Going to march bravely along. This is, I believe, our final session for the day, and I am very excited to welcome John Marchioni, CEO, and Patrick Brennan, CFO of Selective, back to the KBW Insurance Conference. I am going to start asking John, Patrick, for any opening comments that you want to make.
I would say let us jump right into the questions.
Okay.
Cover everything along the way.
Perfect. We just had an AI panel. One of the things we want to accomplish with this conference is for people to take away really concretized examples of how companies are using AI. I am not necessarily saying our expense ratio will go down by 100 basis points. If it is, that is great. More broadly, so that we can move from the original big picture themes to practically speaking, these are the differences that we are seeing in our operations, and to whatever extent you are comfortable, what is coming next?
Yeah. Sure. I am happy to start, and Patrick could certainly jump in and fill in any of the blanks. I will stop short of giving away any great ideas to our competitors.
There is that.
I think most of us are doing a lot of exploratory work and trying to focus on all the key areas that impact performance in our business. Ultimately, I think there are opportunities to impact every aspect of our performance. So let me just say that out of the gate, from expense ratio to loss and loss adjustment expense. Our view continues to be that if you win in this business long term, and this has always been the case, and we think it will always be the case, you have to consistently execute the fundamentals better than your competitors. What are the fundamentals? Identifying exposures and controls on an account-by-account basis. Based on that analysis of exposure and controls, getting the right price for the right risk and the individual attributes around those exposures and controls.
Claims adjudication, getting to the right outcome in the right time with the right claimant experience along the way. Your ability to enhance those fundamentals and amplify the impact of your knowledge workers that are executing those fundamentals is where all the value creation is. So I will say that out of the gate. There are efficiency opportunities that I think are the first things that we and others are harvesting. Very easy to measure. There are tasks that were done by people that can be fully automated, are being fully automated, and create significant efficiency that can be attributed based on the investment that is being made.
When you get into improving outcomes, that's where it gets a little bit harder to attribute because you're talking about impacting your loss ratios and your loss adjustment expense, which are also influenced at any given point in time by a host of other variables. I think, and you heard pieces of this throughout the last panel discussion, and there was a reference to quality assurance as a way to validate, and I think that's a great example and a great test case. I think the real power comes when you could take quality assurance and what tends to be an after-the-fact, backward-looking evaluation of decisions that are getting made, and convert that into real-time guidance. So guiding your knowledge workers through decisions they're making, through the judgment they're exercising, so you can actually have an impact before an outcome is determined. That's where the real investment is.
The other thing I'll say, and I think this is just part of the evolution of the implementation of AI, is it all started with developing tools and putting them out, or in many cases, these tools were developed by third parties. Putting them out into your employee base and hoping that amongst the thousand flowers, something will bloom. I think we've all gotten benefit from that. I think the real opportunity now at this point is to embed this knowledge and guidance into the workflow so that it's no longer hoping or encouraging employees to take advantage of these tools on a creative basis, but actually at an enterprise level, figuring out where the value creation is and embedding that into workflows. I think that's what'll really start to impact risk selection, individual underwriting decision-making, individual claim decision-making.
The final thing I'll say, and I guess this is sort of an angle with regard to efficiency, but I think it impacts ability to create differentiation in our business, is some of the earliest adoption and successful adoption of agentic tools is in the software engineering space. Which essentially allows us to dramatically increase the output that we're getting in terms of capability building in our technology for every dollar of investment we're making. So what was a dollar of investment for a dollar of output or value of output is now 2X, 3X, potentially 10X down the road, and I think that creates a much greater equalization from midsize carriers to big carriers in terms of what you could actually accomplish with the same dollar of investment. So those are a few areas I'd highlight.
I think maybe one additional theme that I'll touch on that the prior panel touched on as well is just the concept of change management and organizational readiness. Clearly, institutions that have established processes and ways of doing things, when you bring technology to that, change management becomes incredibly important. We're very focused on that, but I would say we also have made investments in terms of AI fluency across the organization. So we have required training. So to answer the question that was indicated to be asked of us by the prior panel, I will proactively answer it, that we do have training for every employee as it relates to AI to create a foundational element there, but then curated learning journeys based on the various roles that people play and/or their expressed curiosity. It's interesting.
We had a conversation, John and I just did yesterday with our senior leadership executive team that stewards some of these activities, and we have pieces of AI capabilities that are available to folks, but it's been like a soft launch, and a number of folks who have actively found their way to it and explored in it has been really encouraging in terms of the internal demand for it. I think there's a lot of excitement around this. I think, as John said, we need to make sure that we focus on delivering the fundamentals, driving better outcomes, enabling folks to make decisions in a more expedited but high-quality way to bring their job enjoyment up and our overall efficiency up as well.
Okay, fantastic. I do feel like I need to touch on other topics as well. I find this to be fascinating, and I'm saying that because in my own 55-year-old experimenting with AI, at first I couldn't get it to work, and now I can. There is hope and it does make a difference.
User error. Yeah.
You'll understand when you get to be my age. I want to ask another question, and I first formulated this question, it was much more theoretical and became much more practical. There's this change in the brokerage world where the big brokers that have historically focused significantly on the large account world have expressed an interest in the middle market and small accounts, so in the Selective arena. What are the challenges and opportunities to a company like Selective as we see the bigger brokers say, "We like this space now"?
Well, I guess first and foremost, they are accessing this space through acquisition. They are acquiring existing operations that we have a strong relationship with. I am not suggesting it is more of the same because clearly they might have a different end game in mind, but we have the benefit of, and our distribution model has always been one that was focused on fewer partnerships, but deeper partnerships with a smaller number of agents. As a result of that, it has made us bigger with a lot of these larger firms who have identified the small and midsize market as a place that they want to be.
But we enjoy a strong position in those markets, and over a long period of time, decades, have demonstrated the strength of our product, the strength of our service experience, the strength of our consistency from an underwriting perspective that I think puts us in good stead. As a result of that, they are another distribution point for us. They are a bigger one, and they might think about the world differently. I think the bigger question, though, is what is the winning model ultimately in the small business space from a distribution perspective? It is not necessarily going to be decided by purely scale. It is going to be decided by customer value creation. Ultimately, the small business customers are the ones that are going to decide, where am I getting the greatest value for the investment I am making and the partner I choose?
I think that is the open question to be answered, which is are these scale players going to come in and find new and different ways to create more value than a smaller, standalone, traditional independent agent might find for them, or create for them. I think that is a to be determined question, and I think it is something that we have to make sure that we could successfully create value for distribution partners of all different types, whether they are large consolidation platforms or they are small, traditional, independent agents, because they are both important, and they both continue to control a significant share of the market. We think we have got enough optionality in our underwriting model to serve both effectively.
Okay. Patrick?
I don't have anything to add.
Fair enough. We'll go with that. I'm going to follow up a similar question and focused on big companies. Selective has, for a long time, done very well in the small commercial space, and we've recently heard, recently over the last couple of years, a couple of major competitors, one, let's say, coming down from the major account space, one, if this is the right metaphor, coming up from the Personal Lines space, that are also interested in the small commercial world. Without downplaying the fact that this is always a competitive marketplace, John, you talked before about the ability to outrun your competitors. I have to imagine that in many cases it's easier to outrun some small, less well-funded resources than outrunning Evan or outrunning Tricia. What does that mean for the competitive market going forward?
Well, I think we've long competed against companies of all shapes and sizes, publics, mutuals, reciprocals, large, small, mid-size. I'll go back to the points I've made earlier. It's about what value you're creating for your customers, what value you're creating for your distribution partners, and what's your ability to deliver consistent performance throughout market cycles. I think those are the things that we focus on, those are the things we continue to invest in, and those are the things that allow us to compete against companies of all different shapes and sizes. I will say this, I think having stronger competitors that think about risk selection, pricing, consistency through market cycles, and have a view similar to ours from a cost of capital perspective, that's a good thing.
That's a healthier environment because it means that you're not just in there competing against the lowest common denominator from a pricing and an underwriting perspective. You're competing against companies that have a similar view and philosophy that you do, and therefore you're competing on product differentiation and service and ability to deliver service and consistent service over time. That's a marketplace we've demonstrated an ability to win in over the long term.
Yeah, I would just add that the Commercial Lines space is an incredibly fragmented market compared to Personal Lines. If you look at where our market share is, we are the 30th largest Commercial Lines writer with about a 1% share. The largest company has just north of 5%. There is plenty of opportunity for share shifting within and among all of those carriers. Yes, having more competition and disciplined, thoughtful competition, it could actually be accretive, but there is plenty of share to go around.
Okay, fantastic. As always, I want to make sure that everyone in the room is getting their questions answered, so if you have a question, please just raise your hand at any time. We will get you the mic and go from there. I am going to shift gears a little bit to more recent results. I think one of the things that was a surprise to, I will say, us on the outside, was premium growth in the second quarter. We work with the assumption that well-run companies are always combing the book of business and saying, "Okay, there is a bottom X percent that is not doing well. We are going to non-renew that." Something seems to have changed in terms of the impact of that pruning in the second quarter.
I was hoping you could walk through, I know we talked about it on the call, but maybe a little bit more detail on what was different in the second quarter, and is that as bad as it gets?
Yeah. I think first let us step back and start with the market context around commercial casualty. I know there is a lot of conversation around this, but when you look at where commercial casualty is on a marketplace basis, the results on a current run rate basis are underperforming. Margins are negative. When you look at auto liability and General Liability in particular, loss trends are elevated and remaining elevated. I do not think there is any conviction in the idea that social inflationary trends are tempering and therefore loss trends are tempering and rate is coming down on a directional basis across the industry. So we have adverse margins, we have elevated trends, and we have declining price. That is the backdrop that we are operating in. The reality is those results are being subsidized by short-tail property lines, Workers' Comp, favorable development, and Personal Lines.
Depending on what your overall portfolio mix is, you either have plenty of other lines to subsidize that or you don't.
Right.
But those underlying challenges on those longer tail lines have not gone away. We've been addressing them, and we continue to address them, not just through rate, but through underwriting and claims initiatives. What you saw in Q2, and we've been transparent on this for over a decade, and we disclose this every quarter, which shows the pricing and the retention by cohort. Those cohorts are broken down based on expected future profitability. It's that cohort that represents about 10% of our portfolio that has the highest forward expected loss ratios on it that we made a conscious effort in the first half of this year to say as pricing starts to temper, and we're not immune from the market dynamics, and we've held casualty pricing as firm as we could, and it's still in the upper single digits across all casualty lines.
But as that started to temper, let's make sure we're picking up more mix of business improvement by focusing on that lowest performing cohort more aggressively than we have. That contributed about half of the premium decline in percentage points was driven by that. The other 1/2 was driven by lower conversion on new business. As has always been our philosophy, we have a view, and we have high conviction around where pricing needs to be based on where loss trends are and run rate profitability is. That conviction doesn't just exist in our renewal actions, it exists on our new business pricing guidance to our underwriters. Based on where the market is, that's put pressure on conversion rates.
We think based on all of the market dynamics, it's appropriate to be a little bit more conservative in how you think about underwriting and pricing that business. What you saw in the second quarter, I'm not suggesting you're going to see that for the next four quarters, but the market dynamics that you're seeing haven't necessarily shifted at this point. As a result of that, I would anticipate some continued pressure on the top line all else equal. But it's not a shift in approach. I just want to clarify that point.
No.
We have always had this approach around applying our pricing and underwriting posture in as granular a fashion as possible, account by account. What you've seen is turning those dials a little bit more aggressively. The flip side is there's a large cohort of business that has better than average margins that we're looking to maximize retention on. As a result of that's where the rate as it's coming down, you want to make sure it's coming down in those cohorts, and that'll give us some additional potential growth lift on a go-forward basis.
Right. I should clarify that the question was premised on the fact that you're doing exactly what you've been doing for a long time. So when you have an output that looks a little bit different, then that's at least worthy of a question. I have a brief follow-up that I thought of as you were speaking, and that is, so you've talked about, my number not yours, bottom 10%. As your analytical capabilities have improved, how much of that 10% have you determined shouldn't have been there last year, should be there this year, because now we know what the differentiated contributors are to subpar performance?
Yeah. Great question. The way we think about it and the way it evolves over time is you're cohorting these policies on an in-force basis every year. As you continue to execute that differentiated strategy, it's not about are there policies that should have been there or shouldn't have been there? It's the differential in loss ratio that starts to flatten over time. So where the loss ratio differential from your best cohort to your worst cohort might be, I'm making this number up, this is not a real number. Let's say it's a 50 loss ratio point differential. Over time, as you're working your renewal portfolio in a more granular fashion, you're expecting that curve to flatten out and the loss ratio differential based on the actions you're taking to be approaching zero over time.
Right.
On a theoretical basis. That's the objective. But you're repopulating your cohorts every year. So to the extent the portfolio's improving overall, that tilt will start to flatten out over time. That's the objective.
Okay. I understand what you're saying, and that makes perfect sense. I always think about it in sort of whatever the opposite of a silver bullet is, that we found this characteristic, and it turns out you have an agent that's gone bad, and we found that or something like that.
Yeah.
But if-
If it was that simple, we would've fired the bullet.
Yeah. Fair enough. Okay. One of the consequences of slowing growth, because by all accounts, I just got back from Monte Carlo, reinsurance pricing is going to get a little softer, however you want to define that, smaller increases or persistent decreases, which probably sustains a little bit more competition, which means that probably your profitability will be more than you need for the premium growth that you would expect. I was hoping you could clarify how you prioritize capital return, or maybe capital deployment is a better option if there are other things you could do with it besides giving it back in that environment.
Yeah. I think our capital management philosophy and approach is premised on three primary levers. The first of which is investing in a profitable, organically growing business, which we think is the most durable form of long-term value that we can create. As a leadership team, it's where we add value to the consumer. I think, after that, we have, as we've talked about publicly before, a focus on having a competitive dividend that pays 20%-25% of earnings over time. Then, as and when we have capital over and above what we expect to need, and the valuation of our stock is at a place that's attractive, we will look to deploy capital by buying back shares. Those three levers and the order in which we consider them are consistent throughout time.
I think the amount that we allocate to each of them will be responsive to the environment in which we're working. If we're in a situation where perhaps there is less ability to invest in the business, that may therefore create opportunity to buy back stock. We want to be thoughtful about what our valuation is. We also importantly want to be considerate of how long do we think that we would have that lower degree of growth in our experience. We still view, I talked earlier about 1% share. We think we've got runway to grow. We certainly have ambition to do that, and we're making investments to help scale the business. Clearly, we will need capital as and when that comes to be. We need to think about all of those things in balance.
We also are mindful that carrying under-leveraged capital on the balance sheet creates a drag on ROE. There are a lot of different considerations we make, and all of those go into the mix when we determine whether or not we're going to come into the market and buy back stock or do other things to deploy capital. I would say that has been consistent in the approach that we've been taking over time.
Okay. Is there an opportunity, and I don't know if this is realistic, but I'm curious. If you have, let's say this year, right, we're probably close to setting a record for the latest hurricane formation in hurricane season, right? You've got El Niño is working out the way the El Niño forecasters would. You have smaller CAT losses in the back half of the year than you might otherwise. Could that change the thought process for growth-related investments? In other words, we were going to add two states next year, now we can add three.
No. I think it's important, and Patrick summed up our philosophy around capital management the exact right way. Underlying that is growth and growth opportunity needs to be looked at on a longer-term basis, as does weather. I think the idea of a single storm season influencing your long-term investment strategy is not how we think about the business. It's important that we clarify that. I do appreciate, and it's a little bit frustrating at times, but I do appreciate that the property CAT reinsurance market does seem to get overly focused on a single wind season and whether it's a good one or a bad one. But with all the sophistication that they all operate from with regard to CAT modeling, a single wind season shouldn't change their expected outcome all that much. That's how we think about investing in the business.
There are short-term dynamics, and there are long-term dynamics in our business. Being a casualty predominant underwriter, you have to operate with a long view. That'll always be our philosophy around this business.
Yeah. I think that's absolutely the right call. The red flag that's flapping in my head as you said that is, yeah, what you're saying I think is largely true of the property CAT reinsurers. But now that we have created these vehicles where capital from investors can come in, and that's the entire world of capital markets, there are people that have that sort of short-term thinking. Which I guess means your CAT program costs will go down next year.
Agreed. But as a primary underwriter that depends on distribution partnerships that are entrusting their key relationships to you, we don't pull capital in and out of the market on a cycle-by-cycle basis. Reinsurance operates a lot differently. You could decide to take your capital and walk away with it for a year or two and wait until it's more ripe for what you're looking to do to bring it back. We don't have that luxury. That's why, again, we need to be focused on delivering a consistent result so we can be consistent for our distribution partners and for their customers over time because we're not going to be pulling our capacity in and out of the market from one year or one quarter to the next.
Okay. No, that is very clear. I am going to survey the room again just to make sure that I am not overlooking any questions that people want to ask. You mentioned distribution partners, and you mentioned earlier that you are becoming a little bit stricter on the underperforming deciles, whatever, of your book of business. How do you manage any relationship stress that that might cause if now one of your agents has to find new coverage for more of their book than they had anticipated?
Yeah. A big part of our model has always been proximity to our distribution partners. Because of the size of the relationship we have on average, a great level of communication around what our expectations are and what the agent's expectations are. When you think about that cohorting that we have talked about a lot on an overall portfolio basis, most of our agents' portfolios look a lot like that in terms of distribution. So your ability to actually lay out over the next 90 or 120 days, these are the accounts we are focused on for a higher-than-average rate. These are the accounts we are really focused on making sure we retain. You have a high degree of transparency and early communication around that. You could manage through any of the challenges. I am not going to suggest that this is not without friction.
There is always friction in those relationships, but I think, we try to be as clear in our communication and as open and transparent in what our expectations are. By giving agents that early indication, it gives them options in terms of how they want to manage those individual customer interactions.
Yeah, I think John mentioned a really important word there that is obvious on the surface but takes on real depth at Selective, which is relationships. The agency partners that we work with to help distribute our product, that we build businesses with, those relationships go back years, and they are deep. Some of them know John from when he was in a very different junior role in the company. But because there is such a focus and emphasis on creating accessibility to our leadership team across our agency plant, it just continues to reinforce that relationship. That is a little bit of the secret sauce, too, that they are with us through challenging times because we have been with them when they have been challenged as well.
Okay. And it sounds, not to put words in your mouth, but that you're comfortable with how you've been managing this process, during this, whatever you want to call it, period of scrutiny.
Yeah, we are. I think they understand, and we've tried to reinforce this point. If you want to be a consistent underwriting partner, sometimes that's really easy based on where market dynamics are, and sometimes it's a little bit more challenging. Right now, we're in one of those periods where if you want to be that consistent long-term player, you've got to have conviction in your views around where casualty pricing needs to be. That might be a little different from where the market is for a short period of time, and being able to work your way through that, and we've been through this before, right? We've seen this movie on more than one occasion. By doing the hard work in periods like this, it sets you up for really strong growth and profitability on a longer-term basis.
We've demonstrated that looking back over the last decade, based on some hard work that was done through the last market cycle that looked just like this in 2010, 2011, and 2012.
Right. I think that's actually an important observation, which is that all cycles have their nuances, but this is human nature. There's nothing terribly shocking going on in terms of what we're seeing. Over the past few years, you've had state expansion as an explicit strategy, and you've been very transparent, I think, ahead of time in terms of states that you're targeting. I was hoping you could look back over the last three years, last five years, in terms of premium production and profitability, in your newer states.
Mm-hmm. Yeah. In terms of context setting, we have been on a longer-term journey and are really focused on this going forward to better diversify our business. The geo expansion that we launched in earnest, about 10 years ago, nine or so years ago, was geographic diversification in our Standard Commercial Lines book. Our E&S investments that have gone from 0% of our revenue in 2012 to about 13% of our revenue now was a diversification investment. On geo expansion in particular, our footprint in Standard Commercial Lines is now 38 states. As I mentioned, 2017, 2018 is when we kind of relaunched our footprint expansion in earnest. That premium of the states we have opened since that point is roughly just over 10% of our in-force premium. So call it roughly $430 million, $440 million, roughly speaking, across all of our expansion states.
As we have talked about in prior forums, when you enter a new state and you have all new agency relationships and 100% of your business in the first year is new business, you are going to have a loss ratio penalty from that. We plan for that, and we layer in our expansion so that the overall impact on company performance is extremely manageable. That is how we plan for it. That is the way we have executed. We are extremely pleased with how that volume has ramped up. We are extremely pleased with the relationships we have built in these markets, and the performance from a profitability perspective has been absolutely in line with our expectations. I will also tie it back to the earlier question around the impact of larger agents and continuing to consolidate and moving into our marketplace.
One of the big benefits of that from our perspective is we have an established relationship and an established reputation from a product and service perspective with those larger platforms that have big offices in these new states. So we are coming in as a company that has a reputation with these larger players, and it has actually really helped us open up these new states with some really strong partnerships out of the gate on the distribution side.
I am curious if I can follow up on that. You wake up one day and you read the news and say, "Okay, Aon is buying USI." What is your next step?
Well, again, we have an existing and a very strong, healthy relationship with USI Insurance Services. First thing is to understand whether or not there's going to be any significant operational changes in terms of how they think about the business. Because I think it's important to understand as well, there's a lot of large brokers like Marsh that have been in our retail space, our type of retail space for a very long time, and we've enjoyed a very strong, mutually beneficial relationship with them over time, in part because they recognize that that business is very different from their other business, right?
buying retail, more local and regional retail operations. The question is, are they going to continue to allow them to run as local retail operations, or are they going to try to consolidate everything? Either model can work, but the manner in which we interface with them from an underwriting perspective will vary if they choose to centralize business placement decision-making. We have apparatus in place to interact with more centralized, more specialized placement operations. There are others that are large in scale that have left the decision-making around who they partner with and how they partner with them as local decisions, and we're also built to interface with them.
Okay, fantastic. Now, I'm going to flip that geographic expansion question forward. What should we expect in the next 2 years, next 3 years?
I would say the majority of what you should expect on the expansion front in terms of Standard Commercial Lines is growing into the footprint we've invested in. We're at a point now, when you look at the states we're not in, the big ones are Florida, California, and Texas. We write non-admitted business through our E&S platform in those states, but those are not Standard Lines markets for us. The question is, do we tackle those at some point, and how? I think our general philosophy is we are in no rush to do that.
But at some point, in terms of ancillary business opportunities that are multi-state or regional out of our existing footprint, that may present an opportunity. But we have the majority of states we want to be in at this point. As Patrick Brennan mentioned earlier, we've got a one share across the country and about a 1.5 share in our 38-state footprint. There's a lot of growth headroom there, and there's agency appointment headroom there that we're going to spend most of our time and energy growing into, and then figure out what the next wave might look like in terms of getting closer to a near national footprint.
Okay. I'm happy to say that it's taken us this long to talk about General Liability reserves because there really hasn't been all that much that we've seen that has given rise to questions, and my question is only beneath the surface. If we were to look at accident years, if we look at your regions, products, is there anything notable going on underneath the surface that aggregates up to the blessed nothing that we've seen?
Nothing notable. As you know, we're a company that takes a lot of pride in disclosing a lot of details, and generally talk about things that are happening below the surface that we think are notable. We do that as part of our normal process. So I would say no. We responded to what we were seeing in General Liability in 2024. Mid-2024 was the significant action we took on prior year and also adjusted our current year expected loss ratios for GL. I think we're pleased that when you get to the end of 2024, we're now six quarters of relative stability in our GL reserves. Over that same time period, we've continued to see industry reserves get increased by pretty significant amounts. Right?
In 2024, the industry added $10 billion to GL, and in 2025, the industry added another $8 billion to GL, and we've had stability over a bulk of that time period. We're not declaring victory. I'm going to make clear that the loss trends we're all living with on the casualty side are elevated, and they remain uncertain. When will the inflection point get here? When will we recognize the inflection point, and what does that look like? We're not declaring victory, but we feel like we've taken the right actions to get ahead of the curve, and are building our pricing expectations around that. That's about all I'll say on that topic at this point. There's nothing else happening that we wouldn't have felt obligated to disclose.
No, that's very fair.
Yeah.
I completely get that. Can you talk about what's going on in the U.S. in the construction world recently? Just because I know at the beginning of the year, there was a lot of uncertainty with regard to interest rates, and that manifests itself with construction. It's a decent size chunk of your book of business. What does the outlook look like now?
Yeah. I'd hesitate to give you my own outlook. What I can tell you is when we look at exposure change in our portfolio through the first half of the year, there's no notable drop-off in exposure. Now, that's a bit of a backward-looking measure.
I'll be careful to clarify that. We haven't seen a drop-off. If you look at our renewal premium change in Commercial Lines and the contribution from exposure, which on the GL side for our construction book is either going to be sales or payroll driven, it has not dropped off in a notable way, which would suggest that at least in our type of commercial construction client, which is going to be on the small and mid-size, that the work hasn't dropped off, hasn't slowed down.
Okay. Parallel to that, is there an opportunity in the bond line to grow more quickly?
I would say yes. We like that business. We have been in the surety business for a long time. But our portfolio is small. It is 1% of our portfolio. But we have talked a lot about building a more diverse revenue and income stream across our various insurance segments, within and across our segments. We think about building out broader capabilities on a specialty basis, not just non-admitted, but admitted. We view the foundation we have in surety as something that we could build and expand upon. It is a great margin business across the industry. It has been a great margin business for us. I do view that as an opportunity for us on a go-forward basis.
Okay, fantastic. I have always said that because I think it is an underappreciated line of business.
To the extent that you grow that would be fantastic. You have expanded, and we touched on this a little bit about the expansion on the E&S side. Where are you in terms of recruiting underwriting talent to build that out? Has the market for that talent changed at all over the last two years, three years?
I would say this applies to Standard Commercial Lines underwriting as much as it does to not admitted or E&S underwriting. Talent is critical in that business. Talent continues to age in the Commercial Lines underwriting space. That's continued to be a very competitive space. Our philosophy has been, you attract and retain the best talent by giving them the best tools to do their job. We continue to pride ourselves on giving our underwriters the best tools to do the job. That remains one of our best recruiting tools. Going back to the earlier conversation, though, the talent challenge we all face, which is there's a smaller base of talent to recruit from, and it's a very high retirement eligible population, just based on the aging in our business.
I think one of the biggest value opportunities with all of these AI advances is the ability to ramp up a first or second-year underwriter or claims adjuster by leveraging the power of these tools, really helps mitigate the impact of the retirement risk that we all have to manage through. Because what happens is, you lose a 30-year underwriter to retirement and replace them with a five-year underwriter, and their capacity to manage that same portfolio effectively is a lot less. You're now taking through AI, you're putting a 30-year digital supervisor on their shoulder that's leveraging 100 years of underwriting decisions and outcomes to help guide them through decision making or help them work through an account in a segment of business they don't have a lot of experience in.
That is a huge opportunity by putting these tools to work and helping us sort of overcome this turnover that we all have to manage through from an underwriting perspective because of the aging of our workforces.
That's actually a fantastic perspective for how you handle the aging workforce and the need for experience that you can synthesize. Final question from me, but before I do, I just want to look around the room to make sure I'm not looking over anybody. I get this question a lot, and I'm sure you've heard it a million times, so I want to get the answer. What's the strategic imperative of Personal Lines to Selective?
It's a significant part of our diversification strategy. We've been impacted more recently because of our outsized position in casualty. We continue to look for diversification opportunities. The high-end home market, the affluent home market, is business that our agents like to write and target writing.
We have the product and the servicing capabilities to successfully compete in that market, and we have a desire to diversify our business by line and segment. It's a business we're in, and it's a business we think is a great fit for our operating model and the manner in which we're built. We're seeing the positive improvement in profitability in that segment. While the growth in auto continues to be negative, we're starting to see the growth come through on the home line in that segment, and we view that as an opportunity for us to further diversify our revenue and our income over time.
Right. It sounds like that's a success because you like that.
Yes.
Fantastic. With that, we have come to the end. Oh, sorry. Got one question.
A real quick one. I'll say it loud now.
Oh, okay. Sorry.
I don't know what are the odds or chances or any level of conviction that you've obviously done a lot to fix the business and adjust to the market. It's been tricky for the whole industry, but where 2027 could be an inflection year where you start to see growth again and margins stabilizing to improving?
That's everything we're striving for. The actions we're taking, from a pricing and underwriting perspective, are designed to give us margin improvement to get us to the point where we're achieving our target margins in Commercial Lines, which then does put us on a path to accelerate growth on a go-forward basis. That's our expectation. I'm not going to predict where the market's going to be, but in terms of the things that we can control, we're positioning ourselves to do exactly that.
Thank you.
Okay. With that, this is very thoughtful as always. Thank you very much, John and Patrick, and we will see you all upstairs.
Thank you.