Welcome to Selective Insurance 2012 Investor Day. We really appreciate you taking the time to come out this afternoon. Just as a reminder, we are webcasting the events this afternoon, so also welcome to those of you who are listening via webcast. We have a full afternoon, a full agenda for you today. As you can see, our theme for the afternoon is Success through Differentiation. We're going to talk to you a lot about our agency relationships and what that means to us, and you're going to have an opportunity to hear from some of our agents, which we're very happy that they are here today. We're going to hear a lot about our field model and what that means, having empowered decision-makers out in the field.
We'll talk to you about our business analytics, which we have sophisticated pricing, underwriting, and claims initiatives and tools out there for our underwriters. We think when you pull all that together, that will define our success over the long term. We think our program will support that. Of course, ultimately, that's up to you, and I just want you to know that I will be sending you a short survey tomorrow, so watch your inbox. I ask if you could please fill that out and return it. It's anonymous. It's being administered by a third party, but it really helps us as we build our investor relations program to make sure we're giving you what you need. If you could do that for me, I'd appreciate it.
We have a number of members of Selective being represented here today, and I'd like to introduce some folks to you. We have a number of members from our board of directors, which is very exciting for us. I'd like to just say their names and ask if you would stand up and wave so that we can put the face with the name. Paul Bauer. Bill Rue, a longtime agent of Selective. Ron O'Kelley in the back of the room there. Joan Lamm-Tennant. Annabelle Bexiga. She's our newest member of the board of directors, just recently voted in in April. She comes to us from TIAA-CREF, where she's the Chief Information Officer. Brian Thebault. And Mike Morrissey. There we go.
We also have a number of Selective management here today who aren't speaking but are going to be available at the break and at the end if you want to have a chance to chat with some of them. I'm going to introduce those as well. Ron Zaleski is our Chief Actuary, in the back. Ron St. Clair, our Chief Information Officer. Michael Lanza, General Counsel. Kimberly Burnett, who's our Director of Human Resources. Susan Sweeney, Chief Investment Officer. Tony Harnett, who is our Corporate Controller. We have Yanina Hupka, who is our Chief Risk & Reinsurance Officer. There she is. I don't have the clicker. I ran up here without something. As I said, we have a full agenda for you today. We're going to have Greg Murphy kick it off here with a strategic overview.
Dale Thatcher is going to come up and talk to you about our foundation for success, which really is that financial strength and stability of the organization. John Marchioni, who's our EVP of Insurance Operations, will talk to you about the strategies we have in our Insurance Operations. His folks will come up and talk about their respective areas, personal lines, commercial lines, claims, as well as our field model and our business analytics. We're going to take a break about midway through so you can hit those BlackBerrys that you've silenced for us, right? Be able to have an opportunity to make your calls. There are a number of locations on the floor where you can kind of wander off and have a private conversation.
We're going to have a break right out the door that just opened in the back to my left, to your right, where Mr. Peters just walked in, and we'll have a break there for about 20 minutes. We're going to come back, and we're going to have a couple more presentations. The afternoon will culminate with an agency panel. We've invited four of our best agents. We have a superior agency force, but we have four of our finest with us today who are going to have a conversation that'll be moderated by Mr. Marchioni. We also have one of our own on the panel today, John Willenborg, who is a territory manager for Selective. He's been with the company for a number of years in a number of underwriting roles, so he'll also be on the panel.
We'll have a Q&A at the end of that panel, so you have an opportunity to ask your questions of the agents directly. We really encourage you to take advantage of this opportunity. Greg will come back up and summarize the day for us, and then we'll open it up to a general Q&A for the management team. With that, I just have to remind you that we will be making forward-looking statements today as defined by the Private Securities Litigation Reform Act of 1995. We refer you to our SEC filings on Form 10-K and 10-Q for the long list of risk factors that go along with that. With that, I'm going to turn it over to Greg Murphy, our President, CEO, and Chairman.
Thank you. Thank you, Jennifer. We really look forward to
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You're good. All right. Now we're on. That's a little better. We had a little microphone problem. First of all, we're glad that you're here today to share this opportunity with us, and I think you'll have a deeper understanding about Selective, what makes us unique. I think what's most important, too, are the things that we think about as a company that makes us different. Not only that, but how we execute in the marketplace. Many of you have had questions about our ability to raise price. This is your opportunity today to talk to four agents from Selective about what's happening in the marketplace. Start to think about the formulation of your questions as we move through the day. I think overall, we are a very nimble company in the marketplace.
I think when you think about us as a super regional, we do have things that are different. We have a field model, first of all. Understand that many companies have offices that are remote. Not only do we have five regional offices, but we have over 400 people that work out of their homes relative to that. When we talk about being close to the customer, we are about as close as you can get without living in their house. Then we'll talk a lot about our ability to execute in the marketplace in terms of the actionable data that we create that allows our people to make decision quickly and make a decision, move on, get to the next policy.
As you got to remember, our inside underwriters and our field people are dealing with hundreds of decisions a day, how do you make that best for them? Then I think, obviously, our history of financial strength, it's best, I think, in terms of our lack of reserve volatility as a company, we have a strong history of financial success. Then obviously our focus is around generating shareholder value, increasing our return on equity, whether that's through dividend increases or through share repurchase programs. It's about how do we grow our stockholders' equity as quickly as possible.
You think about then what makes us unique and the empowered decision making, a true field model, 400 people, whether it is on the underwriting side for new business, the claim or safety management, the 400 people that live and work as close as you can get to the customer, I think provides us an enormous advantage about what is happening in the marketplace. Not only that, when you talk about from an agency standpoint, they want to know what you know about that risk that makes it different. When they go out and show the customer who it is, who Selective is, and why they want to write this account, I think being able to take our field underwriter out is an enormous advantage. Being able to take our safety person out is a big advantage.
For those larger accounts, to take a claim person out and say, "This is the person that is going to be handling your claim inventory and why it makes a difference as to why you should do business with Selective." I think our sophisticated underwriting and granular pricing tools. We do view the national carriers as having a lot of sophistication, and you need to be in that kind of arena to be able to be successful in the marketplace. Obviously, overall, our focus around customer experience and customer service, I think that is a game changer for us. You are going to hear about that through the course of the day in terms of the things that we are doing to better leverage the customer knowledge base as an organization. I think also from a risk management standpoint, we think about risk all the time.
How do we manage it properly? Obviously for an insurance company, the biggest risks are around reserve risk, catastrophe risk, and then how you manage a cycle. I think it should be clear to you that there is no company in the marketplace that manages a cycle more effectively than we do overall as a company. Obviously an organization of constant improvement is what we strive for as our benchmark as a company. When we sit down and think about the differences in the marketplace, I think about a national carrier. They usually have a lot of underwriting sophistication. They have a lot of software and technology capabilities. You look at the overall on the regional side, you normally get more nimbleness on the regional side, you get more local decision making.
I think when you put the two of them together, that is what we have created as a company. We have a true field model where I can only think of two other companies in the marketplace that have a legitimate field model like we have. I think that makes a difference from our standpoint. When you think of the war chest of knowledge that we have as a company, we truly believe that you have got to be able to have the technology capabilities, and we view our technological as award-winning. It is funny that we look at Travelers, Hartford, and other carriers. We win the awards from AMS and Applied, which are the two big agency management vendors in the marketplace for ease of doing business. The thing that you have to think about, agents are like water. They go through the path of least resistance.
You constantly have to be creating that path of least resistance for the agency plan. That's a little bit about, I think, what the combination of the national capabilities, but yet the local relationships that we bring as a regional company. I think this video best encapsulates our nimbleness in the marketplace, our customer focus, and then also a little bit about our franchise value. Again, we do $1.5 billion of premium with only 1,000 agents. Jen mentioned, we don't sub-segment our agents to create a more elite group. Every one of our agents is an elite agent. We like to view them as the Ivy League of independent agents in the marketplace. It's a little clip on the overall service from Selective. Because of their ability to adjust and be flexible.
Selective, as a regional carrier, quite frankly, can adjust much quicker to a location, to the environment, whether it's in the North, the Midwest, or the South. There is a difference in how business gets done. We have some of our largest accounts with Selective.
The largest difference that we encounter between Selective and some of the super regionals or the national carriers is the customer service. Customers can actually call billing centers and get a person and make payments that way. When our CSAs call in and try to solve problems with the big national carriers, they have a lot of headaches.
They're not in every agency in town, it's a very valued relationship in the fact that they give us what we need. Other agents just undo that.
I think that does make a big difference in terms of our franchise. You figure we do 22 commercial line states, and we have 1,000 agents in those 22 states, and it gives you the sense of how much the franchise means to agents overall in the marketplace. You think about Selective as a super regional position for success, and I think it really is the combination of our nimbleness and the data capability that we have. When you think about where we stood in the marketplace and the franchise value that we've gotten with agents, many of you have questioned, well, how is it that you've been able to get rate for the last 3 years when no one else has? When the market does move, how will you be able to react to that? Really it is relationship and nimbleness.
That's really what you guys have been asking about. I think this chart, I think, best demonstrates both those elements. Let's talk about the relationship aspect. You can see that we're now going into our fourth year of price increases on the commercial line side. We were getting rate when virtually no one else was. You can actually see the first and second quarter of 2010, we were up in the mid 3% rate level, and we had to back off a little bit because some carriers were out there talking about rate, they backed off the marketplace very quickly. Yet we still maintain that about right around 3% rate level year after quarter after quarter after quarter. Now that the market's started to move, our April 2012 rate was now at 630.
You were questioning our rate level, rate capability, and that was up over 6% in the month of March. I think the best comp straight up to you is the fact that you should be comparing our rate level relative to Travelers Select program. That's the most balanced comp. I would say that their rate level is just on right around 6 if you interpret the chart, and their retention dropped to, I think, about 75. Our rate level is running around a 600, 630, and our retention's very strong at 83. It's actually continued at about that level right in through April. You can see that retention for the first quarter was right around 83, and the main numbers were pretty consistent with that. I'm sorry, the April numbers were pretty consistent with that overall.
Again, starting our fourth year of rate increases in the commercial lines marketplace. When you also think about diversification, I know some of you want to get an opportunity to talk, and we will discuss more about our new E&S operation. When you think about where we are today and in 5 years from now, we look at a more balanced company, a better opportunity to create an underwriting profit. We look at our personal lines operations from today into, let's say, 5 years from now, say, being about 20% of our business. We think of the E&S opportunity as somewhere between 15%-20%, and then obviously the remainder amount would be in commercial lines at the 65%-70% level. I think that improved diversification will actually provide more consistency in our earnings as we move forward.
Let's talk a little bit about growth. Obviously it's picking the opportunities to grow and grow smartly in the marketplace. I think we have the tools to grow smartly. When you think about, we doubled the company in that timeframe from 1998 to 2006, where we went from $750 million up to $1.5 billion. You got to remember, the hard market at that timeframe started in 2001. I've been in the industry now 32 years, recently minted 32 years, been through three hard markets. I don't classify this necessarily as a hard market. I call it a firming market overall, but it's still improving. The interesting part of that slide is we and the board that's here, we're going to shrink the organization into the teeth of a soft market. We did not grow in 2008, 2009, or 2010.
We actually shrunk in 2008, 2009, and 2010. We had exposures dropping off. It was extremely competitive to write business. The only way that you were going to write new business is if it was really significantly underpriced. You can see that we were willing to make that trade and not grow. Now that the market's moving, we are back on a growth trajectory in 2011. You think about our ongoing focus around underwriting improvement, and you're going to hear every element of this. When we talk about continuous improvement, what does that mean? All right. Let's look at the first bullet down there, the first bubble. We're talking about a Commercial Lines environment of 5%-8%. You think about that over a three-year time period, 6.5% if you just did the simple average.
If you compound that's about a 21% increase in rate. I'll tell you, that was normally one year of a hard market. We're talking about three years now of that kind of level of market. I think that given the economic conditions, that's probably what you can anticipate at this point in time. It doesn't mean things don't change as you go forward, but this is a projection as of today. On the Personal Lines side, you will hear that we are driving rate heavily, probably much more, almost twice the level in home that we're doing in auto, but a good strong push forward in the Personal Lines pricing area. On the underwriting side, throughout the course of the day, you're going to hear a lot on the underwriting improvements that we're making on both the Commercial Lines and the underwriting side.
On the claims side, we have a big holistic plan for a three-point improvement, and we're well into now our second year on that initiative. Doug Holbrook's here to talk to you about that today. I think expense management. We get a lot of this question from you on and off about, well, as a regional carrier writing $1.5 billion, doing everything the nationals are doing, how are you managing your expenses? When you compare our expense ratio straight up at just under 32%, it's almost the same as Travelers. Travelers has a lot more scale and a different diversification strategy than we do. When you look at our expense ratio, it's fairly normal to the level that they run at.
Obviously, to get to 12 ROE, all of these things are really working together, and you're going to hear more about that from Dale in a bit. When you think about it is, why is it that you want to invest in Selective? Very strong balance sheet with limited downside risk relative. We're trading at a 0.9 price to book right now at today's price. A proven ability to manage the cycle. I think what is most telling on that slide is we were getting raised almost at trend, loss trend when no one else was. We feel pretty confident about our ability to do that if the market weakens tremendously. I will tell you that we have the strongest relationships in the industry overall, and I think that's a hallmark of our success as a company.
I think when you look at the fact that we've got lower volatility both on an underwriting side and a claims side, I think from a reserve standpoint, I think that improves where we are. When you think about our leverage as an organization, we have $3.84 of invested assets per dollar of stockholders' equity at a 2.8% after-tax return on your investment portfolio. That's about a 10.5 return on equity from your investment portfolio. The other advantage that we bring as a company is about every one point of combined ratio is just under one point of return on equity, you get a good leverage point from that standpoint as well. Again, growth at the right time.
We want to make sure we're growing at the right opportunity in the marketplace, I think at a very attractive evaluation overall that significantly positions us as a carrier for future success. With that, I'm going to turn it over to Dale, who's going to walk you through a lot of the things that we just talked about relative to volatility on earnings, on the underwriting side, enterprise risk management, and some of the other initiatives that we have as an organization overall. With that, I'm going to turn it over to Dale. Thank you.
Thanks, Greg. Just before I get started here, a little piece of housekeeping. For those of you who flew in and are planning to fly back out, the gift that you get has 750 milliliters of a reddish liquid in there, don't bring it through as a carry-on. They'll stop you. There's also something that could be construed as a weapon that will twist for opening purposes. I won't tell you what is in there, but I just wanted to make sure you understood it is not a pair of golf shoes. I thought that would be important for those of you who are flying right out of here.
You'll hear a lot today about what makes us special, what the upside potential is, the different things that we're doing, and a lot of the strategies that we have in place that are really going to drive both growth and profitability. I also wanted to talk first about the foundation that we have, the strength that we have that really makes all of that possible. We'll talk about the underwriting stability that we have historically in our earnings. We'll talk about our disciplined reserving practices, our focus on expense management that Greg already told you a little bit about, the conservative investment strategy, and also the benefits of the leverage that we employ within our operation and the way we do business. If you start with underwriting stability, what this graph shows you here is it looks at Selective statutory combined ratio compared to the industry.
By the measure of standard deviation, the volatility around the mean, you can see that compared to the industry, we have less volatility. We don't have the kind of risk that you see broadly in the industry. Remember, this is an industry number. If the industry has more volatility, obviously individual members of that industry have even more volatility. We have a very stable platform, stable results driven by a number of different items. One of the big items is catastrophe losses. These are the cat losses here for Selective. Obviously, in 2010 and 2011, those were tough years for us. They were actually the worst years in our history. If you compare that to the industry, the industry actually is even worse consistently.
You can see over this 10-year timeframe, SIGI has averaged about 2.3 points on the combined ratio, whereas the industry average is 4.5. That's not just by luck. It's by where we have decided to write business. We don't write business in Florida. We don't write in the Gulf Coast. We don't write in California. We don't write in Texas, at least not on a standard line basis, only on an E&S basis now with our new operations. That limits our exposure to catastrophe losses, which also limits then the volatility that we have in our combined ratio. If you also look at the way we manage reserves, we do a ground-up reserve analysis each and every quarter so that we stay on top of any reserve trends.
We don't get surprised, we don't have big news releases at the end of the year or tell you in the beginning of the year that we're going to do a reserve study and let you know what happens at the end of the year while everybody holds their breath. We look at it every quarter. We stay on top of reserve trends. That's why you see in the blue there that Selective has, again, a lot less volatility in terms of reserve development, whether it be adverse or favorable. Again, we manage that reserve inventory. There's a little bet amongst the other folks that are going to be presenting today is my ability to walk you through this slide in about five minutes or less. If you've got your actuarial playbook here, first off, this slide graphs two different actuarial methods.
One's the Mack method, the other one is the Merz-Wüthrich method. What those do is they purport to look at reserves, and they purport to estimate potential reserve development. It's a forward-looking stochastic approach, looking at your reserves based on the way they have historically developed. The best place to be on this is lower volatility. The bottom left is the best place to be, and you can see all of the other folks that we have graphed based on publicly available information there. You got Chubb, Cincinnati, CNA, Hanover, Harleysville, all the guys that you look at when you look at Selective, and you can see where we reside in terms of looking at our reserve volatility on a go-forward stochastic basis. The blue line down there at the 1% is the actual historic volatility.
Again, that's the backwards look, and again, determines that we have much less volatility in our reserves. I think that was less than five minutes, so I think you owe me, Greg. We also combine those conservative reserve management philosophy with a conservative reinsurance program. What this graph gives you is looking at our reinsurance program. We buy $435 million in excess of a $40 million retention, and it graphs the 1% probability and also the 0.4% probability. 1 in 100 or 1 in 250 year event. You can see the amount of our equity that is at risk in both the short term and also the long-term view for RMS and AIR combined. It's a blended approach. Greg talked about our expense management, talked about our expense ratio in comparison with Travelers.
This particular graph looks at us compared to the peer, and you can see although we were a bit higher in the '07, '08 time frame as our premium declined, remember Greg showed you that slide before where we actually declined from '08, '09, and '10, yet we made up ground in terms of our expense ratio. Very disciplined expense management. We made sure that we weren't letting that decline in premium impact our ability to manage our expenses and be good stewards of our shareholders' dollars. Conservative investment portfolio. It's well-diversified, double A minus average quality, 89% of that is bonds. We did deploy a high dividend yield equity strategy just this past year. Basically, we saw an opportunity where equities were yielding more on a gross basis and even more on a tax-adjusted basis, since equities are tax-advantaged in their treatment in the tax code.
All that gave us an opportunity to deploy some of our capital into an equity strategy, only so much that you can apply to that before rating agencies start getting a little excited about the amount. That did give us an opportunity to boost yield a little bit without really boosting the risk in our portfolio. We're right at about a 3.3 year duration. We've done a lot of testing around the effects of inflation and deflation to try and determine what do we believe the sweet spot to be if we all expect to have some form of inflation hit, and where do you want to be? We feel that the 3.3 year duration is the right spot for us to be in. Greg talked about our investment leverage at $3.84 per dollar of stockholders' equity.
Gives us a little bit more ability to generate income off of the portfolio than most of our peer group. You're going to see the peer group, generally speaking, is going to be more in the 280 or 290 kind of a range. Here you see how we use leverage in our premiums to surplus. We're at 1.4 to 1, compared to the broad industry at 0.8 to 1. If you look at just primary carriers, they are at about 1 to 1 premiums to surplus. We're able to use more leverage because, remember back that first slide, the volatility that we have in our combined ratio is substantially less. The conservative investment portfolio that we have puts us in a place where the rating agencies are willing to allow us to use more leverage in our operation. What does that do for us?
If you look at Selective at the $3.70, this number is as of year-end because we're going to compare it in a minute to the industry. At year-end, we were at $3.70 per dollar stockholders' equity, the 1.4 underwriting leverage. All that means at about a 95 combined ratio, we generate a 12% ROE. The industry, at their leverage numbers, investment leverage at year-end of $2.30 and underwriting leverage of 0.8 means the industry needs to be at an 87 combined ratio to generate that same 12% ROE. That's the benefit of leverage. By keeping everything else conservative, operating in a more conservative manner, we're able to use more leverage to generate better returns for our shareholders. The other way that we manage risk, you see the low level of volatility, the low to medium risk that we have in our portfolio.
We also team that up with, I believe to be a very excellent and very strong method of enterprise risk management. We have an emerging risk committee that reviews basically the landscape out there to look for things that may be impacting us in the future. Obviously, today, spending a lot of time on the Eurozone and what that might mean even today, particularly, right? This is made up of VPs and senior VPs in the company. These are top-level people that get together on a quarterly basis, at least, if not more frequently, to make sure that we're looking at the broad environment, making sure that we're managing our risk, and dealing with it appropriately. We identify those risks.
We make sure that they get farmed out and managed to the extent that we need to or at least monitored, and then they report that back to both the Executive Risk Committee, which is Greg and his direct reports, as well as to the Board of Directors on a quarterly basis. The Board is extensively involved in our enterprise risk management efforts. We have all the same traditional risk management approaches that many people have, and that's siloed approach. Our ERM enables us to look at risk across the enterprise so that we don't have any surprises. One of my rules of thumb has always been that if anything takes me more than 15 minutes to explain to the Board of Directors what we're doing, then it's too complex and too risky for us to get into.
I think that that has served us well in terms of keeping a very good risk profile and generating the right kind of returns for our shareholders. If you look at how we've managed capital over the years, you can see in the 1998 to 2006 timeframe that Greg talked about, we doubled in size, we used our capital at that standpoint. We actually got up to about a 1.8, 1.9 to 1 premiums to surplus. That's because we were generating much better combined ratios. We were able to do that. As that capital built up, we were able to use that capital to return it to shareholders in the form of both share repurchases and increases in dividends. That was in the 2006 to 2008 kind of timeframe.
Obviously, 2008 when the capital markets were melting down and 2009 when things were going bad, it was a matter of preserving capital, kind of hunkering down, not doing anything unduly that you didn't need to do, let cash build up a little bit to make sure that we understood exactly where things were moving. As that passed through and we had an opportunity to make some acquisitions this past year, get into higher margin opportunities with the E&S, that's what we did in the 2011 timeframe. We bought those two pieces of business. One is a book of business, the other is an actual company. Both of those acquisitions were done basically just like a renewal rights transaction. We didn't take anybody's balance sheet. We didn't take anybody's reserves or unearned premium reserves.
We did what to me is one of the best ways to do an insurance acquisition and one of the least risky ways to do an insurance acquisition. This slide, our waterfall chart, gives you a look at some of the stuff that Greg put out there for the path to a 12% ROE, a little bit different look at what it is. First we adjusted the 2011 results. Pulled out the excess caps, pulled out the favorable development to get you kind of a base case kind of a number, the 1,033. We add to that loss trend, obviously losses have normal loss inflation. Generally for us it runs between 2.7 and 3 points per year of loss trend. The reason it's only 6.5 and some of these numbers are that way because they only operate on a piece of the combined ratio, right?
A 3-point loss trend only operates on the 60%-70% of Loss and LAE ratio. That's why the numbers may look a little bit different because the math will work, and we'll walk you through that later. 6.5 points of loss trend pricing, our expectation is between 5%-8% pure price increases over the next three years. That correlates to about 12.5 points of improvement on the combined ratio. You add in some of the underwriting initiatives that we have, as well as the claims initiatives, some of which are already in the 2011 base case. Remember, we talked about three points of claims improvements. Two points remain on that three-point program, as well as some giveback on the expense. That's not that we're going to be operating more inefficiently.
It's that we're going to be paying more to our agents and to our employees because profitability is going to be increasing and therefore profit-based commissions and bonuses will increase in that payout. All of that is how we get to a 95 combined ratio in the 2014 timeframe. That's our internal projection. I think it's based on a lot of good sound work and not a lot of crazy ideas or hope-me-sos. I think that a 5% to 8% price increase seems pretty reasonable where I stand today. Obviously, if the market hardens quicker, we'll be getting more than that. If the market turns the other way, we'll be getting something less than that. Where we stand today, we think that that is a very reasonable projection. The other thing you'll see the next page in your flip book, and it's also on the web.
Don't worry, I'm not going to walk you through that. It gives you basically the actuarial methodology and an example of how price increases and loss trends actually impact the combined ratio. You've got a mathematical example that you can work through as you go back and look at your models and think about some of the different numbers that we talk about. With that, I'll turn it over to John Marchioni.
Thank you, Dale. We appreciate you coming out to spend some time with us today to really hear the Selective story firsthand. We're extremely proud of the organization that we've built, the people that we have out there. We've done the heavy lifting over the last couple of years throughout the soft market, throughout the difficult economy. We've continued to make the investments to position this organization for long-term success. That's the reason why we think we're prepared to outperform and really take advantage of the marketplace as it's changing. We've got a very unique business model, and we're going to take advantage of that. When you think about what makes us different as an organization, why it is that agents want to make us their market of choice, it starts with people.
This business has always been, and will always be about people, especially on the commercial line side of the business. We think we have the best people in the business, and we've got a structure that positions them to make decisions. As you've heard from Greg, positioning our folks as close to the agents, as close to the customers as we possibly can. I'll talk in a few minutes about how we back that up with a centralized expertise model, but the combination of great people and empowering them to make decisions makes us absolutely unique. The second key part of our model is the ability to build and have very deep relationships with the absolute best agents in the country. You heard from Greg, he described them as the Ivy League of independent agents. We absolutely believe that.
1,000 agents, $1.5 billion in premium, significant penetration, significant share of wallet. It's a big differentiator. There's the second piece, is deep relationships that start with the owners and the senior management team at Selective, and make their way down to the frontline underwriters and claims adjusters, as well as the producers and CSRs at the agency level. The third key piece, and this is where a lot of our investment has been over the last several years, is a high degree of sophistication in underwriting, pricing, and claims. If you look at these pieces together, there are a lot of companies out there that are going to have one or two of them.
Our ability to put all three pieces together, great people, great relationships with great agencies, the sophistication that matches the capabilities of a national company is what makes us unique. It's what makes our agents want to have us as their market of choice, their number one market of choice. Let's talk about these three pieces a little bit more specifically. We talk about a field-based model on both the underwriting and the claims side. If you think about the field underwriters that we have out there, agency management specialists, they own the agency relationship. They drive new business production. They own their overall territory. We have inside underwriters in our regional offices. On the claims side, same concept. You've got CMSs out there, and you're going to hear a lot more throughout the presentation, as well as field-based litigation adjusters, workers' comp adjusters.
Having these folks out there and giving them broad powers to make decisions. Now, when you do that, you've got to make sure that they're backed up by a level of expertise at a very specific level. You think about this model that we have out there. Underwriters and claims adjusters need to be generalists in their capabilities. You've got to make sure that you've got strong infrastructure, strong expertise backing them up, and you've got to do that in a way that appears seamless to your customers and to your agents. Because if these folks are going to be empowered, they've got to make decisions real time. To the extent they need to refer things, it has to happen quickly, and it has to happen in a way that's invisible to the agents. On the underwriting side, you can see very seasoned regional management teams.
Dennis Barger is going to come up, who runs our commercial underwriting operation, to talk to you about the expertise we have at a line of business level, GL, auto, workers' comp, and also at a segment level, contractors or manufacturing or our specialty programs. Those are the folks that really own the product, that really establish the underwriting guidelines and the pricing structure, pass that authority down to the field. The same thing exists on the claims side, and you'll hear more about this. When you think about the concept here, it's local decision-making, local presence, backed up by centralized expertise. You'll hear that over and over again. The second area we talked about is agency relationships. You're going to hear this over and over again.
You're going to hear from a panel of our agency partners to really reinforce, I think, what you heard from us throughout the presentation. We talk a lot about franchise value. What does that mean? That means we're going to give out our Selective contract to fewer agents than most of our competitors. We're not going to have agents in the same locality bumping up against each other, competing against each other, coming in with that Selective product. It means a lot to a producer because they know if they could break into a prospect and get a chance with a prospect, there's not somebody else who's likely going to be in there from another agency with a Selective product. Gives somebody a huge competitive advantage.
Again, the trade-off in that model is if you're going to have fewer agency partners, you've got to have a greater share of wallet in each one of those agency partners. That's the trade that we make, and that's the give and take that happens to build our strong footprint. The other piece, and I hope you'll hear this as well during the course of the panel, and I would encourage you to talk to the agents during the break or after the program. We're a very active management team. We're out there. We survey our agents on a regular basis. We host producer councils, agency councils, our Presidents Club program to get feedback from our agents. I think more importantly, what you'll hear from them is we don't just go through this exercise.
We actually come out at the end and say, "Okay, we're going to work on this, and this," come back and report on the progress we've made. Again, it's part of the relationship building that we do, but I think it's also part of the continuous improvement. Just a couple of metrics there. You can see the $1.5 million per agency. Keep in mind, if you look across our 22-state footprint, we only write personal lines in 13 of those 22 states. Our ability to get to that kind of a number, there's very few companies that are anywhere near that amount. That's the return on a franchise value model. The agency survey. At an 8.3 on a 10-point scale, very high participation rate.
Actually, if you look over the last couple of years, very stable results in terms of the survey, despite the difficult economy and despite the things that we did to aggressively manage our underwriting and our pricing performance over that time period. You get into the third piece, which is that sophistication. I'm not going to spend a lot of time on these slides because you're going to hear a lot more as we go through the presentation from Dennis and Allen and Doug and Brenda. Underwriting sophistication. Again, people are critically important here. We talk about having those generalist underwriters out in the field. That's a difficult job when you think about having a broad underwriting appetite and need to know how to underwrite a very broad spectrum of product.
That's why it's also so important to have that expertise resident in our corporate underwriting operation. We've really boosted that over the last couple of years. You hear a lot about product development and appetite expansion. Agents want you to have a very broad product capability. We spent a lot of time and energy the last couple of years making sure that our products continue to be best in class. In certain cases, getting into a segment and introducing a new product. You'll hear a lot more about that as well. Tools. We've talked a lot about predictive modeling. We've talked about price monitoring. You're going to hear about some of our new capabilities in terms of the dynamic portfolio manager, our advanced segmentation capabilities.
Again, this is what Greg said to you earlier about the local presence, local decision-making backed by the kind of capabilities that a national company brings to the table. That's underwriting. You're going to hear more about that as we go on. Pricing sophistication. If you think about our ability, Greg showed you that slide earlier, that plotted out rate since the second quarter of 2009, and retention. Why is it that we were able to do that? Greg gave you a sense of this. Number one, we have great people with excellent tools that allow them to execute a very granular pricing strategy. The second key piece, and this is where a lot of companies are getting hurt on retention, is those relationships we talk about.
If you're trying to understand, okay, how do I take the concept of relationships and actually translate that into results, this is it right here. We have an ability to actually go out with a granular pricing strategy and then have real conversations, real honest conversations at a policy-by-policy level to understand, can we sell rate here if it's in fact needed? Where we really have competition on an account, and where don't we have competition? It's that balance and that back and forth that allowed us to do that. Here's one way we look at the granularity. We've talked a lot about predictive modeling. This gives you a sense that our predictive modeling output and how we got rate relative to those different buckets. One in two is the worst-performing business. These are not equal buckets.
That's a little bit less than 20% of our business in those two buckets. You can see that's where we've driven the bulk of the rate. As you move forward over those four time periods, you can see the three diamonds, which is your average bucket, and then your four and a half bucket. This is one way to look at it. Here's another way to look at it. Brenda will take you through this in a little bit more detail in a few minutes. For us, it's not just about having predictive model score and saying, "Okay, this drives the answer on this account." We have set strategies at a state level by line of business, by segment, by agency. Has the account currently priced relative to manual rates?
What the tool that Brenda's going to talk to you about puts all of that together and provides pricing guides at an individual account level and buckets business based on whether or not we really want to retain that, whether we want to put aggressive walkaway pricing on the street, or you really want to focus on retention. You think about it, the output of that is low and below average buckets of business. That's your worst roughly 20% of the business. Then you can see on the other side, your higher quality accounts. You look at the rate differential there, and then more importantly, look at the retention differential. The notion that this is a straight trade between rate and retention is not right.
You've got to understand what you're retaining and what you're losing, because in addition to driving rate in excess of loss trends, you're also improving your mix of business at the same time. It's not just a straight rate and retention trade. You have to look at it this way to understand how you're improving your overall mix of business. Then this is just a slice by rate change. You can see that the breakdown of the business based on the negative all the way up to the positive, greater than 20%. What you'll see as the market moves is that middle slice, which is in between two and let's say seven or 8%, that'll start to drift to the right as the market starts to move.
The bulk of your business is always going to be in that category of just needing to get a little bit better than loss trend. Then you've got the business on the far right, which you're putting out walkaway pricing, need significant rate. If you lose it, you lose it. The business on the left, you're clearly focusing on retaining. This will continue to shift to the right as the market moves. As I said earlier, you put all these three things together, and that's what's allowed us to drive that rate and not have a negative impact on the retention side. You're also going to hear a lot about claims sophistication. Very similar to the investments we've made in the underwriting arena, same thing on the claims side, making sure we've got great people.
Doug will talk to you about the things he's done to really improve the leadership structure at a line of business level, made process improvements, introduced a lot more specialization. If you think about claims from a process perspective, the key is to get the claim into the hands of the person best equipped to handle it as early in the claim lifecycle as possible. Okay, Doug will talk to you a lot about what we've done in that area to improve there. Then starting to introduce a lot of improved tools in the claim area, starting to do a lot more modeling on fraud and recovery, a lot of process redesign work. Doug will talk to you about these things.
As you saw in the upfront session that Greg took you through, we expect to see about three points of loss ratio improvement over a three-year period from these improvements in our claims arena. Let's just shift gears a little bit because this kind of sets up the rest of the presentation when you think about the investments we're making. We play on the standard line side in two very distinct marketplaces. You got personal lines and small commercial, and you got middle market and large accounts. We say this because the way that business is transacted from an agent's perspective or from a customer's perspective is very different. You got to make sure that as you're addressing those markets, you're addressing them in a very different way.
As you hear from Allen and Dennis on the small commercial side, these are some of the things it takes to be successful in the small commercial and personal lines arena. This is where you've got to have a very broad underwriting appetite within that particular segment of business. The CSRs, the customer service reps in the agent's office, want to know that there's a high probability that they could place this account with you if it's within your appetite. This is where ease of doing business is important. Clearly, automation is a big part of this. This is a lot more transactional. It's not a commodity, but it certainly has more of a commodity feel to it than we'll talk about in the middle market and larger accounts arena. Got to be highly efficient.
There's not a lot of time or energy to be spent back and forth on getting these accounts underwritten. Got to get them into the system, got to get them written and issued, and move on to the next account. This is really where pricing sophistication is critical. You got to have the models that support this because in many cases, you got to get this business issued without manual intervention. You've got to make sure you're putting good pricing on the street first time out, because there's not a lot of back and forth. That's small commercial and personal. When you hear from Alan and Dennis on the small commercial side, I think you'll see that the investments we're making and have been making are really designed to help us better position ourselves in these key success factor areas.
If you move over to middle market and large accounts, on the small commercial and personal line side, you generally do not have producers involved. It's for the most part call-in business, it's referral business. It's driven by the customer service rep trying to get that business transacted. On the middle market and large account side, this is producer-driven business. You think about our business model. This is where it's really designed to be successful long term. This is where having those deep relationships, having a franchise value model makes a big difference. This is where having some differentiation on the product side makes a big difference by providing better claim service, better loss control services. This is where that really sets you apart.
As you hear from us later on in the program, I think you'll see that the investments we've made in product development and a lot of the other capabilities are really designed to address this part of the market. When you think about it, again, as you hear the rest of the presentation, two very distinct markets. While we have one overall structure, we're trying to address these markets very differently to meet those key success factors. The third area to highlight is the binding authority business, the E&S business. We recognize the need to introduce more high-margin segments into our product portfolio. A lot of the business we compete for, which would be classified as generalist type business, provides you great top-line opportunity. Because it's broadly competed for, a little more pressure on the bottom line.
We have some strong niches on the standard market side. We identified E&S as an opportunity to introduce some higher margin segments into our portfolio and specifically the contract binding authority aspect of E&S. This is a small business transacted much like our what we call One and Done, two and done small business is transacted. It has a low limits profile, small average policy size, allows you to put out very strong underwriting and pricing parameters to your agency partners, in this case, wholesale agency partners, have the business driven that way. A lot of strategic fits in that regard. The other key piece of this is our retail agency partners control a lot of this business right now, it tends to be written in a highly fragmented way through a whole host of wholesalers.
There's an opportunity here to really take advantage of that and start to create some connections between our retail agency partners. As you can see, we would estimate about $300 million-$400 million of business that they control. This is beyond what we were identifying as part of the wholesale relationships in place. Just a little bit more on the binding authority segment in particular. As I said earlier, this is not a situation where you're giving away the pen or you're giving away control of claims authority to the agents. These are wholesalers. These are not MGAs. Okay? You're providing the underwriting guidelines, you're providing the pricing structure, within those parameters, they have the ability to actually issue the business. This is not a scenario where we're giving away control.
We do think it's very similar, although it's a different segment, very similar to the success we've had in growing our small business, One and Done, two and done. It's template driven, you're giving authority to your agents to issue business. The other, as I mentioned earlier, it is in fact written through wholesalers. It's a different business model for us. We've been traditionally in the retail segment with our standard business. Now this opens up a new distribution channel, as you can see, very small average account size, very similar to what we do on the standard market side. Just in terms of how we got into this business, as I'm sure you've seen, really two individual transactions. The first one with Alterra was a renewal rights transaction. You heard Dale reference this earlier.
We knew we wanted to get into this business, but we also knew we did not have the underwriting expertise or the wholesale agency relationships in order to do this successfully and ramp it up relatively quickly. We did a renewal rights transaction with Alterra, which is now Stone creek, operates out of Horsham, Pennsylvania. Very experienced management team. The other nice strategic fit is both of these companies have a limited distribution model. They've taken a franchise value approach with their wholesale partners. You can see there are 35 wholesale relationships generating about $70 million in premiums across the 50 states. They continue to build that out, but it's a very limited distribution model. That was the first transaction.
The second transaction with Montpelier was to give us the infrastructure necessary, give us a licensed, not admitted company, to give us a technology platform. It also brought with us additional premium volume. As Dale indicated, this also looks like a renewal rights transaction because of the adverse loss development cover in place. We got another team out there in Scottsdale, Arizona. This is very relationship driven, surprisingly so. You think about the relationship between the wholesalers and the underwriting company. Of the way this business transacts, there's got to be a lot of stability there. It's heavily relationship driven. We wanted to keep both of these operations in place because they both have a set of very distinct relationships with their wholesalers. We're making some changes to put some shared services in place to make sure we're driving maximum efficiency.
In many ways, it operates like our regional structure on the standard market side, where each of them is defined not by geography, but by the wholesale relationships they have in place. We're going to move forward with that platform. Between these two transactions, and now we're through all the integration to get the foundation built and get both companies functional on Music Paper, which is the one underwriting company. We're moving forward, and we think we've got a great platform on which to grow in the binding authority segment. Okay? I'll be back up at the end of the presentation to talk a little bit more about a couple of other topics. Now I'll turn it over to Alan Anderson to talk about personal lines.
Thank you, John. When we think of Selective, we think about a very strong, excellent commercial lines carrier. As we listen to Greg and Dale and John talk, I think hopefully you'll realize as I go through my presentation, that much of what they talk about, a lot of the strategies they talk about how we take rate increases, how we focus our pricing actions, how we work on retention, how we interact with our agents, those same theories apply to us in personal lines and how we manage our personal lines operation as well. One of the questions I get, which is the first couple of topics I'll cover here in the first few slides, is what's our opportunity here in personal lines? How big can we get? How aggressive can we be in our growth?
We're not looking to be a top 5 personal lines carrier, but we're looking to maximize our opportunity within our footprint states and within our agency plan as well. First thing it does for us is it deepens the relationship that we have with our agencies. You'll meet some of those agencies today, but as you look across our footprint, the more product we can bring to those agents, the deeper our relationships will be and the better off we're going to be in building that partnership over the long haul. The other thing is, we talk about the direct writers and the direct writers stealing market share in personal lines and the growth that they've seen over the past several years. Well, if you look at the pie chart here, you'll see that the independent agent channel has about 34% of the personal lines market.
That's been pretty stable over the last several years. Where the direct writers are really stealing the market share from is the captive agency force. The independent agents, the 1/3 that goes to the independent agent continues to go because they focus on service, and they focus on product differentiation, and they focus on that same relationship that they want to have with the local independent agent in their community. Personal lines is in 13 states across our footprint, and our agents control about $3.5 billion of personal lines premium. Tremendous upside opportunity for us in personal lines. Another way to look at it is if we had a little less than a 1.5% market share across our 13-state footprint, which is about what we have in New Jersey, where we've been doing business for some time now, we have around $900 million in personal lines premium.
That's our real opportunity that we have across our 13-state footprint as we look to continue to grow. We're focused on profitability, focused on growth, just like you've heard some of the conversations around commercial lines, and you'll hear more of that as well. The first thing we lead with on focusing on profitability is pricing. Now, that's not all that there is that's available to us as far as tools to use, but pricing is certainly a big one, and I'll talk a little bit more about that. We also focus on improving our mix of business. You've heard us say before that what we want to do is we want to write more low frequency, high retaining business.
Business that we know is going to stick around with us for the long term, and business that we know is going to help improve profitability as it stays with us and ages, and we continue to grow our business. Finally, increasing operational and model efficiency through scale. Those are two important items. By growing our premium base and increasing our scale, we're going to be able to build much stronger, more robust, predictive models for our pricing. We're also going to be able to improve our overall combined ratio because we can continue to grow our premium at a faster pace than we grow our expenses, which will help us on the combined ratio side. I'm going to talk a little bit about homeowners. Homeowners has had an exciting couple of years, right? If you've paid attention to the marketplace.
There's no safe place where you can go and say, "Well, that's the place that it won't hail or the wind won't blow, or the tornadoes won't come, or the hurricanes won't hit." We're a very good home writer, a very solid home writer, and we're focused on improving our results. The industry is focused on improving the results, we've been moving on price for several years now. We moved a little bit ahead of the industry as well, we're making a couple of underwriting changes. Again, the first thing we lead with on home is price. Varies a little bit. We're seeing some of our competitors take more rate in the Midwest than we're seeing on the East Coast, we're taking rate really across our footprint.
We're changing some underwriting guidelines as well to get a really. The home product continues to evolve, and it goes back and forth through the years. Over time, people will once again start to use it as a home maintenance policy. My front door blew off, let me file a homeowner's claim. Well, that's not what it's for. It's really for the catastrophic losses. Your home burned down, a tornado comes and destroys your home. It's not for those smaller losses. Over the past about 10 years ago or so, the industry moved to a $500 deductible, and that's really where the industry has been for some time now is a $500 all peril deductible. Take coastal out of it, hurricane, that sort of thing. We have 1%-5% hurricane deductible.
We'll be changing to a $1,000 all peril deductible unless your roof is over 15 years old, and then it'll be a $1,500 all peril deductible. That's going in across our entire footprint. We're also making changes to our underwriting guidelines relative to age of roof. Traditionally, we've written roofs that would be up to 25 years old, and that's going to be changing to 20 years unless it's a lifetime roof, slate tile, that sort of thing. We'll be changing that to 20 years. Now, the big benefit that we have, and you heard talk earlier about having some of the power of the nationals with the nimbleness of the regional carriers, bi-peril rating really gives us that. We've talked for a while about bi-peril rating. We rolled it out a few years ago, that has really been a huge benefit for us.
Now, some of the nationals have this, some of the nationals will use it, maybe a handful of regionals. Really, there's only a couple of companies that do it the way we do it, which is all in. We're being aggressive with the bi-peril pricing to make sure we have the most precise rate on home that we possibly can. If you think back 10 years ago or five years ago, even on how homeowners was priced, it was an average rate that was put together, it was an average rate that was then put together by territory, then you'd apply a factor to it for the value of the home, the age of the home, that sort of thing. Well, now we do that by peril, we do that by peril within each zip code.
We'll have a base rate for each peril. We'll then apply different factors to that for same thing, age of home, age of roof. Now we add in things like age of heating system, age of cooling system. Do you have central station alarms, that sort of thing. We've now been able to be a lot more precise in our pricing. Just like Dale, I have a bet on how quickly I can get you through these maps and try and make them clear. For the sake of time, I'll spend a little bit more time on this first one, which is fire. You'll see the seven perils. We actually use eight perils, but in this example, this is Ohio, so we don't have the hurricane peril. It's not a coastal state, and our coastal states will have hurricane.
What you have here is, this is essentially the pure premium, your frequency times your severity, your loss cost. Red is the worst, blue is the best for fire. This is your fire peril, and this is your weather peril, and those are really your two biggest ones. Wind will be bigger in some states than others, but those are your two largest ones. In the past, these two rates would have been the average of those two put together, then you would have applied, again, the same factor to them all, et cetera. Well, today, we have a fire peril. We have a weather peril. We have a wind.
If you happen to live in a high-risk fire area, but you have that central station alarm, or you have masonry construction, or you have some of those other things, then we're much more attractive in those areas where you're less likely to be exposed to fire. The converse is also true as well. If you live in a bad weather area and you have a roof that's very old and about to blow off, your rate with us is going to be extremely high, and chances are you're going to go somewhere else. Again, just to go through these, this is wind, a little more scattered throughout the state. Water. As I go through these, the impact of these perils becomes a little less in the overall dollar amount of the premium. Water, theft, liability. You can see liability concentrated in certain areas within a state.
Other, which is everything else that's come together. Again, in the past, it would have just been an average of that all put together, and now we've broken it out, and we're able to develop a much more precise price for each homeowner that we insure. Again, back to price. Price is what we're focused on. In 2011, our renewal rate was about 6.2%. You can see going back to 2008, we continue to take more and more price on home. First quarter of 2012 is up around 7%. Now, that's taking into account how the rate comes in throughout the year based on what the rate changes are taken.
The other thing we do, though, which you see some personal lines companies do, is they essentially snap a chalk line at the end of the year and say, "How much premium do I have in force in each line in each state?" They'll take a look at, well, how much rate are they applying throughout the year, and what would that be worth on an annualized basis? That's what we do as well. You'll see on homeowners, the total impact of 2012 rate increases would be 11.5%, again, on that snap a chalk line at the end of 2011 number that we had. We've been very aggressive on homeowner rate. Again, a little more skewed towards the Midwest than the East, which is really how the market is handling this as well.
I think we've been out in front of them for a couple of years, and you'll see that throughout that time, homeowners retention has really been pretty stable for us. In fact, it's up a little bit from 2009, but really has not moved around very much at all. Now move on to auto. Again, first bullet up here, maximizing rate. Everywhere we can, we're maximizing the rate that we take, making sure that we stay very focused on that. Continued mix improvements. You've heard us talk about changes we've made to our rate plan and our underwriting structure to focus on writing, I can't say it enough, low frequency, high retaining business, making sure that we're focused on that. Underwriting restrictions. If you look at our production, you'll notice that about a year ago, we put in some new underwriting guidelines.
We took some targeted underwriting changes, just like we take targeted price changes. We knew that was going to have an impact on our ability to write some new business, but we knew it was new business that was really causing us the most amount of pain. We were willing to make that trade, that we're going to write a little less new business last year, which is what we did. We know that the business we're putting on the books is going to stick around a lot longer for us and ultimately perform much better for us as well. We put in some underwriting restrictions last year that continue in place. Doug's going to come up and talk to you about claims initiatives that we're working on. Three points of loss and LAE improvement that we expect over the next couple of years.
That applies to personal lines as well as it applies to commercial lines. We expect to get that benefit as well. Finally, we talk about age of book. You've heard us talk about the new business penalty. It isn't just new business in year one. Year one is the worst performing auto business. Year two is a little better, year three is a little better, and it goes on as it ages. Our average policy age across our 13 state footprint on auto is 6.9 years. A little less than probably where the industry is at, but 6.9 years. Outside of New Jersey, it's 2.9 years old. Very young book outside of New Jersey. If that non New Jersey book was 6.9, if it was equal to our countrywide average, it'd be a 3.5 point improvement in our auto loss ratio.
Pretty significant improvement as that book continues to age for us over the next several years. Skipped ahead there, sorry. Continuing on with rate. In 2011, our auto rate was about 6.6%. A little less than that in the first quarter of 2012, you can see that the annualized impact for 2012, we expect to be around 6%. Now, note the difference here. Again, we've been taking rate well above 5%, close to 6%, over 6% in the last year. Every year, retention continues to improve. That's not normally what you'd expect as you're taking rate aggressively, but it's because we've been focused on the business that we're putting on the books and making sure that the business we've been writing over the last several years is the business that's going to stick around.
From 2008 until the first quarter of 2012, retention on auto has improved by about five points overall. Pretty significant improvement on the retention side for us. Where's our growth going to be focused on in the future? How do we continue to get growth? Well, there's a couple of ways that we do it. One is we've expanded into new states over the last several years. We've added some states outside of our traditional New Jersey Northeast footprint. We've added a couple other states out in the Midwest. We've added Rhode Island. You can see that our non New Jersey premium has gone from roughly $80 million in 2007 to close to $160 million in 2011.
Just about doubling in size over the last five years Which means it's gone from about 40% of our business in force to about 57% of our business in force. That's happened through adding states. The other thing we've been doing, now you heard us talk about franchise value and our agency relationship. These are very targeted, but we've also been doing some very targeted agent appointments across our 13-state footprint. This is really where we have geographic gaps. We just haven't had agents in these geographic locations. Maybe there wasn't a lot of middle market opportunity there, but we believe that there is a fair amount of small business and personal lines opportunity there. Not a large-scale agent deployment, but targeted, focused on geographic expansion. Plenty of growth opportunity for us here in personal lines as well.
Growth opportunities, the underwriting changes that we need to make when we need to make them, very focused on doing that, the improving age of business that we're going to continue to see on the auto side as we move forward, targeted but aggressive rate increases, and then also increasing scale to make us overall more efficient and give us better predictive models as we move forward for personal lines. With that, I will bring up Dennis Barger.
Thank you, Alan. Got me on the spot. Okay, I'm the only thing that stands between you all. Good? Can I move? Stay like that. I'm the only thing that stands between you all and a break. Oh, my goodness, Harry. Good? All right. Sorry about that. Yep. Good? Harry? Good? Okay. Again, apologize for that. Well, I am the only thing that stands between you all and a break. Let's get started. I'm going to give you some insights into some key success factors for commercial lines. John already mentioned this, local decision-makers supported by centralized expertise. That's one of the key differentiators and values to our model. What does that really mean?
Well, in a traditional sense, we have line of business personnel that lead each of the individual major lines of businesses, and I call it say grace over those lines of business and provide institutional guidance and expertise into the field as well as into the corporate area. The real value of what we get with centralized expertise is what we do in terms of segmentation. That is that we have three distinct industry strategic business units at the corporate level, contractors, manufacturing and mercantile, Community & Public Services. Those teams of people working with the line of business folks have really developed expertise at a granular level looking at more than 80 different business segments. Now we take all the SIPs and put them into those three individual strategic business units. There are some things we just don't have an appetite for.
We have a real focus on about 80 of those, and I'll talk a little bit more about some of what we do with those in just a moment. With all of that, at the end of the day, what we're really trying to do is help provide ability to provide the expertise, provide product development to the organization, provide referral capability, again, as an expertise to the field personnel, because you got more than 100 field AMSs and other underwriters in regional offices that can't always understand all these different segments that we do. Providing them an expertise resource to come in and get additional guidance, as well as doing training of our personnel and going out and conducting sales meetings for our agents. All of that is delivered to our regions to execute at a local level.
The decisions are made out there locally, closest with our agents. All right. We do a lot of what we do with a high degree of sophistication. The first that we take great pride in is our predictive modeling capabilities. We've invested a lot of time, money, and manpower in this, and we are now on our third generation of predictive modeling. We fully deployed this as two generations in four major lines of business. We're now working on deployment in the third generation. This gives us the ability to really granularly price some of the things that John talked about in matching diamonds and retention and pricing, et cetera. Another thing that we do, I've already mentioned the three strategic business units and the 80 business segments. We get very granular at our ability to look at pricing, profit, production, et cetera, around those three segments.
We build product around them. We build services around them. That gives us the ability to get very granular and very analytical in what's happening in those individual industry segments by the industry, by local state, by line of business, et cetera. We have a lot of sophistication that frankly matches many of the national companies that are out there operating. Mentioned price a couple of times. Again, one of our sophisticated capabilities, coupled with the predictive modeling and the other analytics that we do, is our pricing capability. The actuarial team and the underwriting team work very closely together with our field personnel, conducting state rate reviews, line analysis, et cetera. We're doing base rates, company analysis, tiering, schedule mod, usage, et cetera. We have a lot of sophisticated capability in this area.
The real beauty of it is that we can deliver it at a desk level. We do that really two things. One is it's delivered right on our what we call DSS, decision support system, to the underwriter screen. They can look at pricing live, so can our agent on the screen as well. The other thing, John mentioned this, and Brenda's going to talk to you about this much more in detail, is dynamic portfolio manager. All of the initiatives and actions that we identify at a corporate level that we think can help drive improved profitability into the portfolio, years ago, that was all done as multiple different spreadsheets and things. We drive it all through one single source, down through dynamic portfolio manager.
It shows up on an underwriter's desk, and they're able to manage all these multiple things that used to seem disconnected and now put it together. Okay. John also mentioned small business and middle market large accounts. In the commercial line space, we really operate in two market strategies. I'm going to talk to you about both of those. The first one will be middle market large accounts. The reason we do that, we recognize that in these two spaces, predominantly by size, but more by some of the characteristics about these market segments, characteristics meaning that the buyer themselves buys differently, and also our partner agents handle this business differently. Therefore, we have to look at how do we build products, services, capability different for these two different market segments. The first one I'm going to speak to you about is middle market large account.
Our strategy there is we want to be a best-in-class generalist with specialty niches. What does all that really mean? Well, I'm going to tell you a little bit about it. First, let's talk about best-in-class generalists. We understand that doing business with our agents, we cannot possibly just be a specialist in a few really good niches, because our agents do more than that. We also know that we have to bring to the market, to our partner agents, a best-in-class underwriting approach for a broad spectrum of business. What you see represented on this pie chart is a very strong representation of the kinds of industries, classes of business that we do. You see the contractors is the largest shaded, that teal color there, represents currently about 34% of our overall commercial lines portfolio. About five years ago, that was as high as 45%.
Of course, economic conditions the last few years have shrunk that a little. More importantly, while we have maintained a focus on writing good quality contractors, because our contractors also diversifies us away from property cat, any cat business, leverages away from that. The real beauty of what we've done over these last few years is that we have grown other things to augment the contractor portfolio that we have. We're building a very good, strong position with our agency partners and being a good contractor, underwriter, as well as other general industries. Let me talk to you now about moving from general, going to go down micro, to what does specialty niches mean? It means getting really intimate into some very unique things. One of those is we've built some sustainable ability in the social services marketplace.
We've done that with very strong focus around underwriting, service, coverage, et cetera. This is a market segment that we've built specific coverages for our automobile, for the general liability, and for the property. We do a couple unique things. We provide business income on an actual loss sustained basis. For about a third of our social services classes, we do provide workers' compensation. The other thing that we do is safety management services. Some of the unique things that we do here, not all of our other social services competitors do. Probably the thing we've identified foremost that we do that they don't is in infrared testing. Many social services, when they go to government agencies for loan money, et cetera, are required to get infrared testing done to prove that they've done it and that their facility is acceptable.
We do that as one of the services that we provide in safety management, along with a number of other things. It's things like this that we get intimate at knowing what goes on in this industry that makes us a go-to market with our agents for social services business and allowing us to provide the kind of returns that we are. What do we do when we try to figure out how to get into some of these different things? A very traditional approach. We identify opportunities. That's done either ourselves or our agents coming to us and telling us that there's some kind of a market opportunity. We look at demographics and economic trends, et cetera, we constantly are reviewing and looking at possible opportunities. We go through a market research process. We build forms, coverage and services, et cetera, we roll the product out.
More importantly, I'm going to show you how we did this with something here recently. Paratransit. Not a lot of companies are in the paratransit niche. This really grew out from the identification process, grew out of already doing social services business and being in that for multiple numbers of years. As we were writing social services business, we identified this was one of the emerging kind of activities and businesses coming out of the social services industry, really out of the aging population. We went and did a lot more demographics research. We also found that in our 22-state footprint, a couple things were happening. One, some of our states are growing pretty substantially in terms of demographic age population.
Second thing is we saw a number of these risks beginning to emerge in those states, we also identified that there weren't a lot of competitors in this space. We thought it would be something good to move into. We also had a little bit of experience with it in our existing social services business. The more research we did, we found that we could use a lot of the existing products that we already had, so our cycle time was shortened up in terms of what we needed to develop to come to market with it. We really put a team of people around safety management, underwriting, segment people, line of business people at building the underwriting box. We built a very tight underwriting box that I think allows us to play in this market space.
Part of that underwriting box is this is one of the few classes that while we generate it at a local basis, the field co-underwrites it with the Community & Public Services strategic business unit. We're finding some nice momentum out of this particular niche. We launched it back in the fourth quarter of 2010. Okay. Other than developing broad-based product for a specific niche, we also look at our existing portfolio for emerging gaps or coverages that are there, that are emerging, meaning the client is showing interest that they need it, or our competitors are starting to offer it. If we don't offer something, we have the possibility of losing out risk, et cetera, to competitors and certainly want to close up that gap. One such is CySurity. This is our internet liability policy.
We've developed this primarily for our portfolio, meaning low to moderate hazard risk. We do it for service and mercantile kind of risks, some of our contractors. We avoid things like financial, healthcare, et cetera, things that are higher hazard on the grade of internet liability. We offer three product coverages. We do media liability, internet liability, and security breach expense. This is all done at very low limits, less than $1 million. Frankly, right now, most of our portfolio that we write is less than a half a million dollar limit. Again, it's an example of what we do to try to fill the gaps in emerging coverage needs for our existing customers. All right. I'm going to show you a short video clip, just highlighting a little bit of the ability of Selective and what we do in the product development and segmentation.
We're a general agency. Selective is a general market as well. However, they do have quite a few good programs that they specialize in.
I think one thing that sets us apart is all of our coverage forms are very enhanced. They stack up very well against all the other carriers. Also, we go further steps where we have a lot of niche-type products, be it municipalities, volunteers, fire department, social service. It's a technology product that's come out. All of those products are not really what a lot of other carriers offer, so we have a lot more opportunity to write business.
As an agent, we work with Selective in a number of different segments, and personally, I've found success in the auto service industry, social service programs, and also the golf course programs. Their coverage is better than about anybody in the industry, and they can compete along with that.
Okay. Moving from middle market large account to small business and our strategy there, John already talked to you a bit about this, the need to be easy doing business, responsive, defined appetite, automated, et cetera. That is what we're trying to do, and not just trying, what we're accomplishing in the small business space. We are approaching this market from a template underwriting, predictive model-driven business with a high automated throughput. That's really the approach that you have to take to be successful at small business. How do we do that? First is pricing sophistication. Again, predictive modeling. Predictive modeling, we rely on it a lot more in small business than we do in middle.
Not to say we don't use it in the middle and large, in small business, in an automated environment, you really build much of your underwriting around and your pricing around the predictive modeling and what that tells you in the automated workflow of things. The automated underwriting technology. Here again, from a corporate line of business and strategic viewpoint, what we do is we look at the entire landscape, all the businesses that are out there. Then we basically look at what kind of businesses can be template underwritten. Then you take that, and mostly it's very homogeneous kind of risk that you can template underwrite so that you can create a nice defined box in your system. We're doing that, frankly, right now.
We currently offer a little more than 400 classes of business, mostly driven by our BOP classes, which represents a little more than 350 of those, and then the remainder are made up mostly of some contractor classes and a few sprinkled other classes. We've also supported all of that approach within, in the field, we've placed small business teams in each of our five regions, and those teams are really designed to handle the workflow and response time necessary to make this business truly easy doing business for our agents. What happens is, when you build an automated box, there are things sometimes that don't fit the automated box, or you want them to edit out because you do want somebody to take just a look at something.
When the edits pop, it comes to this small business team, and their job then is to look at that, and we're staffed in each of the five regions to have personnel then that that's what they do in working with our agents to handle the edited business or what we call Two and Done. One and Done, it goes right through the system. Two and Done, it comes out to a small business team person for them to look at and get responsively back to the agent. Lastly, Alan talked about this a little bit, is our field marketing representatives, our resources. They're really out there now working face-to-face with our agents, to really drive the message and understanding, frankly, the training and development with our agency partners and their personnel, particularly, again, you heard CSRs versus producers or account reps.
The CSRs are really the persons placed in this business. Our field marketing personnel, they're responsible to go in then and work with that agency personnel to train them on what our market appetite is in small business, our automation capabilities, make sure they understand how to use our system, and how to get things through on an easy basis with us. With that, with local decision-making, centralized expertise, sophisticated tools, granular underwriting, sophisticated capability, we think we've got a very strong platform and value proposition to deliver profitable growth in the commercial market segment, both middle market, large, and small business. Okay. With that, Jennifer, just nodding your head yes. All right, 20 minutes for the break. It's right at 3:00 by my watch. If I'm wrong, by 3:20 then, come on back in. Thanks for your time thus far.
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Everybody get to their seats. We'll get started again. You want to take your seats? Thank you. We'll continue on here this afternoon. Before we do, I'd like to thank a couple of people. This is not an easy thing to pull together, and it takes a lot of people a lot of time, and we had a lot of people who did a lot of work. I really want to highlight my team, my Investor Relations team. Katherine Roy is Investor Relations Manager. I think most of you may know her. Brad Wilson back there in the back of the room, too, is our Investor Relations Analyst. They've put in many hours to get this all coordinated and pull it all together, and they did a fabulous job. I just want to say thank you, guys.
We're going to get started here with Brenda Hall, who is our Senior Vice President in Field Underwriting. It's not coming up. Here. Let me see. It's not working. We got a clicker issue now. All right. We're good. Brenda's going to take over here. She's our Director of Field Underwriting and Business Intelligence. We'll continue through the afternoon. Thank you.
Good afternoon, everyone. We're actually going to start by taking a look at a video to actually see our field model in progress, particularly around hearing from an agency and one of our customers as to why they believe that it's our people and our field model that truly does differentiate us in this marketplace, and why we believe it positions us for success.
I try to build a personal relationship with the client, try to find out what their needs are, whether it be more loss control, more stability in pricing, et cetera. I try to match the client to the market, and Selective is generally a good fit, meaning Selective is always my first choice. It's basically ease of doing business. We have great underwriting consistency and things like that, and that's what clients are looking for. They want long-term stability. They don't want pricing fluctuating year to year. If they have a claim, they want it to be handled properly, professionally. That's the kind of thing our clients like, is stability. At least my clients. Again, that's what I sell. I sell long-term solutions, not quick fixes. Selective's been a great partner in that regard.
My relationship with Mike has really grown and developed over the years. It's really a no-nonsense relationship. He calls, we sit down, we review an account. I really like to visit the account with safety management, and usually Mike will join us so that I really understand what the account does when I'm speaking with my counterparts, either in the region or at a home office level. Then we deliver a quality product to Mike and present that to the customer, and hopefully have a win, which turns into a long-term relationship for the three of us, the customer, Mike, and us.
Diane is what I call a classic seasoned underwriter. She's quick to say yes when appropriate and quick to say no when it's inappropriate, and that's what we need from an underwriter. We don't get dancing around topics. We get straight shooting from her. Power Partners is a very large account. They make electric transformers, and it's a pretty large account for Selective, quite frankly. When they came in and looked at it, they obviously trusted my relationship with the client. We ended up putting the business with Selective, and that was a great success.
Power Partners manufactures power distribution transformers, and we've gone into precision sheet metal fabrication, solar hot water heaters, and ECO-MAX absorption chillers. We bend metal. We shape metal. We use hard components in our factory to produce products that are needed every day, and it takes companies that understand that.
As quickly as I could get a good handle on what the needs were here, I very quickly thought, this is going to be an account we want Selective to look at, and she's performed really well for us.
When Mike brought Selective to us, he said this was an organization he had worked with and he trusted and he thought was very good for an organization our size, financially stable, responsive, competitive in the marketplace. Mike sold a lot harder than he had to because we had faith in Mike.
From ease of doing business to underwriting, safety management, or even the customer experience, what you heard in the video was that it absolutely is our people and our empowered field model that gives our agencies the encouragement and the confidence that they need to place their best business with Selective. Dennis mentioned to you a little bit about our corporate expertise from an underwriting standpoint in our corporate office that supports the regional offices, our regional offices and the teams that are in place that truly differentiate us in this marketplace. Our regional offices are staffed with senior leadership, and they're fully operational, fully operational being one of the key components to our structure.
What that means is marketing, new business underwriting, renewal underwriting of small, middle market, and large accounts, as well as safety management professionals, claims professionals, all very well positioned, empowered with broad underwriting and authority, and armed with the tools that they need to not only build those deep relationships and partnerships with our agencies, but to make sure that they're executing on our strategy and delivering results. I'd like to introduce you to a few of the key players in our regional offices and the team, and the first one is our agency management specialist. Our AMSs really are the cornerstone of our field model. We have a little less than 100 of them throughout the organization, and while they report into the regional offices, they actually live in the territory in which they manage.
They're responsible for the new business production from a commercial line standpoint, they're much more than field underwriters. These individuals are considered to be the CEOs of their territory. They're responsible for not only the ownership of the overall territory and the relationship, but ensuring that their territory is structured and performing that meets the overall strategy of the organization from a diversification standpoint, looking at new appointments, terminating agencies, truly the makeup of their territory they absolutely own. They're also considered to be the relationship manager, cultivating relationships and building those deep relationships with our agencies. They do so by making sure that we've aligned resources and that our agencies can take full advantage of all that we have to offer from a product standpoint, services, and technology, as well as having broad underwriting authority.
One of the key differentiators of this position compared to our competitors is not only do they live in the territory in which they manage, they're visible in our agencies' offices, and they have the authority to write the business. As you heard in the video, putting the decision maker in front of the agency who's backed by the corporate expertise is key and of extreme value to the agencies. Finally, relating it back to being the CEO of their territory, our AMSs are measured both on new business production, so on growth, but also on their overall territory's profitability. We believe creating the direct connection between accountability and ownership. I mentioned to you early on about having the tools that they need to actually grow their territory.
What we've done is we've built an underwriting system that really does give our underwriters the ability to not only evaluate the traditional risk characteristics of a risk, but also giving them swift access to additional information to take into consideration, information such as agency performance, so the rank in an agency, the profitability or the growth of that agency, their mix of business, taking that into consideration, the financials of a risk, integrating Dun & Bradstreet information into that process. Predictive modeling, scoring each line of business, and providing reason codes to our underwriters. Information that would support our cat management strategy, such as geocoding individual locations. Finally, access to safety management reports, not only the reports themselves, but the recommendations, obviously, to improve an overall profile of a risk.
All within real time, at their fingertips, giving them the ability to not only ensure that the decisions that they're making align with our corporate strategy, ensuring that those decisions can grow their territory profitably. In the video, what you heard about was the safety management specialist, or traditionally known in our industry as loss control engineers, of being another key position for us. These individuals support the underwriting process as they enable better risk selection. You heard Diane Vijay, the large account underwriter, talk about wanting to bring safety management out because she can develop a greater understanding or a deeper understanding of the risk and the controls that that risk has in place.
We believe that we need to be more strategic in how we've deployed safety management over the course of time because we've found that when we do so, we can improve our hit ratio as well as improve retention. We believe that this is because of a consultative approach that we take with our insureds, making sure that our insureds see us as a risk management partner, and that our expertise can not only help a risk to identify the exposures, offer recommendations to make sure we're mitigating any future losses, preventing losses, as well as lowering frequency and severity, thus, from their standpoint, protecting their insured's assets, and from our standpoint, improving the overall risk profile. A value add to not only Selective, but also to our agencies and to our insureds. The last position I want to touch on today are the renewal underwriters.
Our renewal underwriters, as I mentioned, are in their regional offices, and they work in partnership with our AMSs, our safety management specialists, our claims professionals, as they manage their book of business, which is approximately a $9 million to $10 million book of business. They themselves have developed outstanding relationships with our agencies. In order to maintain a consistent approach in our underwriting, again, you heard in the video, having consistency in our underwriting approach year-over-year is extremely important to our agencies and to our insureds. What we've done is maintained the same tools that the AMSs use when they write a piece of new business our underwriters utilize on renewal. They too have the access to corporate expertise.
They have the broad underwriting authority they need to manage their book of business, and they look at their book of business on an agency basis, managing their overall agency's performance. They too, similar to the AMSs, are measured on both rate and retention. They also are measured on their ability to execute profitability improvement strategies, which I can tell you in this marketplace over the last several years was an extremely difficult task. Fortunately, we've rolled out, and a few people today have mentioned it to you, the dynamic portfolio manager. The dynamic portfolio manager rests on the underwriter's desktop, and it actually is built into their underwriting workflow. Over the course of time, as we've invested in our data warehouse, we have the ability to really understand and know our book of business.
As a result, we've been able to come up with very specific strategies to target our performance, whether that's by line of business, by strategy, risk characteristics, agency profitability. What the dynamic portfolio manager does is it gives us the ability to automate those strategies in a way in which they work together. The output of those strategies to an actual underwriter is policy pricing guidance as well as retention guidance, but more importantly, the impact that risk has on their overall portfolio. What that does is give them what we believe is not only the ability to do what if scenario analysis to determine what they want to do with that risk, but more importantly, it gives them what we call a walkaway price.
Being out in front of very tough messages to our agencies, being able to balance those messages with an overall portfolio approach has been really the key to not only being successful in how we execute our strategies, but making sure that we're able to drive rates and in the end, ultimately improve the overall underwriting benefit to our organization. When you look at our empowered field model, you really can't look at just the AMS position or the safety management position or the renewal underwriter position as a whole or as an individual function. You really need to see the essence of our overall empowered field model, our local presence, the empowered ability to make decisions, to be having the corporate expertise to support our underwriters, as well as the deep relationships that we have with our agencies and our ability to execute strategies.
We believe that's how we're positioned for success and how we're going to absolutely improve results. With that, I would like to turn it over to Chief Claims Officer, Doug Holbrook.
Thank you, Brenda. All right. No more microphone issues. Now we're to the exciting part of the presentation, claims. Tornadoes, hurricanes, all the fun stuff. What is Selective's claim philosophy? It really is to achieve the best possible claim outcome for all of our stakeholders. The different stakeholders, if you're a customer of ours, we want to make sure that we settle your claim in a fair amount. We settle it timely, and we provide clear understanding to you of the expectations of what the claim process is and what you can expect to progress through the claim process.
From an agency perspective, the best possible claim outcome is to make sure that their insurer is treated fairly, that their claim is timely settled, and that we provide someone that's the face of claims in the field, so that there's a local field person that they can tell their insureds, "Here's who's going to be handling your claim in the best possible way." Obviously, from a company perspective, the best possible claim outcome is really achieving all of those, but at the most efficient model possible. Can we align our resources such that we can afford to have claims adjusted in the field, but also supported with highly specialized claims adjustment dependent upon line of business that helps us achieve the best possible outcome at the lowest possible price?
Our holistic approach to claims is really looking at people, integrating people, process, and tools, and using those three to create a culture of continuous improvement, so that everybody in the claims organization looks at what they're doing on a daily basis and ask themselves, "Am I doing this in the best possible way to achieve the best outcome? Am I adding value to the process?" If the answer is no, use one of our tools that we've implemented, whether it's use of an internet wiki type site, monthly calls to pass that information up so that we can integrate it into better workflows and better processes to allow it to do that. The other thing that we always ask ourselves, or we teach our adjusters or claim professionals to ask ourselves is, are we making the claim file better, or are we making the adjuster better?
Every time we integrate or introduce a process or a new tool, we ask ourselves those two questions to make sure that we're not doing something that's going to take the adjuster away from making a better claim outcome or making the adjuster a better person or a better adjuster in their professional development. From a processing standpoint, we really look at integrating data analytics and operational best practices to continually review how we do things and look for the best possible ways. I'm sure you've seen this slide before, but in different formats. Really from a claims standpoint, it's very similar to the underwriting side that you've heard.
Really, it's the local field adjuster being there for the agent to sell to the insured, to have someone that they're going to have as a face of claims, someone that can be there, feet on the ground in case there's an emergency in the middle of the night, on the weekends. They can come in the adjustment process and make sure that the claim is being handled appropriately. In order to make sure that person, who's a generalist by nature, has the support they need, we have them supported at both a regional level. We have field leaders who are actually in the field that do ride-alongs with the adjusters, and we also have a local field management that they can come into the office on a regular basis for training needs and stuff like that.
Also, the field adjuster's supported by line of business experts that we have in home office for work comp, liability, property, and auto physical damage that they can call on through referral basis or send files up for reviews to help strategize on the cases and achieve the best possible strategy to get the best claim outcome. Lastly, the last arrow is really the shared services. How do we maximize resources so that we can provide services that really go across all the organizations for all the different lines of business and all the different types of claims? We have litigation support, where we consolidate vendors and vendor lists and litigation management. We have our SIU, our fraud team that helps fight fraud and partner with the field organization to receive those.
We have subrogation experts that they can immediately transfer and refer cases over to from a subrogation standpoint to make sure that our intervention in a subrogation claim is at the earliest possible moment. This is really a video to show how important that field adjuster is to the agency and the relationship with the agents, and how valued it is, not just to the agents, but to the insureds.
Our CMS, Mona Sinclair, is second to none in the industry. Having a claims management specialist be able to go out and be with the clients on the front end during the sales process, tremendous. None of our other companies offer that. Our clients can develop a relationship with our claims folks, and that's what helps really cement the brand and the relationship between Selective and the clients.
We retain a lot of insureds because even for a higher premium, they like that hands-on touch that most companies don't have. We have a 24/7 claim service center. We're there. We're not a Monday through Friday operation.
Our overall experience with Kinghorn and Selective Insurance has been a breeze. From claims, you always get someone on the line, and if not, they're calling you right back. That's what it's about, prompt service, making everything you want happen with your insurance, because of course, nobody really wants insurance until they need it.
Clearly, that video is a great example of what the field adjusters mean to the agents and the value that they put in those field adjusters. Really, just a quick example of what we've done to integrate people and process. In the last year and a half, we've looked at how we intake claims into our system and how we then assign those to the adjusters. For the most part, our claims historically were given to us through faxed ACORDs. Some were called in by the insured, some were called in warm transfer with the agents. What we're really looking to do is come up with better information on the upfront claim process so that we can get more information immediately and begin adjusting that claim from minute 1 as opposed to a day later or 2 days later.
What we did is really, we're embarking on a marketing campaign in conjunction with our agents, in conjunction with our field underwriters to really get the agents to get their insurers to call in the claims. We retooled our scripting for the first notice of loss so that we get more information, more detail with respect to each claim, and then are able to put that through a triage model to get the claim to the right person as early as possible. If you have a work comp claim with a specific set of injuries in a specific jurisdiction, we can make sure that lands with a claim adjuster that has the right expertise to adjust that claim from day 1, as opposed to being transferred a week or 2 after the fact.
Really, retooling our first notice of loss system to really get the claim immediately into the hands of the adjuster that's best suited to handle that. Ultimately, to achieve a better outcome on the claim. Some of the process enhancements that we've done, you've heard about the 3 points improvement. These are some of the big ones that really are helping us drive towards that savings. We've got a liability complex claims unit. If you look at liability, 60%-70% of the dollars that are paid out in any liability organization are in the most complex claims, the smallest number of claims are the most complex claims. What we've done is realigned our liability units to create 2 large or complex claims units that have a span of control of 4 to 1.
You have very tight spans of control that allow us to get the claim early, put together a specialist that's very experienced in the industry, has a lot of litigation management experience, a lot of coverage experience, a lot of negotiation experience, and really has strong relationships with counsel that we then also try and specialize and put counsel on the right types of claim as well to achieve better claim outcomes on those liability claims. The complex claims units been in place for about 9 months now. We've seen great results from that. In workers' compensation, we look to break apart the workers' compensation in what are the claim tasks associated and that are important in the life of a work comp file. One of the single most important decisions in a work compensation claim is it compensable?
What we did is put together a specialization model where we put an upfront investigation team in place. They investigate the claim early, they investigate it aggressively. They're very specialized and understand the compensability laws in all the jurisdictions that they handle, and they make that decision early. They also help us identify subrogation opportunities earlier and any SIU or fraud referrals that may be appropriate in there. We're seeing better compensability decisions being made earlier. We also want medical management, medical review, helping the claimant return to work as early as possible. We put together medical management specialists that helps us manage that medical appropriately, works with our doctors, works with our networks to make sure that the treatment pattern's conducive to the injury, and they receive that treatment timely, and they get back to work as timely as well.
The other one was we have a fast track team that if it's a small, low-severity case, goes into fast track, it minimizes the hand or the touchpoints on that and closes it as soon as possible. The last one on the list is the claim service center, which is really just consolidating all the high-frequency, low-severity claims in a service center so that you can do a low-touch, high-volume type business. We specialized the service center and realigned it by regional and geographic concerns so that we can get our service center aligned with our agents, aligned with our regions, and get them working together to provide the best customer service and a quick and timely outcome. Lastly, just are some of the predictive tools and analytics. I think they've been touched upon earlier.
A year and a half ago, we introduced a fraud analytics model, which continuously sweeps our claim system for information and data and anything that has flags, whether it's day one or day 30, gets an automatic referral to our SIU unit. The SIU units, we've seen a significant increase in the referrals that we've had because of this model, but more importantly, we've seen better referrals. Not only have we increased our referrals, but we've had more success on those referrals once we get them. That's very good. We're using that same intelligence to develop a recovery model and a more complicated and comprehensive triage model to really get the assignment process honed in and much better. Lastly, I've got a leader in claims metrics and finance that I brought in.
He's in charge with developing comprehensive scorecards and data and dashboards at all levels of the organization. My adjusters have daily dashboards or scorecards that they can use to see what kind of book they're managing, how they're doing on a day-by-day basis. The team leaders of those adjusters have scorecards that they get so that they can compare not only how their adjusters are doing on the individual basis, but how their adjusters are doing compared with each other, and across not only their own team, but across their region and across other similar aligned businesses. Those are very good and comprehensive, and they all lead to really one thing, which is get the three points of reduction on combined ratio. The commitment is to reduce loss costs by three points over three years. We're into year two, and we are ahead of schedule so far.
Now I'll turn it over to John Marchioni.
Thanks, Doug. Let me just hit a couple more key areas of investment for us, then we'll move into the agency panel. I want to hit marketing/branding and customer experience briefly. We just hit marketing and branding first. Our strategy is not to build a brand like some of the national companies have done with major national television ads. I think we recognize that, especially in the middle market and larger accounts arena, our agents are still the ones that are out there selling our unique proposition. They're the ones out there convincing their customers that Selective is the place for you. But in the small commercial and personal lines arena, we think that while that continues to happen, you're going to see more and more need to build some local brand presence, and we've done a lot of that.
Our marketing team has done a lot with a pretty reasonable budget, got out there and done some pretty neat marketing buys and branding buys through sporting events. You see a couple of examples here with both the NCAA basketball and more recently into NFL. For those of you who have a few minutes later on, you may want to take a walk through Times Square. You'll see us advertising actually on the G-Tron outside of the Toys R Us store with an ad that runs 4 times an hour, 24 hours a day. With a relatively limited budget, starting to do some things on a more local level, giving our agents some access to programs through billboards and mailing pieces, direct marketing campaigns that they could deploy locally, radio spots, and those sorts of things.
Doing a lot more here, but again, not with a goal of matching a GEICO or a Progressive or a Travelers in terms of their advertising spend on a national basis. But to the extent it becomes a little bit more of a tiebreaker in small commercial and personal lines when you're presenting multiple independent agency quotes, we think some of this local investment will pay big dividends for us down the road. Then the second area I want to focus on, you heard Greg allude to this earlier, is our investment in the customer experience. Like most insurance companies, especially independent agency insurance companies, have been very internally focused over the years, focused on underwriting, focused on process improvements, focused on claims adjudication.
This is an opportunity for us to now take a step back and look at things from a customer's perspective to make sure that we're treating every customer interaction not as a simple transaction, but as an opportunity to build brand loyalty. What we've done is we've gone through a review, actually had some outside help come in and help us look at every individual customer touch point that we have, billing transactions, people transactions through our service center, policy documents, those sorts of things, and identify how we're doing and where are the opportunities to really improve upon that customer experience. At the end of that process, really put together a roadmap to improve that customer experience. Again, the goal here is because the bar is not very high, quite honestly.
If you look at P&C companies, especially agency companies, the customer experience, this is a game changer. It's an opportunity to really set ourselves apart. That led to a series of initiatives that we're really focused on going forward. You can see here, the first one is the voice of the customer survey. Starting to survey our customers across all major points of interaction, and then capturing that information in a way that you could start to gain a 360-degree view of your customer certainly helps in terms of retention, certainly helps in terms of word of mouth marketing. The customer invoice, the billing transaction, probably the highest frequency, lowest satisfaction rates in terms of interactions with customers, not just for us, but really anybody in the industry.
We went through a process that took us the better part of a year to completely redesign the look and feel of our bill. Eliminates an awful lot of confusion on their part, eliminates an awful lot of phone calls to our independent agency partners and to us, and it's an improved experience, but also helps us on the efficiency side. That's a project that's been absolutely completed. The voice of the customer survey ongoing. This one's been completed.
Also, you heard Doug allude to this a little bit on the claims side, but in our service center on the underwriting side, our folks interact with our customers to a certain degree in a certain number of transactions, making sure that they have the skills necessary to treat those interactions in a way that's going to build a real positive experience and ultimately drive improved retention and lower acquisition costs. In terms of the opportunity here, certainly to the extent you're providing a better customer experience, you're going to improve your retention. Improving retention of this business obviously drives profitability. You're lowering your acquisition costs as well because you're creating a lot more word of mouth marketing. Again, we're trying to track Net Promoter Scores through this voice of the customer survey.
Net Promoter is somebody who, based on their experience, is going to go out and recommend that their friends or their family buy a product from us. That's what ultimately the goal of this particular process is. Hopefully you got a sense through the course of this afternoon, as Greg talked to you early on, our focus has been that local presence, local decision making, and relationships of a regional, and combining that with the capabilities of a national through really on the insurance side, these three areas, great people, empowered to make decisions, great relationships with the best independent agencies in the country, and then a high degree of sophistication in terms of underwriting and pricing and claims. I hope you get a sense as to the investments we've been making over time and continue to make to be successful in that regard.
I'm going to launch a video introduction of our agency panel, and then those folks will come up, and we'll get started with the panel discussion.
Jay Taylor is Senior Managing Partner of Kinghorn Insurance Agency of Beaufort, LLC in South Carolina. Kinghorn Insurance Agency of Beaufort has served Beaufort and the surrounding counties for over 100 years. Jay has been with the agency since 1995. Jay has been very involved in the industry as past board member of the Independent Insurance Agents & Brokers of South Carolina and chairperson of the Young Agents of South Carolina. Kinghorn has been a longtime agent for Selective, and Jay has been a member of Selective's Agency Advisory Council for many years, serving as chairperson for the past 2. Jayson Bass is the Principal of Allied Insurance Managers, located in Rochester Hills, Michigan. Allied is one of the largest independent property casualty insurance consulting firms in Southeast Michigan, producing innovative results for over 5,000 individuals and companies every year.
Jayson has been an integral part of Allied Insurance Managers' success. He has 15 years of experience as an account executive in the commercial property and casualty industry. Allied is a relatively new agency appointment with Selective, having come on board in 2009. John Willenborg is one of Selective's territory managers in the southern region with direct oversight of the field operations in Georgia and Tennessee. He oversees seven agency management specialists. Two agencies from John's territory are represented on the panel today. John joined Selective in 1997 and has had several underwriting positions throughout his career, including agency management specialists for multiple territories. Michael Gautreaux, a licensed agent since 1972, has been a partner in AI Insurance Group of Athens, Georgia for the past 31 years.
AI Insurance, a Selective agency since 1989, is one of the largest independently owned insurance brokerage firms in north Georgia outside of metro Atlanta. Mike has served as chairman in the past to numerous insurance industry related committees such as the Young Agents Committee and Technical Conference Committee. He also served as national chairman to the Errors and Omissions National Committee. Jerry Niewiek has been a principal at Berends Hendricks Stuit Insurance Agency of Grandville, Michigan since 1995. Berends Hendricks Stuit Insurance is a locally owned independent agency in West Michigan, celebrating 70 years of service in 2012. BHS became a Selective agency in 1998, and Selective very quickly became a top carrier in the agency. Jerry's responsibilities include leading the commercial lines division, assisting in developing sales strategies, and mentoring new producers. Over the years, he has served on the agent advisory councils of several insurance carriers, including Selective.
John Marchioni, Executive Vice President of Insurance Operations, will serve as moderator of today's panel. Please join us in welcoming our panel to the stage.
All right. What we'll do is I'm going to run through a series of questions, get some conversation going amongst the agents. I think it'll really help to reinforce everything we talked about in terms of our strategies and hear in the agent's own words as to how they view some of these capabilities. We'll have some time for you to ask questions directly to the agents, and after we're finished, Greg will come back up and wrap things up, and you'll have an opportunity to ask more general questions to the Selective management team. Let me start, and Mike, I'll ask you to get us started here. We talk a lot about relationships and the importance of relationships and our focus on that and how that really drives the business.
I think it'd be helpful for you to provide a little bit more of an agency perspective on why it is, A, is relationship really that important? B, why would that be from your perspective?
I think we've spoken to this all day long, as a broker, relationships are really what we trade on. I've been very fortunate to build a close relationship with Selective, what that means is if I call an underwriter or even higher up, James McLean, who runs the region, say, "James, I'm working on a deal, this is the deal." Based on the trust and the relationship I've developed with them, they, number 1, believe me, trust me, and we end up doing the deal. That simply doesn't exist with the larger carriers, the national carriers. It's very difficult to build those same long-term trusting relationships with those larger carriers. I found that Selective, through the years, have been very easy to build relationships with, and it just makes my job a lot easier.
I'm able to do what I'm supposed to do for my clients and at the same time produce great results for Selective.
Maybe somebody else could follow on, more specifically talk about how does that happen throughout the agency? It's one thing to get in there and establish a relationship with a principal or a producer, how does that make its way through the rest of the agency to really build a holistic relationship?
Go ahead, Jay.
We do business with people we like. My own opinion. Our AMS and as you heard, the CMS and SMS, those folks are in our office on a very regular basis, establishing relationships with not only the partners, but also the producers and the account managers. Again, it's very easy to place that business with Selective, and the relationship does mean everything.
John, I know you were trying to jump in from a company perspective.
Yeah, I was just going to say that a lot's changed in my time at Selective in terms of technology and how business is processed. The one thing that hasn't changed and remains consistent is the companies that have the best relationships with the agencies get the best business. Our focus is on those relationships, making sure that we have the best relationships, and we can drive the best business to Selective.
Yeah. I might just follow up on that and say one of the things that has always impressed us about Selective from our organization is the quality of the people at Selective. I know you've all heard a lot of stories here today, I think each one of us would say it really is true. The quality of the people, their visibility, the ability to get things done in our specific geographic areas. When you have quality people, it lends itself. It's like a fire that went through our agency back in the day when we first started doing business.
Jerry, let me just follow on with a related topic and ask you to get us started on this one. Another concept we've talked about in addition to relationships and related to it, is this notion of franchise value. We believe it to be important that you limit your franchise, especially in the middle market and large account side, and that actually means something to producers. Just talk a little bit about the franchise and what that means from an agency's perspective.
Yeah, it's a great question. Yeah, number one, being an independent agency you're competing with other agents that have many of the same companies. Again, from our organization standpoint, we want to sell not just on price. We all know price is important
The things that Selective brings from loss control to the great coverage forms, just technology all through the line. You talked a little bit about your sense to build from an advertising standpoint. Quite frankly, in our office, our customers, if you ask them, "Who's your insurance company?" They're probably going to tell you it's that producer because that's their connection, and that means so much in regard to what we do, where we place it, and the fact we can count on you.
Jayson, let me jump to you because as everybody saw in the introduction, Jayson's agency has only been with us a little over two years now, we've probably talked a lot on the way into the relationship about our commitment to the franchise, our commitment to building relationships. Why don't you talk a little bit about, at least on those two topics, what's the early experience been as a relatively new partner with us? Then maybe get into a little bit about why did it make sense for you to partner up with us?
Sure. When we look at a carrier to bring into our agency, we don't take it lightly. We look for specific things, and Selective is known to be one of the best out there in our area. It goes back to franchise value. That means a lot. If you can get a Selective appointment, that's a really good thing. We were very interested in the field model. We know the field model is very rare in the industry, and we know it works. Besides that, you guys have cutting edge technology. You really do. You're number one in our agency already. Our people are comfortable using your technology. Bringing you in, though, our AMS is fantastic.
We were able to think from the time that we initiated the appointment, the process took less than two months. Our AMS made that relationship, that connection very quickly in our office, and bringing in the right people to connect with. It's been a very positive experience.
Somewhat would say that, and I'd ask anybody on the panel to take this one, the whole idea of relationships driving the business, we're moving into an era where it's all about modeling, it's about information scale, computers making decisions. Maybe one of you can talk a little bit about your long-term view on a relationship, people-driven model continuing to be successful in the future.
I'll just weigh in briefly. It ties into the relationship piece that I started on. It's hard to build a relationship in one or two years, and it's not uncommon in many insurance companies to change underwriters, to change field personnel. The personnel changes all the time. With Selective, the AMS in particular, the claims specialists, we seem to be able to hold on to these people for four, five, six, seven years at a time, which, at least in my experience, just doesn't happen with most insurance companies. Again, over time, you can build a strong relationship, and it's just very difficult, as I said, to do that in a one or two year increment, and all of a sudden, oh, new underwriter, oh, new field rep, new claims specialist.
I think that's been a very effective part of our relationship with Selective is the long-term nature of these relationships.
I'm going to add to that. An experience that we just went through with one of our national carriers. We had a relationship there, and they decided to close down our regional office, and within weeks, the flow of business just stopped. Consistency with underwriters, your AMS, SMS, it's very important, that continuity out there.
John, one of the other things, too, is Selective, it really adds to the franchise value is not only the financial strength of Selective, but also the consistent underwriting, consistent pricing, and the fairness in claims handling and service.
John, from your perspective, because franchise value conceptually sounds great, but obviously it's a two-way street. You're going to limit your franchises, which means you've got to maximize your production per relationship. John, surely you run into some situations where you or your folks have had to make some tough calls. Just talk a little bit about agency management in general and that balance between keeping the number of franchises limited, at the same time, you're trying to maximize profitable growth in a territory.
Sure. Really, our goal is to have fewer agents if we can. The first option is to try to use the agents that we have in place, the appointed agencies in a given area to reach a certain level of growth. However, we do have growth targets in an area, if we are not able to get it done with our existing plan, we do have to think outside of our existing appointments. Fortunately, that is not something we have to do very often. Typically, we have the agents we need in an area. They're getting it done. We give them every chance to get it done. We bring a lot of tools to bear to make them want to keep that exclusive appointment in that area or semi-exclusive. To the extent that does not get done, sure, we need to discuss other agencies.
We plan with other agencies, possibly bring on additional appointments as needed. Those kind of discussions are ones that we have openly and honestly with our existing plan, we certainly, again, give them every last opportunity to maintain the franchise before we go outside.
Great. John, I think you asked the question, too, in regards to the tools that are in the industry, you hear all the companies today talk about their predictive model. Again, I suspect that my peers here would agree, we've seen with some carriers, quite frankly, I have one of our top three carriers that went to a predictive model that was no longer a tool, it was
The mandate. Quite frankly, we don't even need the underwriter anymore, that book of business is dwindling so fast because the model says it lends no room for the underwriter to do what they were trained to do, that is to underwrite. When you take the human element out, it's a real problem because any risk can be the right risk if it's priced accordingly, if you understand the issues. Again, if you look at the things that Selective brings from a loss control standpoint, from the video thermography.
Thermographic testing.
Again, you're using the tools, you're using the expertise to determine, okay, what is the right price for this account? Does this account make sense? Again, I applaud Selective from the aspect that you've rated your book from one diamond to four diamond. You know very well which of those is more profitable, why, and again, if you take that human element out, you really lose that connection with the agent.
Let's just stay on that topic. I want to come back, and we'll talk pricing a little bit more specifically in a few minutes. You talked about those services and the things that we bring in terms of coverage, the things we bring in terms of service. Just, and I'll go to one of the other folks to start, what's the sense in terms of just how easy is it to sell service?
If you got a customer out there wanting to talk about price, when you think about the economy we've been in for the last couple of years and the point in the pricing cycle we've been in the commercial lines area, how difficult is it to get your producers to get out there and make the tougher sell, which is trying to get folks to talk about service, sell that service, sell that coverage advantage, and keep it from being 100% about a pricing discussion?
John, when you take your field model and you take your CMS, the claims management specialist, out to visit the customer themselves, the client themselves, and they know that this is the person they're going to be dealing with if they have a claim, it's a whole lot better than saying, "You can deal with this person," or, "I can give you this 1-800 number you can call." That usually seals the deal right there.
I can tell you from an underwriting and sales perspective, one of our biggest advantages is having that claims support. Our agents look at our claims service as really tops in the industry, it makes us going out and selling a policy much easier. I always say they're our best sales force, our claims people. They've built up that reputation over time, it's something that our agents believe in, they can go out and put their best clients with us knowing it's going to be in the right hands.
Okay. The other thing I want to just hit on, John, this ties back to something you said about you need to maximize production from the agents you have before you'll go out and appoint another agent. One of the ways we've tried to do that is through getting the agents turned on to maybe some unique products that we have, some product differentiation. You heard Dennis talk a lot about the investments we've made in product development and appetite expansion. I know a couple of you, Jerry, maybe we'll start with you, have had success by getting a producer married up with a product that we know we have some real competitive advantage for, let them run with that as a way to either jumpstart a relationship with a producer or an agency overall.
Yeah. Actually, a couple thoughts along that line, if I can. First of all, Selective, again, one of the few carriers that we do business with that has partnered with us to actually help us train and bring along new producers, all the way from the process of finding that producer to then getting them into a program, helping offset that cost with us, then launching forward. With that, in our agency, we do niche marketing. We have someone that does just nonprofits. We have someone that does just banks. Taking your products, especially in the social service area, taking some in the manufacturing area, we train those producers in that segment, which makes them much more effective. Then again, we tie that in with the resources that Selective offers, really at no cost.
Other examples? I know other folks have done some pretty unique niche marketing with some of our products.
We have three new young producers, we've been doing the same thing. We try to stay generalists in nature, each of them are developing their niche. With Selective's products, each one of them have committed to a program, whether it's the garage program, the golf course program, paratransit. That's how you differentiate yourself out in the marketplace as a producer. You're getting away from price when you can talk about product risk management in those categories. We can bring an SMS out and really target those markets.
John, we've had tremendous success with a leads program over the past few years in writing small business. The leads have come in. Our AMS has helped us devise a marketing campaign to get out to those leads, and we're getting appointments and we're getting business. They're helping us attract and find new business.
John, just to touch on niche marketing and our niche products, we are a strong generalist, our niche products allow us to do several things. I think with our existing agency plan in the bottom of the soft market, our niche products allowed us to go after a new area of growth in some segments that we had not penetrated previously. Jay's agency, we've been able to write a lot of paratransit business, a lot of daycare business. Those are things that we didn't have the ability to do in the past. We came out with these niche products. There is much less competition in those areas. Those are things, again, when the rest of the market is really underpricing the standard
segments, your printers, your machine shops that every company wants. We're able to go after that really more specific segment that has a higher margin. Second piece of that is being able to go out when we do look at new agency appointments, those niche products allow us to go out and appoint some agencies that wouldn't have necessarily been a fit in the past. I know we've been able to go out and appoint some niche agencies that specialize in paratransit, agencies that specialize in daycare, agencies that specialize in municipalities or social service. That's been a significant growth engine over the last few years, both with our existing agencies and with the new agencies.
John, I may say too, that your niche products are industry leading in coverage and in service as well.
Your sense is that you can get a customer to listen on these service on coverage, and they're not just sitting there saying, "Listen, my revenues are under pressure. I just want to understand, can you save me money or can't you save me money?" How do you work through that process when you got a customer who wants to talk about price, and you want to convince them that that's not everything that they need to be thinking about?
If I can, two quick things there. Again, I said it before, price is always a factor. One of the things that Selective has done that helped our agency is with your One and Done program and the service center, we can't afford to have producers out writing business that's going to generate less than $2,000 in revenue. It's just not practical. You can't get the agency where it needs to be. We can't get the producer to where they need to be. By having that process, which works second to nobody in our office, you are absolutely first call when it comes to the service center.
Secondly, it's being able to focus on those prospects, whether they're a niche or whether they are general business that are large enough that they will understand through sophistication and through what they're doing, that bottom dollar isn't always the right buy. I've used the phrase many times. There used to be people that would buy Yugos and there's people that would buy Lexus. There's buyers for both, and it's those that they understand, they either have an issue, they know somebody else that had an issue. They need help in their risk management program. Those are the people that we want Selective in on so that, again, we can use those services.
John, we had a recent claim example where a Selective insured was in litigation, and it turned out to be our CMS did a fantastic job of mediating the claim. This is a risk that is always under pricing concerns. They work on very fine budgets and very fine margins. This particular risk was extremely pleased with the way that her claim was handled. She came out to me and said, "Thank you for putting us with Selective. Your CMS did a fantastic job." One of the board of directors for that organization came up to me, and he said, "I want to have my insurance with Selective." Price was never brought up.
We've talked a lot about the sales process on producer-driven business. A producer is going to look at the account, understand what they really need, and try to match up a company or two, and then decide to try to put it with that company, if that company can compete on it. Let's talk a little bit now about the difference in the sales process when you're talking small commercial or personal lines. Jerry, you talked about revenue below a certain amount, your producers aren't going to pursue it. Some agencies will have small business teams. We talked a lot about the differentiation and approach we're taking to try to make that more of an easy to use transaction.
Maybe Jayson, you could start on this one, but just talk a little bit about the difference of the sales process at the agency level and what they're looking for in companies for small commercial accounts instead of the middle market where the producer's involved.
Well, in our agency, when we get a small account that comes in, it's all about efficiency. For us, we have one particular rating person who understands each of the different carriers. When that account comes in, she's able to rate it up, and she'll go to the one that she knows best or that's most efficient. That's where you guys really come in strong, is with that technology.
John, a lot of the small business and in personal lines too, tends to be much more transaction oriented. Selective provides us with the automation platform to get it done and get it done very efficiently. It doesn't totally remove the personal aspect of it. We still have field underwriters. We still have those safety management folks and the claims folks that can go out and visit some of the smaller accounts when necessary. You give us the technology platform and efficiencies to get it done.
Those who would argue that that's small commercial, Jay, I'll come back to you on personal lines in a minute here, is really a commodity play. You would argue that you're still picking a group of partners that you know you can rely on, you're pricing up business and making the choice that's most appropriate for that given customer. That it's not purely the lowest price, I'm going to try to sell that low price.
No.
Go ahead.
Briefly, when I was managing partner, we would always try to identify two or three carriers to place that type of business with. Inevitably, our customer service reps or account managers would place it where it was the most easily accomplished task. Even though we might say, "Oh, we really want to build this company up," they look at me and go, "Oh, 14 steps. I can do it in four steps over here." Your platforms have in fact driven that small business your way.
Simply by ease of doing business. It is a consumer product, as you're saying, to a large extent, ease of doing business is critical.
One of the things that's helped us write new business and certainly retain good business is Selective's service center. They have people that are there that are able to answer the telephone and make decisions. They're empowered folks that have the ability and authority to get stuff done, where a lot of the competitors don't. They have to say, "Okay, well, I have to get this approved." It may take a few more days, that kind of timeframe is just unacceptable in the small business and personalized arena. We need to have it done now, it's got to be very efficient, your folks do a wonderful job. It's just as if the client were talking to somebody in our office.
Jay, you would equate the personalized process to be very similar in terms of not a pure commodity play. You're looking at the partners, and you're going to rate up business for a couple of companies and decide what makes the most sense for that particular customer?
Absolutely.
Okay. All right. Let's shift gears again a little bit and talk about E&S. We've laid out our strategy for getting into the E&S business. We've talked about the fact that it will be a wholesale-driven sales process for us, but we want to make sure that we situate ourselves in such a way we are creating connections between our retail partners and our new wholesale partners and want to capitalize on that opportunity. Just talk a little bit about, and Jerry, maybe you could start on this for us. Talk a little bit about the way that business may be placed right now throughout the wholesalers that you do business with. What kind of opportunity you really think there is for us to capitalize on more of that business through these new wholesale partners.
Yeah. Thanks. It's a great question. The whole concept is, in the excess and surplus lines market, there's probably thousands of. There's many choices and different companies, whether it's Lloyd's of London or somebody in between. The problem is you don't know who you're dealing with. You don't know if you can count on the response. You certainly don't get the services. You don't get other things. From our perspective, we were very excited when Selective got into this arena because now we have the hope that someday we will have a very close relationship with that. Now we know who stands behind this. Again, it's just like because you have the memory and the understanding of how Selective does things, how management makes decisions, you know that it's a quality product. You know that it's going to be there.
You're going to be able to trust it.
We've actually asked several of the wholesalers we deal with, are they doing business with Selective's E&S companies? If they're not, we've asked them why not, and we've tried to identify a few key MGAs out there that are doing business with you guys. Whenever I call the E&S broker to try to place a piece of business, I ask them, "Can we put it with this company?" They know the relationship we have with Selective. I certainly know that Selective will stand behind them, like you said, Jerry. The service will be there.
Okay. All right. Let's move on to pricing, which I know is a topic that everybody's probably top of mind in terms of what's happening out there. Before we get into any sort of prognostications as to where you think things are going, let's just start, and Mike, I'd ask you to start on this topic. We spent a lot of time in the prepared presentation talking about the fact that we believe we took a very granular approach, that we took a very deliberate process that had a lot of communication and was not, by any stretch, across the board and a take it or leave it type approach. Talk a little bit about your experience with that approach and what are you seeing with some of the other companies out in the marketplace relative to how they're handling the changing environment relative to firming of the market.
Well, I think I'm lucky in that most of my clients are four and five diamond clients, and we've been able to get away with 1%, 2%, 3%, 4% type of increases. I've always believed in trying to be stable and/or if prices have to go up, let's go up slowly. Let's not overreact. Let's get the prices from the clients that have had issues, have had claims, changes in operations which require different underwriting. Again, Selective's been excellent with my book of business in that regard and with our entire firm. There is a time when a higher than average rate is appropriate. Again, my career has been based on communication with clients, so they typically know a year in advance. Next year is not going to be as good as this year. Here's why.
Here's what's going on in the market, here are the losses trending, and therefore, you can expect higher than average. Again, I'm going to say Selective's been exceedingly receptive to my input on what type of pricing we can sell versus not. The larger carriers, I think we're supposed to try to avoid certain names, and I will, but there's a couple of big carriers out there right now that they're pretty much putting pricing up that's take it or leave it. It's not uncommon to get a 10% increase on an account that's been loss-free for five years, and the carrier says, "We don't care if we lose it." These carriers are putting it out in their press releases. We see it every day. Their retention rates have taken a 6%, 7% hit, yet they don't seem to care.
I'm thinking, I don't follow that line of thinking. I don't understand why a national carrier would attempt to push that much rate. We still are somewhat in a recession. Most clients' sales and ratables payrolls are in fact increasing, so the carriers are going to get more money. Payrolls go up 10%, sales go up 10%, those product lines go up. They're also trying to get rate. When you go to a client and say, "It's a 10% increase, take it or leave it," they're looking at us really hard saying, "So what else are you doing for me?" It does create opportunities for companies like you, which have, I think, a more, as you use the term, granular There's not a one-size-fits-all when it comes to pricing commercial accounts, not in the marketplace we play in.
Yeah, John, our numbers are up tremendously this year in new business. A lot of the reason for that is we're seeing very good accounts that are put out to market, and the rate is socialized across all the business that's going out from certain carriers. It's 10%-15% in some cases. "Hey, we need rate. We need big rate, and we're going to put it out. Again, take it or leave it." That's where we've been able to pick the ones that fit, the better accounts. We're able to take that data that they're throwing out with the bathwater and put it on the books at a reasonable price that everybody can live with.
Can I just add one thing? I've always been surprised at an underwriter who's been told, let's say, by management, we need to get an average 8% increase this year. I've always been shocked at how many underwriters simply say, "Well, I know how to do that. I can get 8% out from everybody." I'm literally shocked versus 2%, 3% here, 10%, 15% there. Get your 8%, but get it where you should. You can sell price to the right client under the right circumstance, but everybody shouldn't be treated, in my view, with the same approach.
John, go ahead. We thought a little bit about your modeling earlier. Again, I think your modeling is far beyond what many of the national carriers are doing. Greg, you've said it for years, being able to have that granular approach to accounts, and you live it every day. On pricing, whether you're pricing new business or renewal business, you're able to hit the mark, and having that underwriter there, that flexibility to get the price that you need, but not to run the business off, has been key.
Well, one of the things that we said, because it wasn't easy. Two years ago, one year ago when Selective said, "Hey, we got to get a couple percent." Because every % you get on your book is a big number. The reality of it was, I sat down with our producers at our weekly meeting and said, "Look, 1%? You can't get 1% from a client? Let's think about this." Because we were able to get one here, two there, maybe three or on those accounts that needed it, we got what we needed. That made it a lot better, as others have said, too. If I'm getting 1.5%, 2% three years in a row, now I don't need to get 10%. Now I can take 4%. That approach for us today is a lot easier than some of the other carriers.
We have a regional carrier that just came out and said, "Every policy here is getting a 5% bump." Some of those accounts don't deserve a 5% bump, and some deserve a lot more. That business is on the street. Again, being very inflexible, that doesn't work for us from the agency side. Again, that's where Selective said, "Hey, I need a little, I need a little." Now if we have an account that's in jeopardy, we know we can call the underwriter, and we can say, "Hey, on this one, here's what we think we got to do to keep it from going away.
That gets back to your relationships with your underwriter. The AMS is there. You're talking to him on a weekly basis. He knows who you are. He knows that he can help in those cases. When prices are starting to tick up, that relationship really does matter, I think. It's a good thing.
One of the dynamics that has been in the market as it started to turn the last couple of years was this notion that the same company would take a very different philosophy on prospective new business accounts versus what they were trying to do with their renewal accounts. Are you seeing that start to change, or does that continue to be a force out there that may work against the ongoing firming in the market?
Well-
You go ahead.
That goes back to, again, I say it is the relationship you have with your agencies. If your agents want to place business with Selective, they're going to place business with Selective based on your products and services, not purely driven on price.
You're seeing generally, though, more discipline across the market, which would indicate that this firming cycle has some staying power to it.
Yeah.
Is that kind of universal, or does anybody have a differing opinion on where we're going with price?
I think as a general rule, you're correct in that about everybody says the same thing. We've got to have rate on property. We've got to have rate on work comp. Our loss ratios verify it. Yet you'll see a national carrier, in my mind, that they're mandating double-digit increases here to new piece of business, the philosophy is different. There's still some concern there. There's still a lot of capacity, there's still a few carriers out there that you just don't know what they're going to come up with. As a whole, I would say it's certainly a lot better than it was a year ago.
John, those carriers that are still going as low as they can go to buy the business up, they're running tremendous combined ratios right now. That will not last. The business that those companies are buying right now, it'll be back out on the street again next year.
The final topic I just wanted to hit quickly, and we can open it up for questions after that. There's been a lot of discussion around the aging population of the independent insurance agency channel, its difficulty in attracting newer producers into the business. Jerry, you referenced some of the things that we've done to help our agents and partners with perpetuation, with developing very strong sales programs and cultivating new producers to sell things other than service, or something other than price, like service and coverage. Maybe just talk a little bit, and I'll throw this open to anybody as well. Talk a little bit about where we are as a distribution channel, and what are we doing to start to attract some younger talent in that are going to be the future owners of independent agents and maintain that viability of this channel?
Well, I think as a general statement, the agency side of the business has done a terrible job of publicizing who we are and the fantastic opportunity that is out there for people that get into insurance. Having said that, I was blessed to be associated with partners that 15, 18 years ago began a perpetuation plan. Spent a lot of time, energy, money putting that together. Today, 15 years later, we've transitioned the original three founders of our organization out. That was all funded. From there, we now have seven of us that are the shareholders going forward, and we continue to want to promote that model so we don't end up being forced to sell to some large national broker or something else like that. We look at it that we have a responsibility to our people.
We certainly have a responsibility to the carriers that we do business with and to our clients. The whole perpetuation idea, bringing in new people, we actually like to hire our own, train them through our own systems, so that we're not hiring people from other agencies that possibly were washouts. We have a lot of energy focused on that.
All right. There's other comments on that. Why don't we open it up to questions in the audience? I think we have a couple of microphones that we can pass around for those who have questions for the agents, and then we'll get into a management Q&A after this. Craig in the back.
Thank you very much for your comments. Perhaps you can spend a minute and talk a little bit about your own agencies, whether they've been growing commission revenue over the last couple of years, shrinking or stable. Then, I know you've touched upon it various times in the day, but when you're out there selling or awaiting at least not maybe this year, but in prior years, has there been a concern that one of your competitors might be looking over your shoulder with the carriers and offering a discount to what you're in the market with, and how have you approached that?
Okay. Why don't we start with the overall growth? Some commentary around how your agents are doing. Mike, we'll start down with you.
I'd say we're blessed and fortunate that we've never had a year where the revenue commission income, fee income was less than the prior year in spite of the recessions, the ups and downs. We never grow a lot, but we don't ever go backwards. A lot of it has to do with relationships with both clients and the marketplace. Part of that is because if we lose an account, and to begin with, we lose them every now and then, and I'd say 90-plus % of the losses come from a large client selling out, and the home office is in San Francisco, or they're not going to be buying from us. The good thing is everything we sell, the buyer has to have. That means they're buying what we're selling. We just have to get them to fire their current agent to hire us.
That's just the way we tell it. Can you fire your broker if we do a better job? A lot of times that stuns them. It's like a two by four, they go, "What do you mean? No, I'll just be making a change." No, you'll be firing somebody to hire us. The point is, you can go out and get business. If the agency has good markets and good salespeople, great service teams, then you can go out and get new business. There's a great opportunity for agencies that are properly postured in the marketplace with good carriers and with good people to continue to grow. I hope that answers your question.
Go ahead, Jay. We'll come back and hit the new business question in a minute.
Okay.
Our agency's been growing as well over the past couple of years. It's been a tough economic environment. It's been a tough insurance environment. We too have been growing. Yeah, we've experienced growth every year like Michael has said. I think it comes back to if you've sold strictly on price, you're in trouble, for several reasons. They'll move for price. If that client's only concerned about price, they maybe aren't even around today.
Again, I can't emphasize enough what it has meant to us to be able to partner with Selective to use the resources that you've made available, whether that's CIB to help recruit and train, to do additional training for our people, for the loss control staff, for being able to offer the training videos, things of that nature, to educate our people, to make us better at what we do so that we can find those clients that truly are interested in more than just the bottom dollar.
Jason.
Absolutely. Our agency has also experienced just a nice, steady growth over the years. Partners with Selective make it possible to continue that growth. Again, we brought in three young producers a couple of years ago around the same time that we partnered with Selective. The amount of training and effort that your people put into our people is second to none.
Let's come back around, and we'll start with you, Jayson, on the second part of Craig's question, which was more about the changing environment out there. What was it a year or two ago, you, as agency owners, probably had a pretty good sense as to the market dynamics and what was happening out there, where you could envision where a lot of producers were scared to death to try to sell a rate increase of any kind because they figured there was another agent knocking on the door of that client with a company or two willing to come in with very low pricing. How do you overcome that, have we seen that really change? I think that kind of captures the essence of the second part of your question, Greg.
I think it gets back to what Michael said. As far as communication with our clients, as long as you are communicating with the client a year in advance, the relationship's there, that really does help when you start having to talk about price. If they're not expecting it, that creates all sorts of problems, if you're out in front of the client and you're communicating with them efficiently, typically, it's not as big of a deal.
If I could share a real-life case that goes to the question perfectly, that is, a year ago, it was a Selective renewal, I had another agent come in, my client said, "Look, we're not looking, but this guy's wore us down." I said, "Okay, that's fine.
Nice story.
That agent came back, and they were 25% less premium than what we were. The client called and said, "How can this be?" The implication is we've ripped them off, right? I said, "First of all, who's the carrier?" He said, "I won't say." I said, "All right." We identified who the carrier was. I did some quick research on that carrier, probably took me about an hour. Lo and behold, five years earlier or so, they had come into Michigan, where I'm from. They had gotten burned because they did low price, and they were gone again. Here they came again for the second time. Again, they were selling strictly on price. They came in, they were trying to undercut the market, and I just laid it out for the client, and I said, "Look, we've been with Selective.
It's been very stable. Look at their financial rating." Talked about a couple of claims we had over the years, how that experience went. That was a done deal. They stayed with us. It was no problem.
We've been very fortunate in that there have been several agents in my area that have been selling on price for the past several years, don't know how to do anything but sell on price, and that have got no relationship with their clients. They're out here, they're just telling the lowest price. If we can come in and establish a relationship with the client, bring the additional value-added services that a company like Selective offers, it's easy to seal the deal. Now upon renewals, if we're seeing, again, consistent, steady, and even moderate price increases, the client's staying with us because we're out in front of the client. We've got that relationship. We're talking to them about coverage, and they know that they've got a complete insurance package.
I was just going to add to it, John, that we mentioned during the course of the presentation, the portfolio approach. We're working with our agents every day to figure out where are we in the buying cycle, which customers are shopping their insurance, where do we need to be from a pricing standpoint. There's a lot of back-and-forth conversations to figure out where the price needs to be and what we need to do to retain the best accounts. You would think that would be common sense and that would be done, I will tell you, in the P&C space, it's pretty rare to get those kind of back-and-forth conversations, and typically, a price will just go out and an agency, again, it's take it or leave it.
That's been something that we've deployed over the last couple of years, that portfolio approach, and we've been able to keep our retention up and fight those situations off where somebody's shopping for price.
John, I may also say that very few, if any of our other carriers do that and offer that to us. Selective's very unique in that.
Yes. William.
Just two questions. Firstly, do you all quantify the value of your relationship with Selective relative to other carriers in your agencies in terms of loss ratio in your business flow? If so, could you perhaps quantify that in terms of some numbers? Secondly, do any of you all have a material business revenue stream in personal lines? Perhaps you could talk about whether Selective has a similar representation in personal lines as they do in their agencies in commercial lines.
All right. Let's start with the second question first, because Jay is the obvious one to handle the question around your mix of commercial and personal and how that compares with Selective's mix of personal and commercial. Jay is the obvious one because the other three agents are from Georgia and Michigan, which because of the overall environment out there, are states we choose not to do personal lines in, but certainly in South Carolina, we do. Jay, why don't you take that, and then the rest of you could queue up your responses to the first question about quantifying value.
Our agency is half the revenue comes from personal lines, it's very important to us, and it goes by the relationship we have with Selective. They bring the same tools they do in the small commercial and large middle market business to personal lines. They offer fantastic modeling, a rating platform, rating support, the field claims folks are all out there at our disposal, and we've met with a lot of clients with the field claims folks. Once again, you can say, "This is who's going to be handling your claim." That means a lot to them. Personal lines, again, is very important for us. It's, again, a very material part of our book. We look to continue to grow that book with Selective. Selective has given us some new initiatives to help increase that book by cross-selling with the small commercial accounts we have.
Again, you've given us the tools to get it done and write new business with you.
We do measure our share of wallet at an agency level, both commercial lines and personal lines, versus what they do overall. We know where the opportunities are and where we may not be getting a fair share of one or the other. It is our expectation to get in there and build a balanced relationship. The second question, which is going to be, I think, a little bit more difficult, is the actual quantification of the value when you think about Selective or another company. You okay back there?
Yeah.
Is there an attempt to quantify that? When you sit down, either on an annual basis, whatever it may be, and say, "Okay, let's look at the carrier partners we have, and let's decide where do they rank right now, who do we want to try to grow with and who don't we want to grow with?" Is that a very subjective discussion, or is it very numbers based in your analysis?
Well, we are commercial only, 1%-2% personal lines, I can't say anything to add to what you said there. Fee, commissions, and incentive agreements with our carriers are our three sources of revenue. We endeavor to not overly focus on the revenue, quite frankly. I've always felt like take care of the client, the revenues will take care of themselves. Selective, fortunately, pays a competitive commission schedule on commission business. If it's an account we need to do net and charge a fee on instead, they can do that. Their profit sharing or incentive agreements, we think, are fair and in line with the industry. We think they're appropriate. I know there was a lot of talk in the press, especially here in New York a few years back, for obvious reasons. I guess no names there either.
Agents were almost tattooed for the incentive agreements. I've always said, if I place very good business with a carrier year in and year out, 20%, 30% loss ratio, meaning way under their normal loss ratio, I should get paid for that, as a broker. We've done a very good job in our firm of attempting to have really good loss ratios so that we can drive those incentive agreements as they should be, and it's a fair share. I think Selective does a great job in that arena. Hopefully that answers the compensation.
Honestly, I would expect our agency partners to struggle with that question because, for the most part, we don't do business with a lot of agents that are going to be focused on what's my total compensation going to be with you versus carrier X or carrier Y and are looking at it as more of a long-term relationship and do what's best for the customer relative to coverage and service.
I'm glad to hear that there's not a ranking, and we would be surprised if we heard that. There are agents out there like that, but I think our approach has always been to partner up with companies or agents who believe in selling service and coverage. I think Mike said it perfectly.
The revenue will take care of itself. Other questions? Jay?
Thank you. I have a couple of questions. Has the number of carriers you deal with, has that number gone up or down? Just curious about that. Separately, to try to be more give some constructive criticism, let's say, to Selective, are there things that the company could be doing better from your standpoint that you'd like to see?
You want to start? Let's start on number of carriers first, we'll hit the other one.
We would probably-
I want to give that plenty. It's not going to come easy for me-
Yeah
to come up with an answer on the second one. We got to give him a lot of time to queue that one up.
The number of carriers that we operate with in our office has really stayed pretty much the same. We do, however, evaluate our carriers every year. We are looking for the things like financial strength, what are they doing in the marketplace, what kind of people do we have that we're working with, their quality of that knowledge, and so forth. We've separated ourselves from some, but then we'll look, does it make sense to add somebody? There's got to be a reason. There's got to be a need.
Like Jerry, we remain pretty consistent in the number of carriers that we do business with. There are carriers knocking on our door all day long to come offer new products to us. I personally have the feeling, and as well as my partners, that if a company like Selective can come in and provide us with the products we need to get out and sell, I don't need to bring this other carrier in. Typically, the only thing they have to compete with is price. I know that's not going to last, where Selective offers a lot more value. We're placing that business with Selective.
Yeah. Numbers pretty much consistent, like you're saying. A lot of companies get absorbed, carriers go away, Harleysville gets acquired by, and things like that. It seems like we lose one to a merger and acquisition, but then gain one through a specific need. The numbers seems to stay about the same. I will say this, though, most agencies, I would speculate, would have somewhere on the order of, I'm going to speculate, 75% of their business with the top three carriers. Most carriers want to be in your top three. It does seem to happen, that inevitably the majority of your business will be with approximately three carriers, and then you have the other niche players that fill in the blanks.
The only thing I would add as to what Selective could do differently, and we talk about this all the time, I'd like to see them go all the way to the Mississippi River and then fill. In Georgia, we do a lot of regional business and global, but a lot of our clients that were in Alabama or in Florida or now that we're in Tennessee, that's great, but we would like to see them have a better model for helping us write the accounts in the neighboring states. Especially when it's just there's three cars in Alabama, what are we going to do with it? They have a field office in Mississippi, and all of a sudden you have a nice account that you just can't quite put with Selective. I'd like to see them increase the footprint commercially.
Now that you've all had plenty of time to rack your brains, any other, in addition to geographical expansion, that you'd like to see Selective improve at?
I think from our perspective, we would just like to have more of what you do for us now. You continue to invest in not only us, but you continue to invest in your technology, in the products. We haven't talked a lot about coverage forms today, but that's one of the leading things that we look at and that Selective does so well. In fact, even those situations where we need a manuscript or a special endorsement added to a policy, Selective has been able to do that for us, in some cases within 24, 48 hours, where a national carrier would just drop their jaw. There's no way they could compete with that kind of a thing. I think it's just really more doing what they've done already.
I'll put a little different twist on that and then go back to the question prior to that in that I think I would quantify the relationship with Selective and say you're number one. You're number one in premium volume with us and to the loss piece of it that goes back to the franchise and protecting that franchise value. We're very selective in what business we're going to put with Selective.
We don't want to put a risk that would chance ruining a loss ratio with them, and so we protect that relationship and protect that franchise value. As far as what Selective could do better, really, I look at it as what could other carriers do more like Selective to drive more business in?
Any other questions?
Thanks. Yeah, I was just curious on the agency field model, which is obviously one of the attributes everyone has talked about being the best for Selective. I was just curious, there's only another couple of carriers that have this type of model. Why don't you think other carriers have gone a similar route and tried to emulate that model, the field agency model, similar to Selective?
What's the question? Why Selective?
Yeah. When you note the success of that model for the few companies that truly have it, why haven't more companies done it?
I'll just throw out real briefly. Too many carriers, I think, are now specialty underwriters in a sense. Travelers hates the word silos, but they still have them. They'll act like they don't, but they have so many different units, construction technology, FIB for banks, et cetera. If they were to have an underwriter calling on us, a Travelers underwriter, a field agent, a field underwriter, they would have an underwriter that knows how to operate with their 21 different business units. Where Selective is, while still a generalist, they have figured out a way to get the support where it's more or less invisible to us. As they've shown in all these slides, they have found a way to have that AMS call on us, be highly trained, be there all the time, yet have the back room support to back up that strategy.
I don't think the other carriers have figured it out.
Yeah. Maybe just play off that a little bit, that is, as Michael said, our AMS, our field person's very good, has a great knowledge, but as soon as there's something that they're not sure or comfortable with, they have someone that they can pick up the phone immediately and talk with someone that's an expert in that area.
I think that's what really makes a difference. A thought I had earlier was when we think of Selective, I'm speaking for my organization, we don't think of the name Selective. We literally think of the people that we deal with day to day on an ongoing basis. When we think of some of our national carriers or even some of our regional carriers, we think of their advertisement, their logo, their insignia, whatever. It's a total difference in that relationship through this model. I can't emphasize enough how big a deal that has been for us.
Yeah.
Selective is by far. They grew faster than any company that we've done business with. They're number 1 in our organization. We do 7 digits of premium with them year in, year out, we look to keep doing that.
The question was directed at the agents, the other thing I would say is, we know this from firsthand experience, it's hard to build that kind of a business model. It takes a long time, it takes a commitment to it because you're going to go through a lot of growing pains. We've certainly had our fair share of growing pains, it is not easy, you've got to start with the right people. I think that's also a challenge to make sure you get the right people and keep them. John, I want to jump in quick.
I was just going to say that the other piece of that
We have the technology to support that field-based model, that's not something you can grow overnight. Our technology, you can do everything you need to do from your home office. You can do everything you need to do from a hotel room. It's set up. It's all internet-based. Most companies don't have the capability to just roll into a field model their current infrastructure. We've seen them try it and then have to tweak it a bit because the workflow is real clunky, that's something we have 20 years invested.
We have time for one more question if we have any other questions. Well, I want to just thank the panel. With that, we're going to turn it back over to Greg. Thank you, guys.
Thank you.
I think when you think of strategic competitive advantages. It's on, right? It is on. Telling you it's on in my pocket. There you go. Just a little technical problem in the back. This is not our high tech, I want you to know. This is the hotel's high tech, just so we get clarity around when you guys nail me later on, you can understand that this is not our part of it. Let me just sit there and try to get the day together for you. When you think about strategic competitive advantages, I would hope that sitting here listening, there's two things that come to mind. First is relationship.
When you think about other companies and they talk to you about the relationships that they have with agents, you can sit there and ask them, "Hey, what's your agency survey scores look like? What's your premium volume in every one of your shops? Hey, do you sub-segment your agents into elite tiers and semi-elite tiers when you sit there and start to characterize how well you're doing with your franchise?" I'll tell you, we don't do that. We sit there and look at our agents. We're trying to increase our shelf space with our agents across our geo-locations. The other part, I think when you think of strategic competitive advantages that should jump off the page to you is execution.
When you sit here and look at everything that we're doing, pricing, what John talked to you about in terms of the customer experience, that's a game changer to us. We view customer experience and the investment, which is tremendous at the board level. We're looking at a good size investment holistically for that is no different than the discussions we had with our board members back in 2005 relative to when we needed to get into modeling, why we needed to get into data warehouses, why we needed to have seamless capability to deliver to our people. Because we made those investments is why we have the flexibility that we have today to be able to provide people actionable decision-making capability. I think that hopefully resonates loudly to you. Really, our success really is driven by the empowered people.
You heard it on the underwriting side, you heard it on the claims side, you heard it on the safety management side, you heard it on the inside underwriting staff within the SBUs. Everything we do, we try to make sure we have empowered people operating through very deep relationships. We always focus on relationships holistically throughout the company. Then how do we make sure we supplement that with the best decision-making capability possible, whether it's on the underwriting side, which we talked about, third generation models that we're into. This is not the market that you would want to be rolling out your first generation modeling. I will tell you that. You are going to get killed.
When you think about it, then the other part, what we're doing on, just like we invested in the underwriting side, now we're investing, like Doug mentioned, on the claims side. We've done a lot in fraud, we've done a lot in recovery, now we're moving a lot into triage, and those are ways to harvest more money out of your claim inventory to make sure you're maximizing every settlement possible in the marketplace. Those are the things that you need to leverage in this kind of market if you want to have a difference and be successful as a company. Dale took you through, I think, the waterfall chart, and it gave you a sense of what it is we're putting on the table.
We're not putting anything big on the table because he talked to you, three years of 5%-8% pricing. Think about that. The average on that is 6.5, compound that for three years, it's a 21% commercial lines rate increase. Like I said, I've been in the market 30 years. A 21% rate increase in a hard market would be the first year, maybe, you would see. We are not stepping back and saying, "Wow, we're expecting something very big to happen." If something happens larger than that, then we'll take advantage of it in the marketplace. We're very measured in that, and as a result of that's why you see our loss trends staying at about three.
If loss trend goes higher because you see more in medical inflation, you see more cost shifting, you see more other things happening, home repair, your rate level needs to go higher. As that inflationary aspect kicks into the market, your investment income numbers are going to move up. One number just doesn't move by itself. They all move in their own different directions. You just need to understand how they move and how you take advantage of them in the marketplace. I think when you go through every element of this, I think you had a really deep dive into the different things that we're doing as an organization to get to that 12% ROE. We feel very confident that we're on the right track. Our agents is the highest franchise, I will tell you, in the marketplace.
We could have put any four agents in front of you. You would have heard a very same story with a New Jersey agent, Pennsylvania agent, wherever it's from. You would hear a very consistent story to what you heard here today. With that, we'd love to open it up to questions now on the management team that you have, this is your opportunity. With that, we'll turn it up to questions. Jay, you're first up
Two questions, one the bigger picture, one a bit more specific. I'll start with the bigger picture. It was an impressive day. It really was, you showed how you distinguish yourself from others from an operational standpoint. The agent panel was really phenomenal, as it always is. I go back to one of the charts Dale showed, where the volatility in earnings was less than others, what it does show is that your combined ratio over the time really wasn't any better than the industry's at that point. Despite the fact that what we heard today was very impressive, you don't see, at least as of the last five years, more impressive underwriting results, I'm wondering why you think that is. The second one is on the claims side. I'm wondering more specifically, how do you get those three points off the combined ratio?
What are the key drivers of that improvement with the changes you're making on the claims side?
Yeah. All right. Fine. Why don't we take the first part first? I will tell you that, first of all, we match our numbers up against regional companies. If you look at the five-year combined ratios for the time period you mentioned, we actually were the best performing regional relative to the companies in our benchmark group that we look at. Relative to the nationals, you're right, we are more mixed in there. I think part of the performance issue is the fact that it's been very difficult to deploy any kind of pricing thing in a marketplace where we are clearly, as I like to say, the first deer across the alligator pond. We've been very much dialed into that.
I would think that, relative to the regionals, which we have to compete in the marketplace, where for everything you heard of later today, we're the best performing. Relative to the nationals, there's more room to improve. Part of that, I think, is a mix of business issue relative to some of the higher margin opportunities that Dennis and John talked to you about. Our business was more, not generally characterized, but more in the middle, Main Street style business that's a little more highly competed for in the marketplace. I think also the fact that because we did such a heavy construction book. I think Denny mentioned to you, we were 45% construction four or five years ago, and now we're down to 34%. As that market went, it had a pretty big tail onto us as an organization overall.
I want to say that, at the same time, we were growing, as Alan mentioned to you, growing our personal lines book, and as we grew that book, it was a relatively new book to us, and we had big new business penalties. The other thing I would sit there and say from an actuarial standpoint, we seem to be much more disciplined in how we set our reserves, how we look at our new business plan, and all of those things, I think, weigh into that. Dale, do you-
Yeah, just maybe a little bit more specific on the numbers is if you look at that timeframe, personal lines during that time, as Greg indicated, we were growing that. It was actually a drag on our overall combined, while you look at some of the other competitors, and it was favorable to their combined. The other thing, if you just do a straight numeric on the contractors that Greg talked about. If you take our contractors book, call it a 40% average during that timeframe, and you move it to the 17% average that you see as the business demographics and adjust the combines for that, you see that we're spot on where Travelers has been performing. Those are the two big drivers in terms of a pure numeric standpoint.
I'll try to handle the claims question. I can tell you that internally, there's a set of very specific initiatives that we actually measure the actual dollar savings impact. If you were to look at that three points of savings, you could split that between things that are clearly measured and things that are just going to come through in improved outcomes over time. You're going to see them materialize through quicker cycle times, higher disposal rates on the litigation side. In terms of specifics, there are things that we measure, like the introduction of fraud and recovery models. You could actually see the change going forward in your identification of fraud, your ability to recover. That's one area.
We do some things in terms of Doug talked to you about estimating tools and being able to make sure that you're pricing up your contents losses appropriately. We've got some tools in place where you can actually see a change over time, and you can specifically measure and attribute to that particular instance. You could look at back to the cycle time issue, a lot of things Doug talked about in terms of specialization. What we've done in the workers' comp arena, getting fast track claims into one person's hands versus lost time claims into somebody else's who are very well positioned and trained to handle those cases more effectively. Those are the things that are on the more intangible side.
I could tell you that there is, in fact, a list of probably eight to 10 specific initiatives that targets are established for that you're measuring against, very specific, very tangible. There's other things that you're going to see through improved outcomes that you have related measures, sort of leading indicators that say if these things move directionally, I mentioned cycle time, I mentioned disposal rates. If they move directionally, that's a pretty good indication for us that we're getting those less measurable or attributable savings along the way. Those items are, in fact, tracked pretty closely. I think you would've seen in the proxy, in particular on the cash incentive program that employees are measured on, you could actually see some of those tangible numbers tracked and feeding the bonus pool.
Greg in the back?
You mentioned and talked about your predictive modeling a number of times during your presentation this afternoon. I was just curious from a big picture perspective if you could give us a sense on how your predictive modeling capabilities differentiate between unusual or large loss anomalies versus something that might be more systemic at a particular account. Then a very specific question. I think in one of the slides I saw a 95 combined ratio target for 2014.
Just wondering if you could comment on that as well.
Yeah. You want me to hit the first question first on the modeling side? It's a great question. Without going into too much detail on the proprietary aspects of the model, I could tell you that the variables that attribute to individual loss experience, whether frequency or loss ratios, you are in fact using a capping approach to make sure that an individual loss, either on the loss frequency side or loss ratio side, is not unduly influencing the outcome on that particular account relative to loss experience. You want to make sure that you're seeing more of a pattern than an individual loss that may be explainable, make one account, turn a good account into a bad account.
The other important thing to reference there, you heard a couple of the agents on the panel talk about this as well, is I think we've gone through a learning experience as we've introduced the model output to our underwriters to also recognize that there's a lot more to underwriting a commercial account than just looking at a predictive model output. If you think about, say, with the loss experience issue, you may have an account that has poor loss experience, as a result of it, may in fact score poorly. Now if you interject individual underwriting judgment, they're going to know things about that account that they may be able to say, "Listen, this is what it was that caused these losses. Okay, they had unprotected equipment," whatever it may have been. They've been addressed.
On a go-forward basis, we feel comfortable with this particular account, maybe not looking on a go-forward basis like it may have looked historically. I would say you've got loss capping to mitigate that, and then you've also got the introduction of other traditional underwriting variables beyond insurance scoring to make that determination as to the quality of the account.
As far as your other question, I'd first like to refer you to Jennifer's first slide regarding forward-looking statements as a reference. Number 2, yes, you're right, there is a slide in there that indicates clearly that our expectation is to get to a 95 combined ratio by 2014, which will generate a 12% ROE. Obviously, it's predicated on a number of things, the largest being 5%-8% average price increases over a three-year timeframe. That is definitely what we believe our current plans will lead to.
Thanks. Maybe can you talk a little bit about the personal lines business? I think there was a slide that showed your guys' target over the next five years, about 20% of your business being personal lines. Is that going to be driven by geographic expansion? Maybe just comment on the average, I guess, seasonality or season of the books. If you move into new territories, how are you planning to manage those two?
Great question. With regard to geographic expansion, there's another state or two within the remaining nine in our footprint that probably makes sense for us to consider getting into in personal lines. I would say that the bulk of our growth over the next few years will come from existing personal line states. As Alan mentioned in his presentation, we're also adding some agency storefronts where geographically it makes sense for us. You'll get some benefit, not just by better performance in your existing agency plan, but by adding some new agency storefronts where you may have geographic gaps within that particular footprint. With regard to the age of the book, and I don't want to throw specific numbers out there, but suffice it to say that with the opening of new states, and we opened four states in roughly the 2008 timeframe.
We got into Wisconsin, Iowa, Minnesota, and Rhode Island. Wisconsin was kind of a reopen, those are the four of the newer states. That business has got 0 age to it. If you were to look at our overall book, it's a New Jersey versus non-New Jersey story. New Jersey average age is clearly in the double-digit range, non-New Jersey average age is clearly in the very low single-digit age because you've got a lot of new states feeding that production. There's a new business penalty associated with auto insurance, no matter how good your models are, that you're just going to incur.
As the book ages, which it will over the next several years, that in and of itself, in addition to what we're doing on the underwriting side and what we're doing in pricing above loss costs, will together contribute to the improvement in the auto book that we expect to see. Not terribly specific in terms of the average age, but you get a sense as to the difference between New Jersey and non-New Jersey.
I would just add to that in terms of when you think about why retention is so critical, to give you a sense of that, new business penalty in commercial line runs about 11 points, personal line is like 19. Just to give you a framing of the difference. When you think about how important it is to balance rate and retention, you think about it, if you have a retention of, let's say, even 80 or 81, 82, 83, in that neighborhood, you got to write 20% of your business new just to stay even, theoretically thinking about it in that holistic view. It's very important that if you're going to improve your profitability, that an integral part of your profit improvement plan is your retention strategy.
When you think about our retention strategy, it was woven through today, but I want to restate it so it's clear. We're balancing that one risk at a time. Our inside underwriters have an enormous amount of information, it's not just modeling. There are probably 16 or 17 or 18 different variables that come into play when they figure out where they are in their pricing. That's very important. As important that is our service, claim service, safety management services, the services that we lay on top of that account so we don't lose that on that front. Think about it overall from a customer experience standpoint. We want to improve the customer experience to have a best in class so we improve our retention.
One of the things, even too, tying it back to what John mentioned on the claim improvements.
When you think about it, if you've got better access to getting report notifications on claims faster, that allows you to start the triage process quicker. That allows you to keep the rental days down. That allows you to do so many other things, get that maybe a claim in network faster, and particularly if it's a state they have more trouble directing care in. If you get that claim instantly and get it in network, that's a huge opportunity for saving in network aspects. All of those things really tie together when you start thinking about the bigger picture of profitability and what it means. It's not just price. It's all interwoven to make the fundamental improvements that you need to do. We are comfortable with the path we're on for personal lines. We look at a number of different ways.
You heard multiple references to metrics. We measure the incoming business on both auto and home by every underwriting variable that we have to make sure you're looking at hit ratios in particular, because if you have a gap in your rating plan, you're going to see it come through there first because you're going to see high hit ratios or excessively high hit ratios based on a certain characteristic. That's why we feel comfortable that the model is working correctly on the personal line side in terms of identifying quality risk and also establishing the appropriate pricing level for that particular risk. Then on the homeowner side, you heard that really is just an overall rate story for the entire industry, in addition to the quality in terms of the mix of business that we have coming through there. Other questions?
On your E&S business, can you just remind us what your expectations are for premium relative to that $120 million that was prior in those two companies? What your expectations are for combined ratio? Then just lastly, you mentioned your agents, I think it's $300 million or $400 million.
3 to 400. Yeah.
How much do you expect to write of that agency business this year and going forward?
The combined books are $120 million, as you indicated. Our expectation is in the first year of operation, it'll be somewhat less than that, not completely the 120, because there's a number of things that we wanted to tweak a few things with regards to some programs maybe that we didn't like as well. Still substantially similar to that kind of a dollar amount. The expectation, as you saw on one of Greg's slides. We're squeaking. What do you want me to do? This way? Into the light? This way? Can you hear me now? In one of Greg's slide indicated that in a five-year timeframe, that would represent 10%-15% of our overall production.
We haven't provided any guidance with regards to combined ratios other than to say that historically, the contract binding authority business performs 6 to 10 points better than standard commercial lines, and it is our expectation to get the performance to that range over time. In terms of the growth, there's three real avenues of growth for that particular business over the next couple of years. The first one's going to be as the primary, the standard market starts to firm, you're going to start to see business moving back into the E&S market. That's clearly going to drive growth. The second opportunity, in addition to the pricing on the other business. The second opportunity is you've got about 90 wholesale relationships across 50 states for the two companies. There's an opportunity for them to add wholesalers.
The third avenue is the one you cited, which is taking advantage of that, what we would estimate to be $300 million to $400 million of contract binding authority that our agents control. For us to sit here and put a number on it would be very challenging because the first thing we need to do is make sure that it makes sense for our retailers to connect with the wholesalers that we have, to make sure there's a geographic match there and a relationship match. We're going to learn a lot more about that in the next several months. The other piece of it is once those relationships are established, you've got to have an appetite match.
For us to sit here and say it's going to be 25% or 50% of that $300 million to $400 million would be a little bit of a shot in the dark, but I can tell you we're going to get a better understanding of that over the next several quarters.
Just one follow-up. What are you doing specifically to make sure that the underwriting margins in that business are consistent with the overall company?
I would say there's a couple of things there. First is making sure that we have the right people with the knowledge base to put the underwriting and pricing templates out there, and I think we have that, and I think we've tested that and feel very good about it. The second piece is a lot of the sophistication that we talked about from a data warehousing perspective, from a price monitoring perspective, are things that weren't resident with either one of those operations. Our ability to bring that sort of back room support for them to really understand what's driving their performance, what do they need to do to improve their performance, our ability to deliver that to them, I think, is going to allow them to really understand the business.
They're going to have to deal with some top-line volatility as they stick to their guns through those market cycles. I think to this point, both of those operations lack a lot of that sophistication that we could bring to them that I think will absolutely help them manage their business going forward. The only other point I'd like to make, and because it was touched on before, is that we try to pick the lowest risk way to enter this business, which were two renewal rights like deals. That's a positive from a sense that you don't have unearned exposure. You want to cancel a program, you can do it like that. You don't have any reserve risk relative to that.
It is a more expensive way, given the new deferred GAAP accounting rules in terms of expenses, because if you think about it this way, we have a fully capable operation to handle combined $120 million of business. You've got that entire expense run rate coming through against a very small amount of earned premium. During this transition year, you're going to see that impact the numbers, and as we get into a better steady state, it'll normalize it because unlike statutory accounting where you're amortizing the expenses over the written, on a GAAP basis, you can only defer truly variable costs for the most part, which means everything else gets expensed. We've got a fully functional operation, but only earning premium at a run rate that will build up over time. I just want to make sure you guys understand it.
The benefits are lower risk. The detriments are it comes with a bigger price tag up front in terms of your overall expense ratio relative to that operation. That's just a give and take relative to what you need to do.
That's in your guidance for this year?
Yes. The question is that in our guidance for the year when we sat there and gave guidance at the beginning of the year? Yes, it was. Any other questions? All right, well, first I want to thank you for you investing the time to learn about a little deeper knowledge about Selective. I think it gave you great exposure, insights what happens at the agency level. I think it also provided you an opportunity to see what makes us truly unique. When you hear the words franchise, agency relationships, nimbleness, you will truly equate that with Selective in terms of the best franchise in the marketplace. Thank you very much. Thank you.
We do have cocktails right across the hallway for those of you who are thirsty at this point in time. Straight across. Feel free to ask anybody any questions there, too.
All right.
I've given them instructions not to get too liquored up before you start asking them, though.
Thanks, guys.