Just to keep us a little on track, we're going to move on to the next presenters, Selective Insurance Group. By the way, I'm Alison Jacobowitz, if I don't know everybody in the room. I work with Jay Cohen. I think also this is a perennial speaker. I don't know if in the, I'm not going to admit how many years I've been doing this, you've ever missed one.
I don't think so.
I don't think so, and it's a lot of years. I'm pleased, as I said, to have Greg Murphy and John Marchioni from Selective Insurance Group here today. Greg's been with the company since 1980 and has been CEO for about 15 very busy years. John is Selective Insurance Group's President and COO and has also been with the company a while, since 1998. With that, I'm going to turn it over to you.
All right, great. Thank you very much. That's true, I've been with the company for 34 years, and it's been a great 34 years at Selective Insurance Group. Let me tell you a little bit about Selective Insurance Group and who we are. We are the 44th largest property casualty company. We've been rated A or better for 84 consecutive years. We're going to talk to you during the course of the day about our high tech, high touch business model that I truly feel makes a difference in the marketplace. I think the thing to think about Selective Insurance Group is how we operate at a higher leverage point than the industry. Our premium to surplus ratio is twice the industry average. The way that you equate that, for every one point of combined ratio generates one point of ROE.
If you sat back and looked at the composite of the business, 76% of our business is in Commercial Lines, 16% is in Personal Lines, 8% is in our Excess and Surplus Lines area. Let's talk a little bit about the Standard Commercial Lines overall. We operate in 22 states. That's the map of Selective. We have a high franchise model. We truly believe we have the Ivy League of independent agents. We have 1,100 agents. When you think about motivating strategies of doing things, we have 1,100 people that we need to talk to about moving us forward. When you think about our overall account size at $10,000, we are in the lower end kind of the market where things aren't nearly as competitive as they are in the upper end.
For 2014, we generated a statutory combined ratio in this segment of 95.5% overall. Let's move now to our Personal Lines. Again, one of the things we think about Personal Lines is where can we make money as a company overall. We're only in 13 states. You can see where we're not in. We picked the more regulatory-friendly states to be in. We distribute this product through approximately 700 independent agents. We're focused, you heard a little bit about this from Jay earlier, we're focused around the consultative buyer. We lead with home. We don't write monoline home in a number of our states. We view that as a customer that wants consultation in the process. That's the type of buyer that we identify.
John will talk to you a little bit later about some of the enhancements that we continue to make on our Edge product that are helping us grow this market share. The overall combined ratio on this was 100 basis points better than the Commercial Lines. That came in at 94.5% overall. Our newest product segment is E&S, which gives us more diversification as a company through all 50 states. We have 80 wholesale, again, a franchise-type model. It's basically lower hazard, principally General Liability. 70% of the business is in the General Liability sector. Think about this, average account size is only $3,100. We're talking about the lowest hazard of the E&S sector of the marketplace overall. Combined ratio at 99.2%.
It's still a little bit above where we'd like to see that, we continue year after year to bring that down, that's a fairly new element of our overall business segments. To think about Selective in terms of risk and return overall, we start at the center of the bullseye, we do write a low to medium hazard. We measure that by where the PIV limits are. Just about 90% or less of our Commercial Lines business has limits of about $1 million. We truly are a lower hazard style writer when you think about Selective. We surround that center core with a very conservative investment portfolio, a very conservative reinsurance portfolio overall.
I would say superior and actionable analytics that our people can deploy day in and day out to manage their inventory, to manage new business, to get a sense as to where they need to be overall. Where we do take more risk is on the operating side, where there's two things you want to think about. One is the fact that we run at about a 1.4 or twice that of the industry in terms of premium surplus ratio. That gives us $3.80 of invested assets per dollar of stockholders' equity. When you think about what that means relative to the investment portfolio, let's go right down to the bottom line. $3.80 of invested assets per dollar at a 220 return is 850 basis points of ROE from our after-tax basis on our investment portfolio.
That's the bottom line. We manage that portfolio very conservatively. You can see 91% is in fixed income. 32% of that is in muni, 38% is in corporates. Think about that. Double A minus average credit quality, 3.7 year of duration, I think that's why we manage it around those two tenets. We can maximize the leverage and generate that 8.5% ROE from our investment portfolio overall. I'm sorry, let me just go back. The one thing that we did have in our guidance, as you can see, was $105 million of after-tax investment income for 2015. That represents some very strong cash flow for the year, offset to some extent by a lower estimated after-tax return on new money in 2015. We've lowered that a little bit to 200 basis points, I just wanted to make that point for you overall.
When we think about our cat program, there's a lot of material on here. What I'd like you to focus on is, what we're showing you is the 250-year or the 0.4% probability curve. When you think about that impact on Selective stockholders' equity, a 0.4% probability event affects our stockholders' equity by only 5%. A 250-year event is a 5% diminishment in overall stockholders' equity. That's a very strong program. A fair amount of the program is collateralized overall, these are the hallmarks, I think, of what you see. It attaches at $40 million. It's a $685 million program all in, a well-placed program. The next thing, you heard a lot about, I'm sure this through the course of today, is in terms of, well, tell me about reserves. Tell me how you manage your reserve inventory.
What do you look at internally? Very disciplined process. Our reserves are signed, the opinion comes from a third party. Also our actuaries are very involved. We have a lot of them in the organization, they're involved in the planning process, we go through quarterly ground-up reserve reviews every quarter. It isn't any year-end surprise that you should ever get from Selective, because we're constantly managing that inventory and looking at those reserves on a ground-up basis quarter after quarter. We also have three evals done by our independent auditor. The thing to look at is, overall, look at the lack or the very low volatility in reserves that you get from Selective relative to our peers. We identified the peers down there.
We don't have an enormously large peer group, but our reserve volatility for a 10-year period was just slightly more than 1%. That means that we've set the reserves very well. The past nine-year period, our reserves have run off favorably. Let's move a little bit into the high-tech kind of conversation, and that starts with our easy-to-use technology that we offer our agents. Our systems are fully integrated with AMS, with Applied, which are the two major vendor packages out there. Then I think we are investing heavily in what is called the "omnichannel experience." You say that to a lot of people, and they go, "Oh, what does that really mean, omnichannel?" That means that we want to be able to do business with the customer however and whenever they want to in the manner in which they want to communicate.
That can change based on the circumstances that they have in front of them. It could be a technical question about coverage that they maybe need to talk to a producer, but also it could be an insurance card, insurance certificate, or some other way. We want to be able to communicate with that customer however and whenever they want, in terms of being seamless between us and our agents. The advantage that Selective has is we've got to get 1,100 agents on board with this "shared experience concept," because servicing an end customer is a shared experience between the agency plant and the company. It's very important that when you think about the advantages and the competitive advantages of Selective, you're sitting there threading them all together. High franchise value, great technology, very customer-centric as an organization, which are critical elements moving forward.
Then in terms of business intelligence, this is an absolute must in the organization, and it's more than just personalized models. It's about Commercial Lines models, GLM, where you are, what you're doing in fraud, what you're doing in recovery, what you're doing in terms of triage models, and how are you advancing all of that work product to lower your cost of goods sold and maximizing your returns overall. We've done a great job as a regional carrier. You heard a little bit from Jay earlier. We do view Travelers as a head-to-head competition in terms of what we're doing on a modeling and overall business intelligence standpoint. That really evidenced itself in something like this. You heard Jay mention this a little bit earlier.
This shows you the granularity of which our inside underwriters look at their renewal inventory, and they're making all the right decisions across the spectrum. This is a simplistic view of it. There's so many data points in here. We just basically take it in and look at above average, below average, low, and very low. You can see the percentage in each sector. The important part is, what are we doing in terms of rate? You can see that. What are we doing in terms of retention at point of renewal, which is really what we measure to see the effectiveness. Are we keeping the new business, and are we being aggressive with the business at the lower end? Then our field model overall in terms of what we do is the linchpin of our success. Our field underwriters are out there.
There's about 100 of them. They're assigned to agents. They're responsible for new business. We have our claim people out, our safety management people out. They're all out in the field working with our agents to help them write new business overall. When you really tie it all together, this is the best slide that I can show you in terms of this slide shows you the amount of rate that we've gotten in just Commercial Lines and then the overall retention levels. You can see they've been very much stable or improving while we continue to drive rate well above the market. Our rate for the fourth quarter was 470 basis points, about 170 basis points above loss trend.
I want to turn it over to John, who's going to walk you through some of our growth opportunities and some of our profitability successes that we've had. Thank you.
Thanks, Greg. I'm just going to build off of Greg's comments. He gave you a good sense as to how we think about the business, what our overall market strategy is, having the capabilities in terms of breadth of product and appetite, in terms of technology, in terms of underwriting and pricing and claim sophistication, but marrying that with a distribution model, a relationship model that's regionally focused, that's locally focused, putting our underwriters and our claims adjusters and our safety management specialists as close to our agents and as close to our customers as we possibly can. The combination of those two disciplines is what we really think separates us in the marketplace. I'm going to talk a little bit about some of the results we've delivered of late, and then how we think about the business in each of our major segments going forward.
In terms of what we've delivered, for those of you who've followed us for a little while, you know that three years ago, we set out a very aggressive three-year plan to get our combined ratio on an ex-catastrophe basis down to a 92. We did that in the beginning of 2012, at a time where there was a great deal of uncertainty in the marketplace in terms of the pricing environment and the economic environment. Now you look at where we are and where we finished 2014. On the combined ratio side, the 92 ex-cat with an assumption of three points of catastrophe losses, the actual you see there, 92.5. A little bit of elevated non-cat property in the calendar year 2014, but overall, very strong at a 92.5 and the cat ratio at 3.2 points.
Very strong relative to the expectation that we set out 3 years ago. We said at the time that we wanted to and expected to deliver renewal pure pricing increases of between 5% and 8% over that same 3-year period. You can see the actual results up there, 2012, 6.3%, 2013, 7.6%, and 2014, 5.6%, very much in line. More importantly, Greg just showed you the slide, when you think about managing renewal pricing in a very competitive environment, you also need to look at customer retention alongside of your pricing performance, because that really shows how are you executing on those strategies. Do you have the tools, and do you have the relationships to deliver those kind of price increases and maintain a very strong retention level?
Finally, return on equity target that we set over the long haul is to deliver 12% return on equity, which is relative to our cost of capital, about 3 points above our weighted average cost of capital. Finished the year at about 10.3% on an operating basis, 11.7% on a total basis. Continuing to make progress towards that long-term target. In terms of our growth over time, we've been a very disciplined company in terms of how you manage growth. We're in a mature business. We're in a business that has historically gone through cycles. You need to make sure you're growing at the right times. If you look at what happened from 1998 through 2007, we've doubled the size of the company over that time, did it in a very disciplined way.
As things turn a little bit more difficult in 2008, 2009, 2010, you can see that we managed the growth of the top line and really focused on bottom line performance, and then positioned ourselves over the last 3 years to get back into a growth mode. You can see about 27% on a cumulative basis through rate increases, through retention, and through entering a new business, as Greg mentioned, the E&S business, which has really given us geographic and product diversification as a great platform for us going forward. In terms of how we think about the growth overall, I'll start with Standard Commercial Lines. As Greg said, 76% of our total operation, our primary business. We think the growth comes from a couple different areas. We really focused on our people in this business.
As we said, the unique part of our model is having field underwriters that are out there, agency management specialists that own about 12 to 15 agency relationships, responsible for driving overall growth and profit in those territories, but also have underwriting authority on the commercial lines side. We've beefed up the number of AMS we have out there. We're adding more than a dozen. Are in the process of onboarding those right now. That's capacity for us to grow on the commercial lines side. We've also enhanced our small business team. That small flow business, a lot of it goes straight through the system without manual intervention, but there is some of that business that ends out of the system. We're now positioned to be able to handle that business a lot more efficiently and a lot more capacity to do so.
With regard to the third and fourth items you see up there, this is about maximizing the share, our market share in our 22-state footprint for commercial lines, our 13-state footprint for Personal Lines, and our 50-state footprint for E&S. There's really two levers that we look at in terms of driving up our market share. The first is, what's the market share that your agency partners control? We're pushing to make sure that every one of our 22 primary operating states, we've got agents in place, still respecting our franchise value model that can access at least 25% of the market. The second lever is share of wallet. How much of the business that they write, do they write with us?
The combination of those two levers and unique plans in each one of our states to push on each of those is how we expect to drive that up. We think we have about $400 million of new business capacity in place right now. No additional investments necessary to generate $400 million of new business on the commercial lines side. In terms of what we've done the last couple of years as well to enhance profitability and also give us more growth opportunities is improve our diversification. You look back at 2008, we had a nice balanced book of business, but still heavier on the construction side of things at 43%. We continue to grow that business. We continue to be a strong player there, but you see a lot of growth in the other industry verticals, manufacturing, wholesalers, distributors.
You see it in our community and public services, public entities, school systems, not-for-profit, social services. On the mercantile and service side, the retail business. Good improvement relative to mix of business overall. The final area I want to highlight on commercial lines, and we talked about this actually at this session a lot last year, was workers' comp. Our workers' comp results were the one area from a profitability perspective that was underperforming. There's some very specific plans we put in place. What you see from 2014 performance rolling into 2015, the progress that we've made there. The accident year 2014 at 110. When we roll that forward into 2015, you see a nice improvement there. We expect to have that line running at or below 103 combined ratio. You can see the different pieces that are driving that.
You heard a little bit earlier about a discussion about loss trend. A loss trend in that line driven by medical inflation and wage inflation, we expect puts upward pressure going forward on the combined ratio from 2014 to the 2015, offset by price. Earn rate of about three points. Again, that's the impact on the loss ratio. When you think about the overall rate level, what's the impact on the loss ratio? You get a point of improvement on a net basis. Underwriting and claims mix improvement. Again, it's not just about rate over trend, it's about what are you doing to change the mix of your business, and what are you doing to improve claims outcomes to drive down the loss ratio overall?
We've made a lot of improvement relative to our mix of business, focusing on lower hazard, smaller workers' comp accounts, changing over our book of business over the last couple of years. Lower hazard, lower frequency, lower severity business, that drives improvement. Have also changed the way we handle claims in this particular segment. Centralized our claims operation to allow for more specialization. Focus on compensability, focus on short-term medical claims, focus on lost time claims. As you heard from Greg, also got a lot more sophisticated in terms of modeling around escalation of workers' comp claims. The ability to see very early in the life cycle of a claim, based on risk characteristics, which ones are likely to really elevate in terms of the severity.
Getting those into the hands of a strategic case unit early to better manage the treatment plans, better manage the care, and the return to work around those. It's a small percentage of your claim inventory, but it's the bulk of the dollars. Those are the other factors that are driving performance going forward. Moving on to Personal Lines. It's about 16% of our business. You can see very, very strong improvement in profitability over the last couple of years. At the bottom there, you can see the 2013 and 2014 combined ratios. About 200 basis point improvement both on an all-in and an ex-cat basis. We expect to continue to see that improvement going forward. We've also made some product enhancements, you heard a little bit of this in the last session in terms of the type of customer that we compete for.
We write through the independent agency channel. We're not built and don't intend to compete in the commodity side of Personal Lines. We do think that that individual who has an asset and a home, they don't think about that, protecting that as a commodity decision. Our ability to take a great home product and de-commoditize how they think about the auto sale is what our real focus is. That consultative buyer. That's what aligns well with the independent agency channel customer. These were the number of product enhancements that we made and rolled out early in this year to make sure that we're better positioned to serve that market. E&S, the final of the three segments for us. You continue to see good solid growth here, about 16%, just under 16% for the full year, and good continual improvement from a combined ratio perspective.
You can see from 2012 to 2014, almost a 20-point improvement in combined ratio and a 16% compounded annual growth rate on the premium side. Coming from a couple of areas. We've got deepening relationships with our wholesale partners across our 50-state footprint. Also taking advantage of the retail agency partners we have on the standard side and driving more business through those wholesalers to us on the E&S side. The other part for us on the E&S business is differentiating ourselves from a technology perspective. These businesses that we acquired didn't have much technology infrastructure. We've now rolled out a new quoting platform, making us a much easier company for the wholesalers to do business with in terms of E&S. We see a lot of growth opportunity going forward.
In terms of 2015 guidance, when we think about rolling all of these improvements forward, you can see on an ex-cat basis guidance to a 91 combined ratio. We assume 4 points of catastrophe losses. You saw the 3.2 actual in 2014. We've got 4 points in terms of guidance for 2015. 4% on the overall renewal pure price. That's all lines, commercial, E&S, and Personal Lines. 4 points of overall renewal price, $105 million in terms of after-tax net investment income, as you saw from Greg, and then there's your weighted average shares outstanding count. That's the overall guidance. Then taking the current actual, the 2014 accident year combined ratio, and rolling it into the 2015 and see the component parts. The point I make here, we talk a lot about loss trend.
You assume generally loss trend is going to drive up your expected loss ratios. You actually see a little bit of a negative in terms of trend, largely because of what we mentioned earlier. Non-cat property was elevated in 2014. As you normalize that'll actually offset the inflationary pressures you do see overall. That's why you see a point of actual improvement from a loss trend perspective. There's your earn rate at 2.5 points. That's a benefit underwriting claims initiatives, as I've highlighted. Then actually expenses going higher by about 1 point, driven by a few factors. Number 1, we continue to invest in our IT infrastructure to make sure we're able to scale as an organization. Some additional pension expense based on what's happening in terms of investment yields. That's the second area. Then the third area.
What am I missing there, Saul? You've got the-
The investments.
The-
The compensation sensitivity.
Yeah, the profit-based compensation for agents and for employees. As our profit levels go higher, the profit-based compensation goes up as well. That's how you tie it all together to the 91 on an ex-cat basis and then a 95 overall when you assume the four points of catastrophe losses. That's it in terms of the presentation. We've got a few minutes left for questions if anybody has them.
Jay Fishman in the previous presentation said that contrary to a lot of their expectations earlier on, that as they grew and consolidated other companies, their penetration with agents actually increased. That as he put it, "The more important we became to them, the more important they wanted to become to us." At number 42, how do you play the share of wallet game with your agents? It wouldn't seem that you could do it on the same basis, what is the plan of attack?
Yeah. It's a great question, actually, we do play it, but play it in a different way. Our philosophy is we're going to have fewer agents than a company like Travelers. Our 1,000 agents. If you think about our average premium size at about a million and a half to a million seven per agency, our expectation is we're going to be the number one, two, or three carrier in almost all of our agents. For a company our size, you create that leverage in that relationship and make yourself as important to them as they are to you based on where you occupy, what space you occupy for that individual agency, as opposed to thinking about it in terms of overall market share. That's how we approach and continue to approach share of wallet.
We don't make a lot of appointments with agencies that we don't expect to quickly become one of their top carriers.
We very closely track placement inside the agency. Like John said, that's what the difference is. We're doing, in total, just under $1.9 billion premium with 1,100 agents.
I guess related to the agents, one of your growth goals is to increase the number of agents. For many companies, that's not a big deal. For you, it's probably a bigger deal because you try to be very selective, excuse the pun, in who you deal with. I guess two questions. One, how do you identify these agents? Two, are you going to piss off your other agents in those regions by bringing on more distribution?
Yeah. Great question. We believe that there's opportunities to expand our agency plan on a state-by-state basis and not violate the basic tenet of a franchise value model. To give you a little bit more color on that, if you look at New Jersey, which has been the state we've been in the longest, I would say if you ask independent agents in New Jersey whether they're ours or not ours, they would tell you we probably have the strongest franchise and the most desired contract that's out there. We also have agents that, in total, write about 25% of the overall market. When we think about building out all of our states, in many of our states, our agents control much less than 25% of the market.
Pushing up towards that sort of a number, we believe we can do, we've accomplished in other places without violating the franchise value concept. The other part in terms of how we find them, we've got a field force out there. They know who the agents are that they prospect. We also get a lot of our best referrals from our existing agency partners, who in other parts of the state or other states are going to tell us who the best players are. Finally, onboarding them, that's part of why we enhanced our small business teams, and we've added more than 12 agency management specialists is to prepare ourselves to be able to service an increase in the number of agents that we have.
When you think about what's the lowest risk way to grow, well, you want to grow in geolocations where you already know the regulatory environment, you already understand how you make money. To take these 22 states and not increase the yield, that's really when you think about us growing in size, our goal is to take a state like Michigan, take some of these other states out there, and really increase our market share and do it in the way John just went through. We've already spent the money on the knowledge base, so why not get a bigger harvest every year? We feel we can do that without trampling on one of our basic tenets, which is Ivy League franchise relationship, franchise value, but also value given for value received.
When you get a Selective contract, they know what that means because we're helping agents write new business. We're helping agents train and develop their producers to develop a better sales culture and to sit there and say, how do they better market with social media? What are the things they need to do in terms of customer experience? We're one of the only carriers out there talking to our agents about customer experience, about the shared experience, and what they need to think about differently in the marketplace if they're going to be truly maintaining that Ivy League status in two years from now, five years from now, or 10 years from now. I think that's what makes the difference in the marketplace.
My other question, thank you, Greg, was on Workers' Compensation. It's been a rough line of business for you guys and for the industry as well. Your results have not distinguished yourself at all. Two questions. Why has it been such a challenge? Secondly, you seem to have some confidence you're going to get that combined ratio down below 105. You haven't been close to that, but why are you so confident you can finally get to a reasonable level?
Yeah.
I could certainly start.
I think one of the clear drivers is it is, without question, one of the most heavily regulated lines from a pricing perspective. You're relying on either the NCCI or an individual state bureau to set rates. In certain cases, you have limited pricing discretion. In many other cases, there's a lot of pricing discretion. The market takes already inadequate base pricing structures and just makes matters worse. I think that's a big driver. The other big driver clearly is it's a medical delivery product system. It's a lot less like a traditional P&C product where what's happening in the healthcare environment has a big impact in terms of what's happening with regards to utilization of treatment, utilization of prescription drugs.
Your ability to manage that medical claim is a big reason why I think a lot of companies have struggled with it over time. In terms of why we're so confident in our ability to continue to drive that down is we're actually seeing already the results of the big underwriting and claims strategies that we've implemented relative to hazard mix improvement, which we're only just starting to scratch the surface on. Directionally, you're seeing improvement in our mix from a hazard grade perspective, and we expect that to continue over the next couple of years. We think there's more benefit coming there. The maturity of our new claims model, we're already seeing improvement come through, but we know because it's still very immature that that's going to continue to accelerate going forward.
I think that's what gives us the confidence that that line will continue to improve.
I think just the fact that our entire comp unit is now centralized in North Carolina, in Charlotte, has now created a clear for the 55 people that work down there, have created clear specialty units, whether it's med only, return to work, whatever the process is now, we've got specialized units developed with long-term career paths. Before we had that disaggregated into five regional operations with limited amount of push in every area. By bringing that all together and bringing the right management on top of that, I think we truly have, coupled with the triage model that John just articulated, we clearly have the best way to manage that inventory for the more aggressive outcomes and more aggressive treatment paths.
That is all the time we have, unfortunately. Thanks, guys.
Thank you.