Our next presenter is going to be Selective Insurance, which I think has not missed one of our conferences over a very long time. The company itself has had among the most stable management teams over the past decade. Greg Murphy, the Chairman and Chief Executive Officer, has been with the company for 35 years and has had numerous roles over the years, including Chief Financial Officer and Chief Operating Officer. Dale Thatcher, the Chief Financial Officer, has been with Selective for 16 years, right? Having joined the company from Ohio Casualty. Under Greg's leadership, Selective has developed into a key trading partner for their independent agents in selected geographic regions. With that, I'm going to turn the podium over to them, and they'll talk to you more about how they do.
Great. Thank you, Allison. Selective truly is in a league by itself. We like to say that we've got the Ivy League of independent agents, a very focused regional carrier. We're the 42nd largest property casualty company in the United States. We actually have three segments of insurance that you can see here that we have. We've got our commercial lines division that represents 77% of our premium, our personal lines, which is 14% of our premium, and then our newest E&S operation that's growing is about 9% of our total premium. I'd say the three things that if you were to point out and ask me about Selective that makes us unique, one is the fact that we have true franchise value with Ivy League of independent agencies. That's number 1.
Number 2 is a very unique field model where our field people are armed with sophistication that helps them make very granular decisions as part of the underwriting process. The third is a culture around best-in-class customer service. We're focused on growing and growing through our agencies in the existing territories. When you think about where we are in terms of franchise value, we are in 22 states. From a commercial line standpoint, we have 1,100 agents. You think about that is very high franchise when you think about overall the number of agencies that a company that writes as much as premium as we do would have. That's number 1. Number 2 then, in our standard personal lines business, which we write in 13 states, we have about 700 agents that represent us.
Then in our E&S business, we have about 80 wholesale brokers in every state in the country. We have an average premium on a standard lines basis of $1.7 million per agency, and we're number 1, number 2, or number 3 in most of our shops overall. When you think about what makes us different is our unique field model. We survey our agents systematically, and our survey scores by our agents in terms of overall satisfaction is about an 8.6 on a 10-point scale, and that's been very stable in the last three-year time period overall. We have this success as a result of our field model, and I'm going to talk a little bit about it in a second. Look at a quote from one of our agents. "Selective is our go-to company.
We constantly speak of how great the company is to our customers." That reflects the entire organization overall. When you think about, well, what makes you so different, what makes you so special in the marketplace? When you put whoever in the middle of that field model, whether it is an end customer or an agent, we surround them with a holistic field model whether it is with the linchpin of our success, which is our field underwriters, which we have about 100 of, whether it is on the personal line side, our personal lines management specialists that we have, which is about 15 of them, or on the claims side, when you have a claim, we have about 100 claim management specialists that live and work in the territory, and they are all assigned to individual agents.
They are the ones that are going to handle the claim throughout its life cycle overall. We have, which is pretty unique, 80 safety management people. They are very important because they are brought in on accounts to provide and act as the risk manager on a piece of business. Whether it is safe driving, OSHA training for any of our public or service entities that take federal money if they have to do infrared testing. We would do that as part of our safety management program overall. What an agent said is, "Great partner, great company and staff. You are our number 1 commercial lines carrier in our office." We hear that over and over because of the high service level we offer to our agents and to the end customers.
When you think about renewal premium and what drives improvement and profit improvement, we have worked very hard, and we are showing you the amount of renewal premium in our commercial lines division, which I mentioned before represents 77% of our premium. Look at the renewal growth Look at the renewal retention, which is on the right side, overall retention. Very stable as we are increasing price. In 2011, 2.8%. In 2012, 6.2%, so on and so forth. 2015, we raised our Renewal Pure Price by 300 basis points. When you think about it, consistently getting above loss trend, consistently leading the market overall.
I know you have heard a lot about where rate is going from some of our competitors over the last day and a half, and I will tell you, our Renewal Pure Pricing for the month of January 2016, where we write 10% of our premium volume in the month of January, was up a very solid 2.8%. We are still getting what we believe to be our expected claim inflation rate. That is very positive overall as a company. Part of it is the way we actually deploy it at, what I would call, at an account level. We have, what I would like to say, a very good structure of being able to drive rate. We bucket our business, and you can see the above average and average, which represents close to 80% of our premium.
We can show you the amount of price that we had driven on that segment, as well as what the retention is at point of renewal. For every underwriter, we measure the rate that they get, but also we measure the underwriting improvement that they generate. By that, I mean if an underwriter put a 15% price on a piece of business that wasn't accepted, they would get underwriting credit for that. The fact that it non-renewed for whatever reason, somebody might have wrote it for less than expiry or whatever, we actually calculate a credit and a benefit for that inside underwriter because they're doing the right things.
Even though at the end of the year they may not meet their renewal target because what they put larger a pricing on, they didn't actually stick, we would actually calculate that as a renewal benefit when we look at overall by target. We're very granular. We deploy this on an account-by-account basis. We can look down and see within an agency what the business inventory coming up with, and how do we want to price that going forward. That's the reason why we've been very successful in driving rate and retention in the book in the direction we want it to be in. When you look at profitable growth, which is a key part, you can see our biggest sector is the Commercial Lines division. We continue to increase our capacity as an organization.
You can see we wrote about $340 million of new business, followed by what we wrote, which is the goal portion of that in Personal Lines, and then our newest growing E&S operation. Nice new business growth rate, and you've got to be able to generate new business while at the same time you're increasing retention and working on your renewal pure price levels if you're going to grow and be profitable. This is how we analyze our inventory, what's happening on the new, how does it score, what happens on the renewal, and how are we balancing it from best to worst? As a result of all those things, you're seeing nice growth rate in Commercial Lines.
You're seeing a little bit of traction start to pick up in our Personal Lines division as a result of our new Edge product, as well as the ongoing efforts in our E&S division. When you think about last year, for us, was the most profitable year since we've been listed on NASDAQ, a 89.4 combined ratio ex cats, you can see what our original guidance was for every year there and how we actually performed. We believe in performance, and we believe in what we're doing to improve our profitability. Overall, we exceeded our target, which is 300 basis points over our weighted average cost of capital. For 2016, we believe that through the combination of earned rate and underwriting and claim improvements, we will clearly exceed our expected loss inflation levels.
From a Commercial Line standpoint, a key part of our business, again, you can see the profitability in the line. For 2015, it was an 89.2 combined ratio overall, and look at the nice growth of the business as well. At the same time, we're improving the profitability. Again, the reason why we are where we are, 25 consecutive quarters of Renewal Pure Price at or above expected claim inflation. That is an unbelievable track record for any company to sit here and talk to you about. How we're doing it through writing new business and maintaining our inventory is the reason why we've been able to balance growth and profitability as an organization. When you think about some of the other things we've done outside of rate, because it's not always just about rate, it's about how you improve your inventory and what you're doing.
You can see the change in the mix of business in our comp profile as we've tried to go to more low hazard business, and you can see that movement up about 700 basis points, and there's a lot that we've done on the workers' compensation area to improve the claim handling practice. We've consolidated all of that in Charlotte, and we've got a nice strategic case management unit that works with a triage model. Just look at how our results have improved. We printed an 88 combined ratio, and that has about 13 points of favorable development in it, but still a nice healthy track record. From a profitability standpoint, I've already talked some of that. What we're doing in Personal Lines, our goal is to drive our home book to an 80 combined ratio in a normal cat year. That's our target. That's what we're pushing towards.
We're very aggressive on that. We rolled out our new Edge product, which is targeted at the consultative buyer, and it's much more coverage risk rich, but we're trying to find ways to better identify the traits of a consultative buyer and then drive them, him or her, into our independent agency channel. Talked a little bit about overall E&S. Talked about what we're doing in terms of claims improvement, mix of business, Renewal Pure Price increases, as well as continue to grow the book overall. This is a very low hazard, low limit book. Most of this book is at limits less than $1 million, and it's what I like to refer to as E&S light.
When you think about what it is that's going to make us different as a company, because we sat there, we knew back in 2005 as an organization, we needed to invest in technology, we needed to invest in modeling. We knew that that would be critical to our long-term success. Where we sit here today is what's next on the frontier, and for us, it's being able to deliver a service experience in what we like to call in an omni-channel. That means however and whenever a customer wants to do business based on the type of transaction that they're doing. That's what we are building out now is a very aggressive omni-channel capability, so we can work together with our agents because it's a shared experience in commercial lines, and how do we work together with our agents to provide a 24-hour-a-day service environment?
That would be very unique and very difficult for most companies to do in this business. You got to remember, we've got 1,100 agents to work through an omni-channel experience with. Most companies, particularly larger companies, would have 20,000 or 30,000 agents that they'd have to work that through. We've got a big advantage in this area, and we're going to be very aggressive overall from our standpoint. From an investment standpoint, Selective, very unique competitive advantages, a long-term track record of being profitable and growing and delivering on the plans that they've articulated. A unique model, investing in best-in-class customer experience, which will be very difficult for many of our competitors to do. Focused on growth by in the lower hazard area, which is increasing our share of wallet with our existing agents.
Our share of wallet is at about 7 right now across the country, and our goal is to take that share of wallet up from 7 to 12. That's over $1 billion of opportunity. Adding agents in the 22 states that we're operating in is another $1 billion of premium. When you think about the lowest risk way to grow, growing with your existing agents in territories that you already know and agents that you already know, and then adding agents in territories that you already know is the next least risky way to grow. We feel very well positioned to generate profitable growth in the future. With that, I'd like to turn it over to Dale, who will run you through the risk profile and financial strength of the company. Thank you very much. Thank you.
Thanks, Greg. We'll just spend a few minutes here on the financial side of the house, give you a little bit of a rundown about how we view risk and how we balance risk across our enterprise. This is kind of a graphical representation of how we view risk. We have a low-risk investment profile in terms of our portfolio is about a AA- average quality, 90% bonds. You can also see we've got a conservative reinsurance program that we'll be talking a little bit about. Reserve strength, you've already heard about how well that has done over the years. Then one of the key elements is you've got to take risks somewhere to make money. The way we do that is we use higher than average industry leverage.
The sweet spot for us is to run between a 1.4 and a 1.6 to 1 premiums to surplus. Every 1 point of combined ratio equals 1 point of ROE. The industry runs at about 0.75, which means every 1 point is only half a point of ROE. A distinct advantage when you get substantially below a 100 combined ratio, which is where, broadly speaking, the industry is tending to run today. We get a real ROE advantage in terms of that. Looking a little closer at the investment portfolio, as I said, AA- average quality, 3.7 year duration on that portfolio, 90% of that is invested in bonds. Clearly only about a 1% is in high yield bonds, so very conservative, plain vanilla style of portfolio there.
One of the things people have asked about is yield, obviously, in this investment environment, what's going on out there with the 10-year moving even lower again. We're at 1.78% is our expected after-tax yield for new money this coming year. All of our guidance that we have provided, which includes $100 million in after-tax investment income for the year, is based on that expectation of continued low yields. One of the things that Greg likes to talk about is he actually likes this environment, and we love this environment because it really places an emphasis on good underwriting, and we think we can win that game hands down, day in and day out. If you look at our reinsurance program, we buy $685 million in excess of a $40 million retention on our cat program. That covers us up to a 1 in 274-year event.
Pretty good coverage in terms of where a lot of folks are buying. You see a lot of companies only buy to the 1 in 100-year event. Clearly, a lot of very high-quality partners participate in that. We have over 30 markets that we deal with on our cat program alone. We view that dispersion of risk as a much better way to go. The other thing is the top layer of that program is substantially collateralized. In the event that we do have a very large event, we don't have to worry about collecting that. It's collateralized with traditional markets as well. You can also see here what the 1 in 250-year event does for Selective, approximately a 4% of equity at risk in that 1 in 250-year event. You can also see that the median and the max for the industry is substantially above that.
Again, a conservative profile there. Reserve strength. One of the big reasons that we're able to maintain that higher degree of operating leverage, the premiums to surplus as high as it is because our reserve development is substantially less volatile than the industry. You can see here historically at 1.4% compared to a peer average of 3.6%. That's predicated from a lot of things. One is the agency partners that we deal with that Greg talked about. One is the fact that our average account size is $10,000 for commercial lines. Takes a lot of $10,000 accounts to make $1.5 billion in premium. You're spreading over a much wider base, which also means for lower volatility in terms of that.
Combine all of that with the way we manage reserves, the way we do an actuarial analysis each and every quarter on our full reserve position enables us to stay ahead of reserve trends and make sure that we minimize the volatility. We've had 10 consecutive years of favorable development in our reserve position. We're all about generating long-term shareholder value. You can see the graph here. Something that we concentrate on significantly about how do we continue to generate value for our shareholders. We talk to employees about how we earn our independence every day by delivering the shareholders high-quality returns. You can never keep the people at bay that may want to buy companies and things like that.
The only thing that we can make sure that we do is if somebody runs after us, is that we make it as expensive as possible for somebody to do that. That's the best way that we can deliver value to our shareholders is by continuing to hit on all cylinders in terms of our financial performance. Total return for our shareholders over the one, three, five, and 10-year period. You can see the graph of Selective stock compared to the S&P 500 and the S&P Property and Casualty Index. Ultimately, as Greg pointed out, we think that it's a distinct investment proposition and that we are unique. We deliver true franchise value with our agency plant, number one or number two in most of those agencies.
That gives us not only the first look at a high-quality piece of business, but also often the last look at a piece of business, which means that you don't have to sharpen your pencil all the way and deliver the rock-bottom price. You're able to deliver the right price for the risk. Unique field model builds those relationships where we have those field underwriters in that agent's office once a week, twice a week, whatever it takes to be able to deliver that value and to go out and write that business. Lastly, a superior customer experience, making sure that our customers stay around, have high retention, because the longer you keep a customer in our business, the more profitable you're able to be. With that, we'll turn it over to, I know Jay will have one or two questions. We'll invite your questions.
Here, actually.
Oh, thank you. Right here?
Two questions. Maybe just start with you, Greg. When you talk about you're trying to expand, getting into new agencies, but yet where you are, you're the number one and two provider. How do you go from being someone that haven't written any business on your paper to becoming number one and two? Second part for the CFO, talking about reinsurance, what are you seeing different now from some of your providers than you were 12, 18 months ago?
Okay. Why don't I start with the first question? Let's talk about what Selective does for its agency plant is very unique and very special. When we like to say our agents are Ivy League agents, when you walk into a meeting at Selective and you look at the people in the room, you say whether it's a Georgia meeting, whether it's a Connecticut meeting, Massachusetts, you look and say, "Wow, these are the best agents in the state." Our capability to attract new agents is very high, and it's high because most of the people that, because we operate with such high franchise value, some of the agents out there that don't have Selective have lost opportunities to a Selective agent. Why? Because they're providing local claim service. Why?
Because they provide safety management services, whether it's OSHA training that I mentioned before, whether it's on safe driving for vehicles or whatever it is that we offer. You've lost as a new prospect. You've lost a lot of opportunities to Selective. You want Selective, you need Selective on that wall. You have a little sense of humor. You guys have been here two days, right? From our standpoint, our phone rings
A lot from prospects that want to have a Selective appointment. Part of it is we don't have an agent on every corner. Just picture this, 1,100 agents in 22 states. There are 37,500 agents in the United States. We've elected to do business with 1,100 of them, and that's very special, and they know to get into that club means a lot. We do a lot for our agents. We do a lot of executive training for them. We're pushing them hard on customer experience on a 24-hour-a-day experience, which is uncomfortable for a lot of agents.
We tell them, "Hey, if you want to maintain that Ivy League status, this is what you need to be thinking about, or you could get disrupted out of the marketplace." That's what we worry about as an organization, and that's why best-in-class customer experience is going to separate the winners from the losers.
To give you some context on that agency side of things, because I think it is important. Allison indicated I was with Ohio Casualty many long years ago. At that point in time, Ohio Casualty had $1.5 billion in premium, pretty decent size. At that time, we had 5,600 agents that delivered that $1.5 billion. Selective is doing $2 billion with only 1,100 agents. That really gives you an idea, because that Ohio Casualty model is actually fairly similar to what you generally see out there in the marketplace. Selective is definitely unique in the way we do it. We have an average premium per agency of $1.7 million. There's only one company out there that has a higher average premium per agency. Not that I want to give them any press time here, but it is Cincinnati Financial, in the interest of honesty.
They're the only company out there that's able to deliver a better penetration, we're chasing. We think we're better in a lot of other ways. Anyway, lastly, the other question you had was on the reinsurance marketplace. What's different from 12 to 18 months ago? I don't know that a lot is different from 12 to 18 months ago, but I would say that if you look at that reinsurance marketplace over the last five to seven years is the big change, as you've seen is so much pension money has gotten into the cat business, and cat bonds have become much more palatable. Some of that's driven by these low interest rates that we have.
I'd say in the last three years, for the first time in my career, as we went through our reinsurance renewal process, cat bonds were actually a viable alternative for a company like Selective. Usually, they've been used by companies that really needed large capacity that wasn't available in the traditional reinsurance markets in the past. Now, cat bonds are really a viable alternative, and they're priced pretty similarly to what you can buy traditional reinsurance for. I would say that there are still advantages of the traditional reinsurance marketplace for a company like Selective, but I think that's the big change, because what that has done is it's added a lot of competition, obviously, in the cat arena. As the cat arena has heated up, you see some players that used to be exclusive cat players now venturing over into casualty business and venturing into non-cat property business.
You've changed the landscape a bit in the reinsurance marketplace in terms of competition. Obviously, my brethren in the reinsurance space can speak to that more specifically as to what that means to them. It is certainly a tough spot for them these days. It's a great spot, obviously, when you're buying reinsurance in that we've seen ongoing reductions in our reinsurance costs over the last few years, and also it's enabled us to craft an even better program for ourselves.
Jay, you had a question?
I do have a couple questions. The one line of business you didn't spend too much time on, you didn't put a target up on, was auto insurance.
Workers' comp, you did a great job fixing it. Auto is the one business that's it's not a big business for you, I get it. It's still running above 100. What's the strategy there, Greg?
Yeah. commercial auto is our second largest commercial lines of-
You mean personal auto.
I was thinking personal auto.
Oh, I'm sorry. Personal or commercial?
personal auto.
personal auto.
Oh, personal. Oh, yeah, thank you. All right, I'm sorry. Yeah. On personal auto, yeah, it's part of what we offer as a complementary package to the commercial lines. I will tell you that our goal in well, there's three main products in our personal lines division. The first is so our home, our auto, and our Flood. The Flood and part of that division is a great product because it hedges. It's the one true hedge that we have to hurricane exposure. When we had Hurricane Sandy, which I'll still call it a hurricane, not, or refuse to call it a super storm. That hurricane, we actually did very well and offset a lot of our losses from Hurricane Sandy through our Flood operation.
I would say on the auto side is something that we are now companioning the products, or trying to sell what we call The Selective Edge product, which is just a combination of the home and auto together. That's how we're focusing it, looking for that consultative buyer, and we have found a lot of ways to better identify them, and we are now testing those marketing strategies. Right now, for the most part, we're selling home and auto together. Home will be a slower path down to profitability than auto will be. I'm sorry. Auto will be a slower path down to profitability than home will. Home's going to take a much more straighter line down to where we need to get it to.
Again, not a big part of your business at this point.
No.
The other question I had was, you showed the slide, it's a good slide, where you segment your business and you show the retention and price change by-
Yes
by segment. Over time, as more of those risks move into the better buckets through the selection that you're doing, doesn't that mean that your published price change would naturally go down? Is that part of the issue that you're seeing?
Well, what happens, the way that this modeling works is it's a rack and stack, so you always have a new bottom 10% ID'd. It's just that in theory, if you're constantly improving and the modeling stays the same, what you would expect to see year after year is the combined ratios would improve all the time. What happens is when you do it in reality, you improve your modeling, your lift curves. Not to talk a lot of technical. Your lift curves get better, which tilt it this way. If all things remained the same and you did modeling year after year and everything was the same, used the same model, and the combined ratio on your worst business was here and your best business was here, eventually this would start to tilt like that.
You don't really see that, you're constantly repopulating the bottom tier with that 10%, then you're ID'ing that for improvement plan. There's plenty of opportunity in this marketplace because an account doesn't stay in one area all the time. It does have a tendency to drift.
To the pricing component, generally speaking in our business claims inflation, it runs, call it 2.5% to 3%. The reason that's higher than the CPI is because medical inflation has a much bigger component or is a much bigger component in our cost of goods sold. Really the whole industry, if you were to get the exact same combined ratio from every company every year, all else being equal, the industry basically needs to raise prices by between 2.5% and 3% every year. You heard our guidance, for what we've been able to deliver, what we delivered in January here of this year, 2.8%. Right now, loss inflation trends are running about 2.7%. We're just a little bit ahead of that.
The trick is really kind of training the consumer base to understand that you expect to pay more for your pair of Nike this year than what you paid last year. The insurance product works pretty much the same way. There is inflation that needs to be dealt with.
Got it. Unfortunately, the Nike inflation's a lot more than 2.7%, as my son will tell me. Ran out of time. Great presentation. Thanks, guys.