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State Auto Financial Corp (STFC)
Q2Â 2020 Earnings Call
Aug 7, 2020, 11:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome and thank you for standing by. [Operator Instructions] 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's, Director of Investor Relations, Natalie Schoolcraft.
Natalie Schoolcraft -- Director of Investor Relations
Thank you, Jason. Good morning, everyone. Welcome to our Second Quarter 2020 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 and Commercial Lines and Managing Director of State Auto Labs, Kim Garland; Senior Vice President of Data and 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 our 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 will turn the call over to STFC's Chairman, President and CEO, Mike LaRocco.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Thanks Nat and good morning everyone. I hope you all are safe and healthy. Weather that pretty much sums up both our second quarter and the first half of the year. As we shared in our pre-release, we had an unusually large amount of weather-related activity in the quarter. Based on our mix of business, we expect and plan for higher amounts of cat activity in the second quarter. But this year the amount we received was far in excess of our historical averages. Of course, that is the nature of our business. And as usual, our team met our customers' needs during these challenging events with fast and fair service.
As I've said many times before, I could not be more proud of our associates. Of course, the excessive cat activity overshadowed what otherwise was a good quarter, the 111.5 statutory personal commercial combined ratio given the 26.5 points of cat losses demonstrates our non-cat loss performance was excellent.
In addition, we continue to see strong double-digit growth. Of note is our 24% growth in homeowners and nearly 15% growth in commercial, excluding workers' compensation. It's clear that our digital platform and rebuilt products are delivering and meeting our expectation. While COVID has clearly created challenges. Our agent partners continue to meet the needs of customers, who even in the face of a pandemic, need to protect our personal and commercial assets. Having a partner like State Auto with the digital platform and a team that has continued to work remotely at full capacity makes delivering for those customers seamless.
Today, the overall impact of COVID has been more limited than we originally expected. Now there were impacts and a clear impact was in March and April as we saw a sharp reduction in miles driven much more across personal lines and commercial. Since April, there has been a continuous increase in miles driven and while not at pre-COVID levels, things are clearly heading in that direction. Also with less economic activity in general, there was a drop in claims across our commercial lines. We did receive a reasonable amount of workers' compensation claims due to the virus. Even in the face of those claims, I'm pleased with our workers' compensation results.
More importantly, as with the cat claims, our team handle the workers' comp claims with empathy, speed and fairness. The biggest unknown regarding COVID is business interruption claims. That said, our policies have either physical damage requirement or a physical damage requirement combined with the virus exclusion. So we're very confident in our position regarding these claims.
We're seeing some early litigation decision in matters that were not party to that we believe are positive for the industry and the sanctity of the physical damage requirement President. Of course, our optimism has always tampered with caution as we continue to monitor the landscape for changes in President or Public Policy argument that shift our entire industry in an undesire and for unintended direction. From my vantage point, insurance carriers simply do not owe the claims for business interruption when there is no physical damage. But even so, the industry is working together to try and create both funds to help small businesses and a go for government backstop should this occur again.
Steve and Kim will provide more details on COVID and the dollar impact this quarter. Our overall combined ratio of 111.5 was poor and we own that. However, it was driven by an unusual large amount of cat claims and we are proud of how this business is performing. Finally, before I turn it to Steve, I'd like to comment on the events in the first half of the year and how our industry has performed to date and what I believe, we must we do going forward.
I've been in this industry for over 42 years and I can say, I've never seen anything like the last six months. An unprecedented pandemic, the resulting economic downturn and ongoing level of catastrophic weather and social unrest following the murder of George Floyd. In the middle of all this is our industry and while we can do better, I'm proud of what we've accomplished in protecting the financial security of policyholders, creating environment that permit work at home flexibility so that those in the industry can stay safe, while assisting policyholders, as well as tend to the needs of their families.
During COVID, we've worked with our customers during the second hardship, the lane payments, writing off charges, such as insufficient funds and providing premium credits. We pay the claims we owed based on the coverage we provided, including honoring our obligations on workers' comp claims that are often paid to the brave men and women on the front line in the fight against this insidious virus.
In the face of tragic cat activities from tornadoes, to hail, to hurricanes, again and again the industry quickly shows up to help customers in their time of need. We deliver on our promise when it is needed most. In the face of the social unrest, we handle the claims from the damage to properties, but in this space, we can do much more. As individual companies and as an industry, we must recognize the reality of racism in this country. We cannot turn away from this moment. It is critical that we have open, candid and transparent dialog about the reality of racism, which we have already done at State Auto.
These conversations must then lead to real and sustained action and all of us must have the strength to say enough. If you see or hear something say something, but beyond saying something we have to do more as an industry to ensure that the worse perspectives lead us into the future and that we reflect the diversity of our country and our customers. This extends not only to race, but bias against and lack of conclusion related to gender, sexual orientation and religious beliefs. It has no place in our country, our industry or our companies.
State Auto believes that this fight is critical to our success as an industry and our ability to track the talent we need to succeed. More importantly, it is simply the right thing to do. As an industry, we can be an easy mark. It's not difficult to target insurance companies in many do. It's time we stand up and speak up about the good we do, how we help when things are most difficult and how we can be better. We can do more and State Auto is committed to doing our part.
With that, I'll turn the call over to Steve.
Steven E. English -- Senior Vice President and Chief Financial Officer
Thanks, Mike, and good morning everyone. Earlier today, we reported $34.3 million of net income for the second quarter of 2020, driven by net investment gain of $59.9 million net of tax, as the equity markets rebounded from the lows in March.
On an operating basis, the second quarter of 2020 produced a loss per fully diluted share of $0.59. This compares to second quarter of 2019 operating loss per share of $0.33. Underwriting results as compared to the same quarter a year ago were impacted by significantly higher catastrophe losses, adding 26.5 points to the GAAP combined ratio, as compared to 15.4 points in the second quarter of 2019.
Second quarter is typically when we experienced the greatest impact from catastrophe losses caused by weather. Our non-cat loss and LAE ratio improved 7.8 points, while the expense ratio was flat. On a year-to-date basis, the 2020 fully diluted operating loss per share is $0.76, compared to a $0.01 loss for the same period in 2019. Catastrophe losses drove the increased loss as our non-cat loss ratio and expense ratio improved year-over-year.
Some additional detail on the quarterly results include the following: First, the second quarter 2020 cat results includes $6.5 million of estimated losses from riots during civil unrest. The remaining catastrophe losses were the result of wind and hail storms in the Midwest and South. Second, our operations like many others have been impacted by the effect of COVID-19 has had on the country. Fewer miles driven along with reduced exposure from reduced economic activity resulted in lower claim frequency in our auto lines and small and middle market commercial and workers' compensation lines respectively.
Having said that there were offsetting negative impacts as well. Reserves of approximately $2.9 million were established for estimated defense costs associated with business interruption claim litigation. As of yesterday, we have 15 lawsuits, four of which are class actions. We review claims on a case-by-case basis and we have closed approximately 95% of the business interruption claims received. Approximately 20% of our workers' compensation book relates to nursing homes or other medical facilities; such as hospitals. COVID-19 related losses in the quarter totaled approximately $2.8 million for these claims.
As far as the impact on premiums, our In This Together Plan will begin to have an impact in the third quarter as the second quarter was needed to obtain regulatory approvals from our states of operation. At the end of the first quarter, we increased our estimate of bad debts by $1.5 million for COVID. Throughout the second quarter, we have worked with our insureds and based upon those efforts and what we are experiencing, it was not necessary to make any further material adjustments to our bad debt allowance, specifically for COVID considerations.
In the quarter, Specialty runoff reserves develop adversely primarily, due -- driven by one claim from 2016 relating to the former E&S casualty product line. We remain confident that the Specialty reserves are adequate in all material respect. The personal and commercial catastrophe combined ratio for the second quarter of 2020 was 111.5, compared to 109.9 in the second quarter a year ago. Catastrophe losses were 12.1 points greater in Q2 of this year and for personal and commercial the non-cat loss and ALAE ratio improved 10.6 points, while the expense ratio was flat. Year-to-date trends are somewhere.
Reserve development in the quarter for personal and commercial was overall favorable, but less than Q2 of 2019. Personal auto was the primary product line contributing to less overall favorable development, as it develops adversely in Q2 2020, as compared to Q2 2019. To varies for bodily injury and frequency of property damage claims, primarily related to the 2019 accident year or the driving factors. Kim Garland will provide additional product details in his prepared remarks.
Investment results in the quarter, of course included a rebound in the equity markets as I previously mentioned. Net investment income was negatively impacted in the quarter, driven by our position in TIPS. In last quarter, we disclosed our intention to phase out the MLP asset class. As of June 30, 2020, $37 million remains in our portfolio.
And finally, we did recently renew our property, catastrophe, reinsurance treaty for the State Auto Group and our casualty reinsurance treaties. The most significant change was to our retention and limit on the cat treaty. We raised the group retention to $90 million from $75 million and we raised at the top end of our limit to $270 million from $200 million as a result of the continued growth in our homeowner and commercial property businesses.
And with that, I'll turn the call over to Kim.
Kim Garland -- Senior Vice President of Personal & Commercial Lines-State Auto Labs
Thanks Steve and good morning everyone. Our overall personal lines and commercial lines results are the following: The second quarter '20 statutory combined ratio was 111.5, compared to 109.9 for second quarter '19. The second quarter '20 year-to-date combined ratio is 109.4, compared to 104.9% through second quarter 2019 year-to-date. Written premium growth was 11.9% second quarter '20 versus second quarter '19 and 12.6% year-to-date 2020, compared to year-to-date 2019.
For the quarter commercial lines had a combined ratio of 104 and a written premium growth of 14.7% and personal lines had a combined ratio of 116.5 and written premium growth of 10%. The two major events of the quarter were catastrophes and COVID, the impacts were the following, but varied by product line.
Catastrophes and non-cat weather had negative loss ratio impacts and the COVID had both positive and negative impacts to the loss ratio and our new business volumes. The catastrophe impact on our second quarter '20 results was the following: The commercial lines catastrophe loss ratio was 8 points higher than our five year historical average. The personal lines catastrophe loss ratio was 16 points higher than our five year historical average.
Starting with our personal lines business, our personal auto results for the quarter are a combined ratio of 94.1%. Written premium declined 5.2%, policies in force declined 6.8%, 5.3% excluding -- decline excluding our Georgia and Michigan legacy books which we decided to close. New business counts declined 20% and we have a retention level of 67.7%. Year-to-date personal auto produced 98.6% combined ratio, compared to 97.7% in 2019, with the year-to-date, written premium decline of 4%.
We like other personal auto carriers saw miles driven dramatically drop in March and April around a 40% drop and then gradually trend back up in May and June to where they are now just below pre-COVID levels. This reduction in miles driven resulted in a reduction of personal auto claims around a 50% drop in collision claims at the low point.
In May and June, personal auto claims increased as miles driven increased and our most recent data shows personal auto collision claims around 20% below pre-COVID levels. We responded to this reduction in personal auto claims volume with our In This Together Program, which provides a 5% discount for the policyholders entire next policy term. The earliest effective date in the state of this renewal discount is July 13. So the, In This Together Program did not have an impact on our second quarter '20 financial results.
Recall in the fourth quarter of '19, I shared with you our action plans to address our issues in personal auto. Here is an update on the progress of these actions. We have implemented our updated personal auto pricing model, personal auto Connect version 2.1 in 14 states with new business effective dates June 30 or prior. Connect version 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 version 2.1 had not been implemented. We introduced filters in the comparative raters to limit quoting non-standard business under our old pricing model. The implementation of these filters reduced our non-standard new business by about 50%. These filters are being removed as the new Connect version 2.1 model launches in the State.
As I discussed in previous quarters, we began implementing operational changes to reduce premium leakage, like double down pay and 100% verification of prior carrier information. We are seeing immediate benefit from these changes and recognize that these types of operational changes can have a faster impact on rate changes on our personal auto results. Our telematics program until first quarter '20 had only offered a plug-in dongle option. In the first quarter '20, we implemented a smartphone plus tag as a second option. Early adoption of the second option has been encouraging as now 70% of our new telematics customers are selecting the smartphone plus tag option.
Our homeowners results for the quarter are a combined ratio of 141.1%. A written premium growth rate of 24.1%. A policies in force growth rate of 13.6%. A new business count growth rate of 4.4% and a retention level of 76.4%. Year-to-date combined ratio was 120.2%, compared to 117.6% in 2019 with year-to-date written premium growth of 25.2%.
Catastrophe's where the story of the second quarter '20 for homeowners. With the cat loss and ALAE ratio of 62.3%, which is 27.5 points higher than our five year historical average. Last quarter, I shared that in 2019 Texas represented a disproportionate amount of State Auto's total homeowners book of business. We implemented a 15% rate change in May in the Dallas-Fort Worth counties. This rate change in combination with our December 2019 rate change in Dallas-Fort Worth has reduced our homeowners new business in the Dallas-Fort Worth counties by 50%.
At the same time, our homeowners new business in non-Texas states has been increasing. So we are starting to make progress, reducing the percentage of our homeowners business in Texas. The impact of COVID on our personal auto and homeowners quote volume and new business levels has been negligible.
For commercial lines, our middle market results for the quarter are combined ratio of 106.6% and a total written premium growth rate of 13.1%. A new business premium decline of 7.8% and a premium retention level of 89.2%. The year-to-date combined ratio is 139.6%, compared to 110.7% in 2019. Catastrophe is where the story of the quarter for middle market with a cat loss and ALAE ratio of 17.6%, which is higher than our historical average.
Our second quarter '20 non-cat loss and ALAE ratio of 48.1% was better than anticipated. The biggest impact of COVID on our middle market business is that we have seen about a 20% decline in middle market submissions during COVID, which has resulted in our second quarter '20 new business premium volumes being down about 10% over second quarter '19.
As a reminder, we are rolling out CPP Connect throughout 2020. Seven additional states were launched during the second quarter of '20 for a total of eight states on the Connect platform. Early results are as we expected. Our small commercial results for the quarter are combined ratio of 123.5%, a total written premium growth rate of 3.2%, a new business premium growth rate of 27.6% and a premium retention level of 86.6%. The year-to-date combined ratio is 111.6%, compared to 97% in 2019, year-to-date growth is 3.9%.
Again catastrophes were the story of the quarter for small commercial with a cat loss and ALAE ratio of 38.4%, which is 23.8 points higher than our five year historical average. Our second quarter '20 non-cat loss and ALAE ratio of 43.6% was better than anticipated. The biggest impact of COVID on our small commercial business is that we have seen about a 10% decline in small commercial submissions during COVID, which has resulted in our second quarter '20 new business premium volumes being down about 6% over first quarter '20, but still up about 25% over second quarter '19. We continue to believe that there is still a lot of untapped upside in our small commercial business.
Our commercial auto results this quarter are combined ratio of 87.5%, a total written premium growth rate of 39.4%, a new business premium growth rate of 60.1% and a premium retention level of 85%. Our year-to-date combined ratio is 92.6%, compared to 103.6% in 2019. Year-to-date growth is 44.9%.
For commercial auto, the miles driven impact from COVID was different than we saw for personal auto. The total miles driven by our commercial auto risks dropped in March and April only 20% versus the personal auto miles driven drop of around 40%. And we saw significant variation in the miles driven impact by industry and state.
Commercial auto miles driven trended back up in May and June and it is now at pre-COVID levels. This reduction in miles driven combined with less overall congestion on the road from personal auto miles driven drop resulted in a reduction of commercial auto claims around 50% drop in collision claims at the low point. In May and June, commercial auto claims increased as miles driven increased and our most recent data shows commercial auto collision claims have increased to pre-COVID levels.
Our workers' compensation results for the quarter are combined ratio of 101.7%, a total written premium decline of 15.6%, a new business premium decline of 50.5% and the premium retention level of 61%. Year-to-date, the combined ratio is 103.2%, compared to 96.9% in 2019. Year-to-date written premium growth is minus 8.9%. The impact of COVID on our workers' compensation business has been the most complicated of all of our product lines. There has been a negative impact from COVID on the loss ratio in that it has created additional claims that otherwise may not have occurred.
There has been a positive impact from COVID on the loss ratio in that there has been less business activity overall, which has resulted in fewer non-COVID claims. The combination of these two impacts has generally been a watch on our workers' compensation loss ratio. Our 2020 workers' compensation loss and ALAE ratio of 46.3% improved 3.4 points, compared to the second quarter '19. COVID has also impacted our workers' comp new business volume as our second quarter '20 workers' comp new business was down about 50% over second quarter '19. We continue to be on schedule with our workers' comp Connect Core Systems build and the first workers' comp Connect State is scheduled to be launched in fourth quarter '20.
Our farm and ranch results for the quarter are a combined ratio of 124.5%, a total written premium growth rate of 28.7%, a new business premium growth rate of 241.3% and a retention level of 91.1%. Year-to-date combined ratio is 104%, compared to 106.7% in 2019. Year-to-date written premium growth is 24.2%. Again catastrophes were the story of the quarter for our farm and ranch business with the cat loss and ALAE ratio of 33.4%, which is 16.3 points higher than our five year historical average. Our second quarter '20 non-cat loss and ALAE ratio of 43.2% was better than anticipated.
Farm and ranch Connect has now been launched in 20 states. The impact of State expansion farm and ranch Connect and our new farm and ranch sales team has resulted in a tripling of our farm and ranch new business premium volume, just a terrific result.
And with that, we'll open the line for questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Paul Newsome from Piper Sandler. Your line is open.
Paul Newsome -- Piper Sandler -- Analyst
Good morning. Hope you are all well, as we are here. I want to ask about the competitive environment in auto. In particular, we're seeing some press reports of competitors decreasing pricing, I think, I actually read something where your pricings are little bit higher. Could you talk about sort of both the -- basically just give us a sense of the competitive environment and how you guys are reacting to it, particularly on.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Yes, Thanks, Paul. I'm going to let Kim start and I may have a couple of comments afterwards. Kim?
Kim Garland -- Senior Vice President of Personal & Commercial Lines-State Auto Labs
Thanks, Paul, and I'll probably touch on a couple of things. And in some ways, some of the actions we are planning to take are going to end up being pretty fortunate for us. So I think we, like many or most other carriers, sort of get -- we access information that allows us to gauge our relative competitive position in the market and within that we get a general sense of what others are doing around rates. We are seeing some carriers become more competitive lower rates some.
I don't think we've seen a dramatic like market moving stuff at least in our channel yet. I think the thing, if you want to ask, like what our response is, when I speak about the Connect 2.1 version of the pricing model for personal auto, we intentionally and based on loss cost tilted the curve, so that we became more competitive in the ultra-preferred and preferred segments less -- increase rates on the non-standard end of the risk spectrum. And so this like leaning in or becoming more competitive in preferred, ultra-preferred helping us sort of stay either as competitive as we were or actually in a number of cases, improve our rate competitiveness on the preferred, ultra-preferred end of the spectrum. We are also seeing that we are becoming less competitive on that non-standard, which is both we are fine with and was intentional. So that's what we're seeing.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
So, Thanks, Kim. I'm going to just tag on a little bit. I mean, just had a very high level, our focus is always going to be profit first, so where people go really negative into a place where they don't feel we can make money, were not going to go there. So certainly we're not going to chase business.
Having said that, and I said this lots of times over the last 42 years, it's a very inefficient market. So when you do hear about rate activity, I think right now you're seeing State Farm make a lot of noise about rate drops and so on and so forth. There is just so much inefficiency, meaning that you could get 10 quotes and get quite a range of response. So companies like State Farm still are battling the exclusive agency side of it and I know they do ton of advertising, but I continue to believe they're going to struggle and they're in a situation where they're getting quite, so I know they're getting little overly aggressive.
I still see the better competitors using commonsense and the thing that I think is most interesting in your question is that COVID has created an environment where we're getting the benefit of less miles driven and pricing during this time is extraordinarily difficult and better companies who better price are going to have an advantage, because you've got to kind of figure out how much should this is sustainable, what is going to be the post-COVID world, what is going to look like.
And the other thing that I think gets to that is Kim talked about our continued investment in telematics. I mean that is a very critical piece of how we're responding to all this, going to a mobile phone with the tag and then ultimately probably we've taken that technology even further in the coming weeks and months, I think it's going to create a real opportunity for us. And then the final thing I'll say that because it is inefficient, a lot of this comes to your distribution and we have ranges of traditional independent agents through more network agents through agencies that are platform or digitally based agencies. So we cover a wide spectrum of opportunity to get at the business and the way you win there is certainly price first and no question about that, but again our platform is demonstrated right through COVID and it becomes much, much more critical.
Companies that have already invested in digital and we have, are going to have an advantage coming out of this change. I think it's pretty obvious thing to say, but while we don't know what the world is going to look like post-COVID. One thing we know for sure is digital is going to play a bigger part, and it was a combination of having good decisions may be a little bit of luck that we made those investments heavily over the last five years, and I think that differentiation is also how we're going to combat the ongoing competitiveness of the auto market, but I appreciate the question.
Paul Newsome -- Piper Sandler -- Analyst
That makes sense. Second question, could you help us a little bit on the appropriate level or either a range on the cat load, looking at sort of the cat load that has happened over the last five years, it is amazingly a variable number even by the standards of other insurers and the business mix has changed quite a bit over that same period of time. So, is the historic number here that means sort of the historic average. I'm looking this on an annual basis, not a quarterly basis. Does that have any useful. Is it going up, is it going down, any kind of help that would be great.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Yes. Steve, you want to take that one?
Steven E. English -- Senior Vice President and Chief Financial Officer
Sure, Hey Paul. I would say it is trending up because of mix of business, homeowners is becoming a greater portion of the total company and I make that statement in regards to the standard lines, personal and commercial, so taking depending on how far back you go, I'm stripping out anything from the old specialty segment that's discontinued, but anything that 7% to 8% range, I think, few years ago, it probably would have been more like 5% to 6%, but I think with the product mix shift, it's definitely trending up for that. So doubly important for us to price that products correctly, so we get the appropriate non-cat results to fund that.
Paul Newsome -- Piper Sandler -- Analyst
Great. Thank you very much. Appreciate it.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Thanks, Paul.
Operator
[Operator Instructions] Your next question comes from the line of Sean Reitenbach from KBW. Your line is open.
Sean Reitenbach -- KBW -- Analyst
Hello, I was hoping you guys could tell us how you guys thought about incorporating lower frequency into accident year picks for commercial casualty line?
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Sure. Kim, you want to speak to that?
Kim Garland -- Senior Vice President of Personal & Commercial Lines-State Auto Labs
So I will start and I don't know if Steve or Matt may want to clean up. Because I think this is the reserving question. So as part of our process, I think we estimated, what we thought a normal quarter would be if there were no COVID. I think, then we looked at the combination of the frequencies that we got or the difference in the frequencies versus what we would have expected in a regular second quarter at these volumes and then try to adjust the accident year pick based on that and then maybe added a smidge of conservativeness in that because of just uncertainty of this environment, but Steve or Matt, I did not know if I did damage to that explanation.
Steven E. English -- Senior Vice President and Chief Financial Officer
No, that was pretty good. We, as Kim said, certainly frequency was a big factor in assessing the loss pick. But we also looked at it, not just on a quarter-to-quarter basis, but how it emerged throughout the quarter and coming to our final pick. I would just tag on that on the severity side, we haven't yet seen, I don't think any tremendous types of the impact on severity. So our pick was more influenced by frequency than severity. Can Matt Mrozek, do you want to add something from your chair as that had reserving, please do.
Matthew Stanley Mrozek -- Vice President and Chief Actuarial Officer
Thanks Steve. The only additional comment would be that Kim's and Steve's description applies for the year-to-date. So that's how we looked at the current accident year. As we go through the third quarter and assess the year-to-date through 9/30, we would be looking at whatever is going to happen in Q3. So we were focused on the year-to-date. Q3 will just be the reaction to either continued decline or a low volume of business activity or a return to more normal level.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
The only thing I'll tag on is that the questions on the site for one, because I talked about this a little bit in auto, in both pricing and reserving as you think through the challenges of COVID and its impact on claiming behavior. I think it's very important that companies, I mean, we try to take a consistently and appropriately conservative approach to both of these functions. But when it comes to reserving, I think it probably does call for a little bit more conservatism through this, because there is a lot of unknown and I think that your question is important as we try to navigate through what's going to -- how short-term or what type of short-term impacts we're getting versus potentially longer-term changes. So thanks for the question.
Sean Reitenbach -- KBW -- Analyst
Yes, absolutely. That's very helpful. Second question is, it looks like a handful of lines had higher ULAE year-over-year and is there anything specific that drove that?
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Kim or Steve, anything?
Steven E. English -- Senior Vice President and Chief Financial Officer
No, I can't think of a particular issue that comes to my mind, other than that's how the estimates worked out. Matt, I guess I would also ask Matt Mrozek, if he can recall anything in particular.
Matthew Stanley Mrozek -- Vice President and Chief Actuarial Officer
Just to some extent, that number is going to vary with the loss and case-specific expenses. So to the extent that we had higher catastrophe losses and higher this year than history that would put some upward pressure on that unallocated expense.
Sean Reitenbach -- KBW -- Analyst
Okay. Thank you very much.
Matthew Stanley Mrozek -- Vice President and Chief Actuarial Officer
Okay. Thanks, Sean.
Operator
Your next question comes from the line of Marla Backer from Sidoti. Your line is open.
Marla Backer -- Sidoti & Company -- Analyst
Thank you. Could you -- would you be able to provide some color on not necessarily detailed numbers, but just some directional sense on what percent of auto policyholders are currently using the digital in car tools now?
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Are you speaking -- first of all welcome to the call. Are you speaking specifically the telematics?
Marla Backer -- Sidoti & Company -- Analyst
Yes, Yes.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Okay. Kim, can you talk to that a little bit?
Kim Garland -- Senior Vice President of Personal & Commercial Lines-State Auto Labs
Yes, I think if you look at our entire in-force personal auto book, it's around 9% or 10% of the total vehicles are on telematics. Right now our personal auto book is still we have what's called Connector policies that are on our new system. We still have policies that are on our old legacy system. We do not have a telematics options for the legacy book. So if you just look at the Connect book, it is about 17% of the vehicles on Connect have telematics.
Marla Backer -- Sidoti & Company -- Analyst
Great, thank you. And obviously once drivers take up or adopt the telematics, if their driving record warrants that I'm sure that they obtain economic incentives. Are you providing any kind of incentives upfront in order for them to just take the telematics to begin with?
Kim Garland -- Senior Vice President of Personal & Commercial Lines-State Auto Labs
You may go Mike.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
No, go ahead.
Kim Garland -- Senior Vice President of Personal & Commercial Lines-State Auto Labs
Yes. So that's a great question and we try to give this commercial, because we really want almost -- we want everybody to adopt telematics, so how we do it in personal lines, we give a 10% participation discount at new business. So if you buy a policy and you just choose telematics, you get 10% off of your first policy term, then what we do is at renewal, we will use the scoring to give you discount or surcharge for your next policy term. The discounts can go all the way up to a 50% discount and we do have a slide for policyholders who do qualify for that and the surcharges can go up to 25% and we do have policyholders who do get that.
An interesting general fact that we see is on average, policyholders at their first renewal qualify for, on average, in the range of about a 15% discount at their first renewal. So it validates the use of that participation discount, because there is still some sort of self-selection, the safer drivers tend to take telematics.
Marla Backer -- Sidoti & Company -- Analyst
Okay, that's very helpful. Thank you. And then one last question which is on the business interruption clause. So you talk a little bit in your prepared remarks about how you're seeing, you're seeing positive factors right now in terms of upholding the physical nature that causes the business interruption. It is obviously still early days. Are you seeing anything on the horizon that might provide another test of that specific element of the business interruption clause?
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
I think that this is Mike and others can chime in [Indecipherable]. There is specific one that not that I can mention, but there is going to be a number of more cases coming to decisions and so this is going to be as I mentioned in my comments were still being very prudent about our approach to this, we are watching cases carefully. I'm on the Board of Governors for ACTIA, the industry group, with the majority of our company is part of that, and we watch it carefully through that organization as well. So we get access to kind of everything that's happening across the industry and across the country. So we see a number of efforts around litigation that are ones that we are keeping our eyes on, I worry about everything. So I look at that stuff and I've concerned about. But there is not like a specific event that I believe is happening that is more significant to me than many of the other issues and challenges that we're going to see in this stage. Steve, you want to [Indecipherable] on this.
Steven E. English -- Senior Vice President and Chief Financial Officer
No, I don't think I would get that.
Marla Backer -- Sidoti & Company -- Analyst
All right.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
I'm good. That means [Technical Issues] the question.
Marla Backer -- Sidoti & Company -- Analyst
Thank you very much.
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
All right, welcome.
Operator
There are no further questions at this time. I'll turn the call back to presenter for closing comments.
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, November 5, 2020. Thank you and have a wonderful day.
Operator
[Operator Closing Remarks]
Duration: 47 minutes
Call participants:
Natalie Schoolcraft -- Director of Investor Relations
Michael E. LaRocco -- Chairman, President and Chief Executive Officer
Steven E. English -- Senior Vice President and Chief Financial Officer
Kim Garland -- Senior Vice President of Personal & Commercial Lines-State Auto Labs
Matthew Stanley Mrozek -- Vice President and Chief Actuarial Officer
Paul Newsome -- Piper Sandler -- Analyst
Sean Reitenbach -- KBW -- Analyst
Marla Backer -- Sidoti & Company -- Analyst
