Good day, everyone. Welcome to Selective Insurance Group's second quarter 2017 earnings call. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations and Treasurer, Rohan Pai. Sir, you may begin.
Good morning, and welcome to Selective Insurance Group's second quarter 2017 conference call. My name is Rohan Pai, Senior Vice President, Investor Relations, and Treasurer. This call is being simulcast on our website, and the replay will be available through August 28, 2017. A supplemental investor package, which includes GAAP reconciliations of non-GAAP financial measures referred to on this call, is available on the investor's page of our website, www.selective.com. Certain GAAP financial measures will be stated during the prepared remarks that are also included in our previously filed annual report on Form 10-K and quarterly Form 10-Q report. To analyze trends in our operations, we use Operating Income, which is a non-GAAP measure. Operating Income is net income excluding the after-tax impact of both net realized investment gains or losses. We believe that providing this non-GAAP measure makes it easier for investors to evaluate our insurance business.
As a reminder, some of the statements and projections made during this call are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to risk and uncertainties. We refer you to Selective's annual report on Form 10-K and any Form 10-Qs filed with the U.S. Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. Please note that Selective undertakes no obligation to update or revise any forward-looking statement. Joining on the call today are the following members of Selective's executive management team: Greg Murphy, Chief Executive Officer, John Marchioni, President and Chief Operating Officer, and Mark Wilcox, Chief Financial Officer. Now I'll turn the call over to Greg.
Thank you, Rohan, and good morning. I'll begin with introductory comments and remarks and focus on some high-level themes for the second quarter. Mark will then discuss our financial results, and John will review our insurance operations in more detail and provide additional color on key underwriting initiatives. Selective's second quarter results remain solid despite a higher level of catastrophe losses. During the first half of the year, we continue to execute on our strategy of maintaining underwriting discipline while balancing our objectives around retention and top-line growth. Our six-month consolidated statutory combined ratio was an excellent 91.4% or about 900 basis points better than what AM Best expects the industry to report for 2017. On an underlying basis, which adjusts for catastrophe losses and reserve development, our year-to-date combined ratio was 90.2%.
Our Standard Commercial Lines segment continued to produce excellent overall results, and we are pleased with our ongoing efforts to improve profitability in both our E&S and Personal Lines segments. Our annualized operating return on equity was 9.9% for the second quarter and 11.5% for the first half of the year. Our year-to-date results were in line with our long-term goal of achieving returns that are 300 basis points above our weighted average cost of capital. Selective's financial results reflect our continued commitment to seeking adequate pricing for the risks we are assuming. We continue to invest in our field-based underwriting model that empowers local decision-making authority, building sophisticated underwriting tools and capabilities, as well as enhancing customer experience with an omnichannel focus. These initiatives underline our high-tech, high-touch operating model and drive our strategic competitive advantages.
We obtained targeted renewal pure price increases in our Standard Commercial Lines business, averaging 3.1% for both the second quarter and six months of the year. We have outperformed the industry average as measured by Willis Towers Watson Commercial Lines, or CLIPS Index Survey for price increases for the past 32 consecutive quarters ending March 31, 2017, and expect to outperform in the second quarter as well. Maintaining discipline is particularly important in the current prolonged low-interest rate environment where companies cannot generate enough ROE on investments to compensate for inadequate underwriting results. AM Best forecast for Personal and Commercial Lines for 2017 is a 100.3 statutory combined ratio that translates to an overall ROE of approximately 5%, which is clearly not acceptable. We generated solid net premium written growth of 6% for the first half of the year.
Our ability to grow our book while maintaining strong profitability relies on three key factors. First, our franchise relationships with our Ivy League distribution partners allows us to clearly communicate our risk appetite and access the most attractive business through our field underwriters. Second, our inside renewal teams work with our distribution partners to adjust pricing and non-renew business if necessary 60-90 days in advance of the renewal date. Finally, our sophisticated underwriting tools and processes allow us to price business on a granular basis and understand the risk-reward characteristics of our new and renewal business. Our margins in the second quarter were impacted by higher catastrophe losses from severe weather in the Midwest and some development on catastrophe losses from prior periods.
In particular, our results included losses from severe convective storms in March that produced large hail and strong winds and generated higher than expected frequency and severity. Overall, we manage our catastrophe loss volatility by purchasing a reinsurance program that has a low retention of $40 million per event and limits our exposure at the one and 250-year return period or 4% probability of net set to 3% of stockholders' equity. I'm very encouraged by our performance for the first half of the year and by our strong financial position. We continue to invest in initiatives to improve our underwriting sophistication and enhance our experience that we offer with our distribution partners and customers. I have no doubt that these investments will position us for sustained outperformance in the future. Turning to guidance.
After completing six months of the year with solid results, we are, one, improving our 2017 guidance for an underlying statutory combined ratio, excluding catastrophe losses, to 89.5% from our prior guidance of 90.5%. This updated forecast incorporates favorable reserve development for the first six months of the year but assumes no additional prior year reserve development. Two, catastrophe losses of 3.5 points. Three, increasing our forecast for after-tax net investment income to $113 million from our prior guidance of $110 million. Four, weighted average shares outstanding of 59.2 million shares on a diluted basis. Before turning the call over to Mark, I wanted to take a moment to mention that we'll be hosting an Investor Day in New York City on Thursday, November 9th. You should have already received the save-the-date notification.
If not, please contact our investor relations team, and they will make sure they get the details to you. I'll turn the call over to Mark to review the results for the quarter.
Thank you, Greg, and good morning. I'll discuss our financial results, beginning with some key metrics and trends for the company as a whole, and then we'll also touch on our segments. Before I begin, I'd like to highlight that we have enhanced our financial disclosures with the rollout of a new, more detailed financial supplement this quarter. We strive to maintain a high level of financial disclosure and transparency, and hopefully, this new supplement helps you better understand and model Selective's financial results. This is a presentation change only, and there were no changes to our historical numbers or metrics. For the quarter, we reported $0.70 of fully diluted earnings per share and $0.68 of operating earnings per share. We generated an annualized return on equity of 10.2% and an operating ROE of 9.9%.
Through the first six months, we have generated operating income of $91.4 million, which is up 13% from 2016. Overall, our annualized operating ROE of 11.5% for the first half of the year is in line with our long-term financial target and improved from the year ago period. For the second quarter, GAAP underwriting income totaled $20 million after tax and accounted for 4.9 points on the operating ROE. The investment portfolio generated after-tax net investment income of $30 million. The strong investment performance, coupled with our ratio of invested assets to equity at 3.3 times, resulted in 7.5 percentage points of annualized investment income contribution to the operating ROE. Consolidated net premiums written were up 6% for both the second quarter and year-to-date periods. The combined ratio was 94.7% in the second quarter on a GAAP basis and 93.1% on a statutory basis.
On an underlying basis or prior to catastrophe losses and reserve development, our stat combined ratio was 90.4% for the quarter and 90.2% year-to-date, both of which are better than the guidance we issued back in February. After a number of quarters of relatively benign catastrophe loss activity, our results this quarter include $29 million of catastrophe losses, which added 5.2 points to the combined ratio. Of this amount, $17 million relates to second quarter events and impacted the combined ratio by 3.1 point. We also experienced $9 million of current accident year development, principally related to three hail events which took place late in the first quarter of 2017. In addition, we incurred $3 million of development from a couple of large one-off reported claims from some hail events which occurred in 2016.
The $12 million of combined catastrophe loss development increased our catastrophe loss ratio by 2.1 percentage points to the 5.2%, which we reported in the quarter. Year-to-date, our cat loss ratio of 3.7% is in line with our expectations for the first half of the year. In the second quarter, we experienced $14.3 million of net variable casualty reserve development, which reduced the combined ratio by 2.5 points. Our practice of setting loss and expense reserves is disciplined, and for the past 11 years, we have experienced net variable casualty reserve development. Our strong results thus far in 2017 are a reflection of our ability to obtain adequate pricing and also reflect our strategic initiatives around underwriting mix improvements, claims handling, and expense management. Moving on to the segments.
Our Standard Commercial Lines segment net premiums written were up 7% for the second quarter and 6% for the first half of the year. The quarter's GAAP combined ratio for Commercial Lines was 92.2%. Results benefited from $17.3 million or 3.9 points of net favorable prior period casualty reserve development. Development was comprised primarily of reserve releases of $15 million each for the General Liability and Workers' Compensation lines of business, partially offset by $15 million of adverse development in Commercial Auto. The Commercial Lines segment also experienced $17 million of catastrophe losses, which added 3.8 points to the combined ratio. In our Standard Personal Lines segment, net premiums written were up 3% for the second quarter. The GAAP combined ratio of 108 was impacted by 13 points of catastrophe losses and 4.2 points of net adverse reserve development.
The unfavorable development consisted of $2 million related to Personal Auto and $1 million related to the homeowners lines of business. Despite the catastrophe losses, we are pleased with our Personal Lines book, with homeowners operating close to our long-term targets on an underlying basis. In our E&S segment, net premiums written increased 6% for the second quarter. The GAAP combined ratio of 97.5% included $3 million of 5.7 points of catastrophe losses. We're encouraged by the trend in underlying margins and will continue to seek targeted price increases as we look to bring the profitability of this segment in line with our long-term target. Moving on to expenses, our overall GAAP expense ratio was 34.2% for the second quarter, which was down 120 basis points from the comparative quarter.
On a statutory basis, the expense ratio was down 100 basis points from the year-ago period and down 70 basis points year-to-date. We're focused on seeking out areas of efficiency and cost savings while continuing to invest in our employees and key initiatives around enhancing our underwriting tools and the customer experience. Other expenses, which are principally comprised of holding company costs for long-term compensation, were also down relative to the comparative quarter, but elevated relative to our expectations. This is primarily due to higher costs related to our long-term stock compensation plan arising from the strong appreciation in our share price through June 30th.
We continue to expect expense savings in this line item due to the restructuring of our long-term stock compensation plan we completed earlier in the year, although there is some volatility in this line item given the variable accounting for a portion of the plan. Turning to investments for the quarter, after-tax debt investment income was up 29% from a year-ago. Fixed income securities, which represent 93% of our portfolio, experienced an increase in after-tax net investment income, resulting mostly from a higher book yield driven by the restructuring of our core fixed income portfolio over the last several quarters, which is now largely complete. Our fixed income portfolio is highly rated with an average credit quality of double A minus and a 3.7-year effective duration, including short-term investment.
The yield on the fixed income portfolio averaged 2.2% on an after-tax basis during the quarter, compared with 2% a year-ago. The new money yield on the fixed income portfolio during the second quarter was 2.2% on an after-tax basis, which reflects three consecutive quarters of increases. Alternative investments, which report on a one-quarter lag, reported a very strong pre-tax gain of $5.2 million for the quarter. The results were driven by solid performance in the private equity and energy sectors for this portfolio. Risk assets, which principally include high yield fixed income securities, equities, and alternative investments, remain consistent with year-end at 7% of total invested assets. We've been gradually diversifying our investment portfolio and will likely modestly increase our risk asset allocation over time, depending on market opportunities. Our balance sheet remains strong with $1.7 billion of GAAP equity at June 30th.
Book value per share increased 4% during the quarter and 7% for the first six months of the year, benefiting from strong earnings and net unrealized investment gains. We are adequately capitalized to support our growth and continue to target a premiums to surplus ratio of approximately 1.4 times, which is about twice the industry average. We continue to adopt a conservative stance with respect to managing our underwriting appetite, investment portfolio, reserving processes, and catastrophe risk. This allows us to maintain higher operating leverage than the industry as a whole, with each combined ratio point equating to about a point of operating ROE. With that, I'll turn the call over to John to discuss our insurance operations.
Thanks, Mark, good morning. We continue to move forward with various initiatives to drive our strategy and position the company for sustained outperformance. We remain focused on generating disciplined and profitable top-line growth. The three drivers of our growth will be new agent appointments in our current markets, increased share of wallet with our existing agents, and geographic expansion into new states. Our longer-term commercial lines targets of building agent relationships representing 25% of their markets and seeking a 12% share of wallet within each agency together translates to a goal of a 3% market share in commercial lines or an additional premium opportunity in excess of $2 billion. We've appointed 45 new agents during 2017 in our current footprint as we continue to drive our market share higher. In addition, we continue to execute our geographic expansion plans.
Selective has appointed 16 agencies in Arizona and nine in New Hampshire. These agencies control about 25% of the available commercial lines premium in their respective states. We began quoting Arizona and New Hampshire business opportunities actively through the second quarter leading up to our July 1st opening of these two new states. We are pleased with the early performance in both markets. We deployed our new underwriting tool, Underwriting Insights, to our new business underwriters. This tool incorporates our predictive modeling capabilities and provides our new business underwriters with real-time insights into how each prospective account compares to similar accounts already in the portfolio. This is in keeping with our goal of constantly improving the deployment and utilization of our sophisticated pricing tools. We complement our underwriting tools and technology with strong agency relationships that are built around our field-based underwriting model and our regional small business teams.
On the customer experience front, we continue to make progress towards achieving our goal to deliver a seamless omni-channel experience, allowing customers to interact with us and our agents in the manner they choose. We have made significant investments in our mobile platform and continue to eliminate friction points for our customers. Our goal from a data management perspective is to develop a 360-degree view of our customers, enabling us to provide outstanding service and the most effective insurance solutions to our agents and policyholders. Moving on to our operations. Our Standard Commercial Lines segment, which represented 78% of total second quarter net premiums, again produced extremely strong results for the quarter, with a statutory combined ratio of 90.6. Solid net premiums written growth was driven by stable retention of 83%, new business growth of 3%, and renewal pure price increases averaging 3.1% for the quarter.
Overall competition remains fairly intense, especially for new business. We continue to execute on our strategies to balance our top-line growth goals with achieving target levels of profitability. Increasing our agent share of wallet remains a high priority for us, and we believe we can achieve this goal while maintaining our disciplined approach to new business pricing and risk selection. We constantly monitor our renewal pricing on a granular level based on profitability expectations using our Dynamic Portfolio Manager. For the highest quality Standard Commercial Lines accounts, which represented 47% of our premium in the quarter, we achieved renewal pure rate of 1.2% and point of renewal retention of 91%. On the lower quality accounts, which represented 12% of premium, we achieved pure rate of 6.6% and point of renewal retention of 80%.
This granular approach to administering our renewal pricing strategy allows us to achieve additional loss ratio improvement through mix of business changes while continuing to deliver pure rate increases in excess of expected claims inflation. Drilling down to the results by line for Commercial Lines, our largest line of business, General Liability, reported $15 million of favorable prior year casualty reserve development, which related primarily to lower than anticipated claim frequencies and severities for accident years 2015 and prior. We achieved renewal pure price increases of approximately 2.6% so far this year. Our Workers' Compensation line also reported $15 million of favorable prior year casualty reserve development, which related primarily to lower than anticipated claims severities for accident years 2016 and prior. Favorable claims trends have resulted in increased competition for this business.
We nevertheless achieved a positive renewal pure price increase of approximately 0.6% for the first half of the year. Commercial Auto, on the other hand, remains a challenging area that we are focused on to improve the overall performance. For the second quarter, Commercial Auto experienced $15 million of unfavorable prior year reserve development, primarily relating to higher claim frequencies and, to a lesser extent, severities for the 2015 and 2016 accident years. We have been actively implementing price increases, which have averaged 6.7% so far this year, and believe the elevated loss trends support the need for additional rate. In addition to price increases, we've also been actively managing the renewal book in target industry segments and reducing exposure to higher hazard classes. In Personal Lines, which represented 13% of our total second quarter net premiums written, the statutory combined ratio was 105.9 for the quarter.
The Homeowners line experienced significantly higher catastrophe losses for the quarter, resulting from a range of severe weather-related events. We expect this from time to time and remain pleased with the underlying performance of the book. We continue to target a 90% combined ratio in a normal catastrophe year, or one that has approximately 14 points of catastrophe losses for this line. Renewal pure price increases across our Homeowners book averaged 2.1% in the first half of the year. In Personal Auto, we've seen higher than expected frequencies in the most recent accident years. We experienced $2 million of unfavorable reserve development in Personal Auto during the second quarter, largely due to higher frequency and severity in accident year 2016. As the industry moves to address increased loss cost inflation on this line, it should provide us with opportunities to grow the book while improving margins.
A sharp increase in new business volume has resulted in a pickup in premium growth for the Personal Auto line in recent quarters. Renewal pure price increases on our book averaged 2.8% for Personal Auto Liability and 3.7% for Personal Auto Physical Damage for the first half of the year. Our plans for 2017 incorporate rate filings averaging approximately 6% for Personal Auto. Our E&S segment, which represented 9% of total second quarter net premiums written, generated a statutory combined ratio of 97% for the quarter. We've been taking deliberate steps to push pricing where appropriate and let go of business that does not meet our profit threshold. Price increases averaged 5.6% so far this year, with significantly higher rate increases in the General Liability line of business. We've made a concerted push in recent quarters to increase pricing on our renewal portfolio.
We also expect changes to our business mix, an enhanced technology platform, and improved claims management processes to contribute to better performance in future quarters. Looking out to the remainder of 2017 and beyond, we'll maintain a strong focus on underwriting and pricing discipline as we seek profitable growth opportunities. Our strong relationships with our Ivy League distribution partners remain among the best in the industry and are key to the successful execution of our strategy. With that, we'll open the call up for questions. Operator?
Thank you. If you would like to ask a question, you may press star followed by the number one. Please record your name when prompted. You may cancel your request by pressing star 2. Our first question is from Arash Esmaili from JMP Securities. Your line is open.
Thanks. Good morning.
Yeah. Good morning to you. Thanks.
A few questions. I saw you took the guidance down by a point. I just want to make sure I'm interpreting the core combined ratio portion of it properly. I know you had, I think if I annualize it's about 1.3 points of favorable, so that would imply that the core combined is going from 90.5 to 90.8. Is the point that it really is still at 90.5, it's just a matter of kind of using round numbers, or should we think of it as 90.5?
I think you should view it as round numbers. Take two and a half points of favorable development through six months, divide it by two, you get 1.25. We're splitting quarters of a point right now. Yes.
Okay.
Yes.
Okay. Within the current quarter, I think on a GAAP basis, if I back out an 80 basis point uptick of non-CAT weather, the core loss ratio went up about 40 basis points. I just wanted to see, is that something that's kind of secluded or isolated to the auto lines of business, or I just wanted to get a better sense of what drove that.
Yeah, Arash, it's Mark here. Good question. I think what you're referring to is on a GAAP basis, on a comparative quarter, backing out CAT losses, backing out favorable development and non-CAT property losses. The underlying loss ratio is up about 30, 40 basis points from the comparative quarter. What you're seeing there is really two things. One is with the rate increases in auto as a percentage of the premium is a slightly bigger line within the overall loan premium mix, and that's booked to a higher loss ratio than the rest of the book. We are booking the 2017 loss ratio in Commercial Auto a little bit higher than we were a year ago. That is the driver of that uptick in the underlying loss ratio.
Thanks. I know you provided the renewal pricing numbers. I just wanted to know, how does new pricing compare to renewal pricing? New business pricing.
Yeah, this is John. We don't disclose a new business pricing number because it's not nearly as accurate as a renewal pricing number because you don't have the same basket of policies to compare. You're writing a very different mix of business from one year to the next, so it's very difficult to compare. When we refer to our sophisticated underwriting and pricing tools, our underwriters and regional management teams do have a lot of information on an account-by-account basis in terms of how they're pricing a piece of new business relative to how that same class and quality of account is priced in the renewal portfolio, and how that renewal portfolio, as it's priced, is producing from a margin perspective.
Transactionally, our folks understand what's happening from a new business pricing perspective, you can't roll that up in a way that we would be comfortable disclosing a new business pricing number. We've said over and over again, we very much manage that. We see how that performance is coming in relative to expected loss ratios on new business, and we're comfortable with the quality and the pricing.
This is Greg. Yeah, take it even from John's a little bit further. We're looking at by class of power unit, what the renewal rate per unit is, what the new rate per unit is. We're looking at that by geography. Those are the things that we're kind of anchoring to, which new business and new business pricing is a little bit more difficult to get your arms around. I have to tell you that we're doing everything that we can to better understand the price level that we write a new piece of business at.
Thank you. That makes sense. My other question on your wallet share and market share initiatives, I think $2.8 billion is the opportunity that you've mentioned before. That excludes the new states, correct?
That does. That's a number that we've put out there based on the 25 and 12 share wallet in our existing states.
Okay. How would you define, I guess, do you have a similar number you could provide for the new states, or how we should think about that?
I would think about it in the same terms. As we mentioned in the prepared comments, in both our new states, Arizona and New Hampshire, we actually started out with a set of agency partnerships that about right 25% of the market. Again, these numbers are never precise to the decimal point, so you want to think of them as directional targets. We would fully expect over several years to be marching towards that 12% share of wallet in those same states. I think what you really want to focus on in terms of premium opportunity, though, is get yourself to that 3% market share. Look state by state at the available premium in each of our footprint states, and then look at a 3% share.
For us, the 25 and 12 are the management levers that we push in order to drive to that overall market share. That's really where the opportunity number is coming from. We said in the prepared comments, in excess of $2 billion of opportunity, because again, those numbers lag a little bit in terms of getting the reported premiums. We continue to focus on those two management levers that I mentioned.
Thanks. Obviously on the wallet share piece, to increase that, you need to take the business, I guess, from someone else. I guess, can you maybe just talk a bit about how you are able to take that business from others? Is this mostly from small regional carriers, do you think you're winning the business from, or where do you think that opportunity is coming from?
You mean how we're winning it other than better product, better underwriting, better people, better claims service? No, listen, that's our value proposition, and it has been for a long time. Our agents and the approach we've had and the partnerships we've had, we generally have a group of approximately 1,200 agents that want to grow their business with us because they know the product is better, they know we're going to have a very consistent underwriting pricing philosophy, and they know that from a claim service and other servicing perspective, we're going to outperform everybody else that they have in their lineup of companies.
There's no question, if you look at our share of wallet growth expectations, there is a fair amount of that that will come from other companies, controlled accounts that they're going to move to us or give us an opportunity to quote on renewal. At the same time, we also are working with our agency partners to ensure that they're growing new opportunities, new to the agency, which is also going to give us an ability by writing a higher percentage of their new business to the agency than other carriers are writing is also how we expect to grow share of wallet over time.
This is Greg. The two things I would add to that, John touched on it in his opening comments. One is the omni-channel customer experience 24/7. That is something that we've been talking to our agents for now multiple years and driving them into that kind of environment. I don't know how many of our other competitors talk to you about what they're doing on their agency plan. For us to be able to execute that strategy with a franchise value is a heck of a lot easier than doing it with an agency plan that has thousands and thousands of agents. That's a point that you always want to stay focused on.
I think then that relative to the, we're clean in terms of a lot of the things that we do with our agents in terms of our line of sight, our supplemental commission programs, then the fact that there isn't really channel conflict with Selective that you may start to see evidence of, and maybe more evidence of as we march into the future. Again, we're trying to position our agents to be best in class for small business, for medium business, and for large business. I think that's the way you need to think of us. Our share of wallet at 12, I would say that as we continue to expand our state capability and other things, that we would expect that that share will increase over time.
It's not going to go up hugely, but as we can continue to handle accounts in multi-state areas, our share of wallet should go higher. That 12 share of wallet is based on our underwriting appetite today and our config of states that we've got in the inventory.
Thanks. The one other thing I wanted to ask, you mentioned that you've been shifting to lower hazard business on the E&S side, which should help on the margin. I just wanted to ask, why does that help on the margin? Just because I would assume that the lower hazard business has lower premiums. What is it about that that drives it? Because I've also heard some other carriers mention in certain lines that if they go for higher hazard business and they manage the severity there, they can potentially even get a bit more margin because the rates there are higher. Could you just talk to that?
I'm sorry. I just clarify, you broke up when you were saying what segment you're talking about. Are you talking about auto? Are you talking about E&S? I'm not sure.
I'm sorry. I'm talking about E&S.
Okay. Yeah, from an E&S perspective, we haven't really shifted our hazard mix. We've always been a pretty low, let's call it low hazard within the E&S space, low limits profile, generally a $1 million limits and lower. Our average premium size is about $3,000. It's generally contractors, restaurants, bars and taverns, small habitational risk. The risk profile for us has not really changed in terms of the hazard mix that we've talked about.
Okay. That makes sense. Thank you.
Okay.
Thank you. Our next question is from Scott Heleniak from RBC Capital Markets. Your line is open.
Hi, good morning.
Good morning.
Good morning, Scott.
I was wondering if you could just follow up on the comment, John, you made the comment about intense competition, and certainly we've heard others talk about that along those lines. Can I take that to mean, has that really ticked up a whole lot in the last couple of quarters, and are you seeing some more aggressive behavior than maybe you were a year ago?
I would say that is in fact what we're seeing. Again, it's going to vary geographically. It's going to vary a little bit depending on the class and the line of business we're talking about. I would say sequentially over the last several quarters, you have seen competition for new business intensify. Interestingly, we've been able to do an excellent job of managing the renewal inventory with continuing solid retentions and still achieve, and actually slightly outperform expectations with regard to pricing. New business hit ratios are under pressure, and we've seen that really get dialed up. I think the one line in particular that may be worthy of note would be workers' comp, which is surprisingly amongst the most competitive. I say surprisingly because we've certainly seen significant performance improvement over the last few years, as has the rest of the industry.
Overall margins on an actually year basis are right around target for us and for the rest of the industry. You are seeing a much heavier discounting of that line. You're seeing much more focus on increasing commission levels, especially in the low and medium hazard, smaller comp segments. I would say that would be one area in particular we're seeing competition dialed up the most.
Interesting too, Scott, when you see some problems with certain carriers in the marketplace, they have a tendency to go counter and get more aggressive on pricing for new business to try to keep the engine going. It's a little bit of a mixed grill, but we want to make sure that our underwriters in the field are maintaining discipline, and we're closely monitoring their overall performance.
I guess some people are chasing the performance there on the Workers' Comp, which has been a very good line over the past few years for most people.
It is your highest inflation line that you write in the business.
Absolutely. Speaking of that, have you seen any real kind of loss cost inflation uptick at all in any lines? Obviously, it doesn't sound like in Workers' Comp, but anywhere else, or any uptick in legal costs or anything?
I would say to you that overall it's been fairly tame, the line that has seen loss cost inflation the most is Commercial Auto, that's why we're not generating as much improvement in that line as we would normally expect. Remember, our six-month rate increase year to date in the liability aspect of the policy is 7.5%. On the physical damage side, it's 4.7%. When you add the two together, you're at a 6.7% rate level. That is an enormous amount of rate in a line. That rate is being mostly offset by higher trend. I would say that is the line that we've seen a little bit more pressure relative to what's happened on the trend, and the trend's been mostly on the frequency side, although some severity, but it's mostly been frequency focus relative to what's happened there.
Maybe a little bit in Personal Auto. You can attribute that to distracted driving. I'm glad to see some states start to adopt DUI now, right? Driving electronics under the influence and other aspects of that in my mind is a positive because you just see it all over the place. Whether it's gas prices, whether it's poor road conditions, whether it's just traffic congestion, miles driven are up, and we're seeing a little bit higher frequency. As you guys know, Auto is the smaller part of our overall in terms of what we said we were going to do relative to profit improvements. I don't want anybody to be off at that we said we were going to leg into that over time.
As John mentioned, we were going to push a little bit higher on rate at the 6 and the 6 level, that's because we're seeing market conditions change fairly quickly in that segment, in that line, I should say.
Is that 6%? That's obviously an average, is there areas where it's significantly higher than the 6% that you feel like it's kind of? We've definitely seen companies with upper single-digit rate increases there, I didn't know if there's any states that kind of stuck out as well.
Yeah. Just to clarify one point, the 6% we quoted in the prepared comments refers to the full annualized impact of the rate filings we're making in the calendar year. Those are staggered over the course of the years and will earn their way into 2018. You do see some variation from state to state around that 6% based on our own individually developed rate level indications. Overall, I think the trends that Greg just took you through are fairly universal, and it's a matter of what your profitability is in your book as a starting point. They're all moving directionally at about the same pace.
Okay. Just a few more on personal lines. You saw a bit of growth again, which you did also in the first quarter. Some of that is obviously rate, but are you guys feeling a lot better about this business where you feel like you can get some sustainable growth? That's the first. The second on that is, how many of the new agencies you're appointing excluding the new states, are writing personal lines? Just not an exact number, but just generally how is that trending?
Yeah, great questions. Let me take the first one you asked relative to sustainability of growth. You've now seen another quarter of growth in that 3%-4% kind of range, driven predominantly by growth in the Personal Auto line. Homeowners growth has been relatively flat over the last few quarters, and we see that being an opportunity for us to continue to drive our growth going forward as we start to pick up increased new business opportunities on a package basis with our home line driving profitability. We like the kind of the run rate we're on right now in that 3%-4% kind of range and feel good based on where the pricing environment is market-wise and where our rate level is. Feel very good about our positioning in those markets.
With regard to new agency appointments, our general philosophy in the states in which we have both Standard Personal Lines and Standard Commercial Lines, which is 13 Standard Personal Lines states of our now 24 Standard Commercial Lines states, our general philosophy is to appoint agents that write both personal and commercial. We don't go out there and make a lot of Standard Commercial Lines only appointments. Based on market opportunity, we're in fact starting to make more Standard Personal Lines predominant appointments. In other words, there are gaps in our agency plan from a Standard Personal Lines production perspective because we've got very strong Standard Commercial Lines predominant agents that are in place.
We are making more Standard Personal Lines predominant, but they're also multi-line appointments, and that will continue to be our general philosophy, being that we're going to be a better partner to an agency if we give them a better product on both Standard Commercial Lines and Standard Personal Lines.
Okay.
I'm not sure. Did I address the entire question there?
Yeah, no, that's perfect. That's a good answer. Thanks for the new supplement format too. There's definitely some good details in there. That's all I have. Thanks.
Great. Thanks, Scott. Rohan and Mark did a great job on that, thank you for that comment. Operator Bob, next question.
Thank you. Once again, if you would like to ask a question, you may press star one. Our next question is from Miss Alison Jacobowitz from Bank of America. Your line is open.
Thanks. Most of my questions have been answered. I am just wondering, can you do me a favor and just be sure I understood it right? Just repeat again the prior period catastrophe effect in the quarter, what it was in total. I appreciate it.
Yeah. Sure, Alison, this is Mark here. I will walk you through those numbers. In the quarter, you saw we had $29 million of total catastrophe losses, which was 5.2 points on the combined ratio for Q2 2017. Of that, $17 million relates to events that took place in the second quarter, which represents 3.1 points. $12 million relates to development on events that took place in prior periods, of which $9 million relates to Q1. There were three events that happened late in the first quarter that resulted in $9 million of current accident year development. There is also a little bit of development from some large reported losses from 2016, and that was about $3 million.
Net of the 5.2 points of cat losses in the quarter, 3.1 in the quarter from current quarter events and 2.1 from prior period events.
Thank you very much.
Bob, are there any more questions on the line?
At this time, we have no further questions on the phone.
All right. Well, thank you very much for participating. Remember that our Investor Day in November, Rohan is looking for you to be there. Some very good things he's got planned for that meeting, thank you very much. If you have any follow-up items, please contact the investor relations team, and Mark. Thank you very much for participating in the call today.
That concludes today's conference. Thank you for participating. You may now disconnect.