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## Personal Insurance 

 Our homeowners remediation efforts targeted improved loss ratios, higher prices, and fewer agency partners. All of this took its toll on production. We have plans underway to stabilize produc- tion and resume normal marketing to our “prime of life” target market. Despite agency terminations, retention has held up well and is a testimony to our strong agency relationships. 

Our issue is new business. We have a number of marketing initiatives underway to reposition us with our agency partners and regain “shelf space” with the customer service representatives who quote new business for prospective customers. We’re also attempting to take advantage of some disruptions in the market- place for book transfers from some of our competitors. Despite these efforts, we don’t anticipate resuming normal growth until 2016. Once this happens, we expect to regain our position in per- sonal lines as a top quartile market for our independent agency partners. 

In the meantime, we expect strong underwriting profitability driven by adequate prices and industry leading performance in our claim organization. Our loss adjustment expense is com- petitive with anyone. Our disciplined underwriting, responsive pricing and claim indemnity management are also significant contributors to our excellent underwriting results in the personal insurance segment. 

## Business Insurance 

Commercial lines growth is above average, but profi tability is mixed. As with personal insurance, all lines benefi t from strong claim performance. Automobile and liability lines have excellent loss ratios. In the fi rst half of 2014 our Business Owners Policy (BOP) results were impacted by harsh weather and an increased frequency in large fi re losses. In the second half of 2014 large losses returned to a more normal level. However, we identifi ed a handful of classes and larger premium accounts that have dispro- portionately hurt loss ratio performance. Specifi cally, some class- es such as grocery and convenience stores have experienced a higher frequency and severity of property and liability losses. We’ve eliminated several classes from eligibility and reduced marketing the BOP to accounts exceeding $25,000 in premium. 

Our biggest constraint to improving our business insurance combined ratio relates to our expense ratio. Service levels are excellent, but we have a high touch/high cost service model. In 2015, we’ll begin making technology investments to improve productivity, organizational changes to more effi ciently process smaller accounts, and refi nements to our underwriting appetite to focus on accounts over $10,000 that currently have acceptable expense ratios. We anticipate that expense ratios will improve over the next several years as we implement these steps. 

“We’ve completed the transformation of our claim operations by redesigning businesses processes, restructuring the organization, reducing reliance on third-party vendors, and implementing a new technology platform.” 

## Specialty Insurance 

Specialty insurance has achieved top quartile status. Since adding Rockhill’s business to the intercompany pooling arrange- ment, we’ve seen a steady premium growth rate and, excluding RED, excellent underwriting results. We expect to benefi t in the future as we build out our specialty claim capability, handle more claims in-house, and better manage relationships with third party claim administrators and vendors. 

Our specialty segment consists of E&S property, E&S casual- ty, workers’ compensation and programs. E&S property’s results have been exceptional, benefi tting from strong underwriting performance and low catastrophe levels, particularly in Florida where a signifi cant amount of this business is written. 

E&S casualty has produced strong and consistent under- writing profi ts with a focus on umbrella and casualty excess, environmental liability, healthcare (both professional and general liability), and non-admitted general liability lines such as that written through Partners General, a managing general under- writer acquired by our parent, State Auto Mutual, in 2014. 

Our workers’ compensation niche strategy focuses on our two-pronged “barbell” strategy. Approximately 50% of our premium is in the specialty “debit mod” market, which targets businesses with policies of at least $100,000 in annual premi- ums, where we work to reduce a client’s workers’ compensation costs through our superior nurse consulting claim capability and rigorous return to work programs. 

The other half of our premium in this specialty unit is small workers’ compensation policies under $25,000 in premium, although most of what we write is under $10,000. We market to “four wall” classes such as manufacturing, healthcare, hospital- ity, retail and wholesale. These types of risks generally do not have catastrophic claims and benefi t from our return to work claims programs. Our strategy continues to produce strong profi ts, and we see opportunities for continued growth and profit as we expand to new states and broaden distribution. 

In 2014, the program business, excluding the impact of RED, came close to achieving targeted returns as we gained scale. This is a business that should be consistently profi table given our niche marketing orientation, strong underwriting and claim controls, and rigorous pricing discipline. With RED behind us, and a new management team in place, we expect programs to be an important part of our specialty profi t and growth plans for the future. 

## Claim 

We remain very pleased with our claim performance, which is critical to achieving superior loss ratios and maintaining high levels of customer service. Our loss adjustment expense ratio 

