deliver the outcome we have.
Absolutely. As John mentioned, portfolio management, we believe, has absolutely been the catalyst in our ability not only to balance rate and retention, more importantly, maximize rate while at the same time delivering higher retention. It is a tool that provides our underwriters guidance, pricing guidance, retention guidance at an individual account level, which is very important. More importantly, it aggregates that information in real time for them. What that means is they understand the decisions that they're making to price an account, to renew an account, or potentially non-renew an account, what impact that decision is going to have on their book of business, and all done in real time, which is critically important. In addition, it's given us the ability to create better alignment of our goals.
Our underwriters' goals align with that of our state goals, of our regional goals, of our corporate goals. As everybody knows, one of the keys to successfully executing any strategy is alignment.
The communication with our agencies by our underwriters has really improved as well because our underwriters, they're now positioned to talk to their agencies, not just about the accounts that are renewing next week or this month, but for the months into the future. That's what strengthens the relationship. That relationship is what allows us to maximize rate and retention. I've explained it this way in the past. When an underwriter is able to go out and visit with an agency and sit down with them and talk about the accounts that are going to renew three, four, five, even six months into the future, and tell them right then that these accounts in their portfolio are among our best, and we're going to fight to retain those for you.
At the same time, give them that same early indication of an account or two in their book that are maybe underperforming, where we need the agency's help. That brings the relationship and the partnership so close together that it becomes easy to outperform the competition. It really is just that simple.
The focus to this point of the discussion has been more around execution.
Execution is clearly important in terms of our success on this front. Brenda, just give us a little bit more sense in terms of what's behind the tool, and what do we do in terms of building out this capability.
Sure. The tool was built under the guise of consolidating information, key information that would be taken into consideration at the time of renewal, marrying that with profit improvement plans, and then it models renewal strategies for our underwriters. What this does is it gives our underwriters more focus and makes them more efficient. As Brian pointed out, it makes them more collaborative. They're strategically and tactically every day trying to renew their book of business, and it gives them stronger book of business management skills. In addition to that, this tool is actually a sophisticated model. It's built utilizing our third-generation predictive models amidst a host of additional variables. Variables such as Diamond Score, loss ratio, frequency, severity, some hazard and segmentation variables.
What that does is, it gives them that pricing precision and retention focus, not only at an account level, again, rolled up to a book of business level, but it's that that has enabled them to granularly drive rates through our renewal book, while at the same time gaining the support of our agency partners.
Okay, this has been more of a new business discussion, new business focus. That's what we talk about on a regular basis. The challenge is even more difficult on the new business side. When you think about what it takes to understand your new business quality and pricing, you don't have the same basket of policies year-over-year to compare. It's a much harder item to tackle. Brian, talk a little bit more about new business and our philosophy and approach to managing on the new business side.
Sure, John. We recognize the strength of that tool for our renewal underwriters, and we challenged ourselves to come up with something similar to do for our AMSs. Very quickly, as we got into that work, as John described, we recognized that the different basket of goods coming out an AMS in terms of opportunities for new business each month, they don't see the same type of consistency in what's flowing at them as, say, an inside renewal underwriter is going to have in their renewal portfolio month after month. We spent a lot of time thinking about this problem, trying to find a way to solve that and give the AMSs the kind of tool they needed, and eventually, we figured out the answer was right there in our warehouse. Right, Brenda?
Yep, absolutely. The more we talked about how to give better guidance to AMSs on how to price and underwrite a piece of new business, we realized the key was leveraging data. We have a tremendous amount of data and information about our renewal portfolio. The key rested with that information. As we talked about it, we also wanted to make sure that we were infusing some sort of a efficiency gain in the new business underwriting process, if you will.
Brian, take us through the tool that was built and deployed.
We developed Underwriting Insights, and what you see here are a few excerpts of the screens that our underwriters see. When we think about decision management, and we think about Underwriting Insights, the key to all of that is giving our AMSs their pricing guidance, which we've been giving them at the line of business level. Now we provide it to them on a class code basis in terms of a rate per unit of exposure. That's the way an underwriter thinks. It becomes much more intuitive to them and much more granular.
When an underwriter is considering a piece of new business, the first thing we do is we look at the exposures that that account is bringing to us, and we lay out what those exposures are, and we decide on the classifications that we're going to use for that risk based on each of those exposures. The classifications determine the rate that we're going to charge. An underwriter sits down at that point and tries to decide, am I getting enough rate, enough premium dollars for each unit of the exposure that that account brings to us? The unit of exposure could be every $1,000 of sales for the business. It could be every light truck on the automobile schedule. In this example that you see up on the slide, it's based on total area.
It's a building or premises class, it's every 1,000 sq ft of area that the building occupies. What we do now with Underwriting Insights in real time while our folks are working on these accounts, is provide them with our pricing range at the class code level, and that's what's represented by that blue bar you see on the slide. The values that anchor either side of it show you what the pricing range is, and it gives it to the underwriter in a rate per unit of exposure. They see the low and the high end of that pricing range. We show them where their selected price for that particular classification is relative to that pricing range. Most importantly, we show them how our similar renewals in our portfolio are also being priced.
Similar meaning the same classification or segment of business, the same state, and most importantly, the same quality level. What you see here is one excerpt of one classification. As our AMSs are working on a piece of new business, they're going to see that for each classification that they put on the general liability line or each vehicle type that they have on the automobile schedule, and so forth, as they work their way through the account. As Brenda mentioned, we also wanted to create some efficiencies, so we developed what we call quality insights. These are areas where we've asked our underwriters to pay a little extra special attention.
It might be the age of the buildings on the property schedule, or in the case of the example you see here on the screen, it's the amount of money that the insured spends on their subcontracting costs. Previously, these were items that our underwriters needed to gather manually as they worked their way through an underwriting account. As they worked the submission, they gathered those up on a manual basis and brought it into their decision-making. We took this opportunity to automate many of these, streamline their workflow, and allow them to focus their time on the underwriting decision-making.
Yep, absolutely. That last section that you see there closely relates to portfolio management. For each account that an AMS is looking to underwrite, it's going to provide them with a prediction, a prediction of where that account is going to land at renewal, in which retention bucket it's most likely to land. In addition, it's going to provide them with a roll-up of what Brian talked about at a class code level, at a line of business level, how that account that they priced for that specific account had rolled up to relative to the target. In addition, it takes it a next step further. It says for the 12 months of rolling business that that AMS has written, what pricing have they priced their book to relative to the target?
That's a portfolio view of an AMS' new business writings, which, as we all know, in order for us to continue to perform at the levels that we are, we need to incrementally continue to improve that price to quality match of the new business that we're infusing into our portfolio. Everything that Brian and I just talked about gives that AMS additional information and insights for all of the key decisions that they're making every day and an understanding of how those decisions are improving their book of business.
We just spent a lot of time on this topic, and I don't think we could reinforce just how important this is and just how hard it is to deliver this. This is in real time, a new business underwriter getting this level of information, and this is precision that they have when they decide to exercise the authority and judgment they have that most other companies, and probably all other companies, would have a hard time showing you this same kind of capability. This is more about managing individual transactions. Brian, talk a little bit about, Greg showed you that visual, that line of sight visual. What does this do from a management perspective in terms of that line of sight?
Yeah. When we roll out a new tool at Selective, we know we're going to continue to focus on enhancing and improving it, right? No one tool is ever going to solve all your problems. There's a reason a contractor has a saw and a hammer. For us to be able to continue to enhance and evolve this tool, we need to monitor it, and that's what this dashboard is all about. The dashboard's set up at a countrywide level, but it can be as granular as a particular AMS, segment of business, or state. The way we're going to continue to improve the tool is by having dialogue with our staff as they utilize it. Take the monitored results, have conversation with them about where they had successes and where they have questions as they work through the tool.
Those conversations are going to give our leadership team line of sight into the pricing trends in the marketplace. What you see on the top part of this dashboard shows a particular AMS' new business writings, comparing the third quarter of 2016, before we had the Underwriting Insights tool, to how they priced their business in the third quarter of 2017, after they had the Underwriting Insights tool. On a line of business by line of business basis, it shows them how they priced that business relative to the midpoint of our pricing range. If we think back to the earlier slide, again, the blue bar represented our pricing range. As Brenda described, when we roll those up to the targets, that target is the midpoint of the range.
These values show our leadership team and our underwriters how they priced each line of business for the aggregate basket of new business they wrote in that particular quarter relative to those targets. The chart you see in the bottom right on this dashboard, Brenda talked about how we estimate the retention group at the account's first renewal. This rolls that up for the AMS, gives them an idea how the business they're bringing on is going to look at its first renewal relative to our portfolio. That's really where Insights comes full circle. Any guidance we're going to provide, it has to be effective, and it has to be consistent. Agents expect and reward consistency, and that's what this is all about.
The portfolio management that we've been using on renewals and now the portfolio management approach that we can take on our new business is what's going to yield that consistency for us going forward.
Why don't we shift gears now a little bit. In the opening part of this session, I talked about how we're finding new and different ways to deploy the business intelligence we have to help continue to grow the organization. Not that we're ever going to lose sight and continue to fine-tune the underwriting and pricing models, but Brenda, talk a little bit about some of the ways we're starting to invest in using the information that we have.
Yep, you're absolutely right. There's no doubt that the deployment and the continued enhancements of our underwriting tools are going to enable us to continue to outperform the industry. From a claims perspective and in very much in line with what John had mentioned early on about improving loss outcomes, I would be remiss if I didn't mention our claims modeling. From a work comp escalation model, being able to identify claims early in the process and make sure we have the right resources assigned to those claims early in the life cycle of that claim will absolutely enable us to improve loss outcomes. Our fraud and recovery models enable us to not only identify, but manage fraud at a line of business level. We're going to continue to make those enhancements in our claims models, our underwriting models, as well as our pricing models.
In addition, we also recognize that there's opportunities for us to deploy advanced analytics, so advanced statistical techniques. As well as predictive modeling to other areas in our organization to gain different types of benefits. Benefits such as opt-out workflow optimization in terms of marketing as well as overall operations. You're going to see us continue to make those investments going forward.
From a growth and marketing perspective, customer segmentation modeling allows us to be much more effective at pre-qualifying new business opportunities. It'll enable us to target our focus on new opportunities to us that are more likely to purchase their insurance from Selective. That increases our hit ratios and the effectiveness of our sales staff. An example of workflow and process impact, any account that we look at at Selective that has an automobile line on it, whether it's personal lines or commercial lines, we spend a lot of time and a lot of money ordering driving records. We want to see how those drivers perform as we're quoting that account. Many times, those reports come back with no violations at all for the driver.
If we can deploy a model to help us identify in advance those drivers that are more likely to have had a violation, then we can save time, save money, and avoid premium leakage.
Absolutely. Along those same lines, safety management modeling is going to give us the opportunity to more effectively deploy resources so that they can better identify and manage risk. All of the things that we've talked about will absolutely improve underwriting results. More importantly, it's going to allow us to become more efficient, more scalable, which is the goal of advanced analytics applied to these specific disciplines. Everything that we've talked about today from portfolio management, Underwriting Insights, the MVR, customer segmentation, safety management, all of those, and John teed this up early, have to be successfully integrated into our business processes. To date, we have done an outstanding job of doing that in the claims area as well as in the underwriting area.
As we continue to have the vision of the amount of opportunities available to us, that we can be deploying these advanced analytics, we realized we needed to take a step back. We needed to look at the current underwriting environment and design what we're calling a modernized underwriting environment so that we could fully leverage all of the information at our fingertips and capitalize on that information. That roadmap to the modernized underwriting environment is called decision management.
Brian, why don't you just take us through this? You've got a long history in underwriting. You were an AMS in our organization and have led a number of different corporate underwriting functions. You've got a unique perspective around the need to modernize the workflow here.
We've always been a strong and very capable underwriting company. We're not talking about changing any of that. We're talking about generating scale. We're talking about eliminating inefficiencies in our processes and modernizing our workflows. Just because a workflow was effective for us yesterday doesn't mean we can't make it better tomorrow. We're talking about the faster part of better decisions faster. We have about 400 underwriters and AMSs spread around the company, and they all spend a significant amount of time doing administrative tasks, manually gathering guidelines and information, and utilizing tools as part of their underwriting process. We need to continue to focus on streamlining those workflows, on making things more efficient for them so that they can spend more of their time on their underwriting decision making, because that's where the value is for us.
That's absolutely right. All the tools, automation, everything we're looking to do with advanced analytics is all about maximizing our people. John teed it up at the beginning. One of our strategic imperatives is optimize operational effectiveness and efficiency. That is a focus for us. By a variety of benchmarks, our people are already highly productive. But what Brian mentioned is we want them to spend more of their time underwriting and making sound business decisions. This is what this is set up to do. To give you one example of just a very quick hit that we found within decision management is providing a link within our policy admin system. This is a system that our underwriters, our AMSs, spend a tremendous amount of time in.
Providing them links to resource documents, to coverage information, to underwriting guidelines for the class of business that they are working on at that exact moment in time. Utilizing automation to give them that information so they spend less time searching for that information and trying to go out and find it. Utilizing that automation to give it to them to make them more efficient. The one example of something that we're doing to make us more scalable as we continue to grow profitably.
Yeah, we're positioning our AMSs to be able to write more new business on average and our inside renewal underwriters to be able to handle larger renewal portfolios, all as effectively tomorrow, if not more so, than they do today. As Brenda said, the key is in the delivery. We have to provide all the tools, all the information, and all the guidance in a highly consumable, just-in-time work environment for them. That's going to be what positions them to make better decisions faster and will allow us to continue to generate and sustain the kind of underwriting results we've been achieving into the future.
Let me just close this section out with a couple of key thoughts. Number one, everything you just heard is not we're going to do this in three, four, or five years. This is either in place or projects in flight to deliver this full capability. That's number one. Number two is, Greg made reference to headwinds and tailwinds earlier in our discussion. All of what you just saw, and honestly, all of what you're going to see in the next section is positioning us to, while we're always going to be susceptible to market cycles, to make us a lot less susceptible to market cycles so that we could manage our inventory and make good pricing and underwriting decisions regardless of where we are in the overall market cycle. I would say those are the two key takeaways from this section.
Brenda, Brian, thank you very much.
Thank you.
We're going to move on to the next imperative, ask James and Shadi to join me up here. The next section is around aligning resource for a profitable growth. James, to my immediate left, is our head of field operations. James is responsible for all of our regional underwriting operations in the organization, and Shadi, to my far left, who's been in different corporate underwriting functions in our organization, is now the leader of our newest region, the Southwest Region. Let me just tee this section up before I turn it over to James. Just highlight a couple of areas that we're really going to focus on. You hear us constantly reference the field underwriting model that we have and the importance of that model, the value it creates for us and for our agency partners, and James will spend a lot more time talking about that.
Also everything you just heard from Brian and Brenda relative to our business intelligence and our data and analytics capability, how we use that to actually drive improved agency management. We're going to spend a few minutes talking about that as well. Get into a little bit more relative to how it is we plan to execute on that market share growth strategy in our existing footprint as we continue to build out our geographic footprint in a very disciplined way over the next several years. James, let me start with you and just ask you to give us, from your perspective, a little more color around that field underwriting model we talk about so often.
Sure, John, thank you. First of all, you've heard about the field model over and over again today, but we haven't given you total detail about how that model works. Shaddy and I will do that right now. Basically, it is the backbone of our commercial underwriting strategy. When you think about the fact that we have over 100 AMSs, field underwriters out there in the field with our agencies. They service each, as Greg said earlier, about 10 to 12 agency partners. Because we have that connectivity between that AMS and that agency, we are able to do things that other carriers just cannot do.
This model allows our new business underwriters to work face-to-face with our agents, giving them a much better perspective on the marketplace, on our agents, their sales teams, and even our customers, because they see this every day in the environment they work in. Having all of these things happen for us with this AMS out there, that relationship they build with the agencies and our agency partners really makes a big difference in how we operate. Overall, our field model allows us to assess risk in much more detail than our competition. Because of that, we can then deliver better and faster pricing, terms and conditions, and our agents really appreciate that piece of what we do.
That's a great point, James. Having our AMSs in the field allows them to be more responsive with our agents. Another key point that differentiates us in the market is that we have a very limited agency plan. In turn, what that allows the AMS to do is to be more actively engaged in the underwriting process and also to build strong partnerships and relationships with our agents. Another key distinction is middle market business is very core to our model, and our AMSs have the underwriting decision-making authority to place that business. To create scale there and maximize the AMS's capacity, what we do is we complement them with a number of key field-based positions to support their capacity, including small business teams, for example. The small business teams are primarily focused on being quick and efficient, right, which is the key to growing small business.
In turn, what that does is it allows the AMS to shift their focus to growing more share premium with the agent and more complex and larger accounts.
one of the key references you see up here supporting the agency management specialist or AMS is the corporate underwriting functions, the expertise that exists on the line of business and segment side. Shaddy, you've had the experience on both sides of that equation. Talk a little bit about that collaboration between those two different functions.
That is a very important and valuable function within the regions. We continue to invest heavily in both market segment as well as line of business verticals, both regionally, region based, and in the corporate office. The key is for us, making sure that feedback and guidance that's provided to the field making underwriting decision-makers as well as our agents is seamless, and it is. Again, what it does is then it allows us as an organization, and particularly the AMS, to go after larger, more complex niche business with the agents.
If you think about it, often competitive products and pricing, that's a big piece of what every carrier has to do. We know at Selective, that will not totally distance us from the market. What our agents really like is the fact that they can take the entire Selective team with them on a presentation to the insured to try and capture that business. Put yourself in a customer's shoes. How would you feel if a carrier and that agent brought to your operation the new business underwriter, the renewal underwriter, the safety or loss control specialist, and the claims specialist? That is your entire team who will service that business. Not many companies, only a few, do that, and that is a big factor in why agents really enjoy working with Selective.
You think about the confidence that will leave the client with, that they know everybody who's going to touch their business. Think about the agent. Now the agent knows that the clients know who's going to touch their business. That gives the agent and the client strong confidence in Selective.
The other reason why the agents have so much confidence in us is because unlike most carriers, they get to know our entire senior staff. I can't tell you how often Greg and John go on the road, and not in some kind of presentation format, but they're on the road to go to agencies' offices and sit down and talk with them and talk about their business, talk about their issues, talk about what we're trying to do together, and to improve what we will do together. We also have, in every regional office, a Senior Vice President running that office, and that individual will build almost day-to-day relationships with their agencies. Keep in mind, as Greg said before, it's about 50 agencies per state, so they have that ability to grow that close connectivity with them. We have several agency events that we put on.
We have the road shows, where we go out once a year and make presentations to large groups of agencies. We have President's Club, those elite group of the Ivy League, a very elite group of the Ivy League, spend time with us on numerous occasions to really build that close relationship and partnership.
All those things we do to build that relationship and partnership really gives our agents even more reasons why they want to place not just a large portion of their business with us, more importantly, they want to place their best business with us and their most important accounts in their shop, they want to put that with the carrier they believe in, trust, and respect.
Yeah. James, let's close the loop there. You and I talked heavily about the high touch component of our model and leveraging the field-based relationship concept to drive new business. Brenda and Brian just earlier did a great job talking about the use of technology and advanced analytics to make faster and better decisions in the field. That's critical. I think what we've done as a field staff has been great in terms of taking that field-based model, leveraging it, and at the same time complementing it with the use of technology across different aspects of the field and doing that very effectively.
Not to summarize it, but you think there's a number of different areas in the field where we're using technology, whether it's driving new business, making better pricing and underwriting decisions, enhancing small business efficiencies, which is very important, in claims management, we talked briefly about that, and as well, we can't forget about agency segmentation planning.
A unique model that has created enormous value for agents and for us, and the focus that both James and Shaddy, but also Brian and Brenda highlighted, is the focus we have on making sure that we're efficient in that model, and more importantly, we can scale that model as we continue to get bigger. Shaddy, let's get back to the line of sight discussion and the line of sight theme again and talk a little bit about, from an agency management perspective, how you're using information to better manage those relationships.
Sure, John, I'd be happy to do that. What I'll do is walk you through how an AMS would use this information in both their daily decision making as well as annual planning with an Ivy League agent. Second of all, I would say that having access to the information at the street level or in the field is paramount to our success, and the ability to execute on that certainly sets us apart from the market. What's displayed here on the slide is an agency scorecard. We have access to this information in the field, and it's not just limited to what's on the scorecard. We have the ability to drill down into this information and really get a better understanding of how the agents are performing, to which we do daily and on an annual basis. We look at a number of performance-related metrics around both growth.
We look at profitability. We look at market share. We want to understand how we rank relative to our competitors with an existing agency. First and foremost, if I'm an AMS, what I'm doing is I'm drilling down on submission count. I'm looking at that submission count both on middle market as well as small and trying to understand what the trends are, making sure that we're getting a healthy flow of that business consistently from an agency. Submission flow alone doesn't tell you quality, right? We want to make sure that the agents understand our appetite and they're bringing business to us that we actually want to write. What we're then focusing on or shifting our focus towards is looking at the relationship between what's quoted and what's actually submitted.
That gives us better direction as to whether the agents truly understand what we want to go after. Ultimately, what drives top line for us is what we issue, naturally. Hit ratio certainly is an area that we spend a lot of time focusing on. We look at the relationship between prior year and current year hit ratios, and we break that down between classes, sizes of business, and then of course, by agency. It gives us good insight into how the market is performing, where we are relative to the market, and what particular classes we're having success or lack of success. Beyond performance, we also look at a number of profit-driven metrics, and certainly these aren't all of them. I'm just pulling out a few of them for you just to get a sense of it.
As an AMS who's focused on new business, we're the steward of that agency, and we need to make sure we understand the overall profitability of the agency. These metrics give us some insight into that so they can help guide our conversation with the agency on both renewal actions as well as what we're bringing on that contributes to that renewal book. We look at a number of different metrics. First, we look at renewal pure rate, which tells us basically what kind of rate we're getting year over year on that existing book of business with the agency. We also look at pricing deviations on that business. That tells us what are our pricing habits relative to base rates or manual rates for ISO, and how are we deviating off of that, whether that's debiting or crediting. Of course, we've got to look at retention.
Retention is a big key for us. We want to make sure that the business we want to keep, we're keeping, and the business we want to shed, we're doing that. Overall, we look at that by premium, we look at that by counts. What we want to indicate, or we want to find out really, is it a particular large account or set of large accounts that's shifting that premium retention rate down, or is it a set of accounts that are smaller in nature, and are we seeing a trend, and are we comfortable with that? Those lead to conversations with the agency. Another key area for us is just looking at holistically the portfolio, sort of a portfolio management view of the book of business.
Without a doubt, it's very critical. We stress this to our staff, and they have very good insight into our agency's books of business, not just currently what they have on the books, what are they going after? What kind of business are they writing? If we feel that there's a lack of alignment between what they have and what we have, that creates an opportunity to have very active, healthy conversations with the agencies around that and to promote specific action plans with those agents to drive that growth. You can see that here with manufacturing. We felt with this agency we were a little bit light, and we put in place specific action plans with that agency to promote growth there, and then we were able to achieve that.
Shadi is exactly right. Don't be mistaken that this is just a year-on-year view that we're looking at. This is also long-term for us. This is really trying to help us determine how we plan with our agents, not just for next year, but way down the road. Look at this one, the first one there, agency origination. Doesn't seem like it means a whole lot, but it really tells us is how often our agents are entering information into our systems. For the new business piece, if our agents will enter that data into our systems, that allows us to then go in and underwrite it much faster, and that allows us to turn around a proposal to them much quicker. Mind you, I said proposal, not a quote, because we think that everything we do with our agents and our clients is a proposal.
That quote piece sometimes means to put a price out. We don't put prices out. We put opportunities to write an account out there, and that's a big difference for us. The other piece of that is endorsements. Back a while ago, agents would get a call from their client. The client would say, "I bought a new car," or, "I bought a new vehicle. I changed the building," whatever the case may be. They'd email that to us, or they'd fax that to us, or they'd call that in to us. Think about how inefficient that was. Now we have our agents who will go in the system themselves and get that done right away. It's done in a lot more accurate manner, of course, again, it's just that much faster.
When we have our agents doing those things, it really drives the efficiency for the agency and for Selective. What we also know is that when agencies are larger with us, they'll use our technology more. We do a lot of things, as Shad and Brenda, Brian discussed, to make sure that we're driving growth with our agency. We also measure that. We really want to know where do we rank in an agency. What's our status? Are we number one, two, or three? For a long time, we've looked at that almost by itself. Because we know that if you're relevant in the agency shop, you will get a lot more attention, they will use the technology more, you're going to grow faster. We also know that some agencies don't write all the same business we write.
Take an agent that writes a lot of ag business. We may not be one, two, or three in that shop, but we also look at the share of premium that we have with them. If they're writing ag business that we don't write, we also look at the things we do write, let's see where we rank there. That's where that 12% share of premium or share of wallet comes from. We use this information, we get with the agencies and those business dynamics, it really helps us to utilize, again, not just annual planning, but long-term planning called territorial planning. One of the things we do at Selective each year, our senior team goes to each state and goes with that AMS in their territory, and we sit down and do what we call territory reviews.
This is a very important process for us because it really allows us to understand what's happening on the ground. It allows us to give some consultation with the AMS and their team and give some advice. The most important thing we get from those meetings is that it allows the AMS to tell us what else they need from us, what else they need by way of automation, what else they need by way of products and services, and all those things make a big difference for us. Collectively, we take that data and we put out the next plan. We do this planning again with each individual agency, then we roll it up for the entire state.
This model of territory planning, the agency segmentation information, our field model, really allows us then to get our fair share of that agency's wallet in return for the franchise value of the field model and the other many investments we make to help our agencies thrive.
James, let's just roll right in. You mentioned territory reviews again, tying back to Greg's point that he closed the first half with relative to the risk of different ways of growing, and the risk associated with growth within our existing territories and our existing agents, and growth from adding agents within our existing territories ties into our whole market share strategy and our current footprint.
Talk a little more about that philosophy and how we intend on getting there.
Let's talk about the 3% commercial share of wallet. That is our overall goal that we want to get to. We start with franchise value, agency franchise value, that means a limited distribution strategy. We just don't have every agent on every corner. That 50 per state on average we talked about, that is a very low number.
When we compare ourselves to competitors, we'll have 50 in the state, they'll have 250 in the state. That model really means that agency really appreciates the fact that they can provide a quote, a proposal to a client, no other agent in their area can provide that same quote because it would not have Selective. That makes a big difference for us. When we look at that 1,250 agents we have, we look for agents who really have a sales culture. That means they have a sales team who are insurance professionals who really think about going out there and not selling just price, but they're selling services, they're selling their knowledge with that agency to that client. That makes a big difference.
Our field model, coupled with our franchise value model, really gives us every confidence that we can reach our goal of 3% market share in all of our fully operational states. On 25/12/3, you've heard about that piece of it. It's a very simple strategy, our agents fully understand it and support it. Basically, all we're saying there is that any state we're in theory, we want our agents to control 25% of the total premium in that state, commercial premium in that state. If we can do that, we want to get 12% of their share of wallet or their share of premium. Put those two together, that will end up with us having a 3% market share in that state. That is what our goal is for each state, that's what we have the process in place to get done.
That's the overall philosophy relative to the 25 agency share, 12 share of their premium gets into a three share overall. That's our holistic approach. Shaddy, talk a little more though about the specific state approach to getting there, because I think we rolled that out in a way where we recognize there are nuances state to state.
Yeah. There is. That's a great point, John. When you think about, there's a number of factors that really influence our agency market share or share premium strategies state by state. We've got a number of states currently where agents control upwards of 30% market share. In those cases, we really only need to achieve a share of premium of those agencies of 10% to equate to our overall 3% market share goal in that state. Then, of course, there's other variables, one of which is we've got a number of coastal states that are tagged to higher coastal premiums, and we don't necessarily want to write that business. It's not aligned with our interests. In those cases, we don't want our agents controlling upwards of 25%, 30% market share.
What we do is we shift our focus towards increasing our share of premium with those individual agencies. The key is not just to let the agency do that alone, right? There's a number of value propositions we bring to heart with that agency, one of which is franchise value. We've talked about it. It is very significant and important to us. We've done that in new states as well. Our products, our coverages, and the way we go about leveraging technology is certainly another value added to our agents. Finally, another key component is our field-based model. One of the other key distinctions for us is the fact that we leverage agency programs to help promote our agencies' growth. If our agents are increasing their share of the market, then that ultimately helps us.
The way we do that is we invest in a number of different programs, including producer and account manager training programs, perpetuation planning to ensure the agency's going to be around for the long term, customer experience surveys to help guide them to provide better customer experiences and ultimately increase their retentions with their customers, and agency sales meetings. There's a number of programs we do, but that certainly helps to set us apart from the marketplace. I think James and I kind of alluded to it. We feel very confident about our strategy over the long term. We've got a number of states where we currently have been able to achieve 3% of the market, and then we've got a number of other states where we've been able to either achieve 25% agency market share and/or 12% share of premium.
When you think about the potential there, Greg alluded to it a little bit earlier, that's about $2.5 billion in additional premium for Selective in our current footprint.
As we remain focused on maximizing share in the footprint, lowest risk way for us to grow. At the same time, we're also laying the foundation for the future through a very disciplined approach to geographic expansion. James, ask you first to talk a little bit about the overall philosophy.
Then we'll have Shadi talk a little bit about the execution on geo expansion.
Sure, John. I just want to emphasize again, we do understand the opportunities we still have in our existing footprint, and we will continue to maximize that as we move forward. We also know that expanding into other states have great benefits for us also, starting with allowing us to write more multi-state accounts. A lot of our agents right now in our current footprint have accounts that have businesses or parts of their operations in states that we're not in at this point in time, and therefore, they don't place those accounts with us. As we expand, we will pick up on that additional business because they tell us all the time, "We would really prefer to have that business with Selective as opposed to with anyone else. That's a big part of what we're trying to get done there from expanding the footprint.
The other piece of that is that it really, and Mark touched on this earlier also, it really allows us to diversify our cat exposure. As we move to the Southwest and to the Northwest, it really takes away that East Coast hurricane exposure we have right now, and that makes a big difference for us also. The final piece of it is we really want to grow our Selective name, get it out there more, and increase and improve our brand awareness. We think that is a big piece for the expansion. Our long-term goal is to expand to a national footprint while maintaining our super regional philosophy, our high tech, high touch field model.
That makes a big difference, we think if we can do that and then give underwriting capabilities in 18 other states that we'll not be in, we'll be fully operational in 30 states. That will give us the lower 48, and that's our goal, where we're trying to get to as far as our state expansion process. Our selection process here really is very deliberate, and we spend a lot of time trying to decide what next state or new state we'll go into. We gather data to really try and determine things like litigation environments, regulatory environments, how much business is actually there for us to write. Of course, we also look at the profit potential for that particular state, and all those things weigh into our decisions as to which new state we'll go into. Our most recent additions, New Hampshire and Arizona.
We went to New Hampshire because that really allowed us to round out the Northeastern footprint of our Northeast territory, that's been a big success for us. Arizona is really how we've launched our Southwest region. That is our newest region, and that will include Arizona. In the first quarter of 2018, we're going to Colorado. In the last half of 2018, Utah and New Mexico. As you can see from the slide there, we also have plans to go into Washington and Oregon. That'll be our Northwest territory. We'll do some more rounding out in the Northeast by way of Vermont. That's kind of the long-term plan.
We know that this research we do to select the right states to go into is really the big foundation to make sure we get off to a great start in our new states.
James kind of gave you the overall philosophy. Clearly, when it comes to executing on this geographic expansion strategy, in our model, we can get the product and the technology set up. We need to make sure we get the people right because of the way we have underwriting authority set up. Shaddy, who you've already met and heard from on a couple of occasions, is somebody who's been in a number of different roles in our organization, corporate underwriting roles, and was positioned to go out and open up our Southwest region, which is critically important for us to do this right. Shaddy, talk a little bit about our actual approach to opening up a new state.
Sure, John. Thanks for those kind words, first off. We believe the field model's certainly important to us. As we open a new region, we want to leverage that field model. There's no doubt about it. Talent is also a very important asset and really one of the only sustainable assets of our organization. We felt it was really a two-prong approach. We felt that it was important to bring in Selective individuals who had knowledge of our culture, our processes, our people, and really to minimize the operational risk, the execution risk. We brought them into key leadership roles in the region early on. For a lean team, that was very important, and we also complemented them, though, with field-based, new to Selective underwriting individuals who had very strong relationships with agents in the market.
That complementary approach has really set us up well. That talent has also played an instrumental role in helping to devise or direct our agency appointment strategy, whether it be market share or share wallet premium levers. That coupled with existing relationships that Selective has that we've been leveraging, including The Big "I," MarshBerry, as well as local offices of agencies that we do business with on a national level, we've been able to leverage those two components to identify what we believe to be the best agents. In Arizona, I'll give you a very quick overview of what we did there. We started with 50 agents who we thought were the best agencies in the state.
We, over a period of about a year, which is a very extensive process, we whittled that down to what we thought were 16 of the best agencies in the state. We only appointed 16, which again speaks to our franchise value model. That process was extensive, and it was intentional. It was disciplined. We wanted to make sure, first and foremost, that the theme with the agents was that they knew we were there to help them grow and to help mutually gain profitable growth for us as well. We needed to make sure that they understand who we were. They needed to understand our products, our culture, the way we handled the renewal business, the value of our field model, a number of things there that we made sure we drove home those points with them.
In turn, we were also looking for key attributes for those agencies. Agencies that had good growth plans and a good history of growth, strong perpetuation plans, agencies that were focused not just on price, but more so coverage, and were more of a consultative risk management type agency. Agencies that had good ethics too. Those were all key components, and what we ultimately identified were 16 of the best agencies in that state. If you look at it more broadly speaking, you look at Arizona and New Hampshire, we feel very confident in the approach that we've used, and feel very optimistic about its future.
Let me just close this section out, kind of key points on this one. We've got a very unique business model, and we're leveraging it to grow the organization in the future. I think from your perspective, understand that the potential for growth in our reach, in our footprint, and through geo expansion, without really changing the risk profile of organization, what we write and how we write it is very much there and very much within our reach. Let me say thank you to James and to Shaddy, and we're going to move on into the next section.
Thank you, John.
Thanks, John. The final section is around omnichannel experience. I'll ask Gordon and Rohit to join me, and we'll hit this final segment before we close out and get into Q&A. This is on delivering that superior omnichannel experience. I mentioned earlier in terms of how we define omnichannel and why we think it's so critical for us from a retention and a growth perspective, but also to make sure that when we think about the potential disruptors that are out there for our business and for the distribution that we support, that the best way for us to protect ourselves is customer centricity, customer intimacy, and that's what this is really all about. Gordon, let me start, and let me just introduce Gordon is our Chief Information Officer to my immediate left, and then Rohit Mull is our Chief Marketing Officer to the far left.
Gordon, let me just ask you to start. This is not something new for us. We've been working at this for a number of years now. We've been focused on this as an organization. Give us a sense in terms of the foundational investments that have been made in order to position us to really perform relative to experience in the future.
Yes, John, as the technology person, I can confirm we have been making investments in these technologies for several years.
I'll back you up on this.
Two of the most important investments we've made are around master data management and customer relationship management. The reason these are important is one of the critical capabilities that any organization needs is the ability to focus on a person or a business entity as a customer, as opposed to focusing on the products or services that they offer. Today's customers basically want to interact and have conversations with the expectation that who they're interacting with understands who they are, what their preferences are, and that they are knowledgeable of any of the interactions that they've had with the provider. Our MDM platform is the connecting piece that pulls all of this information together. It ties in our underlying unified communication technology, all of our business processing transactions, and the interaction information we have about all of our customers at a detail level.
The second investment around customer relationship management sits on top of that platform and gives all customer-facing employees a true 360-degree view of the customer. This view equips them to be able to interact with the customer at any touchpoint and answer their questions about a variety of topics, whether it's a coverage, a claim, a billing, or anything else they may ask for.
While our handling of the customer experience servicing aspect has been greatly improved, we know that there are a growing set of consumers who want to choose to do things themselves, how and when they choose to do it. Some might say that this applies more to perhaps the millennials or to the personal lines clients. Here's the reality. Older generations and commercial lines clients, particularly in the small and middle market space, are increasingly wanting 24 by seven service. They expect availability of information at the time they want it on their very fingertips. Through our self-service websites and our mobile app, we give them the ability to easily make a payment, file a claim, check on the status of their bill, and many other such services through the capabilities that these systems offer us.
Most importantly, it happens at the time and the manner of the customer's choosing. Our ongoing commitment to improving the user experience does not only include enhanced functionalities such as providing digital certificates of insurance or perhaps auto ID cards. It also includes a strategy to significantly enrich the customer journey through intuitive navigation. All of us use our devices. All of us hate it when we can't simply figure out what we need to do at the precise moment when we need to get it done. Being able to make a payment through a pop-up reminder and one click of your thumb is most important to customers of today. The benefits of this work are realized by all, the customer, the agent, and of course, to Selective. Customers get quick and easy access to whatever information they want whenever they need it.
At the same time, they're able to conduct a whole host of very important tasks from their perspective. What does this mean for us and our agents? Well, it means we don't need to spend our time on these non-premium producing transactions. Therefore, the enhanced overall experience helps in improving both retention and in creating really loyal brand advocates.
Rohit, you mentioned on a couple of occasions, customer preferences, customer expectations. Gordon, I'll start with you. Talk a little bit about how we make sure that we really understand what their expectations and preferences are as we're making choices about where to invest.
Sure, John. The best way that we make sure that we are working on the right information is that we ask our customers. Since 2011, our Voice of the Customer program has actively been capturing feedback from our customers on any interaction that they've had with us, whether it's been a call to the claim service center to handle a claim, whether it's a billing activity that they have a question on, did we receive their payment, or any other transactions that come along the way, or an on-site visit from safety management, an on-site review of audit facilities are all done in captured feedback. The feedback that we've gotten is, on a scale of one to 10, our average scores across all these transactions are between 8.7 and 9.3.
Probably more noteworthy is when you ask a customer of whether they would be happy to recommend Selective as a carrier of choice, the vast majority say yes.
I'd like to add that in addition to these significant customer satisfaction and Net Promoter Score practices, we've also created an online customer forum. We call it the Selective Diamond Council. In the year since we went live with this council, we've had almost 2,000 customers who have voluntarily signed up to tell us what they think about questions that we ask them. Now, I don't know how many of the people sitting in this audience would actually take their time to sign up and tell any of the service providers with whom they have an interaction on a regular basis how they feel to give them ideation opportunities, to be able to give them the reasons why things are going right, and in many instances, why things are going wrong.
We've already got 2,000 with a target to moving to 5,000 such customers with whom we are planning to regularly operate. This Diamond Council allows us to expand the depth and breadth of the surveys that we conduct with them, create discussion forums, and even host hands-on user experience engagements to continuously collect feedback. We can ask them, "Here's a set of screens that you're putting out." We can ask them, "Here is a new product concept. Here's a coverage idea. How often would you like to be communicated with?" We are going to be basing all our decisions moving forward on what the customer tells us they think we need to do. It doesn't mean we take it as gospel truth. We interpret that feedback.
We take other points of data, put it together, they now are right there, bang in the middle of any decisions that we choose to make. If you couple this with the other pieces that Gordon just covered, you will realize that we've got a robust view based on customer insights that we can use as actionable input towards product enhancements and the development of superior capabilities that the customers tell us they really value.
You mentioned robust view of the customer being critical to being able to deliver that kind of experience. Give us a little bit more specificity around what we mean by that view.
In the past, our customer-facing staff managed their interactions with customers based off a single product view and all the correspondence and communication that we may have had with them around that one individual product, because that's all that we knew about the customer at that point in time. However, you can see, instead of just knowing that Scott Phillips is a business owner with a business owner's policy with us and knowing when his next bill is due and the status of his recent claim, we happen, with all the new foundational capabilities that we put into place, to have a very different view of the same customer. Firstly, the moment he calls us, we know who he is, and we can start the conversation by recognizing that this is Scott Phillips who is calling us.
We also now know that he has another small business that he runs, and he has that business owner's policy with us as well, the Phillips Moving Company. We know his detailed payment and claims discussions and conversations that we've been having with him across all the products that we've got. We also happen to know that he's a Diamond Council member. Very shortly, we will be able to integrate his public social media profile with the rest of the profile around his product that we've got here with him. Later on, we will add his personal policy details once we cross-sell to him the personal lines products that we've got, which we are absolutely certain, given his experience with us on the commercial line side as a small business owner, he's going to want to be able to take.
The important part, however, in order to remove the sort of friction points that a customer might have when they sometimes choose to speak to our agency, sometimes choose to speak to us, sometimes choose to go online, will only get addressed when our customer self-service experience is absolutely phenomenal, which is what we've already worked very hard towards putting into place. Now moving forward to extend these capabilities to our agency partners in order for them to have a seamless experience and make sure that every time that Scott Phillips speaks to us, he is getting dealt with to his complete satisfaction. By doing this, those major friction points that any of us could come to get associated with speaking to different sets of people across different organizations all end up getting eliminated.
There's no spending time on getting the customer relations staff up to speed each time a new conversation is getting started. Therefore, what do we end up with? A very happy customer.
Gordon, let me turn back to you. Rohit mentioned a couple of references to whether the customer contacts us or contacts the agency. Clearly, we haven't yet spoken about where does the agency fit into this? Does that add more complexity? How do we make sure this is seamless to the customer? Talk a little bit about that shared experience and how we're thinking about that.
Yeah. You're right, John. It is extremely important and somewhat complicated. From a customer's perspective, our employees and the agency employees represent one entity. The person who's providing their insurance. As Rohit mentioned, they may want to place a call into one of our customer service reps. They may want to go do a transaction on the mobile app or go online to do an inquiry and then have a follow-up transaction with an agent. To them, they expect all of those interactions to be seamless. Now, as James, Shadi, and I think Greg may have mentioned that we have a small group of Ivy League agents, about 1,200 Ivy League agents, that gives us franchise value.
Not only does it give us franchise value, it gives us a manageable working group that we can jointly work on best practices, training materials, and focus on reducing the friction points that Rohit has been mentioning around how they interact with us, when they choose, and however they choose. Managing a shared interaction between our employees, the agent's employees, and over half a million customers is quite complex. When you consider that the agents will maybe use different systems than what we use, it is a complicated environment. We focus on overcoming that complexity by investing technologies that provide the information available, whether it's transactional or interactional, around the customer to the customer service rep at the time that they need it.
It's a joint effort between our agents and ourselves, we continue to work in concert with them to create an environment where first touch resolution or seamless transition is going to be a reality and will meet the expectations of the customer.
We clearly have a strategy that invests in the idea that agents will continue to control acquisition of commercial lines business. What we're saying is the customer experience side of this post-acquisition has to be technology-based, and it has to be seamless between the agency and us, regardless of where the customer lands. A lot of what we talked about to this point in this section has been more about reacting in real time to the customer request, whichever way it comes in. There's also a proactive aspect to the customer experience, being more of a proactive risk manager and more proactive in terms of giving them information that's of value. Rohit, just talk briefly about our focus on the proactive side of this.
You're right, John. With 90 years of history behind us, Selective today is certainly a strong reactive traditional insurer. Something goes wrong, we are there to deal with it. We will address it. We will make our claim payment on time. We'll understand what you need, and we'll be there with you. The future, however, requires us to be viewed as a proactive risk manager. Not just be around when a calamity happens, but attempt to mitigate or minimize the opportunity of a negative event happening in the first place. Not just reinstating him or her when the policy ends up with a bill not having got paid on time, but trying to make sure that that situation didn't arise in the first place. The bill got paid.
The customer's life cycle with us is made up of several individual touchpoints related to typical insurance events around policy delivery, billing, all the standard stuff. Then there's that significant limited set of instances associated with a claim. Today, technology allows us to provide our mutual customers with a very different experience. While the average consumer today is inundated with an overwhelming number of generic messages from multiple sources and wants those reduced, each of you will walk out of this room, take your cell phone, check your email, and you'll probably have 732, of which maybe you want to read seven. That's our customer today. You're our customer today in many ways. Each of us, put yourself in that customer's shoes, has clearly voiced the desire for timely, customized, relevant, proactive messages around moments that matter.
For example, reminding a customer about a non-payment of a bill before coverage is canceled and helping them with payment options, very important. Alerting them about an oncoming storm and providing relevant safety tips, relevant to the type of service and product that we've got with them. That is what is critical. These are just simple examples of the sort of proactive messages that we could end up sending out. Think again about an individual customer with three different products from us and a multiple set of services and messages that we could send out. The complexity is in being able to identify which message sent when, through which medium, at what time is going to make the most sense.
If the customer's just had a terrible claim, maybe it's not the right time for our mobile app to be pushing messages to him saying, "Hey, your bill is due in 15 days. Pay now." Not really the best sort of proactive messaging, right? That's the sort of intelligence we need to be able to build and put into place to be truly effective. If we make sure we make this happen, there will be customers who will prefer to remain with Selective, and we will drive better outcomes jointly.
Last topic we're going to touch on, one that's written a lot about, a lot of folks are paying attention to it, Insurtech. Just talk a little bit, Gordon, first about our overall strategy relative to Insurtech.
Sure, John. Our overall strategy includes looking at all the things everybody's reading about in the paper, whether it's the Internet of Things, artificial intelligence, robotic process automation, drones, blockchain fans, any blockchain fans. We look at all of these things, but this big differentiator of our approach is we don't treat Insurtech as a separate strategy. There isn't an Insurtech strategy. Instead, we look at Insurtech as an element that advances our strategic imperatives. We take a, what I call is a more practical approach in that we focus our activities and our review on solving specific business problems. We look at understanding and making decisions in 40-day time cycles. We need to move fast. The pace of technology change is continuing to increase.
We harvest our learnings whether we make a go or a no-go decision, because a technology that we look at today might not have solved the problem we were looking at today, but we learned to see if it could be applicable for different types of problems going forward. Currently, we have a pipeline of usually over 20, what we call in-flight and insight proofs of concept, where we are mapping technology against our business imperatives. Right now, we have a focus on increasing stickiness by looking for technologies that help our customers manage their business better. For example, we're looking at sensors that can help mid and large-size contractors monitor and manage their most critical assets. We're looking at some cloud and mobile technology that would allow midsize companies better manage subcontractors. We are looking at telematics for anybody that has a fleet of vehicles or heavy machinery.
I could go on and on. We're also evaluating the latest developments in distracted driving, whether they're to be on a training basis or on an actual monitoring and controlling basis. The second thing that I think might be a little bit different from our approach is that we jointly execute many of these POCs with our agents and customers because we want to get the feedback quickly when we go through our fast cycle to say that this would provide value, and when it does, let's accelerate and get that value to market as quickly as possible. Even though the stickiness and the making our customers help the customers manage their business better is a top priority, we have gotten a lot of benefits in two other of our imperatives by doing the approach that we are using. One, we have increased operational efficiency.
We've gotten a lot of insights into robotic process automation. We create a highly engaged team because folks are very interested in working on this. They know it's part of the future. Whether we're using telematics to help our route management or to have people be more engaged in coming up with solutions, it's all been terrific. We get a lot of cross-benefit using this approach.
Let me just close this section out with summarizing as follows. We have an absolute focus on customer experience. We think it is a game changer for the future. This is not something new to us, but we think our investments and how that game is changing, positioning us extremely well. We have a strategy around Insurtech, but it is not an Insurtech strategy. Unlike other companies who are out there issuing press releases about all of these great concepts, Insurtech for us is about advancing or accelerating one of those five strategic imperatives that I laid out for you earlier. There are a number of things that we're not just talking about futuristically, but they're either in place or projects are in flight in order to execute on those.
I'm going to say thank you to Rohit and Gordon, and I'm going to turn it back over to Greg to close us out. Thank you.
Just one more. There.
Just click it on. Just advance it to the next one. That's fine. One more. Let's focus on getting ready for your questions. First, I want to make sure that you are well-grounded in the fact that you're looking at an organization that's extremely agile. Extremely agile. You're looking at a company that has incredibly insightful data. You're looking at a company that has the employees to execute on that insightful data to make good decisions about profitable growth for the long term. You're also looking at a company that is extremely focused on customer experience and also that's trying to make strategic investments in the future, but also what we may be invested in in the past that isn't going to add as much value.
You have to be strategic about investing as well as be strategic about disinvesting in certain items around the table that will make a difference going forward. I'll tell you that our agents put the Ivy in Ivy League, and I want to make sure you understand that 1,250 Ivy League agents that we're working very closely with in an extremely unique business model that no one else can really replicate. You heard why. You need people, and you need to have a model that's focused around franchise value, which most of the competition does not have. It's very difficult to replicate that kind of model and have the right field people to be able to execute at that level with the technology and capability that they need to have at their fingertips.
The superior customer experience, I don't care on the underwriting side, on the safety management side, on the claims side, on the renewal portfolio side, every point of our operation is focused around it. When you think about where we are positioned
With our renewal inventory. I will tell you that we feel really good about our inventory. We feel that three points of rate in the month of October is a positive sign, but that's part of generating good, solid improvement in the future, is where are your underwriting margins? We have a goal internally of 300 over our weighted average cost of capital. That's something as an organization we're very focused on. We start our meetings at the middle of the year with where are our targets? Where do they need to be on a risk-adjusted basis? How do they get deployed through our regional offices? That's what we're very dialed in on as a management team. Mark touched a lot about this, but I can't tell you anything that highlighted risk of ruin and counterparty risk more than Irma did relative to that.
At one point, that storm was going to come up right through the spine of Florida, the question is, how big of a loss would that have been? How many carriers would have been able to sustain such an event? You saw that our 500-year event set is at a very low, 15% of stockholders' equity is a very low benchmark by any measure in the industry. Obviously our higher performance is going to be generated by the fact that we operate with a little bit more leverage, which gives us more ROE on the investment side, as well as more ROE on the underwriting side. We've talked about it enough to know that we don't see anything that's really going to change the long-term environment in terms of book yield going forward.
In terms of investing for the future, the main point, you heard about the geo expansion. It's all greenfield. It's all highly concentrated, and I think that's an important part of the success. Not only did you hear about that part, you also saw about how we look at our Underwriting Insights tool. How many companies could you go to today and say, "Hey, show me your new business tool that you use to price business." I would like to be in that conversation if you would allow me to participate in that, but I'd love to hear what you hear back on the granularity or the specificity that you hear from our competition about that. You got an opportunity to see that product. That is a product in force that's being used throughout our entire organization right now.
Obviously around the sophisticated underwriting tools and the focus around switching costs. This is a big push on my part, too, on our part, to get switching costs higher, and we've got to get more products that create difficulty in a client to be able to move from Selective to any one of our competitors. What we'd like to see is our agency's retention, which runs about 90%, 91%, 92%, to go higher as a result of the fact that is the Ivy League agent. If you go with our agent, you're going to get the best-in-class services. If you run a contracting business, you're going to get these services that you get with no other carrier. When they truly help them manage their business, it's going to be very hard for the competition to pull that account out to go somewhere else.
Just think of the apostle selling that you would get if you were an agent, and you had one of your clients at some construction conference in Atlantic City. They're out there talking about the virtues of what they have in terms of Selective and the product that their agents offered them in terms of keeping track of their inventory or whatever it is that's helping them manage their business in a better environment. Just think if our agents' retention could go from 91% to 92% to 93%, 94%. Our company's retention normally runs around 84%. Can you imagine what our growth rate would be if we could spike that retention up a few points?
You looked at our geo expansion, and when we get to our geo expansion, every time we add another state, Shadi is just sitting there going, "Okay, we can increase share of wallet, Greg, now from 12% to 13% or 13% to 14%." Why? Because that 12% was gated on the fact that we were only a 22-state writer, as we continue to add more states, our ability to write more business in every one of our shops goes higher. We'll be increasing the 12% as we get more and more state capability. The 12% is self-imposed because we have limitations in terms of where we can write. Those are things that will continue to open up. With that, I would like to open it up to your thousands of questions that I know you have in the audience right now.
We'll have the management team up here to be able to answer all of that. We have a mic right here and ready to go.
Hi, it's Paul Newsome with Sandler O'Neill + Partners. I'm sorry I don't have the thousand questions.
You don't? Okay.
Sorry, I'll save.
Usually you do, but that's all right.
tomorrow. I wanted to know a little bit more about capital management. I think you touched on it just a little bit, but should we be thinking that essentially the capital that you're generating today is largely, entirely, partially used for growth or obviously stock buybacks, dividends, et cetera?
I think that's a good assumption. I think, is this on? Okay, there we go. You're on. You are on? Yeah. He is on. I think that's a good assumption.
From our perspective, we want to be good stewards of capital. When I talked about growing tangible book value per share plus accumulated dividends over the long term, it's highly correlated with total shareholder return. That means generating good profits when the opportunity's there, and it's about managing capital when the opportunities aren't there. If you go back in our time series, we have returned capital. We've done it in the form of share repurchases. It's been a number of years since we've done that, but that's a tool in the toolkit if and when we want to deploy that. At this point in the cycle, we believe we have very attractive opportunities to grow our book of business, and we'll be deploying our retained earnings and capital back into the business.
I would just add to that, you saw what Shadi and James and John walk you through in terms of the opportunity. We feel that there's a lot of great runway that we have today, and we're adding geo expansion, which is more runway, so we can fly a bigger plane over it. You got to remember, we said we're going to end at $2.4 billion. We've got a lot of capacity as an organization to grow and have more premium to get to a better trim point in terms of where we are. We want to be mindful of that as we grow. I would say that unless something fundamentally changed, we view our growth opportunity as a key use of capital as we move forward.
Elyse?
Elyse Greenspan, Wells Fargo. I have a few questions. My first, it ties back to both your pricing outlook as well as what we can expect in the reinsurance market next year. What's the dialogue with your reinsurers around potential price increases next year, and how does that impact the potential price that you want to push through your own book?
However you guys want to start with that one. Go ahead.
Yeah. A timely question, John Marchioni, myself, and our Chief Risk Officer were in Bermuda last week meeting with our reinsurers. We're focused on our 1/1 renewals. We have a big program that we'd like to place. I'd say from a reinsurance perspective, it's a core part of our business model. We manage our reinsurance program over a long period of time. Many of our reinsurers have been on our panel for decades, it's a long-term relationship. If you look at the cumulative profit, we have a wonderful slide that we like to show the reinsurers, which is the cumulative profit they've generated on our cat program over a multi-year period going back to 1990. It's in the hundreds of millions of dollars. That's the dialogue we have with our reinsurers.
We were good stewards of capital or exposure management during this year, 2017, when the cat losses are high. Clearly, the reinsurance market has been hurt with rate decreases over a multi-year period. They're looking for rate. They're not necessarily generating an expected return over their weighted average cost of capital. They have had good results over the last few years as actual losses have been less than expected, but clearly, they're pushing for rate. For us, when you think about our reinsurance program and the numbers that are in our SEC filings, we pay about just over $100 million in terms of external ceded reinsurance premium. About half of that's for property, about half of that's for casualty. The dialogue we're having with our reinsurers is look at the track record, look at the profit you've made from Selective over this time period.
Look at the way we're not heavily concentrated in states like Florida and Texas, where a lot of your other clients are. We provide some nice geographic diversification for the reinsurance that they're providing to us. We believe we have a very good story. Yes, while I think there's a lot of rhetoric and talk about rate increases, and most likely there will be, there needs to be, I think, in the reinsurance market as a whole. What we're hearing is not everybody's going to be painted with the same brush, that there's going to be some differentiation between those that are good underwriters and those that have incurred significant losses.
Just in terms of the overall market and what that means in terms of our business and the pricing on the property side. When you look at the market overall, pricing on commercial property has been negative for the last couple of years. For us, it's been a little bit below our total. If you look at our performance on overall rate level, commercial property's been a couple of points lower than our average over the last couple of years. You can look at our commercial property book and say that the performance has justified a little bit below average rate level, but still positive.
I think what you would expect coming out of the last several events is more companies taking the same philosophy we have over the last decade or so, which is when we think about target combined ratios for commercial property or for home, we have always talked about building targets assuming a normal catastrophe load. No different than we talk about homeowners being a 90 in a normal cat year. That's got a full 14-point expected cat load in it for home. We've taken the same philosophy in commercial property. In other words, you expect those lines to perform extremely well in a normal cat year. That's been how we've built our pricing strategy.
For us, it doesn't need to signal necessarily a significant change, you will certainly see the market start to move, we expect, because a lot of companies have gotten very aggressive over the last couple of years in commercial property pricing. They're going to have to deal not just with their aggregate catastrophe exposure, but also what Mark talked about in terms of those who have hit their reinsurance programs are going to wind up paying more. The flip side of that, Greg, I think, referenced this earlier in his presentation, is you also have to look at pricing overall. It's great to talk about commercial property needs to go up by 10 or 15 or 20, whoever you ask.
You also need to factor in when it comes to what's happening in the workers' comp area, which is harder to control company by company because you're reliant on loss cost filings by NCCI and individual state bureaus. You got to understand what's happening on the GL side. What's happening on the commercial auto side, and what's the overall movement in terms of rate level? At this point, there's been a lot of chatter out there. I think Greg showed it as a potential tailwind for us, our philosophy will not change. It's the same philosophy we've had since 2009, which is regardless of what the market's doing, we are looking at our individual portfolio. We're making sure that we're adequately pricing, accurately pricing every account based on the quality of that account and the expected performance, and that will continue to be our philosophy.
It may result in greater opportunity for us on the new business side. To the extent companies start to get into this position, like Greg said earlier, of saying, "We're going to just blanket raise rates by X% in whatever book of business it is," that's going to push opportunities into the market for us for high-quality accounts and for us to go after our right.
Yeah. The only other thing I would add to that is from an operational risk standpoint, we split our contracts in terms of when they renew, which is a big thing. Our catastrophe programs renew on 1/1, and our XOL contracts for property and casualty, excess of loss, that is, excuse me, all renew on 7/1. By splitting the contract period up, we have a little bit better time to assess the market conditions and where we are. We view and are specifically planning for any higher reinsurance costs in our product costs right now, just like we view where we expect claim inflation to be, because that is an incremental cost in the equation. Did you have another question?
Yeah, thanks. A second one.
You got 999 left.
Yeah.
Okay.
Maybe. For number 2, in terms of the proposed tax reform-
Yes
obviously, there's a lot of questions and uncertainties out there, but you guys would fall into the bucket of someone that would benefit-
Yeah
from a lower tax rate.
Right.
How do you think about, and this is just both to your company as well as just to the industry.
Sure
Those companies that benefit from a lower tax rate in terms of the follow-through to price. Will you?
Right
Let a lower tax rate fall to the bottom line, or will you potentially, will that be a reason to push for less of a price?
I will tell you, I think that's a great question. First of all, we closely follow the ramifications of this, and I would say right now, approximately, until the dust hits the floor, we get out of the House Committee on Ways and Means, let's get the House version, the Senate bill version all intertwined and interconnected to a final bill. Just to give you a sense, it's probably about 150 basis points improvement or 150 basis points in return on equity as a result of that, and that's an approximate, so don't hold me to that till we're finally done. We view our returns no different. We would just assess our returns, where we are in the revised tax environment, and then what does that mean to our overall organization?
We look at that as a part of our return on equity overall, too, in terms of our targets. Again, 300 over our weighted average cost of capital is a target. Some years you want to outperform that because some years you may underperform that. Again, I think in the theorem of it's a long-term average, you've got to have some pluses north of 300 to offset a year that could be south of 300. That's the way I would envision that. From a product standpoint, private activity bonds are going to be an issue. That's a big part of the municipal market. If that tax status stays as is, as designed, that's going to take a lot of municipal product in terms of its tax advantage status out of the market.
That's something that you heard Mark, and I'll let Mark talk a little bit more about it. We use municipal product for duration. We use municipal product to lower our effective tax rate. When you start excluding hospitals, when you start excluding university bonds, when you start excluding special purpose bonds or anything else that may or may not fit under that criterion, it's going to change our investment portfolio and strategy going forward because depending on where the tax rate is, we'll have to look at product at a different effective tax rate. All of those things are embedded in that. The devil will be in the detail.
Very good points. I think the only thing I would add to your question, whether it gets passed on to the end consumer or not, I think time will tell, and it's tough to know upfront. Our hope and expectation is it would be a boost for the operating ROE, and Greg talked about the approximate 150 basis points. Knowing the exact legislation, new tax law changes are very uncertain at this point in time in terms of what will ultimately transpire. Just a couple other things I'd mention on tax. In terms of some of the tax reform that's happening, a lower overall corporate tax rate is good for Selective.
Some of the areas that they're targeting in terms of intercompany reinsurance, affiliated reinsurance putting debt from multinational corporations into the U.S. and pressure on getting that interest deduction, the net interest deduction as a whole, those are things that aren't an issue for us. Some of the hot topics for the industry as a whole are not as relevant for us. The other thing to think about, too, a lot of insurance companies haven't been through the cat losses in the early years, as well as the financial crisis, have significant net operating losses on their balance sheet that have resulted in deferred tax assets
There's a one-time hit when you resize that DTA from a 35% tax rate to call it a 20% tax rate. For us, our DTA as of the end of September 30th was about $53 million, I want to say. For us, when you resize that, let's say the corporate tax rate is 20% and leaving everything else consistent, and there are a lot of devil in the details as to how everything will transpire, but that would be a hit to us of about call it $23 million. The way to think about that is that's an upfront cost, just like when interest rates go up and you get an unrealized loss on your bond portfolio. Our payback period for that is relatively quick.
With our expected level of profitability, we'd expect to earn that back over a period of time that's measured in months, not years.
Question.
Thanks. Amit Kumar, Buckingham. Two questions. The first question goes back to the discussion on reinsurance pricing. Based on the spillover effect into primary lines, how do you think about the gross to net strategy for 2018 and beyond? Could you potentially revisit that, keep more net, or just based on the comment on the long-term aspect, you don't anticipate any changes to the retention?
I'll start if you want, then you guys jump in. I want to make sure when you guys look at our gross to net, you strip out the flood ceded premium, because there's a big bulk of flood ceded premium that can distort the numbers. Our traditional non-flood ceded to gross premium is around 6%. I don't really view that changing substantially. As Mark went through, we have a conservative reinsurance program. We want to maintain that conservative reinsurance program. I would tell you, we feel comfortable with our property and catastrophe XOL contracts at $2 million.
That doesn't mean they won't ever change, but that's just going to increase volatility, and I think what you guys have come to appreciate our value in Selective is the fact that you don't see this huge volatility to us, and some of that volatility is better managed through the reinsurance relationships that we have. We're always mindful of when we're trading dollars on a reinsurance contract and what does that mean and where we are. We also don't want to sit there and say, "Hey, well, we want to just increase our gross to nets and take on more medical inflation or more tail inflation into our book." Because we operate at a higher premium to surplus ratio, we get more invested assets.
You just want to be mindful of how much other risks you're willing to take in the organizational balance sheet that we manage.
Yeah, I would agree with that. I think the other thing to your point on gross to net and reinsurance versus primary pricing, clearly the reinsurance market has more flexibility from a pricing perspective. It's less regulated, they can change price on a dial. Whereas in the primary market, particularly in personal lines with filing rates and forms, and the local statutory regulatory requirements in terms of getting price in your book of business, it takes more time for that rate to come through the underlying book of business, and there are more constraints. We don't have a big gross to net strategy. Our reinsurance buy-in is to protect the balance sheet, to protect the solvency of the organization, and to have staying power for our franchise. We will continue to go out and purchase the reinsurance that we need to manage the risks that we're taking.
I gave you the numbers in terms of how much we spend on reinsurance. Even from a property perspective, if it was in our expectation, well, who knows? I don't want to predict the future what will happen at one-one, but we'll be pushing hard to have an attractive portfolio of reinsurance that we purchase. Even if there is significant pressure on price from a dollars perspective, it's not a huge, meaningful impact to the bottom line for us. We do have alternatives as well. I mentioned earlier on the top layer of our program is on a fully collateralized basis. We look at price, and we pay a little bit more for that collateral. There's a cost of capital that reinsurers have to collateralize that top layer.
I mentioned we even use the collateral with highly rated reinsurers, and we pay a little bit more for that. We have alternatives in terms of the alternative cat ILS market, and we could go out and purchase a cat bond. We look at cat bond pricing against reinsurance pricing and have an opportunity to move things around if we need to. The key for us is having the capacity, the reinsurance protection to protect the balance sheet over the long term.
Got it. The second question I have is the discussion on the 3% long-term Standard Commercial Lines market share. One large company out there is now talking about growing versus previously shrinking. They're talking about moving from the larger account, I guess, to the smaller and middle account down the road. Can you talk a bit about the competitive scenario, what you're seeing out there in terms of any company impacting that? What do you think insulates Selective when larger companies start focusing on your sweet spot and attacking it? Thanks.
I'll certainly take a crack at that. There's no individual company out there that we're sitting here saying, "Boy, I hope they don't get into the game," or they've got into the game and it's going to change the dynamic. We compete against, in the small and middle market segment, a whole host of carriers. National companies have been in that space for a long time, very highly successful national companies have been in that space for a long time, as have regionals. Everything we showed you earlier in that first section of the second half, in terms of our pricing sophistication, but more importantly, the execution around our pricing sophistication at the point of transaction, we will stack up against anybody's.
There's been a lot of press releases issued over the last year or two years about companies who have made their mark in the large account space, and quite honestly, have done so at very lousy margins, who are now going to make a big splash in the low end of the market. That has not historically been the case. It's a very different space to play, and I think you just can't plant your flag and expect the producers who control that business to start feeding you, because they're going to expect consistency. They're going to stick with the company that's been there for them, they've developed a comfort level with.
We don't have our head in the sand relative to potentially a changing marketplace, we've been fighting in a very competitive marketplace when it comes to small and lower middle market business for a long time, and have done it very successfully. Our whole focus on customer experience. You got the front end in terms of underwriting and pricing sophistication, which we would stack up against anybody's with our experience. Now add on to that, what we're doing on the customer experience side and the whole idea of creating stickiness for those accounts, and we feel very good about our competitive position.
Scott Allen out with RBC Capital Markets. Just had a question. You guys have always been known as a super regional. You made the comment about being a national carrier. Just wondering if you could expand on that in a little more detail. Obviously, you mentioned those states, but if you could give kind of a timeline. You want to be in every state at some point, but just any detail there.
I'll provide a little bit more context to what James already talked about and give you more specifics in terms of the timeline. We will keep our regional feel. What we mean by that is we are still going to be a company that is decentralized in terms of underwriting and claims. We continue to believe that pushing underwriting authority closer to our agents is a business model that doesn't just create value for the agency, but creates value for us in terms of the underwriting knowledge we have by being there and knowing who the producer is on the other side of that transaction. That model is going to continue to be our focus. When we talk about being a super regional, which in our mind is just a label that the outside world places on us.
We're trying to be the best company in every market that we play in and every agency that we partner with. We have a 24-state footprint as we sit here today. We've got approximately six additional states that have been identified as certain candidates to be fully operational. You saw that map. You've got Colorado, Utah, New Mexico, Washington, Oregon, and Vermont. Are the six that we've said, "The environment is such from an economics perspective, from a regulatory perspective, from an overall market environment, catastrophe exposure, those are locked down. Yes, we want to open those up." Those will be open within the next two or three years. The rest of that map that you saw up there, you could put a couple different labels on it. Let's call it fill-in states.
We want to have our product portfolio over the next, call it seven years or so, approximately, our product filed and approved and automated in every one of those states. Those states you saw in blue on that slide, we're not going to appoint agents. We don't have plans to appoint agents right now or go out and put a bunch of folks on the ground. Those are states that we want to be able to handle accounts that are written out of our existing footprint that have locations in those states. We haven't fully evaluated the remainder to see, do we stop at 30 fully operational or does that push up a little bit? Our overall focus is on doing this in a way that doesn't change the overall risk profile of this organization.
That's kind of how I would think about it, how I'd think about the timeframe, maintaining that regional feel and that franchise model, having a national footprint from a product capability perspective. Does that answer the question?
All right. We've run a little bit over, it's 22 after. Unless someone has a pressing question, you can always catch us at lunch. I want to thank you for taking the time to be here today, for you to better understand the Selective story. Again, thank you for the long-term holders of Selective stock. I want to, again, thank you very much for your conviction in the management team of this company. Thank you