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State Auto Financial Corp (STFC)
Q3Â 2020 Earnings Call
Nov 6, 2020, 11:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome, and thank you for standing by. At this time, all parties are in a listen-only mode. After the speakers' remarks, there will be a question and answer session. [Operator Instructions]
I would now like to turn the call over to State Auto Financial Corporation's Director of Investor Relations, Natalie Schoolcraft.
Natalie Schoolcraft -- Director of Investor Relations
Thank you, Jumeriah. Good morning, everyone. Welcome to our Third 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 other supplemental financial information, are included as part of our press release. Additional material titled Monitoring Our Progress has been made available on our website, saleauto.com, and along with the press release can be found 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 & Chief Executive Officer
Thanks Nat, and good morning, everyone. First, I'd like to say, hope you and your families are safe and healthy as we continue to navigate our way through these difficult times. Well, the third quarter continued the story of 2020 for State Auto, cats. We had a third consecutive quarter of cat activity that exceeded our planned number and was significantly higher than the prior year. As usual, our claims team was terrific. Handling these claims with the speed and empathy our customers have come to expect from this outstanding team.
The impact of catastrophes and weather, in general, has obviously been the main story of 2020 regarding our results. However, the most important message of the quarter and the year is the ongoing improvement across all of State Auto. It begins with our underlying non-cat loss ratios, the key indicator when it comes to profit. Across nearly all our lines of business, we continued to make progress in this area. I'm very pleased with the pricing and position in the market of our products.
Our product management teams have continued to analyze our results, review the competitive position, and then adjusted and improved our pricing models. The level of sophistication this work demonstrates the benefits of our talent and our digital platform. We've built an organization and technology that can deliver continuous improvement. Kim will cover the details of our non-cat loss ratios by-product.
Another area where we see the value of our platform is our ability to efficiently add scale, which of course leads to improving expense ratios. In the midst of a pandemic, we continued to grow. Our agents have seen that. Our technology and our team has not missed a beat during these challenging times. This is a clear differentiator in the market, and our agents have responded. They know we can issuance service business regardless of the challenges. I'm very pleased with the growth we've achieved, and we still haven't hit our stride.
Let me speak specifically to auto. I'm thrilled with where we're positioned with our auto product. It's a one-product where we had to make a number of adjustments and changes to our pricing model. In addition, as our first product on the digital platform, this slide also had to deal with early bugs in the system. I take full accountability for the early missteps. Now, we've overcome these issues and are in the market with a product and platform delivering in this critical line.
Our current accident year results demonstrate improvement. Our mix of new business from preferred to non-standard is meeting our expectations. More importantly early frequency and severity numbers are behaving as planned. I'd like to comment on COVID19 and specifically business interruption coverage under commercial property policies. I'm pleased and not surprised in the majority of cases early rulings nationwide mostly had motion to dismiss have found in favor of the industry's position that the pandemic does not create a physical loss of/or damage to property, and that insureds cannot extend their property coverage for pure economic losses.
I'd like to comment on COVID-19 and specifically business interruption coverage on the commercial property policy. I'm pleased and not surprised in the majority of cases, early rulings nationwide, mostly had motion to dismiss have found in favor of the industries position that the pandemic does not create a physical law of/or damage to property, and that insureds cannot extend their property coverage for pure economic losses. We have confidence that this prevailing view will continue and will ensure that coverage will not be expanded beyond what was anticipated under various policies. For those very few early rulings that we have seen that do not support the industries position, we believe these will be the exception and in each case, we believe that we are able to differentiate our situations from those decisions on specific facts related to our approach and position.
Now before I conclude, I'd like to take a moment to share a milestone achievement and reflect just a bit. Last month, we launched our workers' comp product on our digital platform Connect. This means that in five years, we were able to bring every one of our products under this new platform. Personal Auto, Home, Dwelling Fire, Personal Umbrella, Commercial Auto, BOP, CPP, Commercial Umbrella, Farm & Ranch and now workers' compensation. We took an outdated company with outdated products and technologies, and in five years have transformed it into a digital organization. Think about that for just a minute.
Kim will cover the impact of what we have done in more detail. Now, before he gets that, let me first pass this along to Steve. Steve?
Steve English -- Senior Vice President, Chief Financial Officer
Thanks, Mike. Good morning, everyone. For the quarter, STFC reported $0.26 net income per diluted share with an operating loss of $0.10 per diluted share. This compares to $0.25 net income and $0.34 operating income for the third quarter of 2019 on the same per share basis. For the nine months, STFC reported on a diluted per share basis, net loss of $1.57, operating loss of $0.86 and this compares to $1.25 net income per diluted share and $0.34 operating income per diluted share for the first nine months of 2019. Cat losses, net investment gain and loss and COVID, all impact these period-over-period comparisons and not necessarily in the same way to putting on the focus on weather looking at quarter or year-to-date results.
Let's start with cats, catastrophe losses are a big part of 2020 results with cat loss ratios increasing 13.3 points for the quarter and 10.5 points year-to-date as compared to 2019. Third quarter 2020 was impacted by two significant storms, one from 2017 and one that occurred in the quarter. We have spoken of the impact on Irma loss estimates from the legal environment in the State of Florida and the involvement of public adjusters. Recent court decisions have caused us to reevaluate, and we made a decision to increase our estimate of ultimate losses by recording additional IBNR. We are now fully reserved up to the retention of our property cat reinsurance treaty that was in place at the time of the storm. We do not expect any significant further adverse development as a consequence.
The second, significant event of the quarter was the Derecho that primarily impacted the State of Iowa. Our loss estimate for that storm impacted our cat loss ratio by 4.6 points. Storm losses, both cat and non-cat, have been elevated every quarter of 2020, including the severe tornado that hit the Nashville area this past March. Fluctuation of reported net investment gain or loss, which includes unrealized gains and losses on equity securities and other invested assets has also impacted quarterly and year-to-date comparisons.
One I item I'll note is we completed the exit of MLPs that began in late first quarter. You might have noticed $42.3 million of net realized losses on sale of equity securities in the quarter, bringing the nine month total to $50.9 million. This reflects the exit of these securities. However, the impact to 2020 results [Indecipherable] has included an unrealized gain or loss for equity securities, are the reversal of previously reported net unrealized losses on the same securities, offsetting the net realized losses on sales with the reversal at previously reported net unrealized losses.
The reduction to income or loss before federal income taxes for the sale of these MLPs was $2.8 million in the quarter and for the nine months $35.1 million. The reduction in net investment income in the quarter and year-to-date are also impacted by the decision to exit this asset class. While carrying a high dividend yield, the total returns were not acceptable.
COVID is the third item noted. Kim Garland will comment further on this in his remarks. But COVID continues to favorably impact claim frequency in the automobile lines, as well as small and middle commercial lines. We made no changes to our loss adjustment expense estimates for expected defense [Phonetic] costs, related to business interruption cases, and we have not incurred any indemnity losses to date.
Moving to reserve development, I mentioned the unfavorable development in Irma, so I won't repeat that discussion. For non-cat loss development, we continued to see overall favorable development of prior-year loss reserves. Personal auto is an exception, where bodily injury severity has exceeded prior estimates, primarily from the 2018 and 2019 accident years. Commercial lines development continues to be favorable across all product lines and, in particular, small and middle commercial, along with workers' compensation. The GAAP expense ratio was essentially flat with 2019 after nine months. No significant adjustments were recorded to the bad debt allowance directly as a result of COVID, beyond what we've booked in the first quarter of 2020.
There were some note payable changes in the quarter. In early September, we retired STFCs five-year note with the Federal Home Loan Bank replacing it with a new 10-year note in the same amount of $21.5 million. The new interest rate is fixed at 1.37% versus the expiring rate of 1.73%. In addition, the $60 million Federal Home Loan Bank short-term loan entered into, on March 19th, matured and was repaid in full on September 22nd.
And with that I will turn the call over to Kim.
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Thanks, Steve and good morning everyone. On October 29th, workers' comp Connect launched in Texas. This is our last product line to launch on the Connect platform. We are thrilled, and it's probably appropriate to look back at the impact of the Connect program has driven at State Auto since 2015. From the first day in 2015, the goals of the Connect program were the following; increase scale, reduce expense ratio, reduce our non-cat loss and ALAE ratio, replace and upgrade our technology to give us a competitive advantage, replace and upgrade our products and pricing models to compete with the best prices in the industry.
Of all of our traditional retail independent agent distribution plan to expand to additional types of growing independent distributors that were emerging driven by the significant innovation taking place in the world of independent agents, and significantly participate in the world of InsurTech innovation at a moment in time when the insurance industry was entering a period of massive innovation and disruption.
Our progress on scale. Direct new business written premium for the State Auto Group in the year 2015 for personal and commercial lines was $226 million. For 2019, it was $557.9 million, which equates to a 25.3% compound annual growth rate. For the 12 months ending September 30th, 2020, it was $661.3 million. Connect has helped drive a 3x increase in our new business production since 2015, and this is without a full year of impact from farm and ranch, middle market and workers' compensation Connect. This has driven our total written premium for personal lines and commercial lines to grow at double-digit rates over the last three years. This increase in the size of our new business engine has positioned us well for continued growth into the future.
Progress on reducing expense ratio. Our strategy was to take a short-term expense ratio hit through the investment in Connect in exchange for a longer-term expense ratio improvement through a more efficient platform and an increase in scale. Four of our product lines, personal auto, homeowners, commercial auto and small commercial are far enough along to understand that this strategy is working or not. It has worked in three of our four product lines. Commercial auto is the best example of this with a two 2016 pre-Connect expense ratio of 38.5%. This increased to 46.5% in 2018, as we made our investment in Connect, but the year-to-date 2020 expense ratio is at 34.3%. A 4.2 point improvement over pre-Connect.
Over the next two years, we believe the commercial auto expense ratio will get below 30%. This expense ratio reduction strategy has also worked in small commercial, who's pattern is very similar to commercial auto and homeowners, where this pattern has been slower, and more gradual. Personal auto is the product line where the strategy has not yet been effective as expense ratio has actually increased after the implementation of Connect.
As I have told you on prior calls, we made missteps in personal auto with the primary one being our balance between preferred and nonstandard business skewed too heavily toward non-standard, which has a very low retention. We are putting inefficient business on an efficient platform. This combination is still produces overall inefficiency. The increase in the personal auto expense ratio is not from a bad strategy, but from poor execution of a good strategy. I will update you on our progress in personal auto later in this discussion.
With the Connect product builds being completed, you should start to see two things. One, the same pattern of expense ratio reduction to show up in the main product lines over the next couple of years. And two, since there are no more new Connect builds to invest in, improvements in all the product lines should result in State Auto's total expense ratio, starting to decline.
Progress on our non-cat loss and ALAE ratios. The non-cat loss and ALAE ratios have been driven from the 57%, 58% range in 2015 down to the 49% to 51% percent range currently. Non-cat loss and ALAE ratios in the 50% range, with declining expense ratios should be sufficient to produce mid 90s combined ratio consistently over time.
Progress on evolving our distribution plant. Insurers categorize agents in a variety of ways. We categorize them in the following way, retail agents, network agents, platform agents, and corporate agents. In 2015, we were heavily weighted in the world of retail agents who we love, but we are underweighted in the network agent world and we did zero business with platform agents. Two IA categories that were rapidly innovating and growing.
Over the last five years, we have seen a significant shift in the distribution of our business by agency category. Personal lines is a good example of this phenomenon. In 2015, our personal lines new business was distributed in the following proportions, retail 63%, network 30%, platform 0%, corporate agent 7%. Through nine months of 2020, our personal lines, new business is distributed in the following proportions retail 35%, networks 54%, platforms 8% and corporate agents 3%. This major change in how our business is distributed is a sign that we are now effectively competing in all the methods of distribution in the independent agency channel.
Progress on our technology products and pricing models or what we call the Connect platform. The historical model for insurance technology, products and pricing models was that a carrier would do a big build and then wait an extended period of time, two years to five years to do another big build. Our technology product design and pricing models for every single product line have converted from the periodic big build model to a continuous improvement model.
For pricing models, you hear us talk about versions, personal auto version 2.1, homeowners version 3.0, commercial auto version 2.0, small commercial version 2.2. In this approach, our pricing models are continually improving. Every quarter enhancement are made and this has a very different impact than the approach were ones pricing models improve only once every couple of years. And for our technology, we are converting from the big build teams for Connect to small product teams that are continually enhancing different parts of Connect. In 2015, we started to replace where we had fallen behind in the industry in a number of areas. Our conversion to this operational model of continuous improvement is to help ensure that this never happens again, that we never small behind and have to dig ourselves out of a hole.
Progress on the participation in the world of insurtech and being prepared for this era of innovation and disruption in the insurance industry. In 2015, State Auto does not participate in the world of insure tech. State Auto Labs, State Auto's corporate venture capital fund was created in 2016 and since that time, 24 insure tech start-ups have been implemented into State Auto's Insurance operations and six investments have been made. Without Connect, we would not have been able to integrate this number of insure techs into our insurance operations, it would have been impossible on our legacy system.
In the first quarter of 2020, Coverager, a new source and researcher of the insurtech world survey the participants of the insurtech world and released their list of the Top 11 Insurance Corporate Venture capital funds and insurtech partners in the industry. State Auto Labs was on that list of the Top 11. We believe that the insurance industry is still at the beginning of a period of massive innovation and disruption and it is critical to be connected into the insurtech world.
As we reflect on the impact of Connect and all of the efforts surrounding Connect, we believe it has accomplished all of the goals that we established back in 2015 when we started and that it has positioned us well to be an extremely successful insurer over the next decade. It is impossible for us to adequately thank all of the State Auto associates for what they did to implement the Connect program. We have posted to the Investor section of our website in greater detail the data I have referenced this morning.
Now on the third quarter results. Overall personal lines and commercial lines statutory results are the following. Third quarter '20 combined ratio was 102.2 compared to 98.7 for third quarter '19. Third quarter '20 year-to-date combined ratio was 106.9 compared to 102.7 for 3Q19 year-to-date. Written premium growth was 9.2%, third quarter '20 versus third quarter '19; 11.4% year-to-date 2020 compared to 2019 year-to-date.
For the quarter, commercial lines had a combined ratio of 88.9 and written premium growth of 8.3% and personal lines had a combined ratio of 111.5 and written premium growth of 9.7%.To appropriately understand our results there are quite a few things to unwind. For quarterly results catastrophes are again the story of the quarter. The catastrophe impact on our third quarter '20 results were the following personal lines and commercial lines cat loss ratios were [Indecipherable] in 3Q19, where personal lines 11.6 points higher commercial lines 7.6 points higher. Non-cat loss and ALAE ratios are at our plans of 3Q20. The personal lines and commercial lines, non-cat loss ratio was 6.3 points lower than 3Q19 with personal lines being 2.3 points lower and commercial lines being 12.2 points lower.
Non-cat loss and ALAE prior accident year loss ratio impact. The personal lines and commercial lines, non-cat loss ratio accident year impact was 0.4 points lower than fourth quarter '19. The personal lines non-cat loss ratio prior year accident year impact was 5 points higher than 3Q19. While the commercial lines, non-cat loss ratio prior accident year impact was 7.9 points lower than 3Q19. The overall impact of prior accident years was roughly the same as last year, but there was a meaningful shift between personal lines and commercial lines.
Non-cat loss and ALAE current accident year loss ratios. The personal lines and commercial lines, non-cat current accident year loss ratios were 5.9 points lower than 3Q19, the personal lines being 7.3 points lower and commercial lines being 4.3 points lower. This improvement in the current accident is driven by factors COVID and the actions that we have taken in personal lines to address the issues that we discussed on the first quarter earnings call.
We feel very good about where we are positioned. Catastrophe happen and 2020 is a horrible catastrophe year. But when we look back at the total over the past six years, our actual cat loss ratio is virtually identical to our planned cat loss ratio. Catastrophes, have to be managed over an extended period of time understanding there will be individual horrible catastrophe years along the way. We feel good about our catastrophe management. The adverse prior year prior year reserve development in personal auto is part of the price we are paying for the personal auto missteps we made in 2018 and 2019. The improvement in current accident year loss ratios, get them to where they need to be to consistently produce mid 90s combined ratios. And as I explained earlier, being at the end of the Connect program means that expense ratio improvement should start to flow into our total results.
Some updates on our individual product lines. Personal auto, the personal auto combined ratio for third quarter '20 was 104.7. This was driven by 7.8 loss ratio points from prior accident years. This is 9 point higher point impact from prior accident years than in third quarter '19. And as I said before, this adverse prior year reserve development in personal auto is part of the price we are paying for personal auto missteps we made in 2018 and 2019. The third quarter '20 current accident year loss and ALAE ratio of 56.4 is 11 points better than a year ago and third quarter '20 year-to-date is 11.3 points better than a year ago.
Our shift to less non-standard and more preferred is progressing as expected. Connect version 2.1, has been approved in 20 states and we are seeing the changes in competitiveness across the preferred through non-standard risk spectrum that we expected. Connect ultra preferred and preferred policies in force growth is 42% as of 09/30/20 versus prior year while Connect non-standard PIF growth is minus 13% as of 09/30/20 versus the prior year.
As of 09/3/20 for the first time in Connect history ultra-preferred and preferred connective PIF is larger than non-standard PIF. This shift is driving an increase in personal auto retention as personal auto retention is up 1.7 points to 68.4 since December 31, '19. And another sign of this shift, personal umbrella, new business sales were up 123% in third quarter '20 versus third quarter '19. We are pleased with our progress through 2020 in personal auto, but there is still work to do in this product line.
Homeowners, catastrophes are again the story of the quarter for homeowners with the cat loss and ALAE ratio of 30.4 compared to 9.2 in third quarter '19. Growth continues to be strong in homeowners with written premium growth rate of plus 21.7%, policies in force growth rate of plus 16.1%, new business count growth rate of 16.2% and retention level of 76.7, which is up 1.2 points since December 31 2019. The improved personal auto rate competitiveness from personal auto Connect version 2.1 is helping homeowners retention.
Commercial auto, our commercial auto results continue to be just terrific. With third quarter '20 results of the combined ratio of 94.3, total written premium growth of 44.4, new business premium growth rate of 46.7 and a premium retention level of 84.1. Middle market, small commercial and workers' compensation results in third quarter '20 were all impacted by prior accident year loss ratios that were much more favorable than a year ago. While middle market and small commercial results in third quarter '20 were also impacted by much higher cat loss ratios than a year ago. The workers' comp third quarter '20 current accident year loss ratio of 82.2 was 18 points higher than a year ago driven by five large losses in the quarter.
Middle market growth. We are seeing a slowdown in middle market submissions. Agents are telling us that middle market policyholders are more hesitant to move carriers at this moment in time. Our third quarter '20 middle market new business written premium declined 39.8% from a year ago and our total middle market, new business written premium was flat from a year ago. We rolled out eight additional states for middle market Connect in September bringing the total states on middle market Connect to 16.
Workers' compensation growth. Our workers' compensation business has -- strong for several years, due to four reasons. One, we exited monoline small workers' compensation business sold through wholesalers, which has consistently been unprofitable. Two, we have maintained rate discipline while the market has been significantly decreasing rates over the last several years and this puts significant downward pressure on retention. Three, we are currently non-renewing our nursing home workers' comp policies and fourth and the last reason is that our workers' compensation business was sold on a separate system from the rest of State Auto's products, making it significantly harder to package workers' comp with the rest of our commercial products.
This changed on October 29 with the launch of our first workers' comp connect State Texas. Workers' compensation will now be on the same platform as the rest of our products and we anticipate this significantly accelerating our growth of our workers' compensation business reversing several years of premium decline. The last few years of work have now positioned our workers' comp business for significant future success.
Farm and Ranch results continue to be terrific. Farm and ranch Connect is now launched in 27 states. Third quarter '20 results versus a year ago are the following new business written premium growth rate of 202%, total written premium growth rate of 31.6%, a combined ratio of 101.4% which includes the catastrophe loss ratio of 22.1 which is 18.9 points higher than the third quarter '19 and elevated expense ratio of 45.1% as Farm and Ranch is at the height of its Connect investment and a non-cat loss and ALAE ratio of 30.8%, which is 13.5 points lower than the third quarter '19. Our Farm and Ranch business is positioned incredibly well for future profitable growth. We are excited about how our product lineup is currently positioned for future success.
And with that, we'll open the line for questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question will come from Paul Newsome. Please proceed.
Paul Newsome -- Piper Sandler -- Analyst
Good morning, everyone. Hopefully you are all safe and well. I wanted to ask about the underlying combined ratio improvement in the year, obviously been positive. But how should we think or do you have any thoughts about how we should think about the windfall that we had because of the pandemic versus sort of the real underlying improvements to give us a better sense of where you are as we look past not only with the pandemic?
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Kim, you want to start off. I may jump in a little bit.
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Sure. So I think how I would think about the COVID benefits is I think second quarter '20 results will probably, the vast majority of the benefit was from COVID and we had just started the process making improvements in personal auto. I think the other thing that is worth mentioning from a COVID-type world and after it is. We and others in the industry are in the process of pumping a lot of rate into commercial property. So that's a -- and not a lot of that rate had gotten into the system yet. So I'd say second quarter benefit is mostly COVID.
In third quarter, what we see is miles driven has gone up, but it's not gone up to pre-COVID levels and the miles driven are different in some ways. You don't have really rush hours like you had pre-COVID. So there is still COVID benefit in the third quarter. But the proportions are now -- that part is shrinking and the larger part is, at least for personal auto the actions that we have been taking and more of the rate is starting to get into commercial property. It's still early. We still have a lot of rate that needs to earn in for commercial property. But I think in each quarter going forward, you will see as the COVID benefit burns off, the sort of -- that percentage of impact on our results will go down, but I think we are filling it in with some of the actions that we started back in the first quarter of 2020.
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Yeah, Paul. Just tag on a little bit. Just a couple of areas. I completely agree with Kim. I think that directionally, we're kind of where we believe we can be, there is no question that we've taken some real benefit, and I'm always hate to talk about benefit from something as tragic as COVID, but the impact from a financial standpoint but there has been benefits. But in addition to the rate Kim talked about some of the other changes from a modeling standpoint. We've made some significant improvements in reducing things like loss leakage and areas in our underwriting organization that I believe have been significant.
Our Claims and Risk Engineering organization has had a terrific impact. During this period of time they've been able to implement some real digital approaches to handling claims. They've been able to reduce some of the pending across the spectrum of the many of the older claims. And I think when you take into consideration the rate, the modeling changes, the underwriting improvements and then the Claims and Risk Engineering organization, we're emerging from this period of time I think in a pretty good place. The other thing we all have to be cognizant of is people in the early days of COVID we are talking about, as Kim said miles driven and shelter in place impacts, but obviously the impact of COVID is going to extend minimally through the first quarter of next year. Now it may trend a little bit differently, but I think the reality of the COVID impact on losses will linger for minimally another six months. So that's all I think I would add to what Kim said.
Paul Newsome -- Piper Sandler -- Analyst
Thank you, that's great. And then my -- just, if you give us a sense of the competitive environment, particularly in personal lines. Obviously lots of talk of rates going at least down for some of the companies that have reported so far and lots of insuretech stuff, which I don't think it's that big deal. But just give us a sense, at least from your markets, what you think is going on from a competitive perspective?
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Go ahead Kim. I'll again follow you.
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Yeah, OK. So I think in personal lines we have not seen sort of large changes in couple of the competitive dynamic. So for us, one of the things, there are a number of things to look at. I think one is like your core volumes and your new business levels -- in homeowners we continue to have all time highs in new business sales. Growth is starting to increase in more states so it is becoming broader. So core volumes -- the new business sales and the work we do in trying to understand the competitiveness of our rates, we've not seen big changes in that dynamics, so homeowners is kind of minimal. On the personal auto side, we have seen drops in new business, but we -- our belief is that's primarily from our actions not the markets action, just because we instituted non-standard filters, so we are very consciously sort of reduced the core volume and when we try and sort of take out that impact personal auto growth seem to be sort of not impacted that much. When we look at things and we look at sort of -- if I just look at preferred, we look at preferred core volumes in new business are up for us and when we look at our competitiveness in preferred it is actually improved over the last six months. Some people are making moves t reduce rates, but we implemented Connect 2.1 structure which sort of tilts more toward being more competitive in preferred. So that's more than offset what others might have done in the market place. So for us we haven't seen a whole bunch of changes in personalized and competitiveness.
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Yeah, Paul just to again to tag on to all that. I think Kim is right. I think there is a lot of wait and see feeling just given the uncertainty around COVID. But the other thing I think you have to think about here and be aware of is that there are a lot of companies that have struggled through this. And so our growth across homeowners, now they are trending improvement that we are starting to see in new business and personal lines with regard to more preferred business, and I think directionally that will pick up some momentum here in the fourth quarter and moving forward. You know we are in the market and we again have not missed a beat. And this isn't just me blowing smoke, I mean this is just a realty of State Auto and this digital platform. And that means a lot to agents.
The second thing I will say is that there are certain types of agents that continue to get a disproportionate amount of business. And of course we are in those spaces. Kim talks about that, when he talked about our shift in distribution, the platform agents that we use who really heavily leverage digital approach to sales whether it is online or through a call center, they are still getting quite a bit of quote activity and they will only partner with others who can efficiently handle that business. So I think the impact of companies that are struggling through this who aren't has accessible as the market that's something else when you talk about the marketplace competitiveness and personal insurance. The second thing I would suggest is that there is a different -- there is a growing difference in certain agencies who are driving an increasing amount of business. And I think in both of those counts it directly impacts the competitiveness of certain companies. It is not just a rate issue, but it is an availability and efficiency issue. And on those two counts, I think we are -- is one of the reasons for continuing to see the really positive results in homeowners than we believe we will add auto to that as we rebuild. So I would just want to tag that on.
Paul Newsome -- Piper Sandler -- Analyst
Great. Thank you very much.
Operator
Your next question will come from Marla Backer. Please proceed.
Marla Backer -- Sidoti & Company -- Analyst
Thank you. So since the industry you know is seeing severe weather this quarter, last quarter and it seems like in the fourth quarter potentially as well. Can you talk a little bit about what that means, if it means anything for your reinsurance strategy?
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Hey, Steve, you want to talk about where we're at right now and your thoughts.
Steve English -- Senior Vice President, Chief Financial Officer
Sure. We've touched on this previously. Our strategy on reinsurance, especially when it comes to a property cat is more from capital preservation or protection angle versus a current earnings management philosophy. So we realize that cats go through -- well seem to go through cycles, you can't really predict the weather, but -- and so our products are priced in the property lines to take that into account, making profit over the cycles knowing in any individual quarter or in some cases, years you might have poor results. So we're not planning any changes presently, we just renewed our treaties this past July 1. We did increase our retention on a group level when we do the analysis and look at what the property reinsurers are wanting to charge for layers below our retention relative to the premium and the probabilities of hitting those layers. It just didn't make sense to purchase that. So instead we deploy more money on top again from a capital protection perspective.
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Yeah, I'll just again tag on brief. I mean it's a terrific question look global warming is for real and there has been more weather activity and we all have to be super cognizant of that and aware of that. I really do believe that beyond those concerns this has just been a significantly bad year, if you think about the impact on us. This wasn't as you would normally expect, which is just pure wind and convective storms in particularly, in certain areas. You know, in the first quarter, we had a very unusual tornado set down in Nashville that hit us. In the second quarter, you had a handful of wind and convective storm type issues. The hurricane activity wasn't particularly bad for us, but it's spun off some other, weather. And then if you really look at -- and then of course we had the [Indecipherable] in the third quarter. So it was a very unique set of circumstances. Having said that, again, you make a really important point and we're aware of that. I think what we've done in terms of risk differentiation by geography in which we continue to do is another way we think about this beyond the good point Steve made with regard to how we purchase our reinsurance and how we use it from a capital standpoint. So appreciate the question. Thanks.
Marla Backer -- Sidoti & Company -- Analyst
Okay, thanks for the answer. So then there is how much noise going on right now. With COVID and the impact of people being on the roads less often, so can you try to or maybe it's not possible, can you trying to parse through some of this noise to talk about what you see in terms of like underlying more normalized trends as it relates to the telematics initiative because we've talked. I know you've talked about that in prior calls about the encouraging policyholders and use of telematics. So can you address that?
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Yeah, this time I will actually start and then turn it over to Kim, because I was going to mention telematics in my answer and I failed to Paul because that's another competitive issue. When you think about the competitive positioning. Companies that leverage telematics not just have it but leverage it effectively, which I believe we do are going to have a competitive advantage. And so, I will turn the main part of the question over to Kim, but I think again you hit a really important issue because digital in general and no one knows exactly what the new normal is going to be coming out of COVID, but it's pretty clear that some leverage of the digital -- digital interaction with whoever your supplier of whatever the product is, is just going to exponentially grow and quite frankly that kind of put telematics into that space because it allows people in a very efficient way in both commercial and personal you know to pay as they drive. And I think as people have learned through COVID, the reality of changing driving patterns, we know coming out of this more -- more employees are going to work from home than ever before. That's going to impact miles driven and time of day when they actually drive, so telematics will be a part of the impact coming out of COVID. Kim, you want to elaborate on a little bit?
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Yeah, I think there are the question of like normalizing trends and trying to understand things with all these moving pieces is -- it is a question we ask ourselves and think about it a lot. I think the first thing that for telematics specifically that we keep an eye on is almost from day one on both personal auto, commercial auto. We give discounts for telematics, but even with that discount, we see loss ratios better for our telematics business than our non-telematics business, that pattern continues to exist. So, for us it's just how do we drive more adoption. Outside of telematics, how we think about it and I'm sure it's not that differently than others is we keep track of miles driven and then what our collision frequencies are. And so collision frequencies are sort of have gone down more than miles driven, have gone down, and so that is a way to get some sense of what a COVID impact might be to that and we watch that every month. And claim counts there is lots of them. So, it's a relatively stable measures that's kind of the known to us.
And then the other side that we are keeping an eye on, is there are some signs that some of the accidents are more -- can be more severe, but you know severities bounce around and so it's a bit fuzzy severity up more than normal, if so how much. So, we keep an eye on those sorts of things, but telematics and then looking at frequency, collision frequency specifically for -- versus miles driven to estimate sort of the number of accidents COVID benefit and then trying to overlay is there any severity dynamic on top of that is how we try and normalize all those.
Marla Backer -- Sidoti & Company -- Analyst
Okay. Thank you.
Operator
Your next question will come from Meyer Shields. Please proceed.
Meyer Shields -- KBW -- Analyst
Great, thanks. A couple of small ball questions. First, workers' compensation, I guess the underlying accident year loss ratio has gone up over the course of 2020. Is there a true up in the third quarter or is there some other trend impacting the line?
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Kim?
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Yeah, no, I think there were, as I said there like five large losses that we had in the quarter and so -- well, I think there is -- there are two things going on. So if you look at the current accident year, that is driven by five large losses, four of the large losses were non-COVID so that's just sort of is one of those quarters, you take that out it looks pretty consistent, pretty good. I think, Steve mentioned this, I think the prior accident year was quite a negative loss ratio impact on the quarter and so I think we had favorable reserve development in prior years. So those are the moving pieces, but both of those are sort of -- we do not think that there a signal that things have inherently changed in workers' comp or our workers' comp business
Meyer Shields -- KBW -- Analyst
Okay. I guess related follow-up question. There is a fair amount of dispute, I guess, out there in terms of whether workers' compensation pricing is bottoming, it's inflecting. What are you seeing, what are you planning for?
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
I think, there are debates or how we debated internally is, it's gone down for several years and at some point, you figure things just have to stop going down, but in a non-COVID, non -- there is less activity in offices and restaurants and whatever, so that puts continued downward pressure in doing that. Also I think in some of the states, they're talking about their rate making. They're going to exclude COVID losses in sort of the go-forward pricing, and so if they do that that will continue to put downward pressure on rates.
I think for us, we are probably flat marginally down. So we're not looking to take big rate decreases. If anything internal to us, you're going to see us sort of vary maybe more by state than we normally did and industry type. The industry type, those that have greater COVID exposure were probably going to maybe go up a little bit not down. And then for the states, it all becomes trying to keep an eye on sort of the regulatory system. Are they going to keep the rules the same? Are they going to change the rules that will allow more losses into the system? And so, for states that do that, we will react to that and probably increase rates versus decrease them.
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
The only thing I'd add Meyer is to what Kim said is, which is we're going to continue to do what we've always done. One of the reasons we're seeing a -- we've seen a little bit of a decrease in our workers' comp is because profit comes first and our discipline around that won't change. So if indeed there is a continued downward pressure, which I think at least in the short term, there will be, you won't see us going down that rat hole. The other thing too with our announcement that workers' comp is now on the Connect platform. This is going to increase our sales of workers' comp as part of the mid-market or small commercial package, which I think will also be a very positive outcome on the workers' comp side.
Meyer Shields -- KBW -- Analyst
Right. We actually think about that with regard to, I don't want to overstate this, but some ability and desire to grow in what's been a competitive environment, obviously the margins are phenomenal. So that's on. I just wanted to know your mindset. And then I'm going to call this philosophical, that's too grandiose, but question on BI or maybe it's a broader reserving question. How do you incorporate the risk of absurd court decisions that are still going to be enforced?
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Steve, you want to start and I'll follow-up.
Steve English -- Senior Vice President, Chief Financial Officer
If I understand the question, you're talking about some of these court -- how are some of these court rulings that are coming up that have not been favorable to the industry. How are we considering those in our reserving, is that the question?
Meyer Shields -- KBW -- Analyst
Yeah, the prospects that -- you will get 100% of the decisions in a way that makes a whole lot of sense.
Steve English -- Senior Vice President, Chief Financial Officer
Yeah. So I mean, our philosophy at the moment is, we've been presented with X number of claims. We've adjusted each one of them individually, very thoroughly. As I mentioned in my comments, we've yet to book any kind of indemnity loss associated with this. Until I guess it hits us home, in other words, a particular suit that we might be involved in or something that emerges that as we evaluate those particular cases that we think -- that is -- well, let me respond in a different way. To date, as we've evaluated some of those cases and looked at our particular facts and circumstances, they don't align or line up. So we believe they are differentiating factors. And so, there has not been anything happened to date. In our minds that has triggered any need for us to record any sort of indemnity reserve. So we're watching those very closely, but to-date our position and the conclusions have been still no need to book the reserve.
Meyer Shields -- KBW -- Analyst
Okay. That's very helpful. Thanks so much.
Operator
[Operator Instructions]. Your next question will come from Rob Bobman -- Ron Bobman, please proceed.
Ron Bobman -- Analyst
Hi. Good morning still. Hope everyone's well and safe. I'm sorry if I missed the early part of the call, and I can circle back and get the details on the Irma matter. But I was wondering, I assume you haven't disclosed this at least in the early part. How many open Irma claims do you still have?
Steve English -- Senior Vice President, Chief Financial Officer
Hi. This is Steve English. We haven't disclosed how many open claims we still have, just as a reminder that came out of our -- solely out of our specialty book, where that particular book, quite frankly was in the business of writing, wind exposed, Florida coastal. But in my earlier comments, we've now reserved up to our retention, under our property cat treaty, and so we don't really expect any kind of meaningful further adverse development on our books. I will tell you that, as we analyze the population of claims, that's still not closed. We don't feel at all that that would go anywhere near the top of our program. So we feel the balance sheet is pretty protected now from Irma.
Ron Bobman -- Analyst
Okay. Thanks. Following up a little bit on the recent a question from Meyer and your comments about COVID, I'm wondering whether you're seeing any new business opportunities from agents who are moving business or biased to move business from carriers, who are maybe a little bit more COVID vulnerable, and you're being in essence, the beneficiary of that as agents looks maybe diversify their books at all?
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Kim, do you want to comment before I do?
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Sure. I think the -- we've seen, probably, two phenomena. One is -- this period of time, where people had to reinvent how they are doing business and so like having to have sales people come in the office, having to sell business face to face, agents who sort of that was -- how they did their business and the only way they wanted to do their business, I think they more fully appreciate at least having carriers are doing business with carriers, who can do it in other ways than that. So we probably have seen some agents who were maybe more skeptical about our sort of digital approach. I'll say flip and buy-in and say, hey, that was good foresight you had sort of count me in. And so I think we are probably the beneficiaries of agents diversifying if they had only non-digital carriers.
And then this -- there is this phenomena, which we are seeing in middle market where middle-market policyholders are really kind of hunkering down and staying where they are. So we have a number of phenomenas where like -- we'll get late into quote where competitive. We think we'll get it and at the last -- but the last moment before the policyholder pulls the trigger, they say, "I'm just going to stay here one more year and see how it does."
Also in middle market that is more agents go out and sort of hump to business and it's more face-to-face and is more on depth. So I think some of their pipelines have shrunk through this. And so there is opportunity, I think, they're either like when this ends and everybody sort of says, I want to go or I want to start moving my policies again or if the whole sort of market figures out a non-in-person way to do in middle market. Those are the opportunities there, but that's what we see.
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Yeah. I'd just like to add. I mean, well, it's hard to obviously quantify it with a specific number -- I really like the question because I really -- I talk to a lot of agents and the feedback I've gotten has been very favorable. And we talk a lot about the home growth with the digital platform. We talk about auto now starting to come back. We also wait and talk a lot about our BOP new business.
And again the reason I mentioned those three products because the digital platform in those three is pretty much is kind of quote an issue business. And in each of those cases, including BOP, the number of court opportunities in our growing new business, there is a direct reflection there of the fact that agents have to pick somebody, obviously, who's still open and somebody who they don't have to pick up the phone necessarily and call that they could do everything online in the digital manner, including reaching out to their customers remotely. So again, I wish I could put a more specific number on it, but I think our new business numbers are pretty direct reflection of the benefit we're getting with our platform during COVID.
Ron Bobman -- Analyst
Thanks. I had a -- go ahead. I'm sorry.
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
I just -- yeah. Mike made a great point. We're -- in both September and October, we had record new business months in commercial auto and BOP. And if you just look at sort of the level of business activity out there, that's kind of crazy. So it would be impossible to say that we're not giving opportunity there that others aren't.
Ron Bobman -- Analyst
Okay. You for some time now, I guess really years, you've been laser-focused on your systems and rolling out your systems and presumably writing new business on those systems. But I know oftentimes, new business goes on to the systems, but renewal does not. And I'm wondering in State Auto's execution, is that the case or whenever you've been sort of rolling out these new systems, you highlighted the workers' comp one, I think, in Texas, for example, most recently, and I think the last? With the split, whether it is the entire book on the new systems, all lines or is it just new business? Thanks.
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Yeah. To be clear, when we write a new policy on Connect, it also renews on Connect. So we have the new customers now depending on auto. It has been over four years, almost five years. And each -- as each of the products rollout the new business and as it renews it stays on Connect. Do we still have our -- what we call our legacy business, which is the business that was written before Connect and that business has -- generally speaking, has remained on the legacy systems.
The split between Connect and legacy, Kim, do you want to talk about personal lines where it's probably most significant?
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Yeah. And well, have to, like, double check my numbers, and if I'm way off get back to you. But I think for both personal auto and homeowners, about -- if you look at our total premium, I think is maybe 60-ish percent on Connect, 40% on legacy. And so those products have been out there the most. If you go to workers' comp, we've been in the market for a week. It's probably 99.8% on legacy and very small on Connect. And so there is -- I think, commercial auto is probably starting to get up into the 20%, 30% on Connect, and then BOP is the next down as a percentage.
But you raised a good point. If you think about our -- the path to a lower expense ratio, we've now invested in all the Connect product. So there is no more like new products that we have to invest in. So we're going to sort of reap the benefit of all these savings over time and without having to sort of reinvest in building a new system.
But your point is -- at some point we convert the legacy onto Connect, and that's going to be another tranche of expense ratio improvement. But, I think Mike has mentioned this before. It's a different way of doing business, a different agreement with the customer, and so that is why we have moved relatively slow in the personal lines world, as customers came to us under doing one way. And we did not want to quickly push them to a different way. At some point, the legacy business gets small enough, you need to convert to over, but it's another sort of arrow in our quiver to drive the expense ratio lower.
Ron Bobman -- Analyst
When you said a different agreement, do you mean policy form or do you mean agency agreement?
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Just the informal agreement like when you bought policy from us, you could write a check, and you could pay cash and you got print outs and all that stuff. And so we tried to be very sensitive to sort of when 12-year customer came to us like -- part of that, they came to us with the agent, and then how we did business and we kind of wanted to honor that and go slow. So there is no formal agreement, but there is that sort of how we thought about it or how we talk about it internally.
Ron Bobman -- Analyst
Okay. Thanks. I got one more question. The Company and the group, I think, have an A minus best rating, and results have been disappointing. Candidly, underwriting results have been taken longer to get to the underwriting performance than everyone has desired. And I think it's sort of an acknowledged fact over the years. And having -- but recognizing you've made it -- you have made a lot of progress operationally, it's not fully evident in the printed results partly, because of weather and public. It's just taken longer, and it has been harder than expected.
With the current backdrop, the stock price is really, really cheap on a relative to book value basis. And I'm wondering in the context of your A minus rating, and I'm not sure where sort of the mid-year estimated RBC is, but do you have any other levers to pull from -- with respect to sort of capital allocation and capital return to capitalize upon the cheaper price or because of the capital situation, i.e. the A minus rating where you stand in best eyes, the amount of capital at the mutual? You just don't have a lot of other levers to pull.
Steve English -- Senior Vice President, Chief Financial Officer
Yeah. This is Steven English. I think that was a well thought-out question about whether or not we're contemplating buying back any treasury stock, and the answer that would be, no. We would -- for many reasons, but most particularly, we believe that we're going to need that capital to support our business plans and our strategies, and believe in the long run, we'll deliver a better return for folks in that way.
Ron Bobman -- Analyst
Okay. It was broader than that. But do you have limit at best or your RBC, is that a constraining factor on how much [Phonetic] business you can write, if you want to explain it that way?
Steve English -- Senior Vice President, Chief Financial Officer
No. The -- our RBC ratios, for example are well above any type of level that you will start to get regulatory review or scrutiny. And from an AM Best perspective, because our rating cycle with them, we typically talk to them in the spring. They make their annual decision typically in June, and so we just went through that process with them, presented them our plans, which is a growth plan. They affirmed our rating. Obviously, what we've seen this year with the cats, I think AM Best has been around the industry quite a while. So they are not unfamiliar with the periodic elevated cat that can occur when you write property. But it is presently not a constrain, no.
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
And just a...
Ron Bobman -- Analyst
A minus satisfactory from a competitive positioning?
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Yeah, the A minus minus is based on where we write, which is personal lines through middle market. The A minus is not a restriction at all. And since you raised the stock price, let me just comment. Beyond the insanity of the stock price, it's, I think, more reflective of the lack of understanding of business interruption and what the exposure is and also a lack of understanding of the results that have been achieved. I think Kim kind of laid out a case, and it is out on our Investor site now as well.
We don't worry about short-term, we're long term believers in the organization and very comfortable and confident with where it's going. I certainly agree that the stated results have to reflect that. We -- in our kind of a normalized cat world, I don't know that we would be having that same conversation. But our view in answer your question around capital AM Best stock price is, we believe in the long term and we are very bullish on State Auto.
Ron Bobman -- Analyst
Okay. Thanks a lot.
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Thank you.
Operator
And at this time there are no further questions in queue. I'd like to turn over to the panel for any closing remarks at this time.
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 fourth quarter earnings call, which is currently scheduled for Thursday, February 18th, 2021. Thank you and have a wonderful day.
Operator
[Operator Closing Remarks]
Duration: 69 minutes
Call participants:
Natalie Schoolcraft -- Director of Investor Relations
Michael E. LaRocco -- Chairman, President & Chief Executive Officer
Steve English -- Senior Vice President, Chief Financial Officer
Kim Garland -- Senior Vice President, Personal & Commercial Lines, State Auto Labs
Paul Newsome -- Piper Sandler -- Analyst
Marla Backer -- Sidoti & Company -- Analyst
Meyer Shields -- KBW -- Analyst
Ron Bobman -- Analyst
