State Auto Financial Corporation
Q2 2017 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Welcome and thank you for standing by. [Operator Instructions]. Today's call is being recorded. If you have any objections, please disconnect at this time. I'd now like to turn the call over to State Auto Financial Corporation Vice President, Investor Relations and Finance, Tara Shull.

[Tara Shull:]

Good morning and welcome to our second quarter 2017 earnings conference call. Today, I'm joined by our Chairman, President and CEO, Mike LaRocco; Senior Vice President and CFO, Steve English; Senior Vice President, Standard Lines and Managing Director of State Auto Labs, Kim Garland; Chief Actuarial Officer, Matt Mrozek; Chief Investment Officer, Scott Jones; Vice President of Actuarial Pricing for Commercial Lines, Melanie Watkins; and Commercial Lines Director, Ben Blackmon. After our prepared remarks, we'll open the lines for questions. Our comments today may include forward-looking statements which by their nature involve a number of risk factors and uncertainties which may affect future financial performance. Such risk factors may cause actual results to differ materially from those contained in our projections or forward-looking statements. These types of factors are discussed at the end of our press release as well as in our annual and quarterly filings with the Securities and Exchange Commission. A financial packet containing reconciliations of certain non-GAAP measures, along with supplemental financial information, is available on our website, stateauto.com, under the Investors section as an attachment to the press release. Now I'll turn the call over to STFC's Chairman, President and CEO, Mike LaRocco.

[Michael LaRocco:]

Thanks, Tara and hi, everybody. I'm very pleased with the progress made this quarter. After two years of rebuilding this company, we've seen consecutive quarters of improvement. All our hard work is starting to be reflected in our results. While we still have a long way to go, we've emerged from the most challenging part of a turnaround and see a clear path to profit. Most encouraging was that we saw progress across all 3 of our business units, led by commercial which was greatly improved and profitable for the quarter. While much of this was due to reserve releases, we've made dramatic improvements across pricing, underwriting and claims. Those efforts can be seen in the underlying trends that continue to improve. We had a large number -- excuse me, we had a number of large losses that impacted the commercial segment results this quarter. Steve will provide more color on this in a little bit. The best example of progress is in the commercial line in which we didn't make money this quarter, commercial auto. We're getting significant rate and improving our risk profile. Commercial auto premium retention dropped modestly. Most of that is due to targeted, aggressive rate action. And we're seeing higher risk tiers leaving at a much faster rate while still retaining the more adequately priced lower risk tiers. I'm very bullish on where we're and our drive to get commercial auto profitable. We also saw our middle market new business grow for the quarter. As part of the 2 years of rebuilding our foundation, we clearly communicated our middle market appetite, got the right team in place and empowered them to make decisions. Agents have responded by helping us grow new business for this line the past 2 quarters. Within weeks, we'll launch our new digital commercial platform, the first of its kind for BOP and auto. I'm excited about this platform and its potential to make us a leader in the small commercial space. In personal lines, we also had improvement. It can be best summarized in 2 areas I've been discussing on these calls for the last few quarters, auto profitability and our new digital platform. First, regarding auto profitability. We're seeing improving trends in the relationship of earned premium versus loss costs. Our targeted rate increases are earning through the book, at the same time, improvement in our claims handling has greatly reduced loss leakage. As these 2 trends continue, we will cross the line and accelerate the trend of profitability. Over a year ago, we emphasized that getting profitable in auto was the priority. We have backed those words with action. Secondly, we launched our new digital platform in fourth quarter. The growth on this platform, especially over the last few months, has not only validated the quality of the technology, but also our strategic decision to go digital. Again, we told you on previous calls where we're going and our actions have delivered. We remain confident and excited about our homeowners and farm and ranch products and the team as they are well positioned to be both profitable and growing. We did see some deterioration in these product lines, consistent with what we're seeing in the industry and we expect to take rate in the second half of 2017. Kim, of course, will expand on all these lines. In specialty, while we did not achieve our profitability goal, we did demonstrate quarter-over-quarter improvement. We continue to evaluate what investments are needed to profitably grow these lines. I'm proud of our E&S team and their commitment and discipline, 2 critical factors needed to deliver consistent and long term success. I've just completed 8 full quarters at State Auto. Our results over those 2 years have been poor. Anything other than an underwriting profit is an unacceptable result. In addition, to add value, we must grow. We've neither been profitable or grown. However, throughout the first 6 quarters, we did a lot of rebuilding and replacing. Each of the last 2 quarters has shown progress, the result of all the difficult foundational work. As I look across the organization today, I can see indicators that I believe will result in profitable growth. Our product teams understand our rate needs and are taking the right step. Along with our actuarial teams, they've built the right pricing and monitoring models to measure results. Improvement in data and analytics has been terrific. Our sales team is delivering quotes across all business lines at all-time record levels. They've engaged our agents who are responding with quotes and new business. Our claims team has reduced leakage by improving claims handling for both physical damage and liability claims. And our entire team of associates has helped us rebuild our culture and create an open, inclusive and dynamic workplace. All of that effort has begun to be validated in the results for both the first quarter and even more so in this quarter's results. A year to 18 months ago, we were spending a lot of time talking about our struggling personal auto line. We took aggressive steps to improve and now you're seeing the results. We've described our new technology platform as a growth enabler and now we have data demonstrating not only its potential, but its success. Of course, we're not satisfied, far from it. What the last 2 quarters has done for our team is motivated us to work even harder because we know we have made the right fixes and have chosen the right path. Now we must keep pushing even harder. The first major milestone will be a return to underwriting profitability. As we conclude the first half of 2017, that goal is in sight. Long term, of course, our goals are much more ambitious, but profitability must come first. With that, I'll turn it over to Steve.

[Steven English:]

Thanks, Mike and good morning, everyone. As Mike pointed out, underwriting profitability is our first goal, so we're encouraged by combined ratios for the quarter and year-to-date that improved 8.5 and 1.7 points, respectively, compared to a year ago. Let's review some of the drivers of our results. First, catastrophe results. The second quarter is historically an active cat quarter for STFC. At 7.9 points, the cat loss ratio was the lowest reported ratio for the second quarter since 2014, at which time the homeowner quota-share treaty was in place. Prior to the treaty, you have to go back to 2005 to find a lower second quarter ratio. You recall, during the first quarter of this year, we experienced unusually high cat losses. As a result, the 6-month cat ratio is running slightly ahead of a year ago. Next is the impact of loss reserve development. Reported noncat losses reflect overall favorable development of prior year reserves of $16.3 million for the quarter and $23.8 million year-to-date. That compares to overall adverse development of $20.9 million and $31.2 million in the second quarter and first 6 months of 2016. On a ratio basis, this is an improvement of 11.6 points for the quarter and 8.6 points for the first 6 months. We have now reported overall noncat favorable development in each of the last 3 quarters. Personal and commercial auto estimates continue to hold in total. This quarter, we had a greater amount of favorable development in middle market commercial, with approximately half coming from cases reserve reductions for a few large fire losses across accident years '14, '15 and '16. Other personal reported adverse development due to personal umbrella from accident years '15 at '16. E&S property has been running adverse over the last few quarters due to discontinued multi-peril business in Florida with liability coverage that is classified as E&S property. Last, a few comments on 6-month noncat accident year loss ratios, eliminating some of the quarterly noise. The company-wide noncat accident year loss ratio through 6 months of 2017 was 67.3 points compared to 62.3 points for the first 6 months of '16 and 64.6 points for all of last year. As we discussed last quarter, we raised the 2016 accident year loss picks as the year unfolded. So a more relevant comparison is the 6 months of '17 as compared to full year 2016. I should point out that we have some seasonality to our losses, particularly property lines impacted by noncat weather. On line of business, commercial auto improved 7.1 points for the first 6 months of 2017 versus full year 2016. On the same basis, personal auto was flat. This quarter, some unusual personal auto large loss activity contributed 1.6 points to the quarter and 0.8 points to the year-to-date, masking some of the progress we're making. Homeowners and farm and ranch are elevated due to noncat weather losses. While farm also has experienced an increase in fire losses during 2017. Finally, E&S casualty and program accident year noncat loss ratios are higher when compared to all of '16. E&S casualty reflects more conservative loss ratio picks and programs are in runoff. The expense ratios for the quarter and year-to-date are elevated to a year ago, as we discussed last quarter, due to our ongoing technology investments, placing our new digital platform into service and the change in specialty underwriting costs and the resulting impact on DAC. The gap narrowed a bit from Q1, as we expected. Nonunderwriting items of note include increased capital gains from rebalancing our investment portfolio and tax expense includes a discrete charge of $1.3 million relating to unexercised stock options that expired or terminated. We recently wrapped up our property and casualty reinsurance renewals. Markets generally remain soft overall with some modest savings compared to our expiring spend. We increased the amount of exposure retained by the State Auto group for property cat. On a group basis, we eliminated the specialty-only drop-down coverage that's at below our $55 million retention. We have been slowly eliminating that layer the past few renewals. We raised our group retention to $75 million per occurrence. These changes reflect our analysis of the trade-off of funding reinsurance layers through ceded premium versus the probabilities of expected losses to those same layers. In the long run, we're better off absorbing the risk and retaining the premium as we have the capital base to support that risk. Now on to commercial lines. Mike highlighted the improved results this quarter with combined ratio under 100. The actions our team has taken over the past 2 years across product, rate, underwriting and claims are beginning to impact results. Noncat loss ratios improved across all lines, aside from small commercial which was impacted by a few unusually large losses in the period, adding 10 points to the small commercial loss ratio in the quarter. We view this to be variability for our small commercial book and not reflective of the true underlying run rate. As previously mentioned, we were helped by significant favorable runoff of prior accident years which reduced the quarterly loss ratio by 14 points. There is still work to do in maintaining acceptable loss ratios as well as getting to profitability on commercial auto. We continue to push rate on this line over and above the high loss cost trends as well as improving the composition of our book. We're seeing a decrease in frequency despite increasing industry trends. We're starting to make progress and expect to continue to see the efforts earn out over the next several quarters. While the profit improvements have put pressure on growth opportunities, we continue to see increasing new business. Year-to-date, net written premiums for commercial lines were down 4.1%. Earned premium was down 6.5% as we earned out the overall premium decline from 2016, mostly caused by our prior exit from large account solutions. However, year-to-date, new business premium continues to be strong, up 17.2%, led by middle market. We attribute the increase to our messaging around commercial line's appetite and our refocus on distribution. We're getting more of the right submissions, ones where we can be competitive and profitable. Retention continues to be strong, aside from commercial auto, where we have purposefully priced our nonrenewed business to address profitability. Improving loss cost trends and workers' compensation continue to push premiums lower and increase competition in the marketplace. While we're maintaining underwriting and pricing discipline, our retention remains strong, but new business is down. In the coming weeks, we expect to launch our new commercial lines digital policy platform for small business and commercial auto. This will give us the technology, products and efficiencies needed to grow our small business line quickly and profitably. We're excited to bring these new products and platform to the market as it surely will transform the way we do business. The new capabilities along with the continued focus on a well-defined middle-market appetite position us well for the second half of the year and into 2018. Moving on to specialty. Last year, decisions were made to exit a number of products, including programs, health care and the Florida multi-peril business I mentioned before. That runoff is in full swing and going as expected. The remaining products are growing and we see positive performance indicators over last year. However, we're not satisfied with the loss ratios. These products include E&S property, both third party and our new internal property team; and our E&S casualty book made up of general liability, excess casualty, environmental and gas and propane distribution. The property market has not changed and is still extremely soft. We continue to stress underwriting discipline in this challenging environment. Casualty market, especially auto, is allowing for rate increases and we're taking advantage of that but have to do this intelligently to accomplish the profitable growth goals we're targeting. Turning to numbers. The specialty quarter-to-date combined ratio is 102.2, an improvement of 19.2 points over the same quarter last year. Year-to-date combined ratio was 1.07 which improved 10 points from last year. Premiums this quarter were up 6.4% from the same quarter last year. The impact of exiting lines will begin to take full effect in the third quarter, so we expect decreased volume next quarter. The 16.5 point improvement on the quarter-to-date loss ratio is primarily due to the adverse prior year development reported in the 2016 results which we did not experience in 2017. Prior year development accounts for 1.6 points of the second quarter loss ratio. Products exited added 12.5 points to the loss ratio. Our E&S property loss ratio this quarter is 44.1, up from 41.1 last year. The noncat loss and ALAE ratio is 40.6, up 1.5 points from last year. While this loss ratio is an increase, it is still very low and shows consistency in our pricing and underwriting discipline in this market. Year-to-date net written premium is up $2.7 million, reflecting lower insurance costs and our new internal property team, resulting in an improvement in expense ratio. We have not seen any positive changes in the property market, rates continue to fall and the marketplace is loosening on coverage offerings to lower deductibles and other means of increasing exposure. We're navigating this with strong risk selection and maintaining underwriting discipline. We're walking away from business because of the terms and conditions being offered by some of our more aggressive competitors. We continue to see strong growth in E&S casualty segment with a quarter-to-date increase in net written premium of 38% compared to last year. Both our excess casualty and gas and propane distribution books have achieved significant rate increases on auto liability this year which helped drive growth in those books. The E&S casualty loss ratio was down 2 points from last year with a lack of adverse development and an improved ULAE ratio, offset by more conservative accident year loss ratios in general liability and environmental. We continue to work on better segmenting our E&S casualty products, combining underwriting expertise with supporting data. Finally, program's well into runoff. There have not been any surprises in the process. We adjusted underwriting guidelines where needed and underwriting audits continue to be performed and have gone well. We negotiated the commission reduction with 2 of our programs as they work to transition to new carriers. The writings for these 2 will conclude by year-end and all of the others have ceased writing on our paper. This quarter's net written premium is down 12.6% and that will continue to decline. At year-end, we provided a forecast of the future earned premium for programs as they run off. Here's an update of those estimates, $25 million in Q3 2017, $19 million in Q4, $12 million in Q1 2018, $5 million in Q2 and $1 million in Q3. The programs loss ratio for the quarter is 78.2%. Last year, we discussed a large unfavorable development of $8.7 million that we experienced. Prior years were essentially unchanged this quarter. Now I will turn the call over to Kim Garland to discuss the personal lines results.

[Kim Garland:]

Thanks, Steve and good morning, everyone. As you look at our personal lines results, the story for each product line is the following, personal auto for the quarter, a loss in LAE ratio of 82.8 and a combined ratio of 109.5. The personal auto cat loss and ALAE ratio for 2Q '17 was 3.2 points which is 2 points lower than the 2Q '16 personal auto cat loss and ALAE ratio of 5.2 points. The personal auto noncat loss and ALAE ratio included approximately 1.6 points from some unusual large loss activity. Our plan for improving personal auto profitability has been consistent in each quarter I've been updating you on our progress on each set of actions this quarter's update. Loss reserve development continues to be minimal. We continue to take aggressive overall rate action in personal auto. Our rate change activity for the year has been as follows, In the first quarter of '17, we took 17 rate changes with an average 13% rate change. In 2Q '17, we took 5 rate changes with an average of 12% rate change. And in 3Q '17, subject to DOI approval, we have 9 rate changes in the pipeline with an average 15% rate change. These rate changes continue to flow into our personal auto book of business. Average written premium per vehicle in June of 2017 is 13.7% higher than June of 2016. As a reminder, there's a lag before this increase in written premium shows up as a comparable increase in earned premium. Average earned premium per vehicle in June of 2017 is 8.6% higher than June of 2016. Our progress on operational changes. Over the prior quarters, we have discussed the operational changes in our claims organization. This quarter provided another data point of progress on this front. The following are all 4 quarter rolling loss cost trends, Property damage is up 3.4%. Collision is up 2.9%. Bodily injury is up 8.9%. These loss cost trends are all meaningfully lower than they were a year ago. We closely watch the rate of increase of earned premium versus the rate of increase of loss cost. 2Q '17 is the first time in 2 years where the change in 12-month rolling earned premium per vehicle which is up 5.1%, is roughly equivalent to the change in the 12-month rolling incurred loss cost per vehicle which is up 5.5%. Rate changes that have yet to be earned will increase the change in earned premium per vehicle in the coming quarters and we also believe that there are additional benefits from claims operational changes that we have not yet obtained. On growth. While improving profitability results is the highest priority for the personal auto product line, we have also continued to work to start growing personal auto again. Our performance in this area is as follows, Net written premium for personal auto was up 0.5% in 2Q '17 versus 2Q '16. This is the fourth consecutive quarter of personal auto net written premium growth. Quotes are up 40% over 2Q '16. New business counts were down approximately 5.8% in 2Q '17 over 2Q '16. Retention is down about 1.7 points June of 2017 versus June of 2016. And policies-in-force, our rate of PIF decline, deteriorated this quarter. March of 2017 versus March of 2016 was down 5.1%. June of 2017 versus June of 2016 is down 7%. The growth of personal auto and homeowners was pressured and will continue to be pressured over the next several quarters as our personal auto rate increases earn in and reduce retention and we have not yet experienced enough of a new business lift from our new digital platform rollout to offset this retention decline. In the coming quarters, we expect to continue to experience pressure on retention from the rate increases earning in, but the new business lift from the new digital platform rollout is increasing each month. In the second quarter, auto new business in our 12 launched states increased approximately 4% over the second quarter a year ago. But in July, our auto new business in the 12 launched states increased approximately 78%. As we continue to roll out the remaining states throughout 2017 on our new digital platform, we expect the higher new business levels to help offset the pressure on retention from double-digit rate increases in personal auto. For homeowners, a loss and ALAE ratio of 76.1% and a combined ratio of 106.8%. The homeowners cat loss and ALAE ratio for 2Q '17 was 20.4 points which is 21.6 points lower than the 2Q '16 homeowners cat loss and ALAE ratio of 42 points. While cats were lower than last year, the noncat loss ratio was 5.7 points higher in 2Q '17 than 2Q '16, primarily due to noncat weather losses. We're keeping a close eye on homeowners rate adequacy and expect to increase rates in the second half of 2017. On growth. Homeowners is another product line where we had to reverse the policies-in-force decline. Our performance in this area is as follows, Net written premium for homeowners was down 4.5% 2Q '17 versus 2Q '16. Quotes are up 18.8% over 2Q '16. New business counts are down 16.7% 2Q '17 over 2Q '16. Retention is relatively flat June of 2017 versus June of 2016. And policies-in-force, our rate of PIF decline, deteriorated a bit in 2Q '17. March of 2017 versus March of 2016 was negative 2.7%. June of 2017 versus June of 2016 was minus 3.9%. Understanding the growth results for homeowners. New business is down in homeowners because the new business lift from the launch of our new digital platform is lower in home than it is and autos. In July of 2017, homeowners new business is up 38% in the 12 launched states versus 78% for the auto in the 12 launched states. This is due to the fact that the new business process has not yet been as fully optimized for home as it has been for auto. We're not -- we're also's not taking rate increases in homeowners like we're in personal auto, so net written premium growth is going to be driven -- or not driven primarily by policies-in-force growth. For farm and ranch, a combined ratio of 127.3%. Noncat weather and several large fire losses drove the poor combined ratio for the quarter. New business and retention are up in this product line and 2Q '17 policies-in-force increased 15.2% over 2Q '16. We're keeping a close eye on rate adequacy and expect to increase rates in farm and ranch in the second half of 2017. In summary, personal lines for State Auto can be thought about in the following way, Double-digit personal auto rate increases combined with the claims operational improvements are driving the change in premium curve above the change in loss cost curve which is what we need to do to improve the personal auto loss ratio. Personal auto rate increases will continue to place pressure on auto and home retention and new business volumes for the next several quarters. We're seeing significantly increased new business in the states where we have launched our new digital platform. We're keeping a close eye on homeowners and farm and ranch profitability and rate adequacy. With that, we will open the line for questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Larry Greenberg from Janney.

[Lawrence Greenberg:]

So I just wanted to focus a little bit on the attritional loss ratio, ex cat, accident year loss ratios in auto, particularly in maybe home secondarily. You gave the 1.6 points of unusual in auto. But if we look at the first -- second quarter versus first quarter comparison, it looks like there was a decent deterioration there and I know there's probably some seasonality in there. I'm just -- have you, in your mind, lost any margin in auto from the first to second quarter and how you're thinking about loss trends?

[Michael LaRocco:]

Let me start, Larry, then I'll turn it over to Kim for a little bit more detail. Sometimes you have a single unusual loss that occurs that's not expected to be a recurring loss. And that's what happened in auto insurance. So we know that underneath that, when you eliminate that from the expected -- for the results in the quarter, the real run rate in auto is better than reported. So that unique claim impacted us on a disproportionate basis. So that's kind of the auto story to some degree. The nonweather claims were somewhat part of that story as well. But I'll let Kim address it a little bit more, specifically on the homeowner side.

[Kim Garland:]

So I think on the homeowner -- well, let's start with homeowners. On homeowners, when you take out cat and looking at the noncat loss ratio deterioration in that, again, we're seeing virtually all of that from noncat weather. But what we're doing is probably seeing a slight uptick in homeowners trends overall which kind of means we're taking a closer look at and making sure we get in rate in homeowners in the second quarter. In personal auto, maybe to add on to what Mike has said, if you kind of strip out variability from large losses and all of that, we look at really 2 measures, right? We see how much rate we have in the pipeline and how it is going to earn in. And that's -- we have quite a bit in and we're seeing sort of the latest month's written premium up a bunch. So trying to -- we have a lot of confidence on that side of the equation. On the loss side of the equation, we kind of think about it in two pieces. The physical damage part is -- it's kind of more stable and easier to sort of put concreteness around it. And so a lot of the measures we see from our claims operations in physical damage are continuing to trend positive. And we're seeing that show up in sort of the loss cost trends in PD and collision around 3%. So that sort of premium increase, loss cost increase margin equation, I think we have a lot of confidence in. I think bodily injury which is the biggest thing, we're looking at lots of things. So when you do claims operational changes in bodily injury, there are always kind of -- it's less concrete, it's more fuzzy and it takes a longer period of time to go in. But some of the measures we see are showing improvement. And I think this -- and again, looking around the room if I ventured too far. But I think Mike has talked before about a conservative, consistent approach to reserving. And so we're balancing trying not to -- we're trying to be conservative and not recognize improvements before they're very concrete and so that's kind of how we think about it.

[Lawrence Greenberg:]

I appreciate the color. And then, I guess, this is probably for Steve. And I'm looking at my model, so there's no guarantee there's not an error in this. But it looks like the adverse impact on the GAAP expense ratio compared to the statutory expense ratio was a bit more severe this quarter than the first quarter. Is that right? And could you walk me through what's going on there?

[Steven English:]

You're not comparing the sequential year-over-year GAAP to GAAP. You're comparing the spread between STAT to GAAP.

[Lawrence Greenberg:]

Yes. Second quarter versus first quarter this year?

[Steven English:]

Yes. Honestly, I haven't looked at it that way, Larry, so I'm going to have to get back to you on that. I guess, I will tell you that in terms of the impact year-over-year, we talked last quarter with the change we have made and how the specialty costs are flowing through the DAC that, that was -- and the technology costs are driving that year-over-year GAAP change and that we expected that to narrow which it did. But I have not focused on that relationship, so I'll have to get back to you on that.

[Operator:]

Your next question comes from the line of Christopher Campbell from KBW.

[Christopher Campbell:]

My first question is on reserves. Two things jumped out was the $6.3 million in middle-market development despite the bumping up the current year loss pick by about 10% which I -- it sounds like in the intro script, there was about $3.3 million that was kind of unusual. So can you just go a little bit deeper to explain what's happening in middle market? Because we're hearing a lot about how competitive it is. And that kind of coincides with your increased loss pick. But we just want to understand a little bit more on the sustainability of that reserve development going forward.

[Melanie Watkins:]

This is Melanie Watkins. In terms of what we're seeing in prior years, yes, you're right. We did have several large fires that we had good reserve takedowns on and those were the unusual. We do continuously expect, as Kim alluded to -- we do expect to have favorable reserve runoff. This quarter was just higher than normal. In terms of what we're seeing in the current year, we're seeing some increased pressure. But as you can tell, we're getting more bites at the apple. So our new business production is up. And at that same time we're auditing and seeing that those risks are actually better tiered risk than what we've seen in the past. So while there might be some concern there, I can definitely say that we're seeing very positive trends in the marketplace despite the increased pressure.

[Steven English:]

Yes. So Chris, it's Steve English. So I think as Melanie was describing on the loss reserve development side, yes, that amount of development is not sustainable. We expect to have favorable development, but not -- this quarter, we called out because it was unusually good for the reasons we stated.

[Christopher Campbell:]

Got it. That makes sense. And just one more. Can we get a little bit of color on E&S casualty's results? So if I'm looking at the core combined ratio, that's getting worse and it's about 107 which is up about 7% year-over-year, yet you're growing premiums by 38 which some of that does sound rate driven, where you're taking some underwriting actions. How should we think about growth in this segment given it doesn't appear to be profitable even on a core basis?

[Michael LaRocco:]

Yes. Chris, this is Mike. We had a very strong second quarter, probably stronger than we would have anticipated. We had some opportunities that we felt really good about and we're able to land those opportunities. We certainly don't anticipate that the growth in the back half of this year will remain that high in the E&S casualty space, where it was probably a strong -- not in a bad way because, again, I think these were opportunities that were in the pipeline and we had more success than, I think, we probably anticipated going in. But I can say with a fairly high degree of confidence that we don't anticipate that same level of growth. We feel about all of our lines the same that growth comes after profitability. And the folks in the E&S casualty understand that exceptionally well. So it does seem like it's a conflict and it -- obviously, you're seeing in the numbers and with that type of growth in an unprofitable line. But we feel really good about the risks that we added to the book. But we just got through an operational meeting and look into the future and what's kind of in play right now and our sense is that you won't see those same type of growth rates in the back half of the year.

[Steven English:]

Chris, this is Steve English. And also some of that growth on a year-over-year basis, the gas and propane distribution business is really a new business for us, so you're kind of starting off a very low base and growing. And so that's contributing to that year-over-year delta. It also is carrying a higher loss ratio pick. And then I would just say that with everything we're seeing in that space, we're being more conservative at the moment in our picks to put some margin in the balance sheet to protect those loans.

[Christopher Campbell:]

Right. Yes, I was just wondering, so it sounds like, all right, you're booking a little bit of a higher loss -- higher core loss ratio business, but we're also seeing the expense ratio in E&S casualty up by 90 bps. So will there be a benefit to that, I mean, going forward?

[Steven English:]

Well, I think one of the things I'll point out -- you're new to us, but the -- some of our allocations amongst product lines on a quarterly basis get a little rough. And so we do see some jumps on some of these smaller buckets. Having said that, I think, on a go forward basis, in the E&S casualty space, I would expect that, that expense ratio is -- won't materially move one way or another.

[Operator:]

[Operator Instructions]. And it appears there are no further questions in the queue, I'll turn the call back over to the presenters.

[Tara Shull:]

Thanks for the questions. We want to thank all of you for participating in our conference call and for your continued interest and support of State Auto Financial Corporation. We look forward to speaking with you again on our third quarter earnings call which is currently scheduled for Thursday, November 2, 2017. Thank you and have a good day.

[Operator:]

This concludes today's conference call. You may now disconnect.