State Auto Financial Corporation

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 is 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 booked in the first quarter of 2020. There were some note payable changes in the quarter. In early September, we retired SDFC's 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, but turned and was repaid in full on September 22nd. And with that, I will turn the call over to Kim.

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 that 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. Evolve 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 30, 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 personalized and commercialized 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 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 if 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 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 than over PreConnect. 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, whose 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 this strategy has not yet been effective, as the expense ratio has actually increased after the implementation of Connect. As I've told you on prior calls, we made missteps in personal auto with the primary one being our balance between preferred and non-standard business skewed too heavily towards non-standard, which has a very low retention. We were putting inefficient business on an efficient platform. This combination 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 remaining 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 autos total expense ratios 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% range currently. Non-CAT loss and ALAE ratios in the 50 range with declining expense ratios should be sufficient to produce mid-90s combined ratios 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 were 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. Personalize is a good example of this phenomenon. In 2015, our Personalize new business was distributed in the following proportions. Retail, 63%. Network, 30%. Platform, zero. Corporate agent, 7%. Through nine months of 2020, our personalized 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 for 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 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, enhancements are made, and this has a very different impact than the approach where one's pricing models improve only once every couple of years. And for our technology, we're converting from the big build teams for Connect to small product teams that are continually enhancing different parts of Connect. In 2015, we started from a place where we had fallen behind 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 fall 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 did not participate in the world of insurtech. State Auto Labs, State Auto's corporate venture capital fund, was created in 2016 And since that time, 24 InsurTech startups 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 InsurTechs into our insurance operations. It would have been impossible on our legacy system. In the first quarter of 2020, Coverager, a news source and researcher of the InsurTech world, surveyed 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 to third quarter results. Overall personalized and commercialized statutory results are the following. Third quarter 20 combined ratio is 102.2 compared to 98.7 for third quarter 19. Third quarter 20 year-to-date combined ratio is 106.9 compared to the 102.7 through 3Q 19 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 our quarterly results, catastrophes are again the story of the quarter. The catastrophe impact on our third quarter 2020 results were the following. Personal lines and commercial lines CAT loss ratios were 9.9 points higher than 3Q19, with personal lines 11.6 points higher, commercial lines 7.6 points higher. Non-CAT loss and ALAE ratios are at our plan for 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 in the ALAE prior accident year loss ratio impact. The personalized and commercialized non-CAT loss ratio accident year impact was 0.4 points lower than third quarter 19. The personalized non-CAT loss ratio prior accident year impact was five points higher than 3Q19, while the commercialized 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 ALA 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, with personal lines being 7.3 points lower and commercial lines being 4.3 points lower. This improvement in the current action year is driven by two factors, COVID and the actions that we have taken and personalized to address the issues that we discussed on the first quarter earnings call. We feel very good about where we are positioned. Catastrophes happen, and 2020 is a horrible catastrophe year. But when we look back at the total of 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 reserve development in personal auto is part of the price that you're 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 nine points higher 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 in 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 and force growth is 42% as of 9-30-20 versus prior year, while Connect non-standard PIF growth is minus 13% as of 9-30-20 versus a prior year. As of 9-30-20, for the first time in Connect's history, ultra-preferred and preferred Connect 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, 2019. In 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's still work to do in this product line. Homeowners, catastrophes are again the story of the quarter for homeowners with a 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 enforced growth rate of plus 16.1%, new business account growth rate of 16.2% and a retention level of 76.7, which is up 1.2 points since December 31st, 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 a combined ratio of 94.3, total written premium growth of 44.4, a 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 action 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 shrunk for several years due to four reasons. One, we exited monoline small workers' compensation business sold through wholesalers, which had 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 29th with the launch of our first workers' comps, 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 a catastrophe loss ratio of 22.1, which is 18.9 points higher than third quarter 19. An 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 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.

As a reminder, to ask a question, you will need to press star one in your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question will come from Paul Newsom. Please proceed.

Good morning, everyone. Hopefully you're 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've had because of the pandemic versus sort of the quote unquote real underlying improvement to give us a better sense of where you are as we look past not done with the pandemic.

Kim, you want to start off and I may jump in a little bit?

Sure. So I think, you know, how I would think about the COVID benefit is I think second quarter 20 results were probably the vast majority of the benefit was from COVID. And we had just started the process of 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. 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. 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'll see as the COVID quote-unquote benefit burns off, 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.

Yeah, Paul, I'll just tag on a little bit in just a couple areas. I completely agree with Kim. I think that directionally we're kind of where we believe we can be There's no question that we've taken some real benefit, and I always hate to talk about benefit from something as tragic as COVID, but the impact, you know, from a financial standpoint, there's been benefits. But in addition to the rate Kim talked about and 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 many of the older claims. And I think when you take into consideration the rate, the modeling changes, underwriting improvements, and then the claims and risk engineering organization were emerging from this period of time, I think, in a pretty good place. The other thing we all have to be cognizant of is, you know, people, you know, in the early days of COVID, we're talking about, as Kim said, miles driven and shelter in place impacts. But, you know, obviously, the impact of COVID is going to extend minimally through the first quarter of next year. it may trend a little bit differently, but I think the reality of the COVID impact on losses will linger for, you know, minimally another six months. So that's the only thing I would add to what Kim said.

Thank you. That's great. And then my, just can 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 insurtech stuff, which I don't think is that big a deal. But just give us a sense, at least from your markets, what you think is going on from a competitive perspective.

Go ahead, Kim. I'll, again, follow you.

Yep. Okay. So I think in personal lines, you know, we... We have not seen, you know, sort of large changes in a couple of the competitive dynamics. So for us, one of the things, you know, there are a number of things to look at. I think one is like your quote volumes and your new business levels. uh you know in homeowners uh we continue to have all-time highs in new business sales uh growth is starting to increase uh in more states so it's becoming broader um so quote volumes um you know 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 dynamic so Homeowners is kind of minimal.

Hey, Steve, you want to talk about where we're at right now and your thoughts?

Sure. We've touched on this previously. Our strategy on reinsurance, especially when it comes to a property cat, is more from a capital preservation or protection angle versus a current earnings management philosophy. We realize that cats go through, well, seem to go through cycles. Can't really predict the weather. And so, you know, our products are priced in the property lines to take that into account, you know, 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.

Yeah, and I'll just, again, tag on briefly. I mean, it's a terrific question, and, you know, look, global warming is for real, and there's been more weather activity, and we all have to be super cognizant of that and aware of that. I really do believe that this, 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, particularly in certain areas. In the first quarter, we had a very unusual tornado set down in Nashville that hit us. In the second quarter, we had a handful of wind and convective storm-type issues. The hurricane activity wasn't particularly bad for us, but it spun off some other weather. you know, if you really look at, and then of course we had the direct show 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, and which we continue to do, is another way we think about this beyond the good points Steve made with regard to, you know, how we purchase our reinsurance and how we use it from a capital standpoint. So appreciate the question. Thanks.

Okay. Thanks for the answer. So then there's so much noise going on right now with COVID and, you know, the impact of people being on the roads less often. So can you try to, or maybe it's not possible, can you try to parse through some of this noise to talk about what you see in terms of, like, underlying more, you know, normalized trends as it relates to the telematics, you know, initiative, because we've talked, I know you've talked about that, you know, in prior calls about the, you know, encouraging policyholders in the use of telematics. So can you address that?

Yeah, this time I'll actually start and then turn it over to Kim, because I was going to mention telematics in my 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'll turn the main part of the question over to Kim. But I think, again, you hit on 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 a digital interaction with whoever your supplier of whatever the product is, is just going to exponentially grow. And quite frankly, I 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 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 telemedics will be a part of the impact coming out of COVID. Kim, you want to elaborate on that a little bit?

Yeah, I think there are, you know, The question of normalizing trends and trying to understand things with all these moving pieces is a question we ask ourselves and think about a lot. I think the first thing 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 both miles driven and then what our collision frequencies are. And so collision frequencies are, you know, sort of have gone down more than miles driven have gone down. And so, you know, 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's lots of them. So it's a relatively stable measure. So that's kind of a 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, you know, are more, can be more severe. But, you know, severities bounce around. And so, you know, it's a bit fuzzy of 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 this?

Okay, thank you.

Your next question will come from Meyer Shields. Please proceed.

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? Tim?

Yeah, no, I think, you know, there were, as I said, there are like five large losses that we had in the quarter. And so, well, I think 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 they're a signal that things have inherently changed in workers' comp or our workers' comp business.

Okay, I guess a related follow-up question. There's a fair amount of dispute, I guess, out there in terms of whether workers' compensation pricing is bottoming, is inflecting. What are you seeing? What are you planning for?

I think it's... I think there are debates, or how we debate it internally is... you know, it's gone down for several years and at some point you figure things just have to stop going down. But, you know, in a non-COVID, you know, there's less activity in offices and restaurants and whatever. So that puts downward, continued downward pressure in doing that. Also, You know, 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, you know, we are probably flat marginally down. So we're not looking to take big rate decreases. If anything internal to us, you're gonna see us sort of vary maybe more by state than we normally did in industry type. The industry type, those that have greater COVID exposure, we're probably gonna 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 the regulatory system? Are they going to keep the rules the same? Are they going to change the rules to 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.

The only thing I'd add, Mayor, is to what Kim said, which is we're going to continue to do what we've always done. One of the reasons 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 know, you won't see us, you know, 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 are 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.

Right, yeah, no, I was actually thinking 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 not a problem. I just wanted to read your mindset. And then a I'm going to call this philosophical. That's too grandiose. But a 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?

Steve, you want to start, and I'll follow up?

If I understand the question, you're talking about how are some of these court rulings that are coming out that have not been favorable to the industry, how are we considering those in our reserving? Is that the question?

Yeah, the prospects that you won't get 100% of the decisions in a way that makes a whole lot of sense.

Yeah, so 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, gee, that is, well, let me respond 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're differentiating factors. And so there's 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 conclusions have been still no need to book a reserve.

Okay, that's very helpful. Thanks so much.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Your next question will come from Rob Bobman. Ron Bobman, please proceed.

Hi, good morning still. Hope everyone's well and safe. I'm sorry 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?

This is Steve English. We haven't disclosed how many open claims we still have. Just as a reminder, that came 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 that 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. We feel like the balance sheet is pretty protected now from Irma. Okay, thanks.

Following up a little bit on the recent 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 look to maybe diversify their books at all.

Kim, you want to comment before I do?

Sure. I think we've seen probably two phenomena one is you know this this period of time you know where people had to reinvent how they are doing business and and so like having to have salespeople 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 or 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, you know, that was good foresight you had, you know, sort of count me in. And so I think we're probably the beneficiaries of agents diversifying if they had only non-digital carriers. And then, you know, there's this phenomena, at least 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 a quote, we're competitive, we think we'll get it, and at 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, you know, that is more agents go out and sort of hump the business and it's more face-to-face and it's more in depth. So I think some of their pipelines have shrunk through this. And so there's opportunity I think there 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 middle market. Those are the opportunities there, but that's what we see.

Yeah, and I'd just like to add, I mean, while it's hard to, you know, obviously quantify it with a specific number, I really like the question because 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 talk a lot about our BOP new business. And again, the reason I mention those three products, because the digital platform in those three is pretty much just kind of quote and issue business. And in each of those cases, including BOP, the number of quote opportunities and our growing new business, there's 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, you know, pick up the phone necessarily and call that they could do everything online in a 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 a pretty direct reflection of the benefit we're getting with our platform during COVID. Thanks.

Go ahead. I'm sorry. I just, yeah, Mike made a great point. You know, we're, you know, 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 getting opportunity there that others aren't.

Okay. You, for some time now, I guess it's really years, you know, you've been laser focused on your systems and rolling out your systems and presumably, you know, writing new business on those systems. But I know oftentimes, you know, new business goes on to the systems, but renewal does not. And I'm wondering in state autos, you know, execution is that the case or whenever you've been sort of rolling out these new systems you know you highlighted the workers comp one and i think in texas for example um most recently and i think the last um what's the split whether is is the entire book on the new systems uh all lines or is it just new business thanks yeah to 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's been over four years, almost five years. And as each of the products roll out, the new business, and as it renews, it stays on Connect. We still have 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, you want to talk about personal lines where it's probably most significant?

Yeah. And, um, you know, uh, we'll have to like double check my numbers and if I'm way off, get back to you. But I think for, 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, those products have been out there the most, uh, you know, if you go to, you know, workers comp we've been in the market for a week, uh, you know, it's probably 99.8 on legacy and very small and connect. And so, so there is, is, you know, I think commercial auto is probably starting to get up into the 20, 30% on, on connect. And, you know, then bop is the next down as a percentage. But you raise a good point if you think about the path to a lower expense ratio. We've now invested in all the Connect products. So there's no more new products that we have to invest in. So we're going to reap the benefit of all these savings over time and without having to 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 is 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 folks over, but it's another sort of arrow in our quiver to drive the expense ratio lower.

When you said a different agreement, do you mean policy form or do you mean agency agreements?

Uh, just informal agreement. Like when you bought a policy from us, you could write a check and you could pay cash and you got printouts and all that stuff. And so we tried to be very sensitive to sort of, uh, when, when, you know, uh, 12 year customer came to us, they, you know, part of that they came to us was the agent and then how we did business. And we kind of wanted to honor that and go slow. So there's no formal agreement, but that's sort of how we thought about it or how we talk about it internally.

Okay, thanks. I've 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 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. But recognizing you have made a lot of progress operationally. It's not fully evident in the printed results, partly because of weather and partly because it's just taken longer. And it's been harder than expected. Now, the current backdrop is 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 the mid-year estimated RBC is, but do you have any other levers to pull with respect to capital allocation, 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.

Yeah. This is Steve 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 to that would be no. 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.

Okay. It was broader than that. Do you have limited – I mean, is BESS or your RBC, is that a constraining factor on how much business you can write, if you want to explain it that way?

No, no. Our RBC ratios, for example, are well above any type of level that you would start to get regulatory review or scrutiny of. And from an AMBEST perspective, of course, 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, you know, is a growth plan. They affirmed our rating. Obviously, what we've seen this year with the cats, I think AMBEST has been around the industry quite a while, so they're not unfamiliar with the periodic elevated cash that can occur when you write property, but it is presently not a constraint, no.

And is A-minus satisfactory from a competitive positioning?

Yeah, the A-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, you know, the lack of understanding of business interruption and what the exposure is, and also a lack of understanding of, you know, 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, you know, short-term or 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, you know, I don't know that we would be having that same conversation. But our view, in answer to your question around capital, AM best, stock price, is we believe in a long term and we are very bullish on state auto. Okay, thanks a lot. Thank you.

And at this time, there are no further questions in queue. I would like to turn over to the panel for any closing remarks at this time.

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.

Thank you. That concludes today's third quarter 2020 earnings conference call. Thank you for participating. You may disconnect at this time. Presenters, please hold. Hello friends. Welcome to my channel. In this video, I will show you how to make a simple, easy, and easy-to-make Thank you for watching.