Those of you who haven't met me yet, I'm Alison Jakubowicz, and I work with J. Cohen on the property casualty side. The next company presenting is Selective, and as always, it's a total pleasure to introduce them. They're a perennial company at our conference. However, this year we actually have a first-time speaker from the company, John Marchioni, Selective's President and Chief Operating Officer. He's been with the company for more than 15 years, correct? We get an interesting new perspective. Joining him is Dale Thatcher. Most of you know him. He's the company's CFO. Jennifer DiBardino is sitting in the audience. We've got a full house from the company. With that, I'm going to turn it over to them to tell you about the story.
Thanks, Alison. It's tough getting in and out of these Oprah chairs, and I'm glad to see that we actually have the Selective slide, so that will be good. I won't go through the traditional here, but that is there. We will have some forward-looking statements as we always do. You're encouraged to look at our 10-K and take a look at what the risk factors are relative to that. We're going to talk about our history of success as a super regional carrier. We're the 44th largest U.S. property and casualty carrier. We've got a history of financial strength. We've been A-rated by AM Best for 80-plus years. We specialize in small commercial, but we also do the Personal Lines, and the newest piece of the puzzle is our E&S business, that we'll talk a little bit about today.
You'll also hear about our unique field-based operating model. There aren't too many carriers that have the kind of expertise that we do and the uniqueness of how we distribute our product. If you look here at our Standard Commercial Lines, that's the biggest part of who we are. You can see 76% of our business comes from Standard Commercial Lines. You can see the 22-state footprint where we distribute that. Those 22 states account for about 52% of the population in the United States. These are Main Street accounts. The average account size is approximately $10,000. These are the electricians that you call to come over to your house. This is the bagel place that you stop at in the morning for a cup of coffee. That's our bread-and-butter style of risk. It doesn't mean that we don't have larger accounts.
We do that, but generally speaking, we distribute guaranteed cost contracts. As soon as the company gets large enough that they want to get into the alternative risk transfer mechanisms, they tend to go elsewhere for their products. We distribute through about 1,100 independent agents, so we like to have a very deep penetration of that agency plan. We want to be a very important player within their operation so that they provide us with their best business and oftentimes an opportunity to take the last shot at a piece of business. That's very important in terms of being able to achieve the best pricing and the best profitability. One of the unique things about us is that we have approximately 100 field underwriters that work out of their homes.
Each of those underwriters has about 10 agencies that they do all of the new business underwriting for that agency. They're living in that same community, they're driving past those insureds. They understand the book of business, but also importantly, they know all the producers within that agent's office. They've got relationships with them to the extent that they can be there face-to-face and get their best business, and we are able to get a deeper penetration as a result of that. On the Personal Lines side, you can see that we do Personal Lines in a 13-state subset of those 22 states. The states within our normal standard lines footprint that we've identified as higher quality states in terms of the legal, regulatory, or natural catastrophe environment that's much more conducive to long-term consistent Personal Lines profits, is where we are.
We've got about 690 of our agents in those 13 states that distribute the Personal Lines product, and that represents about 17% of our overall premium written. Excess and Surplus Lines, we made a couple of acquisitions in the 2011 timeframe. You can see that that represents about 7% of our overall premium written. This is the commercial binding authority segment of E&S. It's a very small, or what our chief underwriting officer likes to call E&S light. The average account size here is about $2,400. This is restaurant, bars, and taverns, and habitational risks that can't obtain insurance in the standard lines marketplace. They go to the E&S marketplace, where you traditionally have tighter coverage and higher prices, therefore better margins.
This area of the E&S space has traditionally been six to 10 points more profitable than a Standard Commercial Lines business, and one of the reasons why we added this to the overall mix was to improve our overall profit profile. We'll talk about our strong balance sheet, how it provides a foundation for success. You'll see that we have much lower volatility in our business, both in terms of the combined ratio performance and also in terms of loss reserves and how they perform, which obviously is starting to become more and more important in this phase of the market cycle. As you start to see some companies have difficulties around that, you'll see that we have substantially less volatility and a much better track record in terms of staying on top of reserves.
Talk about our effective cycle management, also talk about the path to a 92 ex-CAT combined that we laid out at the very beginning of 2012, and how we are very much on track for that. In spite of the early skepticism from some folks who shall remain nameless in the audience around our ability to achieve that, we have performed very well. Talking about that financial strength, we've got a conservative investment portfolio. You can see here, $4.6 billion in invested assets. 90% of that is in bonds with an average double A minus quality. It's pretty plain vanilla, pretty straightforward investment profile there. The other thing I think is important, you can see to the right there, is our net operating cash flows as a percentage of net premium written.
Very strong cash flow as a result of how we perform, the leverage that we employ. You can see also when compared to the industry that we tend to be better there. A very strong cash flow company. Our portfolio has about a 3.6-year duration, so our duration is a little bit lighter than our peers, but that is by design, again, because we deploy a little bit more leverage than our peers also, and we'll talk about that in a minute. If you look at our reinsurance program, we have a $685 million coverage in excess of our $40 million retention. Our current program exhausts at a 1 in 250-year event. A fairly conservative program. The $40 million retention is generally on par, maybe a little bit lower than some of our peers.
We increased the top layer just this past year, added an additional $100 million of coverage there. Felt that that was the prudent way to balance the overall risk profile of the company. The average reinsurer rating is A+, you can see there. We also achieved, I know a lot of people are wondering about the reinsurance pricing in the marketplace. We did achieve a flat premium in spite of the addition of another $100 million worth of coverage. There is some competitiveness, obviously, in the reinsurance marketplace. If you look at catastrophes on our combined ratio, that's been obviously a big piece of the puzzle over the last couple of years. We've had some of the worst years in the company's history.
Also, as you can see, even in spite of that, we still had lower cat losses on the combined ratio than the industry did. Even though 2010, 2011, and 2012 were some pretty difficult years in terms of points on the combined ratio, you can see the 10-year average for the industry is still at a 5, and we're at a 2.8. If you go back before 2010, our 25-year average was only about a point and a half. I don't know if it's global warming or natural randomness in the weather patterns, but clearly we're, at least for now, in a heavier cat time frame. We still, in spite of that, end up performing better than the peers. We also have lower volatility of results.
If you look at the standard deviation of our combined ratio over the last 10 years compared to our peer group, you can see on the reserve development and on the combined ratio basis, both has lower volatility. One of the reasons why the rating agencies tolerate us running at a higher degree of leverage is because of that lower volatility that run at. That's generated by a number of things. One is the lower cat losses that we just talked about. Also by the fact that we are writing those small commercial policies that tend to be more well behaved. About 85% of our business has million dollar limits and below, so you don't have large limits policies that add an extra degree of volatility into the overall mix.
The other thing is we do ground up reserve analysis each and every quarter by our full actuarial department, so we can stay on top of reserve trends and react accordingly. Reserve problems are a lot like fish. They don't get any better with age. You need to address them quickly. Here's the last piece of the three year plan. We originally laid out this waterfall chart, as I said, at the beginning of 2012. It articulated that we expected to get three years of price increases of between 5%-8%. We've delivered the first two years of those price increases. This is the third year of that. That 4.5 just tells you what the earned rate impact on the combined ratio is. We're still getting in excess of that 5%-8%. We're in that range, that's going well.
In fact, our guidance for this year is that we'll be getting between 6%-7% price increases. We're doing well along that scale. You can see that 92 ex-CAT combined ratio that we laid out at the beginning of this 2012, we still have that exact same guidance two years later, two plus years later. That is our expectation. At 92 ex-CAT, you layer on our guidance of about four points of catastrophe losses, and that generates the 96 combined ratio that we're expecting to achieve this year. This slide gives you what the impact of our higher leverage than our peers generates. Our underwriting leverage, we run at 1.4, 1.5, that neck of the woods, premiums to surplus. The industry is at about 0.7. Our peer group is right around 1 to 1 premiums to surplus.
You can see what that then means in terms of investment leverage. We got $4 of invested assets per $1 of stockholders' equity compared to the industry at $2.30. Our peer group at about $3 per $1 stockholders' equity. What all of that ends up translating to is at a 96 combined ratio, Selective generates a 10.5% ROE, and the industry generates an 8% ROE. There's a definite ROE advantage to the leverage that we're able to deploy. The reason we're able to deploy the leverage is because we have lower volatility in our results and manage the reserves more carefully. With that, I'll turn it over to John.
Thank you, Dale. Good morning. Glad to be here. I'm just going to give you a sense as to what our strategy is as an organization, and then talk to you a little bit about what's happening in terms of our operating performance. Just in terms of who we are as a company, I think the best way to describe our strategy is to have the capabilities of a national insurance company in terms of product and appetite, in terms of underwriting and pricing sophistication, and in terms of technology, but more importantly, to deliver those capabilities through a very strong regional model. A regional model that's based on relationships with the best agents in the business, and it's based on empowered decision-making.
Our view is we're going to push decision-making on the underwriting and the claims side as close to our customers and as close to our agents as we possibly can. The ability to put those two factors together is what really sets us apart in the marketplace. You see a couple of other items referenced up here other than ones I mentioned. We're also very focused on the customer experience. We recognize that as an independent agency company, we provide a shared experience to our customers. On the commercial line side in particular, there's a real opportunity for us to differentiate ourselves to our customers, improving retention and improving word-of-mouth marketing through a much better customer experience.
Dale showed you the fact that we benefit from leverage, effectively managing leverage, allowing us to generate a higher ROE at the same combined ratio level than the broad industry. In terms of the cycle management, you've heard a couple of references to this already. This gives you a sense as to our growth throughout the different market cycles. You can see back in the last hard market, that period from 1998 to 2006, we effectively doubled the size of the company. As things started, we started to have some pretty significant market and economic headwinds in the late 2000s. It was really about managing our overall growth because the time to grow was not during that period. Again, managing the top line, managing our profitability as effectively as we possibly can.
We started to see a little bit of a change in the marketplace. From 2011 through 2013 and looking forward, we really think it's an opportunity for us to continue to accelerate growth, and you're seeing that start to happen. In terms of the areas that we look at as growth drivers for us on a go-forward basis, Dale took you through the different segments that we look at our business, and the newest being E&S. E&S, we started getting into through a couple of acquisitions dating back about two or so years. Gives us great product diversification, also gives us great geographic diversification. Unlike our 22-state standard operating footprint, this gives us a 50-state footprint for the E&S lines. Gives us a lot of upside potential going forward.
Also, in our view, we have an opportunity to capitalize on our retail agency relationships in our standard operating footprint to drive business to our wholesale partners on the E&S side. That's one big area. We also continue to make sure we build out our product portfolio, wanting to make sure that our coverages and our products are as marketable as possible. We continue to reevaluate them, make improvements. We roll out additional product, again, always staying very close to our knitting in terms of underwriting. We're a conservative underwriting company. We know we do well, we know the markets that we serve well, and we continue to build out our capabilities, but within those defined parameters. We also continue to build out our agency plan. We've had a franchise value agency appointment strategy.
Our view is, with 1,100 agents, we want to do more business with fewer agency partners, requiring us to occupy one of those top two or three spots in our agency partners. Despite that, there's still opportunities in our footprint to add agency storefronts. We continue to do that, and it gives us a lot of upside. Finally, if you look at our market share across our 22-state footprint or the 50-state footprint on the E&S side, generally speaking, in the standard operations, we're about a one share on average of our 22 operating states. There's pretty significant upside for us within our existing footprint. Looking at it two ways, what's the market share that our agency partners control? Then how much of what our agencies write do they write with us? Or as we consider it to be share of wallet.
Those two factors are what really drives our growth on a go-forward basis. Now, a lot of companies will stand up here and probably tell you they've got the best agency relationships out there, and we certainly say that, but I think we can stand behind it. If you're looking for proof in terms of the strength of our relationships, you can look no further than this. This is our performance on the pricing side over the last 19 quarters. If you look at our performance relative to the industry, it's very strong. The pricing is part of it, but the more important factor is to look at pricing at the same time you're looking at retention levels.
What you see here is as we started to really improve our rate performance back in the second quarter of 2009, when most industry surveys still had the overall market as slightly negative, we started to really manage our portfolio. We managed it through relationships with our agents, but also through a very targeted underwriting philosophy. Segment our book and make sure we're targeting the rate in the best areas. The ability to actually maintain very strong retention levels, despite the fact that we're out in front of the marketplace. Over the last several quarters, you actually see retentions tick up from about 80 to about 82 and stay there. There's no question that that is clear evidence of our underwriting capabilities, but more importantly, our ability to work with agents who really believe in our partnership, and I think that's critically important.
I also mentioned the underwriting and pricing sophistication. This gives you a sense as to how our underwriters manage their renewal portfolio from a pricing and retention perspective. What you see here is our renewal inventory split into five different categories based on our desired retention levels. On the far left, you see the above-average category. That's the business that is our best performing accounts, that we think are the best performing accounts on a go-forward basis. Represents about 53% of our in-force inventory. The bulk of our business, our renewal policies, are in those left two towers that you see there. That's where you see we're getting the least amount of rate because you want to maximize retention. We're getting rate just about 6% or so, but you see retention up closer to 90%.
On the far right-hand side, the low and very low categories are where we want to make sure we're maximizing rate. In certain cases, if we're not able to achieve our rate targets, which you see we're achieving in the 13-15 or 16 kind of range, that's business that you're willing to lose if you can't get your rate level. Again, think back to what Dale Thatcher showed you in terms of that waterfall chart in reference to underwriting improvement. This is where, in addition to getting rate over trend, you're getting mix of business improvement. You're improving the mix of business by retaining your best accounts at a higher level, and your lower quality accounts, you're getting more rate and retaining at a lower level. This is where that underwriting improvement comes from.
As good as we feel about our performance, there's still opportunities to improve our performance. This gives you a sense on the commercial line side, Dale Thatcher showed you the profitability overall. You can see very, very good performance across our major commercial lines, with the exception of Workers' Comp. Workers' Comp continues to be the line that we really need to make sure that we're focused on. You can see the performance there on a reported basis of about 120. accident year is 114. When you take out the impact of prior year adverse development, it's a 114. Still, performance that we need to make sure we improve, and we're focused on driving that improvement. There's really three categories. The first one being making sure we continue to drive rate in excess of trend.
That's where you're getting that part of the improvement. Also, as I showed you earlier with that distribution of the renewal inventory, making sure that we're aggressively managing that renewal inventory and really starting to drive up the rate and down the retention on the accounts that are the most troubling for us. We also need to keep in mind that we are an account underwriter. We don't write very much monoline Workers' Comp, so we also need to look at the overall performance of an account between the non-comp lines and the comp lines, but there's clearly an opportunity to drive more improvement in that area. Then finally, and a big piece of the improvement on Workers' Comp going forward is in the claims area.
When you think about some of the investments we're making in the claims arena, most of these are across all lines, but the first three you see up here really affect the Workers' Comp line specifically. The first one is the creation of a strategic case unit. Creation of a group of folks who are highly skilled at managing the tougher comp claims that you have, the ones that are going to have more lost time and more medical costs attached to them. The second piece is very much related to that.
It's the ability through modeling techniques that we're in the process of rolling out to identify very early in the claim lifecycle, those comp claims that are likely to really escalate over time, get those in the hands of these skilled professionals very early in the lifecycle, and they're going to better manage that inventory over a period of time. Those two pieces are relatively closely tied together. Finally, driving better penetration into our network partners on the medical side and really managing medical costs overall. You also see what we've done. We talk about modeling on the underwriting side, have done a lot of modeling and implementation of models on the claims side. Both broad and identification of opportunities for recoveries. Those have been implemented. We're going to continue to see improvement across all lines of business there.
Finally, on the litigation management and the complex claims side, driving mostly improvement on the liability and the auto side, General Liability and the auto side. But again, very similar to the strategic case unit in the Workers' Comp arena. We think when you look out in terms of performance, there's certain things you could do to out-select and out-price your competitors, and we're focused on those, but also making sure that we're managing our loss cost dollars as effectively as we possibly can. Just to close where Dale opened in terms of why Selective makes such a great investment. First and foremost, a very, very strong balance sheet. That's the foundation of everything else that we talked to you about.
The lower volatility that we've been able to demonstrate in terms of our operating results allows us to deploy that additional leverage in terms of premiums to surplus and invested asset leverage, which again, allows us to perform at a higher ROE at the same combined ratio as the broad industry. Effectively managing the cycle. Again, when you look at what we've been able to do in terms of the past cycle, gives us confidence in terms of our ability to manage the cycle on a go-forward basis. Finally, as you look out in terms of what we've been able to accomplish, we laid out a very aggressive three-year plan to get us to a 92 ex- catastrophe combined ratio. We're in year three of that and very clear in terms of our performance and the track that we're on relative to those expectations.
Those are the reasons why you should really invest in Selective. With that, I'd like to open it up to questions. Dale and I are certainly here and happy to take any questions that you may have.
I've got a couple questions. On the slide you showed where you've got the best performing accounts and the worst performing accounts and the various price increases, has the % of business in your worst performing accounts come down? One would suspect it would have, given the action you're taking, or has more business fallen into that bucket?
Yeah. It's a great question. When you think about the distribution of premium, it certainly, as you execute your strategies and you're retaining your lowest expectation performance accounts to a lower retention target, your mix is dropping. Keep in mind, because of the factors that feed these models, you're recalibrating them on a regular basis. It's all relative to your entire inventory. You're going to see that bucket repopulate as everything sort of slides left to right. In theory and in practice, your combined ratio on that business, as you recalibrate, starts to come down over time as well.
In other words, you redefine what's in the lower bucket to some extent.
Correct, because part of what feeds that process is our predictive modeling. Predictive modeling is essentially looking at everything on a relative basis. You do in fact, start to recalibrate things down. Again, the tilt of your loss ratio then starts to drop as that business improves.
Generally speaking, roughly 10% of the business is earmarked for those lower two buckets. As you chop off the bottom 3%, you grab 3% from the upper slide and stick it back in the bucket, is a simple way to think about it.
Got it. The other question on the E&S business. Your Standard Commercial Lines platform is geographically focused on a number of states. Your E&S platform is nationwide. Have you had a different experience with your agents? Because you've introduced this E&S platform, have you been able to sell them more? What has been your experience in E&S in the states you're already in versus the ones that you're not in?
Yeah. A couple of pieces there. With regard to our agents' reaction, as we went into this strategy, we made a concerted effort to say, based on the style of business, we're going to write here, which is small, highly automated in terms of how it's underwritten. We thought it made sense to stay with a wholesale distribution model across all of our states as opposed to a direct-to-retail in our states and a wholesale model out of our states. We think that serves us best. What we really started to invest in now is because of our agents, our retail agents, in many cases, have their E&S business scattered across a number of different wholesalers. We're trying to get them to consolidate and pick a few of our bigger partner wholesalers and consolidate that business. We expect to start to see that really gain traction in 2014.
With regard to the balance of the states, when you think about E&S business, you do have some bigger states in terms of E&S market relative to the standard that are outside of our footprint. We've got some great relationships there that came along with the two acquisitions that we did, and we're seeing pretty good growth in both territories. We look at it as a Selective footprint and a non-footprint and feel good about what's happening in both of those territories.
Remember, two acquisitions. The one acquisition was the old Alterra book that was headquartered in Horsham, Pennsylvania. The other was the Montpelier U.S. Insurance Company operation, headquartered in Scottsdale, Arizona. Each of them were 50-state operations, they tended to have a tilt towards the area of the country that they were located in. The performance of the respective operations at this point is driven really more by the history as opposed to by whether it's footprint or non-footprint. That's really kind of what we're seeing still at the present time.
My only other question was, what's wrong with West Virginia? The one hole in your map segment.
West Virginia is a wonderful state, from an insurance regulatory perspective and from an appetite perspective, when you look at what it is we do, it just doesn't make sense for us. We continue to evaluate all of our non-footprint states for standard operations, that's always been more about regulatory and legal environment and our appetite not matching up with what's available in that state.
I mean, one of the things that you see about the states that we select to participate in is that we're looking for states that we feel have an environment that enable us to achieve consistent underwriting profits. At the present time, our analysis of West Virginia is that that's not really achievable.
What's your name again?
Given the importance of field underwriters in your whole business model, I wonder if you could talk a bit about, A. how you ensure consistency on what has to be a very widely scattered force. Secondly, as these folks retire or want to scale back, how you go about replacing them. I don't think I'd want to take somebody from Newark and put them in Chillicothe, Ohio.
Great questions. In terms of how we ensure consistency, because our field model, we have, as Dale said, almost 100 folks out there with underwriting authority. I will say it's within a very defined set of guidelines. Everybody who's in one of those roles has a clear set of underwriting authorities that they operate within. Then within our regional management structure, those authorities progressively go higher. I would say the other real important consideration for us is because we have these generalist underwriters out there managing our relationships, we also have a corporate underwriting group that is structured with experts both by line of business and by segment of business. We have a contractors group, a manufacturing group, a social service, and specialty group, and they're the ones who are establishing the parameters around what can and cannot be written.
They're also the ones who do a lot of the quality assurance work to make sure that they're looking at what individual underwriters are doing both on the new business side and the renewal business side. A lot of controls around that diversified field model. That's your first question. On the second question, you make a great point. Actually building bench and a bench strength that is, in fact, geographically dispersed based on our model is critically important.
We continue to do a lot more in terms of college campus recruiting and building intern type and development type programs for our underwriters, both those within the regional offices, also those who would ultimately be deployed as AMS or agency management specialists or field underwriters as we describe them because we want to have folks that have been trained and have some local knowledge about the agents who are in a given geography. We think that's critically important. Great questions.
In terms of Workers' Compensation, you're losing about $60 million there on an underwriting basis. What's involved in getting that back to acceptable returns and what's the timeframe for that?
In terms of what the focus is, clearly, as I tried to lay out in the presentation, is making sure that as we look at our distribution of renewal premium and driving rate and retention, that we have a much more aggressive approach to that for the Workers' Compensation line specifically than we do for the package lines. I think that's certainly a big part of it. I would say equally, the claims improvements that we've laid out relative to the strategic case unit and the escalation model are going to be big drivers of that. We don't put out guidance on a per-line basis, we certainly feel like what we've laid out in terms of those three areas, pricing, underwriting improvement, and claims, will significantly improve that line of business over time.
The other thing I'll point out, I realize that in some ways it may ring hollow to an investor looking at it because there's always a feeling, well, why can't you just cut that off and not do that because it's losing money? The thing is that there's a lot of those other lines of business that you don't get a chance to write if you don't provide a Workers' Compensation policy in the overall. One of the things that our predictive modeling does for the underwriter is it gives them the score for the line of business.
It gives them pricing guidance for the line of business, but it also racks and stacks all the different policies for that particular customer so the underwriter can get a feel for, even though I might not be able to get the Workers' Compensation policy priced to where I want to get it because of market forces, can I still achieve an overall ROE on this customer that makes sense? That's one of the major components to managing the process. I mean, believe me, given how Workers' Compensation has run for the industry for the 30 years I've been in the industry, if we could not write it tomorrow and still keep all the other stuff, we would be there in a minute. The problem is that it doesn't end up working that way.
Okay, we got to end it there. Great job, guys. Thank you.
Thank you.