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State Auto Financial Corp  (NASDAQ:STFC)
Q1 2019 Earnings Call
May 02, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome and thank you for standing by. At this time all parties are in a listen-only mode. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to State Auto Financial Corporation, Director of Investor Relations, Natalie Schoolcraft. Please go ahead.

Natalie Schoolcraft -- Director of Investor Relations

Thank you, Donna. Good morning everyone and welcome to our First Quarter 2019 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 of Personal Lines, Jason Berkey; Senior Vice President of Commercial Lines and Managing Director of State Auto Labs, Kim Garland; Chief Actuarial Officer, Matt Mrozek; and Chief Investment Officer, Scott Jones.

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. Financial schedules containing reconciliations of certain non-GAAP measures, along with other supplemental financial information, are included as part of our press release and available on our website stateauto.com under the Investors section.

Now I'll turn the call over to STFC's Chairman, President and CEO, Mike LaRocco.

Michael LaRocco -- Chairman, President & Chief Executive Officer

Thank you, Natalie. Good morning, everybody. We began 2019 as we entered 2018 with profitable growth. Both our loss ratio and growth trends continues to develop as we expect and give us great confidence for the remainder of 2019. Actually, I want to begin by reviewing our commercial lines results. Over the last couple of years as we completed our turnaround, commercial while getting better was still a drag on our results. To be fair, remember we focused our technology investment on personal lines first, since we just completed the rollout of small commercial across all states last year, this was the year we anticipated the turn for commercial auto and BOP and I'm pleased to say we are seeing the turn. The quarter showed critical improvement across both commercial auto and BOP, from both a profit and loss trend perspective. With our ongoing strength in personal lines, this improvement in commercial lines is essential to our overall vision.

In addition, our middle market commercial business while not yet benefiting from the technology uplift that will happen early next year has been restructured the result is an energized team and significant loss ratio improvement in premium growth across the industries, we're focused on. If we can build our reputation as a strong player in the middle market commercial space, something we struggled with for some time and then add our digital platform, we can establish a solid base for these commercial risks.

Our farm and ranch business continues to perform well and we expect it to be on our digital platform, no later than the fourth quarter. These lines are rapidly approaching $100 million in premium volume on a group basis and our view post the platform launch is for much more significant growth. In addition to the list of going digital we will be able to add the states, where we currently write personal and commercial, an additional 9 states for farm and ranch.

While our workers' comp business continues to lag on the growth side, we remain committed to disciplined pricing in this line. We see the market as overreacting and taking the same misguided actions as we've seen in the past. This lack of consistency in pricing comp is not a path we will follow. Having said that we still see opportunities to modestly grow this line, while maintaining our uncompromising view that profit comes first.

I'm very bullish on our personal lines results. Our loss trends across auto continue to improve and our growth reflects the support of our agents. We continue to fight the retention challenge across this line of business. But, much of this was anticipated due to our focus on returning our largest line to the profitability. As the rate need has stabilized, we believe growth will now increased at an even faster pace, as other regionals and mutuals deemphasize and in some cases exit personal auto, again we're very bullish on this line.

Homeowners, even with significantly increased level of 1Q cat activity versus 1Q last year, had a very strong quarter. Our underlying non-cat trends look very good and our growth continues to be strong. We're focused on building an innovative home product and have increased our use of new technologies across both pricing, through leverage of smart home technology and claims through the development of innovative new inspection efforts. Winners in home insurance will be the companies that properly leverage the new and emerging technologies.

Our auto expense ratio is an early indicator of how our investment in technology will pay off in the expense ratio. We're now coming out of the heavy investment period and can see a direct impact of our digital platform on go forward expenses. We have the ability to place a large amount of premium on the new platform with significantly lower expenses, including of course paper and postage. As we look forward, our path to a competitive expense ratio in personal lines is clear, and is now emerging. We believe commercial will follow a similar path. On a personal note this week I completed 4 years with State Auto. I could not be more proud of our team of associates and our agents. Their commitment and passion have led us to a successful turnaround of the Company. More importantly, we've now built a new foundation of people, platform, products and culture that will allow us to meet the rapidly changing market and win.

With that, I'll turn the call over to Steve.

Steven English -- Senior Vice President, Chief Financial Officer

Thanks, Mike, and good morning everyone. Earlier today, we reported Net income per fully diluted share of $1.12 compared to a year ago, at which time we reported a fully diluted net loss per share of $0.05. On an operating per share basis, we reported today net income per fully diluted share of $0.31 compared to $0.17 of income in the first quarter of 2018. As a reminder, we exclude net investment gains and losses, net of tax from operating earnings. For the first quarter of 2019 on a pretax basis, net investment gains included $48 million of unrealized gains on equity, securities and other invested assets, while the first quarter of 2018 included $15.3 million of unrealized losses.

With our exit, the Specialty segment is no longer a reportable segment. It is now identified as Specialty run off. We have provided a reconciliation of the Personal and Commercial segments to total statutory underwriting results, along with a reconciliation to results on the Generally Accepted Accounting Principles or GAAP basis. Overall net premiums written grew 4.7%, while net earned premiums declined 3.9%. Personal and Commercial net premiums written grew by 9.2% compared to the first quarter of 2018, while specialty run off net written premiums dropped quarter-over-quarter by $12 million totaling only $400,000 in the first quarter of 2019.

Specialty run off drove the decline in earned premium in the first quarter of 2019 earned premium of $4.8 million, down from $43.7 million in the first quarter of 2018. Personal and Commercial earned premium grew 9.9% in the first quarter compared to a year ago. The GAAP combined ratio of 99.7 improved compared to 102.6 from the first quarter of 2018. On a statutory basis our Personal and Commercial segments collectively were profitable with a 99.7 combined ratio. This compares to a year ago when those segments reported collectively a 101.4 combined ratio. Personal lines reported 97.9 statutory combined ratio, flat with last year's first quarter, while experiencing 7.7 points of catastrophe losses this year compared to 3.4 points a year ago. Personal auto reported an improved statutory combined ratio of 93.9 with the non-cat loss and ALAE ratio improving 9.2 points on an accident year basis. Commercial lines reported a 102 statutory combined ratio compared to 106.1 in the first quarter of '18.

Small commercial package, workers' compensation, Farm and Ranch and other commercial all reported combined ratios below 100. Commercial auto reported a statutory combined ratio of 104.7, which reflected 11.6 points less favorable development than the first quarter of 2018, but a 7 point improvement in the current accident year, non-cat loss and ALAE ratio. Middle market commercial also reported combined ratio above 100 at 124.5 impacted by large fire losses in the quarter.

Favorable prior year development of non-cat loss and ALAE reserves amounted to $20.9 million or 6.9 loss ratio points. This compares to the first quarter of 2018, which reported $16 million of favorable prior year development or 5.1 loss ratio points. We continue to see improving trends across both personal and commercial autos. Specialty reserves developed adversely by $1.3 million due to development of some late 2018 fire losses. Personal auto developed favorably by $6.8 million, primarily from accident year 2018 with better than expected severity in bodily injury. Commercial lines continue to develop favorably overall totaling an improved $15.3 million compared to a year ago at $9.7 million. Small commercial package favorable development was spread across 2015, 2017, and 2018 accident years.

Focusing on our accident year, non-cat loss and ALAE ratios for personal and commercial on a statutory basis, the first quarter of 2019 ratio of 58.6 compares to 62.9 a year ago. Personal and commercial auto estimates reflect continued improvement attributed to cumulative rate and underwriting actions, as well as realizing improved claims handling efficiencies. Other personal, which includes dwelling fire and middle market commercial are elevated this quarter due to large fire losses. Small commercial package experienced a lower overall level of property losses reported in the period. Jason and Kim will provide further color on growth and underwriting results in their commentary.

Net investment income is down slightly from the first quarter a year ago and down $3.3 million from fourth quarter of 2018. TIPS contributed $1.2 million towards the sequential decline due to the change in the CPI, while dividends on equity securities made up the balance. In the fourth quarter of 2018, we received $1.6 million in dividends on a fund that only distributes annually. And I must note for the second quarter of 2019 and beyond, the $70 million in notes receivable from STFC's parent company, State Automobile Mutual Insurance Company matured in May of 2019. We expect to refinance those notes with the parent company, which currently carry a 7% coupon, with new 10-year notes and an interest rate of 4.05%.

The GAAP expense ratio is up 3/10 of a point with net earned premium declining 3.9% during the first quarter of 2019, compared to the first quarter of 2018. On a statutory basis for personal and commercial, the expense ratio increased to 1.2 points. During the quarter, we conservatively estimated variable incentive comp for agents and associates versus first quarter of 2018. Higher medical costs and premium tax were also factors. These estimates will be trued up as the year progresses and are based upon profit growth results. Reported ordering costs are also up year-over-year as all states are up and running for personal lines and commercial connect is up for commercial auto and BOP or small commercial.

And with that, I'll turn the call over to Jason.

Jason Berkey -- Senior Vice President, Personal Lines

Thanks, Steve and good morning, everyone. The first quarter was another profitable quarter for personal lines with a combined ratio of 97.9%. Our profitable growth as a result of many important efforts, such as ongoing claims operational improvements, the earn in of the rate actions to improve profitability and new business growth seen with the launch of our Digital Connect product, all are coupled with favorable loss reserve development in the quarter.

At the same time, in the first quarter, we experienced higher catastrophe losses than the prior year with the cat loss ratio of 7.7% compared to 3.4% in the first quarter of 2018. The personal lines loss and ALAE ratio was 66.1% for the quarter, compared to 67.3% in the first quarter of 2018. Our personal auto rate actions will be more targeted going forward, reflecting the moderating trend now being seen. As our prior aggressive rate actions renew into our book, they continue to put pressure on our retention and personal auto PIF growth. The new business lift from our Digital Connect product rollout has somewhat offset the pressure on PIF from the lower retention. At the same time, we continue to see double-digit personal lines premium growth with net written premium up 11.6% in the first quarter of 2019, over the first quarter of 2018.

In January, with the launch of our Digital Connect product in North Carolina, we've now launched in all 28 of the states where we currently write personal lines. This completes a tremendous multi-year effort to go digital as we transform our business to thrive in an ever more digital world. We've also launched the next generation of our Connect agency portal, which we call Portal 2.0, containing enhancements to improve the agency quoting experience that we believe will help maintain our new business momentum. In fact, looking at our April 2019, new business, it was up over 20% versus April of 2018 following the March 2019 launch of our Portal 2.0 in all of our personal lines states with our auto new business up over 10% and home up nearly 30%.

Turning now specifically to personal auto, the statutory personal auto loss and ALAE ratio in the quarter was 63.5% with the statutory combined ratio of 93.9% compared to 72.6% and 101.0% respectively in the first quarter of 2018. We closely watch the rate of increase in our premium versus the rate of increase of loss cost to measure the improvement in our profitability. In the first quarter of 2019, the change in 12-month rolling earned premium per vehicle was greater than the change in our annual loss cost. In addition, on our legacy personal auto book of business, the bodily injury frequency trend continuing to be favorable in the quarter. The auto loss ratio in both our Connect digital product and our legacy product improved due to the earning of rate actions along with claims operational improvements in our care organization.

In financial terms, our personal auto performance is as follows. First quarter '19, net written premium for personal auto was up 5.7% versus first quarter of '18. New business counts for the quarter were down by 0.9% over first quarter of '18, although our auto new business count in the month of March was higher than in March 2018 and first quarter new business was up over fourth quarter 2018, as we began to see new momentum with the launch of Portal 2.0.

Policies in force finished 1.1% below the first quarter '18 PIF level. Auto retention was roughly 68% and continues to be pressured by the earn-in of our aggressive rate actions to restore profitability. Auto rate changes over the last 9 months have been more moderate and our expectation is that we'll continue to take moderate auto rate changes in 2019 commensurate with recent trends experience. These more moderate recent rate actions will begin to reduce the rate pressure on our auto retention from prior aggressive rate actions that have now mostly renewed into our book of business.

Moving onto homeowners, where we continue to see a terrific opportunity for profitable growth with our Connect homeowners' digital products, as we continue to see a lower, new business loss ratio than we've experienced previously on our legacy book. This reduction in our homeowners' new business penalty is important to our profitability, as we continue to ramp up homeowners' new business production and grow our homeowners' policies in force.

Homeowners PIF in fact increased by 12.8% over first quarter of '18with the new business lift from the launch of Connect and Portal 2.0. New business counts in the quarter were up 20.1% over first quarter '18 and homeowners retention ended the quarter at roughly 76%. In financial terms, our homeowners performance is as follows. First quarter '19, homeowners net written premium increased 18.6% versus first quarter of '18. First quarter '19 loss and ALAE ratio was 70.1%, with a combined ratio of 103.8%, compared to 59.3% and 92.9% respectively in first quarter '18.

The homeowners' cat loss and ALAE ratio for first quarter '19 was 18.1%, which is 9.9 points higher than the first quarter '18 homeowners' cat loss and ALAE ratio of 8.2%. The first quarter '19 non-cat loss and ALAE ratio of 44.5% was 0.3 points higher than the 44.2% in first quarter '18.

In conclusion, our personal lines story line for the quarter can be summarized as first, personal auto rate actions continue to renew it to our book and placed pressure on both auto and home retention. Secondly, moderation in our personal auto loss trends continues as a result of our ongoing claims operational improvements. And then finally homeowners combined ratio for the quarter was impacted by higher catastrophe losses than in 2018, resulting in a combined ratio of 103.8%.

Needless to say, I'm proud of the team for our first quarter results. We realize we have plenty of room to improve, but with our strong foundation, now in place, we have confidence in what we can achieve in 2019.

With that, I'll turn the call over to Kim Garland, to discuss our commercial lines result.

Kim Garland -- Senior Vice President, Commercial Lines and Managing Director of State Auto Labs

Thanks, Jason. The commercial results are as follows, 1Q '19 combined ratio of 102 versus a 106.1 in 1Q '18 and 1Q '19 written premium increase of 5.9% versus 1Q '18. If we exclude workers' comp the commercial lines written premium increase was 12.6%. For the commercial business as a whole, the story is our statutory non-cat loss and ALAE ratio was 4.3 points lower in 1Q '19 versus 1Q '18 and the non-cat loss and ALAE ratios were good in 4 of our 5 major commercial product lines, sole exception being middle market commercial with a 1Q '19 non-cat loss and ALAE ratio of 74.5. Commercial loss ratios continue to be where we generally need them to be and commercial expense ratios are not in our biggest inhibitor to overall profitability. The 1Q '19, statutory commercial expense ratio of 42.4% was 1.7 points higher than 1Q '18 due to being in the most intense period of the commercial Connect technology investment and higher incentive compensation estimates.

Growth continues to strengthen for our commercial lines business. 1Q '19 was a record new business quarter for commercial Connect, that is commercial auto and BOP products. Commercial auto new business premium was up 164% versus 1Q '18 and total commercial auto premium was up 29% versus 1Q '18. BOP new business counts were up 67% versus 1Q '18. BOP new business premium was up 2% versus 1Q '18 as average BOP premiums and connect around 60% of what they were for pre-Connect and total BOP premium was flat versus 1Q '18.

We also had a record growth quarter for middle market commercial. 1Q '19 middle market, new business written premium was up 50% versus 1Q '18. This is our third consecutive year of Q1 middle market new business growth above 30%. These 3 years combined have resulted in our 1Q '19 middle market new business written premium being, up 286% versus 1Q '16 levels.

Farm and ranch had a solid quarter of growth at 7.8%. Workers' comp growth struggled in the quarter, down 20% as competition and downward rate pressure continued to intensify. Here's an update on commercial Connect. This is the quarter where commercial connect really started to gain traction. March 2019 versus December 2018 Connect new business counts increased 80%. Straight Through Processing rates for Connect continue to improve and are now above 70% and the 1Q '19 percentage of commercial auto Connect new business premium that is on telematics was 19%.

As a reminder, the benefits of small Commercial Connect include a no touch model, which we need to get to an acceptable expense ratio and as prices -- the price model need to get to consistently better loss ratios. We are thrilled that we are making significant process and fighting through the transition to this new operational model, a special shout out to our territory managers, account executives and the Commercial Connect team for everything they're doing to help our agents' business transition.

Here is an update on our path to a significantly improved expense ratio for commercial lines. To get to a significantly better expense ratio on commercial lines will require 2 things, improved unit economics across the different tests that are done within our commercial business and more scale.

On the topic of improved unit economics, Connect is accomplishing this. Pre-Connects commercial auto and BOP had a 0% Straight Through Processing percentage for new business, that is we manually touched every single piece of new business. In the Connect world these products are achieving above and above 70% Straight Through Processing percentage. Now, we just need to get more of our commercial premium on this more efficient platform. In 2018 for all of commercial lines of the premium split was 1.8% on Connect and 98.2% on non-Connect. In 1Q '19, the split is 5.2% on Connect and 94.8% on non-Connect. We will keep you updated on how the split evolves in subsequent quarters.

Scale, as previously mentioned, we are starting to see be solved. For commercial auto and small commercial, Connect new business volumes are significantly increasing. In middle market Connect has allowed our commercial underwriters to stop working on small commercial and turn their focus to middle market. We are seeing this increased focus produce growth in middle market even before the launch of middle market Connect provides our underwriters better tools to work with and the path to significant growth for farm and ranch in workers' comp is clear. For farm and ranch, Connect will allow us to enter 9 new states and for workers' compensation, workers' compensation package business should increase when agents do not have to go to 2 different systems.

The key to this plan will be to ensure that loss ratios do not deteriorate as we grow, the commercial business results by product line are as follows. I'll focus on the loss in ALAE results for each product line as the acquisition and operating expense ratios for every product line poor as previously noted. Commercial auto, the commercial auto loss and ALAE ratio in 1Q '19 is 59.9%, which is a 5.3 point deterioration versus 1Q' 18, but still at an acceptable level. The 1Q '18 result included 18.9 points of favorable prior year development and the 1Q '19 deterioration is primarily driven by the 1Q '19 results having 11.6 points less favorable prior year loss development.

Commercial auto written premium in 1Q '19 was up 29% versus 1Q '18. Small commercial package, the small commercial package statutory loss and ALAE ratio in 1Q '19 is 48.8%, which is a 24-point improvement versus 1Q '18 driven by 14.7 points improvement in the prior accident year development over 1Q '18, as well as the current accident year loss ratio and the cat loss ratio, would be 5.6 points better this year. Small commercial package written premium in 1Q '19 was flat versus 1Q '18 and small commercial package policies in force began to again in February after 5.5 years of decline.

Middle market commercial, the middle market statutory loss and ALAE ratio in 1Q '19 is 83%, which is 5.7 points higher than 1Q '18 driven largely by large fire losses in the quarter. Middle market written premiums in 1Q '19 was up 17.5% versus 1Q '18. Finishing the rollout of Connect and small commercial for new business continues to free up time for our commercial underwriters to focus on middle market commercial. As discussed earlier, 2019 was our third consecutive year of first quarter new business growth above 30% in the middle market.

Workers' compensation, the workers' compensation statutory loss and ALAE ratio of 1Q '19 is 52.5%, which is 13.5 points lower than 1Q '18, this level of loss in ALAE ratio produces a great combined ratio for this product line, 90.4% for the quarter. Workers' compensation written premium in 1Q '19 was down 20% versus 1Q '18. Our premium decline in workers' comp is driven by the following. Debit mod workers' comp, which represents around half of our workers' comp written premium. 1Q '19 debit mod total premium declined 23% versus 1Q '18 and debit mod in our new business premium declined 56% versus 1Q '18. In this phase of the cycle for workers' comp more carriers go after debit mod workers' comp business. We compete in debit mod workers' comp non-price, but our ability to change or rehabilitate the insurance workers' comp risk. This is a harder sell in this part of the cycle, but we are focused on the long game in workers' comp and debit mod will continue to be an important part of our product portfolio.

Mono-line workers' comp, as we move to a Connect world, where all of our products lines are more integrated, we have been deemphasized mono-line workers' comp and emphasizing package workers' comp. Mono-line workers' comp total written premium declined 35% 1Q '19 versus 1Q '18 and mono-line workers' comp new business written premium declined 57% 1Q '19 versus 1Q '18,. We are not unhappy happy with this result. Mono-line workers' comp now represents around 9% of our total workers comp written premium, versus representing 15% (ph) of our total workers comp written premium in 2016.

Package workers' comp will be a more important part of our product portfolio moving forward. Our ramp up of package workers' comp faces 2 main issues to overcome. First, workers' comp is not yet on Connect, which requires working on 2 systems to sell a package workers' comp policy and our sales team have had their hands full, ramping up Commercial Connect in general, and selling workers' comp on a different system has understandably not been our highest area of focus. Despite this, we are starting to see early signs of progress. For package workers' comp, the total written premium 1Q '19 versus 1Q '18 is down 13%. New business written premium 1Q '19 versus 1Q '18 is down 22%. The new business written premium in March '19 versus March '18 is actually up 34%.

The teams will continue to work to make progress on package workers' comp in a pre-Connect world, but the transformational change in workers' comp would likely occur with the launch of workers' comp Connect in 2020. For farm and ranch, the statutory loss and ALAE ratio in 1Q '19 is 46.5%, which is 3.7 points higher than the 42.8 in 1Q '18. You also see a 50% expense ratio for farm and ranch this quarter. This includes 14 expense ratio points of technology spend, which reflects the cost of the quarter build out of farm and ranch Connect. Enduring these current high expense ratios in farm and ranch is worth it, as the launch of farm and ranch Connect in the second half of 2019 includes entering 9 new states and should be the growth accelerant for this product line for the next several years.

Farm and ranch written premium in 1Q '19 was up 7.8% versus 1Q '18. Commercial lines raw numbers for 1Q '19 at 5.9% written premium growth and a 102 combined ratio again mask (ph) how important and good a quarter it was for the commercial business at State Auto. We set new business records this quarter. We made significant progress in cracking the code for selling Commercial Connect and we are establishing a strong identity as a rider of middle market commercial. Each quarter the past is a significant success in commercial lines becomes clear for State Auto. All of this is due to the incredible work with the commercial team and our partners throughout State Auto are doing during this period of transformation. I could not be prouder of them.

With that, we'll open the line for questions.

Questions and Answers:

 

Operator

(Operator Instructions). And your first question is from the line of Larry Greenberg with Janney Montgomery. Please go ahead.

Larry Greenberg -- Lawrence David Greenberg, Janney Montgomery Scott LLC -- Analyst

First one, just a quick numbers question. When we look at the middle market underlying loss ratio, could we assume that all of the increase versus kind of prior run rate is due to the fires? Or was there anything else there?

Kim Garland -- Senior Vice President, Commercial Lines and Managing Director of State Auto Labs

Yes, Larry. And I'll give a little more color on that. We actually had 8 fires in the first quarter, so that exceeded 500,000 and that's whole about $12.5 million of incurred losses. When we look at like the prior 5-year average of fires above 500,000, that was about 3 claims in Q1. So estimate of the sort of additional loss ratio due to the higher number of large fire losses in the quarter is about 15 points on the loss ratio.

Steven English -- Senior Vice President, Chief Financial Officer

Larry. As a reminder, the dollars Kim was just quoting were group numbers.

Larry Greenberg -- Lawrence David Greenberg, Janney Montgomery Scott LLC -- Analyst

And then on commercial auto, I know you guys have talked in the past about loving that business and then you, you grew net premiums by close to 30% this quarter. Clearly, the industry is struggling with that pretty meaningful rate increases from others, just color on your growth there? Your comfort with that level of growth? Is a lot of that a function of what others are doing from a pricing standpoint?

Kim Garland -- Senior Vice President, Commercial Lines and Managing Director of State Auto Labs

Yes, I think there's a couple pieces to that. The first is, I think we would make the argument that we took our medicine in commercial auto before others probably did. So a lot of the works the teams did in 2015, '16, '17 large rate increases, a lot of re-underwriting, I think, got us to a sort of a more adequate rate level earlier than others. And so as others continue to take those remediation actions and we're ready. I think some of that business is coming to us. I think the second part of that is the launch of Commercial Connect. So just the process of writing commercial auto is much easier. And this is still a game where ease of business matters.

I think the third leg of that is having about 20% of our premium on telematics is actually a really good start and sort of the impact of telematics like we think in commercial auto is massive. So more we can put on that, the more we think it's sort of gives us an additional insight to have consistently better results. And the fourth part is, we're still really small in commercial auto, so that as one might see a large percentage increase, it's still not a massive amount of sort of raw premium, at least that's what we tell our sales people to make them work even harder.

Steven English -- Senior Vice President, Chief Financial Officer

And Larry. I think the final piece would be the piece that we've been talking about in both personal auto and in commercial auto, but quite frankly across the organization is that our care or what we -- what we call our care organization of our claims organization, we really upgraded our ability in terms of speed to respond and we're seeing a lot of the effort that's been made in that part of the organization come through towards managing loss costs and, and negotiating harder and being willing to go to trial. And at the end of the day, the impact of an effective claims organization is very, very significant. It doesn't get as much attention on these calls, because it's harder for you all to quantify that, but that distinction I think has been a big part of this turnaround effort that we've made.

Larry Greenberg -- Lawrence David Greenberg, Janney Montgomery Scott LLC -- Analyst

And Mike just a general question on, and I'm thinking personal auto more than commercial, but on telematics where some agency companies have talked about the challenge of getting customers to accept telematics and you know having relatively low take-up rates, what's going on there? And does Connect for you improve your ability to get customers on this?

Kim Garland -- Senior Vice President, Commercial Lines and Managing Director of State Auto Labs

I think what's going on mainly is they're just not very good at it. That would be the first to answer, the other carrier. I think the Digital Connect piece probably has some power and some value, but a lot of it, Larry, is kind of how you communicate the benefit of telematics to both the customer, their family and getting the agent to understand the power of that. Well, our agency, the changes within our agency has really emerged I think in a significant way.

There is reality. There is certainly reality that there are some group of customers out there, who may have a bias against somebody tracking them, the so-called privacy concern. There's others who may just not want the complexity of the whole process. But if you really think about telematics, the main message we have to our agents is that for the best of their best drivers it is the best way to rate their insurance and we have a view internally, which goes to the first part of my comment.

We're super passionate about in both personal and commercial because there's little question in our mind that it's going to become the predominant way to rate auto insurance and so what we're doing beyond what we do today is you'll see us coming out this year with options as well instead of right now, we use a piece of hardware that we call it dongle, we'll be having a mobile application option that will again kind of ease the transition for some people, but to me it's about communicating the benefit of go into telematics effectively and to do that you've got to have a ton of passion and understanding around why it works, and then a willingness to make sure you price for it appropriately. So we're -- to say we're all in would be an understatement. I think it's going to be sensor-based products of all sorts are going to be the future and a lot of it just goes to effort and passion.

Operator

(Operator Instructions). And your next question from the line of Sean Reidenbach (ph) with KBW. Please go ahead.

Sean Reidenbach -- KBW -- Analyst

Hi, personal auto premiums were at low, a little lighter than we were expecting and then it's been trending down for the last couple of quarters. What trends are you guys seeing in new business in retention in personal auto?

Steven English -- Senior Vice President, Chief Financial Officer

Well, as I mentioned on the call -- we've seen a lot of pressure on auto retention due to some of the aggressive rate action that we've taken, and we saw some -- at the same time we've taken rate on the Connect product, our new business product and also to put pressure on new business. We saw that in the starting in the fourth quarter, but in the first quarter with the launch of Portal 2.0, we've seen that return. And in April, we've seen some positive signs that agents are enjoying the experience of Portal 2.0 and our rates are still competitive. We noted, that it's still a very aggressive competitive market in personal auto. And we do expect that to continue, but we see new business opportunities.

Michael LaRocco -- Chairman, President & Chief Executive Officer

And Sean, this is Mike, I'd just tag on that. The reason we're so bullish on auto and you go through these little ups and dips and -- when we launched this product again, I -- sometimes I worry that I didn't do a good enough job of explaining to folks. That when we launched a new platform we literally launched a brand new products. So, when you do that -- and what I mean by that is the product we inherited was not designed or segmented with the level of sophistication that in today's marketplace is really needed to be. And so when you do that you do your best to design that product and build it in the most effective way and I think for the most part that has played out really well.

You can see that through our loss ratios, and our growth, but we also throughout the course of the first launch and then updating it, making changes, we found lots of places where we need to -- we needed to adjust the model, make some segmentation changes, adjust some rates here or there. And when you put your agencies through that, you're going to get some impact on your retention, then you're also going to get other questions in terms of the movement up and down.

Thirdly, the platform works great. In the early days, it had its bumps, it's gotten better, and better, and better. So I think what you experienced when you saw the rush up and then a slight turn down, which is now going back up, is something that I certainly expect it, again I probably could have communicated that better to the market. You're going to go through with any type of new product launch some of those peaks and valleys. I think what you're hearing from us today is that with the launch of Portal 2.0, which is an upgraded new version of the platform, and again that is in itself is important because in the old legacy systems, you would have to wait months and sometimes years to make these types of changes. We can do them much more significantly that factor, number 2, the model, we've turned the crank a handful of times to tighten it up to make it a little bit better to get the rates in the right places. Most of that work is done; of course, you're always looking to get better.

So a lot of the foundational work when you launch a new product and you goes through bumps, allowed us to rebuilt. So now as we see what's happened in the January, February, March, and now April, this consistent sequential increase in new business that's why we're bullish, but your question is a good one in the sense of when you look at it, you'll see some of the ups and downs, you may question that and that's understandable. But, we see underneath that the difference -- this last thing is we are just out with most of our agents over the last 30 days and, and again they're seeing that as well and that's the best telling spot for us. So we think the worst of those ups and downs are over, and we're on a very positive glide path.

Sean Reidenbach -- KBW -- Analyst

And do you expect I guess personal auto and net written premium growth to kind of move more in lockstep with homeowners going forward because of the bundling that typically occurs or how is that kind of --

Michael LaRocco -- Chairman, President & Chief Executive Officer

Yes, I think it'll be a little slower. The answer generally is yes. So you want to see your premium in PIF growth in both of those lines kind of move in the same general direction. Having said that, I think it's -- I think Auto will trail down a little bit. Remember that what we're doing today is we're writing probably more mono-line wine home and mono-line auto than we have in the past, we still -- our preferred way of writing business is bundled, but we're kind of agnostic, if the product either homeowners are going to make money, we're happy to write it with or without each other. So because of that split, there will be a little bit of separation, but it doesn't change directionally. What you're talking about is that once the retention starts to move in the right direction and the new business continues to what we believe will continue to move positive, it should start to follow more consistently the -- what you're seeing in home in terms of PIF growth.

Sean Reidenbach -- KBW -- Analyst

Reserve releases are pretty strong in all of your products, Homeowners being the one exception. You have to put a lot of rate through auto lines and workers' comp, those underwriting results are still strong, but why reserve release is so robust in some of the other lines like small commercial, middle market et cetera?

Matthew Mrozek -- Vice President and Chief Actuarial Officer

Sean, this's Matt Mrozek. Similar to what we've seen in personal auto just from the lot (ph) side, not so much to rate side, we're looking at the accident years mature and looking at the emergence of the claims, handling initiatives, relative to our initial expectations, we're seeing primarily lower severity, primarily on the bodily injury, that the lines that are most heavily influenced would be those with bodily injury exposure. So again, I think we've talked about this in prior calls, we may not expect this level of favorable developments ongoing, but evaluating at each quarter certainly felt comfortable with the movement here in Q1. Again going forward that may or may not hold up at the same level.

Sean Reidenbach -- KBW -- Analyst

And then one last one, what's driving the negative net investment income the TIPS tips portfolio.

Scott Jones -- Vice President and Chief Investment Officer

Hi Sean, it's Scott Jones, that would be the change in the CPI for the quarter, which was actually negative, not positive. And doesn't happen too often over a 3-month period, but in the first quarter of this year, it did occur.

Steven English -- Senior Vice President, Chief Financial Officer

Yes. Sean, This is Steve English, under GAAP accounting, you're required -- that those instruments, you can almost in some respects is not true, but you can almost take it as a change in market value sort of concept, but it's actually a change in PAR value, as CPI resets and the way those securities work, you're going get more or less PAR value.

Under GAAP accounting, those changes you're required to run through your P&L. So in periods where, it's a positive move will have -- well mark to mark effort, you can let me used that term and when there is periods where it goes the other direction it reverses is a markdown.

Operator

(Operator Instructions) And at this time, there appear to be no further questions, please continue with any closing remarks.

Natalie Schoolcraft -- Director of Investor Relations

Thanks everyone for your questions. 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 second quarter earnings call, which is currently scheduled for Thursday, August 1st, 2019. Thank you and have a wonderful day.

Operator

Thank you, that concludes today's First Quarter 2019 Earnings Conference Call. Thank you again for your participation and you may now disconnect.

Duration: 48 minutes

Call participants:

Natalie Schoolcraft -- Director of Investor Relations

Michael LaRocco -- Chairman, President & Chief Executive Officer

Steven English -- Senior Vice President, Chief Financial Officer

Jason Berkey -- Senior Vice President, Personal Lines

Kim Garland -- Senior Vice President, Commercial Lines and Managing Director of State Auto Labs

Larry Greenberg -- Lawrence David Greenberg, Janney Montgomery Scott LLC -- Analyst

Sean Reidenbach -- KBW -- Analyst

Matthew Mrozek -- Vice President and Chief Actuarial Officer

Scott Jones -- Vice President and Chief Investment Officer

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