State Auto Financial Corporation
Q3 2019 Earnings Call Transcript

Published: 4 Nov 2019

[Operator:]

Welcome and thank you for standing by. [Operator Instructions] Today’s call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to State Auto Financial Corporation’s Director of Investor Relations, Natalie Schoolcraft.

[Natalie Schoolcraft:]

Thank you, Latinia. Good morning and Happy Halloween everyone. Welcome to our third quarter 2019 earnings conference call.Today, I am joined by our Chairman, President and CEO, Mike LaRocco; Senior Vice President and CFO, Steve English; Senior Vice President of Personal Lines, Jason Berkey; Senior Vice President of Commercial Lines and Managing Director of State Auto Lab, Kim Garland; Chief Actuarial Officer, Matt Rubik; and Chief Investment Officer, Scott Jones. After our prepared remarks, we will open the lines for questions.Our comments today may include forward-looking statements, which by their nature involve a number of risk factors and uncertainties, which may affect future financial performance. Such risk factors may cause actual results to differ materially from those contained in our projections or forward-looking statements. These types of factors are discussed at the end of our press release as well as in our annual and quarterly filings with the Securities and Exchange Commission. Financial schedules containing reconciliations of certain non-GAAP measures, along with other supplemental financial information, are included as part of our press release and available on our website, stateauto.com, under the Investors section.Now I will turn the call over to STFC’s Chairman, President and CEO, Mike LaRocco.

[Mike LaRocco:]

Thanks, Nat and Happy Hallow’s Eve everyone. The story of this quarter is validation, expanding success and focus. Let’s begin with the validation. When our transformation began 4 years ago, the single biggest decision we made was to become a digital-only carrier. Within the industry, this was unique and within the agency distribution system, it was a risk. Will agents accept a platform that did not allow for cash checks or paper, one that required an electronic signature, use of the checking account or a credit card? For the last 3 years, we have clearly proven that this new approach will work within personal insurance. After years of declining volume and poor results, our Personal Lines book is growing again. The question of acceptance was again raised as we built a new platform, both commercial auto and small commercial, or BOP. It was one thing to think it would work across personal insurance, but what about commercial? In our earliest days last year, the answer to that question was not clear. However, this quarter was the fourth consecutive quarter of record growth across these lines, and there is no longer a question. Our decision to become a digital-only carrier has been validated not only in personal insurance, but commercial and auto and BOP as well. This is a significant achievement and another critical step as we rebuild State Auto from a traditional regional insurance carrier into an innovative property and casualty carrier that is built for emerging innovation and long-term success.The second part of this quarter’s story is our expanding success. Early on, we made hard decisions to exit a number of lines of business, large commercial, trucking, programs in E&S casualty and property. At a time when we were shrinking across personal and commercial, this was another bold decision. It’s always difficult to make the call that results in a smaller company. I have watched as competitors have rates in the Specialty business, large commercial and even reinsurance. It’s too soon to decide which approach will work. But for State Auto, we know who we are. And our goal is to be exceptional in Personal Lines as well as small and middle market Commercial Lines. This quarter was a key indicator that our focus, while causing some initial shrinking of our book, is now paying off. We continue to grow in personal insurance. And as I noted above, we are also growing rapidly in BOP policies in force and commercial auto. That is not the entire story. Our middle market commercial business continues to grow, and we have not yet launched our new digital platform. The improvement in this line is a result of leadership and culture changes. We have built an environment that allows our talented underwriters to effectively and efficiently evaluate and choose risk in partnership with our agents. We will launch our new platform next year, which we believe will impact not only growth, but more critically, our efficiency. This quarter, our growth across Commercial Lines, both small and middle market, has allowed us to demonstrate expanding success. We are now a successful writer of both personal and commercial. I’d also note we continue to grow farm and ranch. More importantly, we are seen as an important market for these lines.Before I close with this part of the story, I must mention workers’ compensation. We continue to shrink in this slot this year, albeit at a slower pace. But I feel this is indicative of our strength and the fact that growth without profitability is unacceptable. This is a challenging business. Growing is easy; growing profitably, is not. We will do both. At this point, we are on pace to pass $2 billion in premium this year. And remember, that’s the gross. As we continue to add scale, which will soon begin to show in our expense ratio, expanding our success was a major part of our third quarter story. The final piece of this quarter’s story is focus. This part of the story can be seen in both our expenses and especially across personal auto.Let’s begin with auto. This was the first product we brought to market in 2016. While the platform that issued business worked very well, we were faced with a portal that did not meet our needs. The technology weakness in that quarter impacted sales, service and ultimately, retention. So we decided to build our own internal portal. In addition, we have been adjusting and improving our pricing models and will take rate as needed to be certainly returned this large line of profitability. This quarter, we began a focused effort to clean up the remaining technology challenges and make the latest updates to our model. While this has slowed our new business growth in auto, we felt it was critical to focus on execution so that our customers’ experience is outstanding and we can improve our efficiency. These issues are not felt within Commercial Lines as we initially launched those products with our own portal. While I’d like to be growing auto more aggressively, it’s imperative we do so profitably, efficiently and with the highest degree of service to both our agent, customer and policyholder customer. If the result of that focus is short-term slowdown in growth in this one line, I’m very comfortable with that decision. Once these fixes are in place, I estimate 3 to 6 months at the longest, we will once again accelerate our growth. And by the way, we fully expect at least modest growth as we adjust the product and finalize the technology issues.The final piece of our focus is on expenses. As we track our ongoing investment in technology, we can now see the resulting improvement in our efficiency and ability to grow effectively. There is still much work to be done, as I note above, but this quarter was another major step forward in our focus on efficiency, which is the last piece in our drive to build a truly unique and effective P&C carrier. I could not be more pleased with our progress to date. There’s much work to be done, but we are well positioned for the coming quarters and years. As innovation continues to change our industry, the true long-term winners will have made the infrastructure investments that will allow for the implementation of new technology to price, sell and service as our industry finally emerges and embraces change.With that, I will turn the call over to Steve.

[Steve English:]

Thanks, Mike and good morning everyone. For the quarter, STFC reported $0.25 net income per diluted share, with operating income of $0.34 per diluted share. This compares to $0.76 net income and $0.44 operating income for the third quarter of 2018 on the same per share basis.For 9 months, STFC reported on a diluted per share basis net income of $1.25 and operating income of $0.34. This compares to $0.86 net income per diluted share and $0.53 operating income per diluted share for the first 9 months of 2018. One factor in the fluctuation of net income quarter-over-quarter and year-to-date over year-to-date is reported net investment loss or gain. Net investment loss or gain reflects the change in unrealized gains and losses on equity securities and other invested assets. For the quarter, STFC reported a net income of $4.4 million in pretax net unrealized losses on investments. While in the third quarter of 2018, STFC reported $16.8 million of net unrealized gains. For the 9 months ended September 30, 2019, STFC reported $51.2 million of net unrealized gains on investments compared to $11.1 million of gains for the same period a year ago.As a reminder, non-GAAP operating results exclude net of tax, net investment gain or loss. The quarterly GAAP combined ratio of 99.5% was higher compared to 98.4% from the third quarter a year ago. The cat loss ratio was down. The non-cat loss and ALAE ratio was up, while the expense ratio improved. For the first 9 months of 2019, the GAAP combined ratio of 103.6% compares to 102.6% for the same period in 2018, reflecting 1.3 points higher cat losses and non-cat loss and ALAE ratio up 0.5 point and an expense ratio improvement of 0.8 point. The GAAP expense ratio for the third quarter of 2019 was 34.3% and for the first 9 months, 35% compared to 36.1% and 35.8%, respectively, a year ago.During 2019, we continue to build and roll out Commercial Lines, technology and products. Having said that, the quarter-over-quarter improvement was more than half driven by reduced consulting spend primarily IT-related and revised estimates of associate variable compensation, with the balance of improvement across several other categories. Similar factors drove the year-to-date improvement, with more coming from reduced estimates of variable compensation.On a statutory basis, personal and commercial reported in the quarter a combined ratio of 98.7% compared to 96.4% for the third quarter of 2018. On a year-to-date statutory basis, personal and commercial reported a combined ratio of 102.7% compared to 100.8% for the same period a year ago. Catastrophe losses during the third quarter were lower than a year ago, while on a year-to-date basis, the cat ratio for the first 9 months of 2019 is 7.8% compared to 7.6% for the first 9 months of 2018. Our estimates of prior year reserves continue to develop favorably overall, but at lower amounts, which was not unexpected. For personal and commercial lines in the quarter, $15.2 million was reported relating to non-catastrophe losses in ALAE compared to $19.9 million in the third quarter of 2018. For the 9 months ended September 30, 2019, favorable development totaled $51.7 million compared to $56.4 million for the first 9 months of 2018. Personal and Commercial’s current accident year non-cat loss and ALAE ratio in the quarter was up 4.2 points, 61.0% in the third quarter of 2019 compared to 56.8% for the third quarter of ‘18. And through 9 months, the current accident year non-cat loss ALAE ratio increased 0.9 point, 59.9% for the first 9 months of ‘19 compared to 59.0% for the first 9 months of 2018.As we have discussed previously, reserve estimates can be volatile from quarter-to-quarter based on many factors. And additionally, the second, third and fourth quarter – third quarters of any given year can be impacted by the reassessment of that year’s accident year pick, relative to book loss ratios from earlier quarters. Jason and Kim will get into more specific product detail in their prepared remarks. The statutory expense ratio for personal and commercial improved 1.7 points as compared to the third quarter of 2018 and 0.6 point on a year-to-date basis, the same factors I mentioned earlier regards to the GAAP expense ratio drove the improvements.Items to point out regarding specialty runoff, for the quarter, net written and earned premiums reflect some reinstatement premium, $300,000 related to an increase on a prior year loss that we ceded to our reinsurance partners, $0.9 million of net favorable development of prior year non-cat loss reserves in the quarter, which now stands at $2.4 million year-to-date, and the impact of specialty on the overall statutory expense ratio has fallen to 0.1 point for the first 9 months of 2019 as compared to 1.3 points for the first 9 months of 2018. Net investment income was lower for the quarter due to lower new money yields, the impact of lower rates on our mortgage-backed securities, a slightly smaller fixed income portfolio and the refinancing of the notes with our current company, which took place in the second quarter of this year.And with that, I will turn the call over to Jason.

[Jason Berkey:]

Thanks, Steve and good morning everyone. Personal Lines finished the third quarter with a combined ratio of 100.6% compared to 92% for the same quarter last year. The Personal Lines loss and LAE ratio was 71% in the quarter compared to 61.1% for the third quarter of 2018. The increase in the loss ratio is due to lower levels of favorable development in personal auto and homeowners as well as the impact of a shorter average tenure in the auto book and higher non-cat weather and large losses in homeowners.Net written premiums for the Personal Lines is up 7.4% versus third quarter ‘18, reflecting higher levels of homeowners and other Personal Lines new business, offset by a decline in personal auto premium. At the same time, our expense ratio for the quarter was 29.6% compared to 30.9% in third quarter ‘18.Looking specifically at personal auto, the statutory auto loss and LAE ratio in the quarter was 73.9%, with a statutory combined ratio of 102.8% compared to 60.1% and 89.6%, respectively, in third quarter ‘18. The personal auto loss and LAE ratio results were impacted by a 5.9-point decrease in favorable development across multiple coverages, including bodily injury, along with some adverse development of UM/UIM. The earned premium from our Connect product now exceeds the earned premium from our legacy product, and we expect to continue to see pressure on our overall loss ratio from a shorter average policyholder tenure until our retention increases. The BI frequency trend on our legacy Connect and Connect books continues to be favorable. We are, however, seeing an increase severity trend in our Connect auto physical damage claims, driven by higher repair costs on newer model years. At the same time, we have experienced an increase in the RUM and UIM losses in the 2019 accident year due to higher frequency in our Connect book. Our recent personal auto rate actions have been more targeted than our more aggressive rate actions in 2018, reflecting the moderation of BI loss trends, and we have begun to see increases in both our Connect retention and our legacy auto retentions as a result.Overall, auto retention was roughly 66% in third quarter of ‘19. We expect to see our auto retention increase as we have greater renewal rate stability with fewer rate changes and with less than 1,500 legacy Georgia auto policies left to non-renew. In third quarter ‘19, net written premium for personal auto was down 3.3% versus third quarter ‘18. Policies in force finished 6% below the third quarter ‘18 level and new business accounts for the quarter were down 18.6% over third quarter ‘18. To restore profitable auto growth, we are rolling out advancements in our auto rate segmentation to improve our rate competitiveness as well as rolling out ongoing system enhancements to improve the ease of use of our Connect product.Moving on to our homeowners product results, the homeowners loss and ALAE ratio was 5.5 points higher this quarter than the same quarter a year ago. The increase was driven by higher levels of non-cat weather and large loss activity. Our homeowners third quarter ‘19 loss and LAE ratio was 69.6%, with a combined ratio of 99.9% compared to 64.2% and 96.8%, respectively, in third quarter ‘18. The homeowners cat loss and ALAE ratio for the third quarter ‘19 was 9.2 points, which is 8.2 points lower than the third quarter ‘18 homeowners cat loss and ALAE ratio of 17.4%. The third quarter ‘19 non-cat loss and ALAE ratio of 54.6% was 13.7 points higher than the 40.9% in third quarter ‘18, again, driven by higher non-cat weather and large losses, with less favorable development in third quarter ‘19. We continue to see opportunity for profitable growth with our Connect homeowners digital product and anticipate the enhancements being made on our auto product will benefit homeowners as well.In third quarter ‘19, our homeowners policies in force increased by 12.1% over third quarter ‘18. New business counts in the quarter were up 16.8% over third quarter ‘18, and homeowners net written premium increased 19.5% versus third quarter ‘18. In terms of homeowners retention, the quarter ended with home retention at roughly 75%. We have made changes to our Connect rate structure to improve renewal rate stability, and we expect to see improvements in our retention as those changes renew into our Connect homeowners book of business. In conclusion, our Personal Lines storyline for the quarter can be summarized as

[Kim Garland:]

Thanks, Jason. The commercial results are as follows

[Operator:]

[Operator Instructions] And your first question comes from the line of Larry Greenberg.

[Larry Greenberg:]

Good morning and thank you. So a lot of detail was given, but it appears that both auto lines are experiencing deteriorating profitability from an underlying standpoint this year. And I know in personal, the lower tenure is having an impact. But just generally, is that an appropriate perception that you have lost profitability in both auto lines? And maybe just a little bit more color on how we should be thinking about the next 12 months?

[Jason Berkey:]

So I’ll start with Commercial Lines. And I think there is some truth to your observation, but some of it is probably our own fault, too. I think on the legacy book, Larry, we have taken – we are on track to take about 5 to 6 points of rate this year, when we really needed to take around 10-ish. And so we have sort of reinforced the message with our underwriters that they need to make sure that they get adequate rate in commercial auto. And so that deterioration is kind of on us of sort of keeping up with the rate need that we need to accomplish. And I think that is probably the biggest part, and you should be aware that we sort of – we are aware of the combination of trends in the marketplace. And when you’re growing commercial auto at the rate we are, sort of managing whatever sort of reduction in average 10-year new business penalty you might want to have. The second piece is, while Connect is a much smaller piece of our book, I don’t think – or to me, it’s not unexpected to at least found a couple of segments that we needed to dial in with the next set of rate changes. So as insurance people, it’s hard to overstate how excited we were to launch the next version of the model in 13 states last week. Pretty confident that those will address that and we are also making sure we keep up with the overall rate need on the Connect side of the house.

[Steve English:]

And Larry, on the Personal Lines side, we are certainly seeing some profitability challenges on the Connect book. When we look at our legacy book, it’s a very stable, profitable book. I don’t really see any great needs there. At this point, and the retention has actually started to come back; some of the aggressive rate actions are quite a bit behind us now. But on Connect, we anticipate our retention continuing to increase. It needs to get up in the mid to low 80s to really reduce that pressure that we are seeing from the tenure, but we are not just waiting for that. We are taking underwriting actions including some system enhancements that we will get in by the end of this year, first quarter at the latest that really improve kind of our underwriting activity execution. And there is also ongoing agency management portfolio management actions rather focus on a few areas that we’ve seen some loss ratio challenges.

[Mike LaRocco:]

Yes. Larry, this is Mike. A couple of quick comments from me on personal, mainly. And I have talked about this before and it’s absolutely not an excuse, everything is on us, but we build a brand-new product. And so as you do that and you launch a new product, again, it didn’t look anything like the old one. You go through a series of challenges. It was exacerbated as I mentioned in my commentary about some of through a vendor that caused additional issues. But as we work through that, the ongoing fixing of the model and getting the tiers right, we did all this in the face of, of course, at that time, a fairly high level of BI severity. So again, it’s always up to you guys to interpret all this stuff. But I mean first of all, auto is probably the easiest line to fix. And what I mean by that is that this is high frequency, low-severity lines and it’s the vast majority of it if not all of it is model-driven. And so I believe that this is just a process of better retention of the legacy business, better retention of the Connect business. The Connect new business is actually performing reasonably well as we would expect, but the mix of business is putting some pressure on the loss ratio. So I actually think, directionally, we’re doing the right things. We’ve got to act maybe with a little bit more urgency. But I feel good about kind of where we’re at right now. But I do appreciate the question.

[Larry Greenberg:]

Thank you.

[Operator:]

Your next question comes from the line of Freddie Slicer with KBW.

[Freddie Slicer:]

I just wanted to start on commercial auto with the core loss ratio. I was just wondering if there are any specific states that are underperforming and what he is currently seeing in terms of frequency and severity trends and sort of what is your loss cost trend assumption right now?

[Mike LaRocco:]

So no particular states sort of stand out, I would say, probably regionally the, what we call, our southern region probably needs more rate than our other regions. So we’re working with the underwriters there to make sure that, that happens. I think from a loss cost trend perspective or sort of the combined frequency, severity trends. I think we are pricing in around 10%. So we think, in general, we need to do that. And that is pretty, I would say, again, Natalie may have to clean this up and give more specifics. But I think it’s pretty evenly split between frequency and severity.

[Freddie Slicer:]

Okay. And then I’m not sure if I missed it, but what rate increases did you take in the quarter? And then also on the, I think you mentioned 5% of additional rate needed and now you are seeing some under-priced business on the Connect platform. How much of your total commercial auto premiums does this enterprise business make up currently?

[Kim Garland:]

So, I think on – we took between 5 and 6 points of rate this quarter and we needed another 5 on top of that. So we probably needed between 10% and 11% is what we were aiming for. So that was sort of the difference there. On Connect, I think, on the under-priced segments were I think newer businesses and...

[Steve English:]

The vast majority of our book is on Connect, on legacy.

[Kim Garland:]

Yes. So legacy is 80% of our book, Connect is 20% of our book and the Connect rate need – or the impact of that was about 1 point on the loss ratio.

[Freddie Slicer:]

Okay. And then just sticking with commercial auto, premiums were up 45% year-over-year. So how much of that was rate versus exposure growth? And should we be thinking of this level of growth as sort of a run-rate over the next few quarters despite the core loss ratio deterioration?

[Kim Garland:]

Yes. So most of it was unit growth, I mean, we have been taking if it’s 45%, you probably have high single-digits of rate and the rest of that is unit growth. I believe the plans to get commercial auto, the growth trajectory we are on, we are comfortable with. And so I think that will sort of continue to go on for a little bit.

[Freddie Slicer:]

Okay. And just lastly – sorry, go ahead.

[Kim Garland:]

Yes. I think if you think about most of our activity around commercial auto, I think you’ll see most of those on the rate side. So, one for underwriters on the larger risks just reinforcing that we need to get the rate that we need to get and then as I said, I think we rolled out the first 13 states of the new model by the end of the year, we should rollout most of the other states. There will be a couple of stragglers based on state approvals.

[Steve English:]

And remember when you talk about the growth rate and are we comfortable with it regarding the rate need, most of that rate need was on the legacy book, the new business is coming on Connect. And as Kim mentioned, our latest model on Connect was just launched in 13 states, we will roll it out to the rest. So, the new business coming on to Connect is much more model-driven. And we have a lot of confidence in not only the rate there, but the rate per risk-based on the modeling that’s been built.

[Kim Garland:]

And as Mike always daringly reminds me, 45% on a small base does not necessarily add much.

[Freddie Slicer:]

Great. Okay. And then just on the Commercial Lines expense ratio, it seems like most of the products are making good progress. But how should we be thinking about modeling commercial expense ratios in 2020 and ‘21? In which segments do you expect – which products do you expect to drive most of the further improvement?

[Kim Garland:]

So I think, as you think about which products, I think you can think about them in 2 ways. So for commercial auto and small commercial, their Connects, sort of the build and rollout is done. And so the sort of IT expense ratio for those product lines will burn off earlier than they do for farm & ranch, workers’ comp and middle market. So I would expect to see sort of more improvement in those product lines earlier than the others. As I talk about, we will still – in 2020, you’ll still see – we still have to build and roll out build and/or roll it out the farm & ranch workers’ comp, CPP, so those expense ratios. We’ll still have to absorb that in 2020. And then part of our focus as we try and sort of either get more business on this more efficient platform or improve our processes is sort of keeping our headcount and fixed expenses flat as we put more volume on it. So our expectation is that gives us a bit of a tailwind.

[Freddie Slicer:]

Okay, great. Thank you. And then just switching to Personal Lines, Jason, I think I heard you mentioned targeted rate increases in personal order budgets, wondering if you could put a number on the rate increases that you are taking and how much of your premiums is it impacting?

[Jason Berkey:]

Yes. The targeted rate changes, as I mentioned, will really be on the Connect product and our legacy personal auto business is performing quite well. It’s stable. And we have addressed over the last couple of years, aggressively since some of the trend issues, but we are not seeing that any more. So on Connect, obviously, it’s going to vary significantly by state, but most states we are talking overall rate changes, low single-digits – mid single-digits, but the targeting of the rate changes would be increased segmentation, really looking to make sure that in sales where we’re having loss ratio issues that we’re putting more there. So there would be areas of the book that might get significantly more rate increase than that.

[Freddie Slicer:]

Right. So how should we be thinking about the personal core loss ratio going into 2020, given some of these targeted rate increases and the recent deterioration?

[Jason Berkey:]

Well, I think the pressure that we faced from the tenure will continue as long as we have this level of retention. But we continue to see that improve month-over-month, both on legacy and on Connect. And the targeted rate changes that we have lined up for first quarter, we’ll begin to shift the business mix. The target rate changes we took in the first half of this year did that as well, really reduced the amount of no prior business and some other business that was shorter tenure, higher loss ratio, and we anticipate that will also occur next year, but I would see that we’re going to face pressure in the auto line from a ...

[Mike LaRocco:]

Remember, what you need to look at is you have to look at the net loss ratio on personal auto and the legacy. And in both of those lines, in that auto line that we expect the Connect loss ratio to get better and we expect the legacy loss ratio to get better based on the actions that we’re taking and of course, on the legacy side, the seasoning and the increased retention. So then it’s kind of depending on how you model that out, you’ve got to kind of fix for that kind of determine that mix between the Connect business and the legacy business, and you’ve got to kind of work. When Jason says there’s going to be pressure. It’s just simply because of the both loss ratios will get better. We’ll have more business on the Connect side than we will on the legacy or think of it this way. More new business versus seasoned business, and that’s going to put a little bit of pressure on that process. Having said that, we think long-term in this, and we believe, as these things start to work out over time when we increase the retention on both of these lines that we’re going to be able to get it to where we need the loss ratio to be on personal auto, very confident about that.

[Freddie Slicer:]

Great. And then just lastly, on investment income, it was down quite a bit year-over-year and quarter-over-quarter. Just wondering if you’re making any changes to the structure duration of the portfolio like the low interest rate environment?

[Scott Jones:]

Freddie, this is Scott Jones. Not really making any structural changes to the portfolio. I think what you see happen is just the result of a lower rate environment that we’re in now and the lower new money yield that we’re receiving on new investments and how that’s impacted our existing holdings of mortgage-backed securities. So no real structural changes to the portfolio in terms of duration or anything like that.

[Freddie Slicer:]

Alright, great. Thank you for the answers.

[Scott Jones:]

Thank you, Freddie.

[Operator:]

Your next question comes from the line of Paul Newsome of Sandler O’Neill.

[Paul Newsome:]

Great. Good morning guys First, I want to thank my KBW colleague for asking the first 500 of my questions, and someone needs to learn the lessons. But the only question I have is more of an accounting issue with the tenure. And I understand on the Personal Lines, auto business. I understand there’s a new business penalty that’s usually a couple of points. But I would have expected to see, if there was a tenure issue that come through more on the written premium side and then on the expense side as opposed to the loss ratio side. And is that underneath the other stuff that the tenure’s affecting the expense line? Or am I just not thinking the accounting correctly?

[Steve English:]

Well. Paul, this is Steve. In terms of tenure on the expense side, I think the impact would be primarily in commissions in the first year versus renewal commission rate. So if you are year 1 to Connect right, when it was all new business, first year commission rate is higher than the renewals. So as time marches on and you get more of a work of the percentage of the book in renewal at that lower commission, you will see that commission rate, and therefore, your expense ratio come down from seasoning. But in regards to other types of, I mean that’s the only one I can think of that has a seasoning effect on the expense side, and of course, on the loss ratio side, it’s a very similar thing, although new business penalty on personal auto is more than 2 points in terms of that business. So I think that’s a little optimistic on new business facility. But I’ll let others react to that as well.

[Mike LaRocco:]

Yes. I think the new business penalty is a little bit higher. Again, I want to be really clear. The reason, as you look at the way the product was built and you look at our ongoing improvement in the modeling. Our expectation is that

[Paul Newsome:]

Thank you. I appreciate it.

[Operator:]

[Operator Instructions] There are no further questions. I’ll turn the call back over to you, Natalie, for any closing remarks.

[Natalie Schoolcraft:]

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 20, 2020. Thank you and have a wonderful day.

[Operator:]

Thank you. That concludes today’s third quarter 2019 earnings conference call. Thank you for participating. You may disconnect at this time.