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State Auto Financial Corp (NASDAQ:STFC)
Q1 2020 Earnings Call
May 6, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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]. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Director of Investor Relations, Natalie Schoolcraft. Thank you. Please go ahead.

Natalie Schoolcraft -- Director of Investor Relations

Thank you, Shelby. Good morning, everyone. Welcome to our first quarter 2020 earnings conference call. Today, I'm joined by our Chairman, President and CEO, Mike LaRocco; Vice President and CAO, Matt Pollak, who is subbing for Senior Vice President and CFO, Steve English, who was unable to join us today; Senior Vice President of Personal & Commercial Lines and Managing Director of State Auto Labs, Kim Garland; Senior Vice President of Data & Analytics, Jason Berkey; 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. [Technical Issues].

Operator

Yes, we can. Thank you.

Michael E. LaRocco -- Chairman, President and Chief Executive Officer

Okay. I apologize. Thanks, Natalie, and good morning everyone. First, I hope everyone on the phone is safe and healthy. I want to begin with some observations and comments on COVID. I would be remiss not to start by talking about our State Auto team. Within one day, we transitioned to a remote workforce. The foundation that made this possible was our move to a digital company over the last four years. I cannot emphasize enough the significance of that work. As I've spoken with folks I've met over the last 40 years in this business, I know that many of our competitors struggled and are struggling with effectively working in a remote world. There was no break in the sales, service and claims handling for State Auto agents and policyholders. The other factor that made the transition so seamless was the unique culture we have at State Auto. Our associates embraced the need to work remotely and nimbly made the move. They prioritized the customers and did what was needed to meet their needs. Most importantly, our culture, which places family first, allowed them to meet their personal needs at this challenging time. As a company, we made decisions very quickly to work with customers who need flexibility regarding payments, payment plans and fees when possible. We knew some of our customers were struggling financially as a result of the stay-at-home orders and the economic slowdown. While, there would be some financial impact, it was the right thing to do. We took a bit more time before deciding about any return of premium program due to fewer miles being driven. Being thoughtful before taking action was critical because things were changing so quickly.

Offering a short term return of premium based on one or two months did not seem fair, since with the benefit of time, it was clear the Coronavirus impact would continue well beyond just a couple of months. Our two part plan began by offering a 5% discount on personal auto policyholders as of June 1st their full premium beginning at their next renewal. If approved by our regulators, this will allow us to better recognize the fact that the pandemic will last well beyond the spring and the renewal discount may provide a larger return of premium rather than only giving a partial one or two months' credit. The second part of our plan was to encourage adoption of telematics. COVID is a harsh awakening that usage-based insurance is a smart choice. Since announcing this plan, we have seen an increase in telematics selections and usage. While our focus has been taking care of customers and making sure our associates are safe and healthy, we have had to be aware of the legal and regulatory threat as a result of COVID, especially on issue of business interruption insurance. Our commercial policies require direct physical loss or damage to property and many of them also include a virus exclusion. We are very confident that BI exposure is limited, unless artificially expanded through changes in legal precedent, a national program, or governmental mandate.

Regarding workers' compensation, we support the paying of claims from medical professionals who are on the frontline of this battle. Of course, overall, our comp exposure is very limited, about 5% of our total net written premium and approximately 20% of that is in medical related classes. Overall, we have adjusted well in these unprecedented times and we simply hope our associates, agents and policyholders continue to stay safe and healthy. This quarter was severely impacted by the Nashville tornado and specifically three large commercial losses. The tornado had an 8.3-point impact on the quarter and these three losses were 4.6 points of that total. Overall, cats in the quarter accounted for 12.7 points on our loss ratio versus 5.9 points in 1Q of 2019. It was an unusually high level of activity driven by those three large losses. Excluding the cats, it was another excellent quarter for State Auto and continue to demonstrate how we have emerged as an innovative, creative and competitive P&C player. Commercial lines once again led the way with another quarter of solid performance. All lines, except workers' compensation had excellent growth, another indicator of how agents have embraced our digital platform in commercial lines as well as personal insurance.

In personal lines, we took bold and aggressive steps to complete the process of meaningfully reducing underwriting leakage and improving our pricing model. These actions, along with the reduction of miles driven, should lead us to an earlier return to profitability across our largest line than I had initially anticipated. Homeowners continues to perform well with another strong quarter of growth. Our growth in this line of business has begun to spread across majority of our states, supporting an important piece of our strategy. Finally, we are in the last stages of our digital platform rollout. The only product left to launch is workers' compensation, which should begin by the end of the year. As I've said on previous calls, this move to a completely digital company in this shorter period of time is an amazing accomplishment and has prepared State Auto for a long and successful future. Sadly, it took COVID to demonstrate just how well we have made this transition to digital. As we entered the first quarter. The quality of what we have done has never been clearer.

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

Matthew R. Pollak -- Vice President, Treasurer And Chief Accounting Officer

Thanks, Mike, and good morning everyone. Earlier today, we reported net loss per fully diluted share of $2.62 compared to a year ago at which time we reported net income fully diluted per share of $1.12. On an operating basis, we reported today a net loss per fully diluted share of $0.18 compared to $0.31 of income in the first quarter of 2019. The impact of unrealized losses on equity securities and other invested assets in the first quarter of 2020 compared to unrealized gains in the first quarter of 2019 can be seen by comparing these per share amounts. For the first quarter of 2020 on a pre-tax basis, net investment loss included $138.7 million of unrealized losses, while the first quarter of 2019 included $48 million of unrealized gains. I will comment further on investments in a moment. While we showed strong growth in net premiums written of 13.2% compared to last year's first quarter, our underwriting results were negatively impacted by a greater amount of catastrophe losses. The GAAP combined ratio for Q1 2020 was 107.2%, a 7.5% increase from last year's Q1 GAAP combined ratio. The cat loss ratio was 6.8 points higher this quarter than it was the first quarter a year ago.

As Mike mentioned, the Nashville tornado contributed 8.3 points to the 1Q 2020 cat loss ratio, less favorable development in the first quarter of 2020 as compared to a year ago, also contributed to the increased Q1 2020 combined ratio. On a segment basis, our personal line segment grew 10.5% in the first quarter of this year compared to last year's first quarter, with a reported statutory combined ratio of 99.6% compared to a statutory combined ratio of 97.9% in the first quarter of 2019. The 1.7 point increase in the combined ratio was driven by adverse prior year loss reserve development in both auto and home, offsetting improved catastrophe and current year non-cat loss in LAE results. The expense ratio also improved 0.8 of a point. The adverse development in auto was driven by higher than expected severity, primarily from the 2019 accident year for bodily injury, property damage and personal injury protection, particularly in Michigan. The adverse development in homeowners was related to higher severity on fourth quarter 2019 third party liability and property claims. First quarter 2020 personal auto results benefited from early trends of lower levels of claims for all coverages attributed to fewer miles driven. Kim Garland will have more on this and on premium trends in his comments.

Commercial lines grew 17.6% in the quarter compared to the first quarter of 2019 with a reported statutory combined ratio of 118.3% compared to a statutory combined ratio of 102% for the first quarter of 2019. The headline for commercial lines in the quarter was catastrophe losses, which increased 19.3 points, while the non-cat loss ratio and expense ratio were improved and relatively stable compared to the first quarter of 2019. As disclosed in our press release, three individual commercial losses resulting from the Nashville, Tennessee storm that occurred in early March of this year were quite significant, adding 11.4 point to the overall commercial lines combined ratio. The Nashville storm in total added 19 points to the commercial lines combined ratio. Development of prior year loss reserves continues to be favorable and in total for the segment was reasonably consistent with the first quarter a year ago. All in all, four of six products produced combined ratios below 100 in the quarter with the exception of middle market commercial which was disproportionately impacted by catastrophe losses and workers' compensation, which continues to be a challenging market. Again, Kim will provide additional comments in his prepared remarks. For investments in the quarter, everyone is quite aware of the impact COVID-19 has had on current and future expected economic results and its impact on markets.

I would like to point out that STFC's equity portfolio does include master limited partnerships or MLPs that are involved in the oil and gas industry and was an asset class showing weakness before the emergence of COVID. We have made a decision to methodically exit this class over the next few months as the market evolves. As of December 31, 2019, the market value of these securities totaled $85.2 million and in the first quarter of 2020 we recognized $1.1 million in realized losses and $46.6 million of unrealized losses, both of which are included in the income statement caption, net investment gain loss. The market value of the MLPs in our portfolio as of March 31, 2020 totaled $32.5 million. These securities historically carried above market dividend yields, but their market values have materially dropped over the past two years. Exiting this asset class is expected to put pressure on our net investment income results as reinvestment rates are still at historically low levels. We maintain a portion of our investment portfolio in relatively short term and highly liquid investments to ensure the immediate availability of funds to pay claims and expenses.

On March 19th of this year, STFC through its wholly owned subsidiary State Auto P&C entered into a short term loan agreement with the Federal Home Loan Bank in the principal amount of $60 million at an annual interest rate of 38 basis points. The loan, which matures on September 2nd of this year, is for general corporate purposes and is intended to provide additional liquidity due to market uncertainties and volatility. Finally, our reinsurance treaties typically renew each July 1st. We recently completed a 15-month property per-risk treaty incepted as of April 1, 2020. The Nashville, Tennessee commercial losses along with loss activity from the last six months of 2019 generated recoveries that exhausted the limits provided by the property per-risk treaty we renewed on July 1, 2019. The 15-month treaty which is on a group basis, expanded the term limits from $38 million to $54 million. We retained the same $4 million retention with a $6 million excess of $4 million layer and an additional $10 million excess of $10 million layer. We are co-participating 19.5% on the $6 million excess $4 million and 14% on the $10 million excess $10 million layer.

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

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

Thanks Matt, and good morning everyone. There are lot of moving parts this quarter. I'll try and walk you through them all. Our overall personal lines and commercial lines results are the following. Combined personal lines and commercial lines had a combined ratio of 107.3% and written premium growth of 13.4% first quarter of 2020 versus first quarter of 2019. Commercial lines had a combined ratio of 118.3% with written premium growth of 17.6%, personal lines had a combined ratio of 99.6% with written premium growth of 10.5%. The place to start for understanding our first quarter 2020 results as with the Nashville tornadoes and the large middle market fire loss. Our Nashville catastrophe losses were $27.4 million. This was primarily a commercial catastrophe for us. Our catastrophe losses were driven by two large middle market losses that make up $12.4 million of the total. These two losses were 21 miles apart, quite rare for a single tornado. One on the West side of Nashville and one on the East side of Nashville. We've done a postmortem on these risks and they were underwritten, risk engineered and priced appropriately. We also had a large middle market fire loss in North Carolina in the first quarter which was worth $2.6 million. The postmortem on this risk showed that it was adequately, but not perfectly evaluated and priced. There were learnings for us from the postmortem on this risk.

The commercial lines combined ratio of 118.3% includes 19 points related to the Nashville storm and an additional two points from the large middle market fire loss. Taking these events into consideration, we are comfortable that our core commercial business is on sound footing. The second part of understanding our first quarter 2020 results is to understand the impact of the COVID. I will cover each product in two parts, the performance of the core product and then the impact of COVID on the product, including what we have seen in our April results. Our personal lines business produced the first quarter 2020 combined ratio of 99.6% versus 97.9% in first quarter 2019 and our first quarter 2020 written premium increase of 10.5% versus first quarter 2019. For first quarter 2020, our personal auto results are a combined ratio of 103; a written premium growth rate of minus 2.9%, a policies in force growth rate of minus 7%, minus 5.1% if we exclude the Georgia legacy business; and a new business count growth rate of 11.8% and retention level of 68.2%. Recall, our fourth quarter 2019 personal auto combined ratio at 114.1 was very poor and last quarter I shared with you the drivers of this poor result and our action plans to address these issues. Here's an update on the progress of these actions.

We have implemented our updated personal auto pricing model. personal auto Connect 2.1 in eight states with new business effective dates between March 8th and May 3rd. Connect 2.1 lowers rates for ultrapreferred and preferred risks and increases rates for risks at the higher end of the risk spectrum. Early results are promising as we are seeing improved closure ratios on the more preferred risks and the new business mix has shifted more preferred also. In early March, in the states where Connect 2.1 had not been implemented, we introduced filters that stopped quoting nonstandard business where we believe we were underpriced in our old pricing model. The implementation of these filters has reduced our nonstandard new business by about 50%. These filters are being removed as Connect 2.1 launches in the state. Also, in early March, we began implementing operational changes to close some of the operational gaps that we had identified. We are seeing immediate impact from these changes and recognize that these types of operational changes can have a faster impact than rate changes on our personal auto results.

Our telematics program, until first quarter 2020, had only offered a plug-in dongle option. In the first quarter of 2020, we implemented a smartphone plus tag as a second option, early adoption of the second option has been encouraging. The impact of COVID on personal auto that we have seen, including April results is the following. Miles driven are down about 40% and have stabilized at this level. Newly reported personal auto claims are meaningfully down. Preferred new business volumes are unchanged. Our nonstandard new business volumes are down, but these are from the introduction of nonstandard filters and not COVID. In response to lower miles driven and reduced claim volumes, we developed the In This Together program, which is two pieces. A one-time 5% COVID discount at renewal, subject to regulatory approval, for the entire next policy term for all State Auto personal auto policyholders as of June 1st, 2020. And an immediate reoffering of telematics to every State Auto Connect policyholder, which includes a 10% premium discount for the first term. We estimate the impact of the discount at renewal to be around $18 million in premium reductions. The impact of our telematics push is unknown, because we do not know how much additional telematics adoption we will see. But in the early days after our announcement of the program, we have seen an increase in telematics enrollments.

We selected the renewal discount plus telematics approach, because no one knows at what rate miles driven will return to historical levels. Telematics allows us to appropriately match rate with risk across a wide variety of possible scenarios. And we also believe that telematics will be an important will be more important in a post-COVID world. Our work on telematics over the last five years has prepared us for this moment. Our first quarter for first quarter of 2020, our homeowners' results are combined ratio of 98.1%; a written premium growth rate of 26.7%; a policies in force growth rate of 14.4%, a new business count growth rate of 27% and a retention level of 75.9%. Last quarter, I shared that in 2019 Texas represented a disproportionate amount of State Auto's total homeowners book of business. In the first quarter of 2020, we implemented a rate change in the Dallas-Fort Worth counties of 15% that will be effective in May. We have also finished the work on the next version of our homeowners pricing model, Connect Version 3.0 that will roll out later this year, making us more competitive on the best homeowners' risks, which should accelerate our growth in states other than Texas. The impact of COVID on homeowners, including April results has been minimal. Newly reported claims are stable. Spring weather has been a more significant impact. New business volumes have been stable post-COVID and the week of April 20th was our highest homeowners quote volume week of the year. The biggest unknown and biggest risk for personal lines during COVID is the impact of state insurance regulators and state legislators. This is very dramatically by state over the last seven weeks. two examples of this.

State mandates related to grace periods and moratoriums on cancellations and non-renewals for nonpayment. If payment of these premiums is not eventually received, this will show up as bad debt. Since the start of COVID, our past due payments as a percentage of premium are more than 10 times higher in the states with these mandates. We are monitoring the potential of a bad debt bubble in these states. Also, state mandates to expand coverage beyond what was contemplated or priced for in the personal auto contract. The biggest example of this is the requirement to provide commercial coverage for delivery drivers under the personal auto contract. In 2018 and 2019, our average quarterly incurred bad debt was around $250,000. Our incurred bad debt for the first quarter of 2020 was $2.7 million, which includes COVID-related charges of $1.4 million and a large non-COVID workers' comp charge of $800,000. Bad debt will be an important metric to track over the next few quarters. Before moving onto commercial lines, it is appropriate to take a moment and recognize the work and resilience of our independent agency partners over the last seven weeks. They have shown amazing creativity and grit in keeping their operations running. We admire what they have accomplished and it is another proof point that our commitment to the independent agency channel is a wise one.

For commercial lines, first quarter 2020 produced a combined ratio of 118.3 versus 102 in the first quarter 2019 and a first quarter 2020 written premium increased 17.6% versus first quarter 2019. As discussed earlier, the Nashville storms and the large fire loss added 21 points to our commercial combined ratio. Our middle market results for the quarter, are combined ratio of 176.1, which includes 64 points for the Nashville storms and seven points for a large fire loss. And total written premium growth of 17.8%; a new business premium growth rate of 43% and a retention level of 90.7%. We launched our first middle market Connect state, Indiana, in first quarter 2020 and early feedback has been positive. Despite the large losses in the quarter, we continue to be pleased with the position of our middle market business. For first quarter 2020, our small commercial results are combined ratio of 99.3; a total written premium growth rate of 4.6%; a new business premium growth rate of 56% and a retention level of 86.5%. We are pleased with the position and progress of our small commercial business. The impact of COVID on small commercial and middle market that we have seen, including April results is that submissions have declined by about 25% and have stabilized at this level. The biggest issue for small commercial and middle market during COVID is around business interruption. There is not much we can add to this discussion that other carriers have not already discussed.

Two things are worthy of note. First, for every single claim we look at the facts of the claim and we look at the terms of the policy to determine whether the claim is covered or not, full stop. Second, our commercial policies require direct fiscal loss or damage to property, and many of these also include a virus exclusion. For first quarter 2020, our commercial auto results are combined ratio of 98.2%; a total written premium growth rate of 51.7%; a new business premium growth rate of 108% and retention level of 87.2%. We are pleased with position and progress of our commercial auto business. The impact of COVID on commercial auto that we have seen, including April results, is as following. Submissions have declined by about 20% and have stabilized at this level. Miles driven are down between 15% to 20% and have stabilized at this level. Certain industries are driving more or less than others. Construction is down about 5%, while finance and insurance are down over 40%. Certain states are driving more or less than others. Texas is relatively flat. Illinois is only down about 5%, while Michigan is down over 50%. Ohio is down over 40%. And newly reported commercial auto claims are meaningfully down. For first quarter 2020, our workers' compensation results are a combined ratio of 104.3%; a total written premium growth rate of minus 3.6; a new business premium growth rate of 61% and a retention level of 60.5%.

The workers' comp expense ratio includes 4.5 points of a bad debt expense related to our net comp book. We continue to be on schedule with our workers' comp Connect core systems build and are pleased with how our workers' comp business continues to become more integrated with the rest of our commercial products. The impact of COVID on workers' compensation that we have seen, including April results, is the following. Submissions have declined by about 30% and have stabilized at this level. Newly reported workers' compensation claims are down overall. The biggest COVID issue for workers' compensation is that some states have made changes that expand the scope of workers' compensation coverage by creating presumptions of compensability. Insurance rates are developed to cover a certain set of claims, and when the set of claims that are covered is expanded, it creates either affordability issues rates need to be increased or availability issues. When coverage is expanded and rates are not allowed to increase, the insurers will not offer coverage. Nursing homes, hospitals and medical offices make up 20% of our workers' compensation premium. Other essential workers make up another 14% of our workers' compensation premium. We are closely watching what the states are doing and will react as they make changes to ensure that we stay true to the core insurance principle of matching rate with risk.

For first quarter of 2020, our farm and ranch results are combined ratio of 81.9%; a total written premium growth rate of 19.4%; a new business premium growth rate of 108% and a retention level of 90.7%. In first quarter of 2020, we launched farm and ranch Connect in five states. The initial results are just terrific and March 2020 ended up being the largest farm and ranch new business month in the history of State Auto. The impact of COVID on farm and ranch, including April results has been minimal. Quotes in new business volumes have been stable post-COVID, newly reported client are stable, spring weather has had been a more significant factor. Despite the headline underwriting loss in first quarter of 2020, driven by the Nashville cat and the large middle market fire claim, first quarter 2020 was a quarter of meaningful progress for State Auto. March 2020 was the largest new business month in the history of the company. Meaningful progress was made in addressing our personal auto profitability issues. The initial state launches for farm and ranch Connect and middle market Connect were accomplished. And we quickly transitioned to a 95% work-from-home operational model and the business did not miss a beat. I cannot thank our State Auto associates enough for everything that they have done the last seven weeks. They are leading through this period of time with grit and grace.

With that we'll open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Paul Newsome.

Paul Newsome -- Sandler O'Neill + Partners -- Analyst

Good morning, thanks for the call, any early read on how big the revenue hit could be for just the economy, especially in commercial given the things like workers' comp and other lines are tied to business activities?

Michael E. LaRocco -- Chairman, President and Chief Executive Officer

Paul, I'll ask Kim to lean in first, then I'll add some commentary. Kim?

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

Yeah. I'm sorry, Paul, we had a hard time hearing you. Could you repeat the question?

Paul Newsome -- Sandler O'Neill + Partners -- Analyst

Sure. I'm interested in what could be the revenue impact of the economy on things like workers' comp and other commercial lines were they're tied to economic activity and employment there?

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

So, I think what we are seeing in the early days varies by line. So commercial auto actually is continued to stay strong and our new business volumes actually increased in April. And so, also farm and ranch on the commercial side is has been strong. So, today, we've not seen anything and so we will just use April results and sort of go for there. I think probably the more meaningful impact is around our small commercial business, BOP, our middle market business, CPP, and workers' compensation. To date we have seen submissions down 25% to 30%. Now this is probably more true in middle market, but the pipeline is long. So, we will get a submission and it'll turn into a policy sometimes two to three months later, so the decrease in submissions may not show up in new business volumes for us until May or June. While for BOP and workers' comp it sometimes happens more quickly. But given that submissions are down 25% to 30%, one would guess that new business probably follows without that. Although, our salespeople are out there going after it, doing their best not to have a new business decline. That's what we're seeing.

Paul Newsome -- Sandler O'Neill + Partners -- Analyst

On the personal lines side, a lot of your peers have tied the size of the rebate they're giving to what they anticipate will be the windfall, because of lower miles driven. Is your discount tied in such a way it's a little bit different structures, so I just wondering if there's any sort of relationship that we should think about?

Michael E. LaRocco -- Chairman, President and Chief Executive Officer

Paul, this is Mike, I'll start and Kim can follow up a little bit. I think it's very difficult if folks are trying to directly tie the reduction in miles driven and even claims activity more precisely to some of the return of premium suggestions that I've seen. I mean, I've seen a huge range, I know you have as well, in terms of the type of credits different organizations are giving. We did our best to try to look at the behavior during COVID, which obviously has not surprised anybody and seen the reduction in miles driven. The challenge we faced when we looked at what others were doing with the short two month rebate was that. One, the dollars were very small on a per policy bases. And two, they were again focused on just those couple of months.

And it was clear to us that the amount of time that you were going to see an impact on miles driven is going to be longer. And we thought it was more fair to recognize folks with a broader discount across the full policy premium. So, yes, we indeed try to look at. Kim and his team did a pretty thorough analysis of not just miles driven, but the early indicators in terms of the number of claims we're getting. But it is very difficult to draw a straight line between the return of premium and the claims impact you're going to get. So we chose a look that we thought would be fair to our policyholders and quite frankly give them what we felt was more appropriate improvement in their premium dollars. Kim, you want to tag on to now?

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

Yes. Sure. Thanks Mike. I think in the work we did, our target combined ratio for personal auto is 96%. And so, again, models based on the data we have are not going to be perfect, but we did our best to try and come up with a plan that would get us would produce a 96% over that period of time. Right? We did not want to lose money, but we're not trying to have a combined ratio in the 70s either. The thing that we probably are most eager to see how it plays out is this push on telematics, because if it is a this period of time the time that's going to be the hardest to match rate with risk and get right is, is the period of time when things start to open up and then get back to historical levels because, during that period of time, different states will behave differently. Different individuals, depending on their job, will drive more or less. So having a more just sort of blanket approach, felt like that was going to be really hard to thread the needle and get right. And so with telematics, if it's a slower opening in general than our telematics discounts will be deeper based on miles driven being part of that algorithm. And so it's almost a bit self-adjusting. Now that being said, we know that we or no other insurer can predict that perfectly or get it perfectly right, so we will keep watch on that.

Paul Newsome -- Sandler O'Neill + Partners -- Analyst

Thank you. Safest Dave everyone.

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

Thanks, Paul.

Operator

[Operator Instructions] Your next question comes from Larry Greenberg.

Larry Greenberg -- Janney Montgomery Scott -- Analyst

Good morning. I'm wondering if you could just elaborate on your comments related to business interruption. You talked about the physical damage trigger. And then you said, I think, many also have a virus exclusion. Can you just provide a little bit more color on what many might mean in that comment?

Michael E. LaRocco -- Chairman, President and Chief Executive Officer

Yes. Again, I will start and Kim can correct anything I screw up here. First of all, having the on all of our policies having been the physical damage "requirement" in and of itself is wording that, obviously, protects us from these types of claims and limits, obviously, or eliminates our exposure. Then in addition to that, there are I think it's probably, Larry, a little over half of our policies also have the specific language around the virus exclusion. And I think if you look at it from our viewpoint and we've received a number of claims and those claims have been denied. Our point of view is pretty firm and pretty clear that, we don't have coverage in this situation when it comes to business interruption. I mean, that at the end of the day is our point of view. We feel very comfortable with that.

Now, having said that, and I think you and I chatted a little bit about this in the past, that doesn't mean that as an industry I'm kind of getting away from State Auto here, and talking about APCIA. We're looking at ways to try to support some of the plans that you're seeing from the government in terms of especially, small businesses and supporting them through that process. But when it comes to business interruption in this situation that we face with COVID, it's just not coverage from State Auto's point of view. And I think that it's just a reality that this was never how this coverage was intended nor priced. So we are very comfortable in our position. I don't know Kim you want to tag on to that at all.

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

Yes, let me Larry, I'll try and maybe give you a little bit more. So when we think of like all our BOP and CPP policies, so we have about 21% of them just don't have business interruption coverage at all. So you can think of that cohort. And then about a one-three of all of the policies have a virus exclusion. So if we add up the ones that don't have business interruption coverage and the ones that have an explicit virus exclusion, that makes up about 55% of our total BOP and CPP policies, and then the remainder have the physical damage requirement.

Larry Greenberg -- Janney Montgomery Scott -- Analyst

And just wondering if you could elaborate a little bit more on the adverse development in the auto book. And I know you mentioned it seemed to be predominantly Michigan, but anything that potentially has lingering issues there?

Michael E. LaRocco -- Chairman, President and Chief Executive Officer

Kim?

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

Yes. So I think lingering issues. I don't think I wouldn't would not short answer is no. I might go a little more detailed or geeky than you might want. But I think what was interesting this quarter is we saw it across a couple coverages, right. So we saw some in uninsured motorists, which were just a handful of older claims that settled for more. So that's just sort of like sometimes that happens, sometimes that does not. I think we saw some in HIP, which we tend not to see. We've been growing a lot in Michigan. So we keep our eye on that, so that's something we are looking into. And then, the others are sort of probably bodily injury as sort of the normal thing and that's-one of the things we do is as again in a prior life I was a reserve actuary. And so any time you have an event like COVID, patterns change, and so trying to dial those in and get that right. So I don't know if that helps. There is a little bit more color, but that's what happened with reserving this quarter.

Larry Greenberg -- Janney Montgomery Scott -- Analyst

Okay, thank you.

Operator

There are no other questions in the queue. Speakers do you have any closing remarks?

Michael E. LaRocco -- Chairman, President and Chief Executive Officer

This is Mike. I just want to hope and continue to wish everyone on the call, stay safe and healthy during this challenging time. And, again, we're very proud of the quarter, and most importantly how well we've responded as keeping an eye on our associates, or our policyholders and our agents. So thank you all for your time today and stay safe.

Operator

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 second quarter earnings call, which is currently scheduled for Thursday, August 6, 2020. Thank you and have a wonderful day.

Duration: 46 minutes

Call participants:

Natalie Schoolcraft -- Director of Investor Relations

Michael E. LaRocco -- Chairman, President and Chief Executive Officer

Matthew R. Pollak -- Vice President, Treasurer And Chief Accounting Officer

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

Paul Newsome -- Sandler O'Neill + Partners -- Analyst

Larry Greenberg -- Janney Montgomery Scott -- Analyst

More STFC analysis

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