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State Auto Financial Corp (NASDAQ:STFC)
Q2 2019 Earnings Call
Aug 1, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time.

I'd now like to turn the call over to Director of IR, Natalie Schoolcraft. Please go ahead.

Natalie Schoolcraft -- Director Of Investor Relations

Thank you, Josh. Good morning, everyone, and welcome to our second 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

Thanks, Nat, and good morning, everyone. The second quarter was obviously an active weather quarter and it clearly impacted our results. Between the volume of cats and the corresponding non-cat weather, the 109.9% personal and commercial combined ratio was worse than we had expected. Of course, second quarter is typically our most volatile quarter since our primary cat exposure is from convective storms and 2Q had plenty of wind, hail and tornados. While we do plan for these events, 2019, in quotes, exceeded our expectations. I am very proud to say that our care team once again performed in an exceptional manner in the face of these weather challenges. When possible, we reached out to our customers in advance to help them prepare. After the storms, we were with them as soon as it was safe to help them begin the process of getting their lives back to normal. We sell a promise, a promise to be there when our customers need us, and it's never more critical than after a catastrophe. We delivered on our promise.

It's always important to measure results over longer periods of times than any one quarter, especially a volatile quarter like the second. My focus is on the year-to-date results. Those numbers help to smooth the reality of both weather impact and the amount of variation of reserve development from one quarter to the next. On a year-to-date basis, I feel very good about our underwriting results. Our product segmentation and models are well designed, rate levels are adequate and concentration of exposures are not a concern. More importantly, operationally, across underwriting, claims and technology, we are executing effectively. Our current accident year non-cat loss and allocated loss adjustment expense ratio, which continues to improve, is a good measure. Our growth story remains strong. In personal lines, homeowners performed exceptionally well with growth across both premium and policies in force. Our digital platform and our new products have been well received and we continue to be one of the fastest growing home writers. While the underwriting results for the quarter were quite poor due to the weather, we remain optimistic that this line will both grow and make an underwriting profit in 2019.

Personal auto struggled in the second quarter. We've seen competitors take fairly aggressive action, both write and compensation, which has made an already challenging market even more so. While we'll never knowingly sacrifice profit for growth, we do feel we have the opportunity to improve our growth in the second half and expect we will. I am pleased that our auto retention, while still much too low due to the necessary changes we made to get back to profitability, has begun to improve. I am especially happy with the growth in commercial lines. In the first half, we've grown 15%. That does not include workers' compensation, where we feel we can be better, but we are absolutely unwilling to chase growth by simply lowering rates below profitable levels. The improvement in commercial lines is a combination of our new platform with new products and commercial auto and BOP. Those changes are just now being leveraged by our agents, and the numbers are very exciting. We have just begun to tap the potential of our new platform and products for small commercial.

In the middle market space, while for the platform changes will launch in 1Q of next year, we've already seen growth through organizational, cultural and focus changes. We're now seen in the market as a true provider of middle market commercial insurance. What we have achieved without the benefit of the new platform is remarkable. Once our platform launches early next year, we expect to build on the current growth. Farm & Ranch simply continues to be a solid performer. We've become one of the fastest growing writers of farm and ranch. Our new platform will be in the market late this year. With the launch of that platform, which will also give us access to new states, we fully expect our current growth to accelerate.

Finally, I want to speak about expenses. The success of our vision and strategy to go digital, build new products and change the culture of State Auto hinges on one final piece, a competitive expense ratio. You cannot get a lower expense ratio if you simply keep using old legacy systems and products. The significant investments we've made, investments that were necessary -- we've made to change the platform, products and the culture, were designed to deliver a competitive expense ratio. In personal lines, we've begun to see the possibilities. We have an efficient platform, one that has no paper, postage or checks, one that allows us to grow without a corresponding growth in labor and other expenses. We expect to see the same result from commercial lines. While our overall combined ratio results continue to be slightly above or below 100, our loss ratios are fairly solid. We now need to deliver on the efficiency of our platform to truly pull all the value from State Auto.

With that, I will turn the call over to Steve English.

Steve English -- Senior Vice President, Chief Financial Officer

Thanks, Mike, and good morning, everyone. For the quarter, STFC reported $0.14 loss per diluted share, with an operating loss per diluted share of $0.33. This compares, on a diluted per share basis, to earnings of $0.14, with an operating loss of $0.08 for the second quarter of 2018. On a 6 month basis STFC reported, on a diluted per share basis, earnings of $1 and an operating loss of $0.01 as compared to $0.09 earnings per diluted share and $0.08 operating for the first 6 months of 2018. As a reminder, non-GAAP operating results exclude net of tax net investment gain or loss. While net investment gain was relatively comparable in the second quarter of '19 compared to the second quarter of '18, on a 6 month basis, during 2019, the $55.2 million of net investment gain includes $55.6 million of net unrealized gain on investments, while on the same basis in 2018 the $400,000 of net investment gain reflected $5.9 million of net unrealized loss on investments.

Fair values of equity investments rebounded in the first quarter of 2019 relative to declines experienced in 2018, particularly the fourth quarter. The quarterly GAAP combined ratio of 111.4 was higher compared to 107 from the second quarter a year ago. Cat and non-cat loss ratios were up compared to the second quarter of last year, while the expense ratio improved. For the first 6 months of 2018, the GAAP combined ratio of 105.6 compared to 104.8 for the same period, reflecting 3.1 point higher cat losses with improved non-GAAP and expense ratios. The GAAP expense ratio for the second quarter of 2019 was 35.1 and for the first 6 months 35.3 compared to 36.2 and 35.7 respectively a year ago. We have discussed the investments being made in technology and products, and during 2019 we continue to build and roll out to final commercial lines technology and products, including Farm & Ranch. The quarter-over-quarter improvement was essentially driven by revised estimates of associate variable compensation. On a statutory basis, personal and commercial reported in the quarter a combined ratio of 109.9 compared to 104.7 for the second quarter of 2018. Year-to-date, personal and commercial reported a combined ratio of 104.9 compared to 103 for the same period a year ago.

Catastrophe losses during 2019 have been higher in both quarters of this year compared to a year ago. While the number of cat events was down in the quarter and flat through 6 months, the 2019 events have been more severe. Our estimates of prior year reserves continue to develop favorably overall. In the quarter, $14.3 million was recorded relating to non-catastrophe loss and ALAE compared to $20.2 million in the second quarter of '18. For the 6 months ended June 30, favorable development totaled $36.5 million, equal to the second quarter of 2018. The current accident year non-cat loss and ALAE ratio in the quarter was up 2.4 points to 60% in the second quarter of 2019 compared to 57.6% a year ago. Through 6 months, the current accident year non-cat loss and ALAE ratio has improved 0.9 points: 59.3% for the first 6 months of '19 compared to 60.2% for the first 6 months of '18. As we have discussed previously, reserve estimates can be volatile from quarter to quarter based on many factors. Additionally, the second, third and fourth quarters of any given year can be impacted by the reassessment of that year's accident year pick relative to booked ratios from earlier quarters. Jason and Kim will get into more specific product detail in their prepared remarks.

The statutory expense ratio for personal and commercial improved 1.2 points as compared to the second quarter of '18. As I mentioned before, this was driven by the timing of variable compensation estimates, partially offset by technology costs. On a year-to-date basis, the statutory expense ratio for personal and commercial is flat as through 6 months, the variable compensation estimates are only down slightly year-over-year, offset by numerous other items which are individually not material. Items of note within specialty for the quarter include $3.2 million of cat losses, which represents adverse development of 2017 Irma claims and $2.8 million of favorable development of E&S casualty reserves. Quarterly activity other than the settlement of claims is becoming less and less as each quarter passes.

Finally, this past July 1, we completed the renewal of our reinsurance programs which are placed on a group basis. No changes were made to the limits or retention of our property and catastrophe treaty. Our group retention remains at $75 million, with limits of $125 million and a 5% co-participation. On a property per-risk basis, retention remains at $4 million. Our excess of loss casualty treaty retention remains at $3 million. Our reinsurance costs are up on an absolute dollar basis, given the growth we have experienced in personal and commercial lines, but not any significant amount or percent of premium.

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 second quarter is typically our most challenging weather quarter, and that was certainly the case in 2019. Personal lines finished the second quarter with a combined ratio of 113.3% compared to 104.3% for the same quarter last year. The personal lines' loss and LAE ratio was 83.4% for the quarter compared to 73.7% in the second quarter of 2018. The increase in the loss ratio is due to lower levels of favorable development in all lines and higher levels of homeowner weather-related losses, both catastrophe and non-catastrophe losses.

Net written premium for personal lines is up 10.8% versus second quarter '18, reflecting higher levels of homeowners and other personal lines' new business counts, offset by lower retention and new business counts in personal auto, which I will speak to further in a moment. Looking specifically at personal auto, the statutory auto loss and LAE ratio in the quarter was 71.3%, with a statutory combined ratio of 101.3% compared to 68% and 97.5% respectively in the second quarter of 2018. The personal auto loss and LAE ratio results were impacted by a 4.5 point decrease in favorable development, offset by 1.7 points of improvement in the current accident year non-cat loss and LAE ratio compared to the prior year. We continue to see our premium rate level increasing faster than the rate of increase of lost costs. In addition, on our legacy personal auto book of business, the bodily injury frequency trend continued to be favorable in the quarter. The auto loss ratio on both our Connect digital product and our legacy product improved due to the earn-in of rate actions, along with claims operational improvements in our Care organization. The earned premium from our Connect product now exceeds the earned premium from our legacy product. As a result, we expect to see pressure on our overall loss ratio, with the increasing percentage of the book that is new business on the Connect product.

As we have mentioned in previous calls, our personal auto rate actions have been and will be more targeted going forward, reflecting the moderating trends now being seen. As our prior aggressive rate actions have now mostly renewed into our book, we have begun to see increases in both our Connect retention and our non-Georgia legacy auto retention. As mentioned previously, in April of this year we began the non-renewal process of our entire Georgia legacy auto book as we made the tough decision to exit that unprofitable book and seek the conversion of those policies onto our Georgia Connect product. Overall, auto retention was roughly 67% in second quarter '19. We expect to see our auto retention increase as we have greater renewal rate stability with fewer rate changes. In second quarter '19, net written premium for personal auto was up 3.6% versus second quarter '18. Policies in force finished 3.7% below the second quarter '18 level, and new business counts for the quarter were down 11% over second quarter '18. We've seen the market soften quickly and we will not chase competitors subsidizing books with rate decreases not supported by loss costs or buying business with unsustainable incentives. I'm not satisfied with our slowdown in new business growth, and we are rapidly rolling out advancements to our rate tiering to be more competitive on risk where we have seen favorable loss experienced on Connect. At the same time, we continue to pursue system enhancements to improve the ease of use of our Connect product to increase our close ratio.

Moving on to homeowners product results. The homeowners loss and LAE ratio was 18.8 points higher this quarter than the same quarter a year ago. The increase was driven by higher levels of non-cat weather during the quarter, especially in Texas, Kansas, South Dakota, West Virginia and Maryland. The homeowners loss and LAE ratio results were also impacted by lower levels of favorable development in second quarter '19 compared to second quarter '18. The remaining increase was driven by catastrophes. Our homeowners second quarter loss and LAE ratio was 101.6%, with a combined ratio of 131.2% compared to 82.7% and 114.2% respectively in second quarter '18. The homeowners cat loss and ALAE ratio for second quarter '19 was 39.5 points, which is 3 points higher than the second quarter '18 homeowners cat loss and ALAE ratio of 36.9%. The second quarter 2019 non-cat loss and ALAE ratio of 54.4% was 16.2 points higher than the 38.2% in the second quarter '18, again, driven by higher non-cat weather losses in 2019.

Going forward, we continue to see a terrific opportunity for profitable growth with our Connect homeowners digital product as we continue to experience a lower new business loss ratio than we have historically seen on new business in our legacy book. This reduction in our homeowners new business penalty allows our ramp-up in homeowners new business production and growth in our homeowners policies in force, with less pressure on our loss ratio from new business. In second quarter '19, our homeowners policies in force increased 12.1% over second quarter '18. New business counts in the quarter were up 14.8% over second quarter '18, and homeowners net written premium increased 18.6% versus second quarter '18. In terms of homeowners retention, the quarter ended with home retention at roughly 75%. We've taken rate actions on our Connect product to improve renewal rate stability, and we expect to see improvements in our retention as those changes renew into our Connect homeowners book of business.

In conclusion, our personal lines story for the quarter can be summarized as, first, continued moderation in our personal auto loss trends has resulted in more targeted auto rate activity relative to the prior aggressive rate actions taken in recent years; second, personal auto net written premium increased in the quarter by 3.6% versus second quarter '18, but our personal auto policies in force declined by 3.7% versus second quarter of '18. Personal auto quotes increased by 32.2% in the quarter, and targeted rate actions are being pursued to increase our new business growth. Homeowners combined ratio for the quarter was impacted by higher weather losses than in 2018.

I'm proud of what the team has been able to accomplish, and I love how we are positioned for profitable growth. We have plenty of room to continue to improve, but with our strong foundation in place and nearly 3 years of nimbly responding to our experience with our digital Connect product, we've made great strides. We have confidence in what we can achieve in 2019 and beyond.

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

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

Thanks, Jason.The commercial results are as follows. The 2Q '19 combined ratio of 104.4% versus 105.7% in 2Q '18 and a 2Q '19 written premium increase of 12.8% versus 2Q '18. Excluding workers' compensation, commercial lines written premium is up 17.2% versus 2Q '18.

For the commercial business as a whole, the story is the statutory non-cat loss and ALAE ratio was 1.8 point higher in 2Q '19 versus 2Q '18. Worker's compensation was the product line that stood out this quarter with a higher than expected non-cat loss ratio due to a single large loss. Commercial loss ratios continue to be where we generally need them to be and commercial expense ratios are not, and they are the biggest inhibitor to overall profitability. The 2Q '19 statutory commercial expense ratio of 38.6% was 2.1 points lower than 2Q '18 due to both lower variable compensation for associates in the quarter and the first signs of positive impact on the expense ratio from our more efficient commercial platform.

Growth continues to strengthen for our commercial lines of business. 2Q '19 was another record new business quarter for commercial Connect, our commercial auto and BOP products. Commercial auto new business premium is up 196% 2Q '19 versus 2Q '18 and total commercial auto premium is up 39% versus 2Q '18. BOP new business counts were up 81% 2Q '19 compared to 2Q '18. BOP new business premium was up 15% 2Q '19 versus 2Q '18. As a reminder, average BOP premiums in Connect are around 60% of what they were pre-Connect, and total BOP premium was flat versus 2Q '18. Middle market commercial had record growth in the quarter. 2Q '19 middle market new business written premium was up 98% versus 2Q '18. This is our sixth consecutive quarter of middle market new business growth of 24% or higher, and middle market total written premium was up 25% versus 2Q '18. Farm & Ranch had a solid quarter of written premium growth at 7%. Workers' comp growth continues to struggle with 2Q '19 written premium down 12.5% versus 2Q '18 as competition and downward rate pressure continues to intensify.

As promised, here is an update on the path to significantly improved expense ratio for commercial lines. We have previously discussed that to get to a significantly better expense ratio in commercial lines it will require 2 things: improved unit economics across the different tasks that are done within our commercial business and more scale. Improved unit economics. Commercial Connect is giving us better unit economics. Pre-Connect commercial auto and BOP had a 0% straight through processing percentage for new business as we manually touched every piece of new business. In the Connect world, these products are achieving around a 70% straight through processing percentage. With Connect and other efficiency gains, the commercial division is handling 13% more total direct written premium and 92% more direct new business written premium with fewer associates in 2Q '19 versus 2Q '18. We need to get more of the commercial premium on this more efficient platform. For all of commercial lines, percentage of premium on Connect was: for all of '18, it was 1.8%; for 1Q '19, it was 5.2%; for 2Q '19, it is 6%.

Scale. As previously mentioned, we are starting to see the scale issue be solved. Commercial auto, 39% written premium growth rate. Connect is the driver. Middle market, 25% written premium growth rate; this is the second order impact from Connect as this is freed up time for our commercial underwriters to focus on middle market risks. The impact of the middle market Connect launch in early 2020 is still to come. Farm & Ranch has a 7% written premium growth rate. The first Farm & Ranch Connect state is scheduled to launch in 4Q '19 and Connect will allow Farm & Ranch to enter 9 new states in total throughout 2020.

Small commercial has a 0% written premium growth rate, but an 81% new business count growth rate. Connect provides us the platform to grow, but we have to both continue to increase unit counts and to become more effective [Indecipherable] larger box. Workers' compensation, minus 12.5% written premium growth rate. Significant growth will likely not occur until Connect launches for workers' compensation in 2020, and the key to this plan will be ensure that loss ratios do not deteriorate as we work on these items. The commercial business results by product line are as follows. I'll focus on the loss and LAE results for each product line as the acquisition and operating expense ratios for every product line are poor as previously noted.

Commercial auto; the commercial auto loss and LAE ratio in 2Q '19 is 66.1%, which is a 3.6 point deterioration versus 2Q '18, but still at a generally acceptable level. We are keeping an extra close watch on commercial auto loss ratios since the growth rate is so high. Commercial auto written premium in 2Q '19 was up 38.8% versus 2Q '18. Small commercial package; the small commercial package statutory loss and LAE ratio in 2Q '19 is 67%, which is a 1.3 point improvement versus 2Q '18. Small commercial package written premium in 2Q '19 was flat versus 2Q '18. Middle market commercial; the middle market statutory loss and LAE ratio in 2Q '19 is 59.1%, which is 20 points lower than 2Q '18. As with commercial auto, we are keeping an extra close watch on middle market loss ratios since the growth rates are so high. Middle market written premium in 2Q '19 was up 25.3% versus 2Q '18. Workers' compensation; workers' compensation statutory loss and LAE ratio in 2Q '19 is 67.4%, which is 14.9 points higher than 2Q '18, driven by a single large loss in the quarter. We remain comfortable with the adequacy of our workers' comp rate levels. Workers' comp written premium in 2Q '19 was down 12.5% versus 2Q '18. The written premium decline was driven more by a decline in renewal premium, down 22%, than by a decline in new business written premium, down 6%. We continue to be committed to maintaining underwriting and rate discipline during this part of the cycle, but we just have to get better at finding good business to write at adequate rates during this intense period of competition.

The Farm & Ranch statutory loss and LAE ratio in 2Q '19 is 69.2%, which is 3.9 points higher than the 65.3% in 2Q '18. You also see a 47.5% expense ratio for Farm & Ranch this quarter. This includes 14.9 points -- expense ratio points as technology spend, which reflects the cost of the core buildout of Farm & Ranch Connect. And during these current high expense ratios in Farm & Ranch is worth it as the launch of the first state of Farm & Ranch Connect will be in 4Q '19, and in total, we will enter 9 new states and that should be the growth accelerant for this product line for the next several years. Farm & Ranch written premium in 2Q '19 was up 7% versus 2Q '18. 2Q '19 was another important step in building a better future for commercial lines at State Auto. We set new business records in the quarter for the second straight quarter. The new business success occurred in both our small commercial Connect and middle market businesses, and we are starting to see some impact on the expense ratio from our work over the last couple of years. The vibe and optimism in commercial lines continues to increase each and every month. I continue to be incredibly proud of the work of our commercial lines team.

And with that, we'll open the line for questions.

Questions and Answers

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

[Operator Instructions] Your first question comes from Christopher Campbell with KBW.

Christopher Campbell -- Anlayst

Hey, I guess, first, quite good progress on the commercial lines expense ratio and thanks for the extra color there, Kim. So I guess just where do you think you can get to by year-end 2019? And then how should we be thinking about modeling that going forward in 2020 and 2021?

Michael LaRocco -- Chairman, President & Chief Executive Officer

Yes, this is Mike. It's very difficult to give a specific number certainly for this year. But I'll tell you, Chris, the same thing I've talked about. I mean, everything we've done to date, the whole vision and strategy, and remember, this company is more of a start-up than it is a 100-year-old insurance company. And as you look at our progress and the reason we feel so bullish about it is, each piece has come together, and the final piece of this is really the expense ratio because the heavy investment we've made in this platform and the products and the people have kind of led us to where we are today. And now, for the next part of the journey, it's kind of bringing this all together from an expense standpoint. So, we've been pretty clear that if you look at our directional work that we're doing in personal auto, we think this will be a low 20s product line. Homeowners would be more kind of in the mid-20s. I think on the BOP side, it'll look a lot like homeowners. And middle market is always a little bit more difficult to get the benefit of the -- of the higher premiums, but of course you're touching these risk a lot more significantly because of the complexity of the risk. So expense ratios are probably still be north of 30, nowhere near the 40 or so that we're running today, which is completely based on our historical challenges with bad technology and bad processes. So, that's kind of how we're thinking about it. I'm not giving time frames for that, but we feel very bullish about the corner that we've turned and our ability to start driving toward those numbers. But obviously, since we don't give direction, I can't be more specific as far as timeframe.

Christopher Campbell -- Anlayst

Okay, got it. That's very helpful. And I guess just looking at commercial auto, the core loss ratio was like up 540 bps year-over-year after the past 5 quarters. Before now, it was like pretty strong year-over-year improvement. I guess, just what are you seeing there? Is that market -- I mean, is that getting more competitive? I guess, just what drove that increase?

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

I think -- I'll go a couple of places. So I think our sort of journey for commercial auto has been -- back in 2015, '16, the loss ratios were really high, in the 80s or 90s and the team took a lot of actions to get them into the 50s and 60s. So we -- and now, we're at a point where we think we were kind of rate adequate and had the right sort of things in place and so could start growing. We are -- in a Connect world, we're putting a lot of new business on the books. I think part of that is we are seeing -- have seen slightly a little bit different type of risks. So some of the ones that go straight through our smaller fleets. About 20% of the written premium on Connect is telematics driven. I do think -- and this is where I guess I have Steve and Mike look at me, make sure I stay in bounds. When we write a whole bunch of new business, right, I think our reserve philosophy is to be consistent and conservative. And so I think we are being just careful in how we evaluate what we are doing on commercial auto maybe more so than other lines. So I think from the rate adequacy standpoint and sort of what we see, there is nothing we see that we're uncomfortable with other than the normal stuff you see a line of business you're trying to manage. So nothing really is standing up to us.

Steve English -- Senior Vice President, Chief Financial Officer

Hey, Chris, this is Steve. I would also add, don't lose sight of the fact on a quarterly basis. This is still a very small book of business. $1 million is 5 points. And so I would point you to the 6 month accident year pick year-over-year, which is just slightly down, so you kind of smooth some of that out. So, when you parse this commercial book in total into these little buckets, you get a lot of volatility quarter to quarter.

Christopher Campbell -- Anlayst

Got it. And then if we're looking at the written premium, it was up like 29% in 1Q and then 38% in 2Q. How much of that is rates versus just kind of new business increased exposures?

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

I would say most of it is unit counts. So this is the whole theory, right? We spend a lot -- we made a big investment to put commercial auto on this new easy to use platform with updated models and all of that, and so we are actually thrilled that agents in the market is sort of adopting that. And then that's sort of one of the levers on -- back to the expense ratio conversation is, over the last 12 months, writing this additional premium inside of commercial lines, we've kept our headcount flat, which we would not have been able to do without sort of the efficiency gains of the new platform. So it's -- to get specifically to your question, majority is unit count, not rate.

Christopher Campbell -- Anlayst

Got it. And are you guys concerned with growing that book so aggressively just given how competitors are shaking lose a lot of this under-priced business? Then like how do you guys protect against being adversely selected with, with growing this line, just given the broader dynamic that's still happening in commercial lines -- or commercial auto?

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

So, a few things, right? So, I think the first one, as we tell our folks and tell ourselves, high percentages on low volume basis isn't sort of that much in an absolute value of it. So, while the percentage number is high, we don't want to like get too comfortable like we're doing great or get too afraid like we're plowing that on. So that's the first thing we look at. The second is, we believe that we -- a lot of the work we did back in '15, '16, '17, we would make the argument, we maybe took bigger actions earlier than some others, so we got our house in order so that when others are still getting their house in order, we would be ready to sort of go. And so we think that is that part of the cycle. So we're actually happy about this, not that. And then the last part is, we put sort of -- Connect is not just a technology thing, but it is a -- it's new pricing models, pricing segmentation, those sorts of things. And so, from the work we've done -- we are both -- you never think you'll get it perfect, but we think we are more confident in our pricing models today than we were several years ago. And then -- I did mention that about 20% of our premium is on telematics for commercial auto. And we think that's a really big deal -- for Connect, and we think that's a really big deal that sort of insight into the drivers of the fleet in commercial lines, telematics, may have a bigger impact in commercial auto than it does in personal auto. So those are the things that I think make us comfortable.

Michael LaRocco -- Chairman, President & Chief Executive Officer

And Chris, this is Mike. Just to tag on a couple of things. First of all, the industry kind of fly -- pendulum swings back and forth. That's not an inherently bad about commercial auto, I think particularly in the space that we play, which is generally kind of more the -- we're not dealing with -- in general, we're not dealing with huge fleets. We are not dealing with big trucking exposures. This is a lot of [Indecipherable] vehicles, this is a lot of small commercial type risk, although we do write larger ones as well. But I think what -- two more things that are really important is, the work that we do to model out, not just the pricing piece, but then follow up to make sure that we're getting the risk and the exposures that we kind of expect based on what we're writing is part of it. And the second thing is, we have a lot of confidence -- a lot more confidence today in our claims ability than we certainly had as recently as 4 years ago. And the difference in having a claims organization that manages the risk and reduces loss leakage makes a lot of difference. So we have a high degree of confidence. I also would suggest on a percentage basis -- Kim already touched on it -- but I would like to see the percentages quite frankly in a lot of our lines and business higher than they are now, not lower because the bases are pretty small. But do appreciate the question.

Christopher Campbell -- Anlayst

Got it. And then just one last quick numbers question on workers' comp. Core loss ratios spiked up quite a bit. Anything special happening there? I mean, I look at the losses, they look kind of flat year-over-year, but the premiums are down. I mean, is that what's driving it? Or is there any like just kind of one-off losses we should like take out?

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

Yes. We had one big loss.

Michael LaRocco -- Chairman, President & Chief Executive Officer

Yes, it was -- Chris, it was a single large loss, and that is really what impacted the quarter. We're -- we feel very good about workers' comp and where it is from a profitability standpoint.

Christopher Campbell -- Anlayst

Got it. And do you have like an idea of what -- how big that would have been in terms of losses?

Michael LaRocco -- Chairman, President & Chief Executive Officer

They're scrambling here to try to answer that.

Steve English -- Senior Vice President, Chief Financial Officer

I think in the script, it was 14 points of effect in the quarter. So I'd like you to reengineer the math.

Christopher Campbell -- Anlayst

Okay, got it. On the loss ratio from that -- from that one --

Michael LaRocco -- Chairman, President & Chief Executive Officer

Yes.

Christopher Campbell -- Anlayst

Okay, got it. Well, thanks for all the answers. Best of luck in the third quarter.

Operator -- Anlayst

Your next question comes from Larry Greenberg with Janney Montgomery Scott.

Larry Greenberg -- Analyst

I think you touched on some of the points I was curious about. But I guess just generally or even qualitatively, when we compare the underlying loss ratios, both in personal and commercial lines, with a year ago, even with the first quarter, at least in the case of personal, there was a clear deterioration. And I know there was a lot of noise in the quarter from various things. But just overall -- I mean, are there any business lines where you think there has been a deterioration in the underlying loss ratio, whether it's driven by changes in loss trends or competitive factors or -- or are we really talking about segments that aren't that big and a loss here or there could swing things? So just wondering what your comments are on that.

Michael LaRocco -- Chairman, President & Chief Executive Officer

Yes. I'll let Jason address auto since that's the single largest line and then Kim may want to add something on commercial and then I've got some just kind of overall view of answering that question. But Jason...

Jason Berkey -- Senior Vice President, Personal Lines

Yes. On auto, I mean, we feel good about where we are profitability-wise. The underlying loss ratio actually improved slightly, when you take out favorable -- the change in favorable development. So we're going to be continuing to take targeted rate activity. So we feel very good about where we are with the adequacy of the overall rate level. On homeowners, we had a lot of weather activity in the quarter. But when looking at our rates from an actuarial perspective, we have relatively modest indications we're going to be taking single digit rate increases, similar to what we've been taken in years past. So we feel good overall. When we look at the Connect owners' performance -- owners' forms performance of the loss ratio, it really helps us see how we can be profitable on a full year basis because we've seen second quarter results in '17 and '18 on that growing portion of our book, the Connect book, about this level and then ultimately in the second half of the year come into underwriting profit.

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

Yes. Across the commercial lines, the general overall rate adequacy I think we are comfortable with and nothing really sticks out as overly concerning. The answer of this, just the normal stuff you always have to keep watch on, right? I think in commercial lines -- and I mentioned this a little bit -- probably the thing from either a rate or risk quality thing, that we are spending the most time just monitoring is high growth percentages in commercial auto and middle market commercial mean like we spend extra time like -- are the types of risk coming in, how are they changing, is the quality of the risk coming in good, is our -- is it coming in in cells that are different, and if so is the adequacy in those cells are the same. So that's more an internal thing based on our growth where we are probably spending the most time looking at those things. But across sort of everything and sort of being here for 4 years, this is a nice thing to say, like, generally the overall rate adequacy in all the lines are good, and so that there is a lot of work to get there.

Michael LaRocco -- Chairman, President & Chief Executive Officer

Yes. And Larry, I love the question because first of all, everything that Jason and Kim said, obviously, I endorse. I think when you look at our rate indications and our rate adequacies and the underlying loss ratios and everything that we see at a very detailed level, I have -- really on a by-line basis, I feel good as far as rate adequacy. The concern that I have, and it's just I will always have, is that -- again, I can't emphasize enough that people want to keep thinking of us as State Auto the way it's always been. But when we rebuilt the company, we launched new products, and the auto growth that we've had has been -- required us to tweak the model, get it better, get it better. Same thing with homeowners. And now Kim's watching those same things, and everything he just said about checking the models, validating the models, making sure every cell is where it should be, every territory is where it should be. Those are the things -- that's just great hygiene in a start-up organization where you've launched new products and your validating. But we've got enough time in the system now and enough time at the company and enough volume of business to know that overall, rate adequacy looks very good. Now, can we get better? Absolutely. I mean, there are segments we can be better. There is individual states where we can be better. But all of that is just where you have the confidence in your data, you have the confidence in the quality of the team that's managing the business. And that's why I made my comments about expenses and I also answered one of Chris' questions around this idea that now that we've done that core work, we're going to continue to leverage and get the finesse of the models and get better and better, but the real opportunity now of course is to see that volume and scale to allow us to start driving that expense ratio because we do have confidence in the loss ratios and, generally speaking, in our operational abilities as well.

Larry Greenberg -- Analyst

And then one numbers one for Steve. The GAAP expense ratio was a decent bit higher in the quarter than the stat expense ratio. I know there is always some variability. But was there anything unusual in there?

Steve English -- Senior Vice President, Chief Financial Officer

No. In fact, Larry, I figured you might ask that question. So I took an extra special look at it, and -- that's really a function of the difference between written and earned premium. Fixed costs are being divided into a smaller base on the GAAP side versus the stat side in the written. So, there's nothing weird in there. It's just the difference and how you calculate the stat versus GAAP.

Operator -- Senior Vice President, Chief Financial Officer

[Operator Instructions] There are no further audio questions at this time. I'll turn the call back to Natalie Schoolcraft for closing remarks.

Natalie Schoolcraft -- Director Of Investor Relations

Thanks, everyone, for your questions, for participating in our conference call and for your continued interest in and support of State Auto Financial Corporation. We look forward to speaking with you again on our third quarter earnings call, which is currently scheduled for Thursday, October 31, 2019. Thank you, and have a wonderful day.

Operator -- Director Of Investor Relations

[Operator Closing Remarks]

Questions and Answers:

Duration: 48 minutes

Call participants:

Natalie Schoolcraft -- Director Of Investor Relations

Michael LaRocco -- Chairman, President & Chief Executive Officer

Steve 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

Christopher Campbell -- KBW -- Anlayst

Larry Greenberg -- Janney Montgomery -- Analyst

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