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State Auto Financial Q1 2010 Earnings Call Transcript

State Auto Financial Q1 2010 Earnings Call Transcript

State Auto Financial (STFC)

Q1 2010 Earnings Call

April 29, 2010 10:00 am ET


Steve English - CFO

Bob Restrepo - Chairman, President and CEO


Mike Phillips - Stifel Nicolaus

Matt Rohrmann - KBW

Caroline Steers - Macquarie


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Welcome to the State Auto Financial’s first quarter 2010 Earnings Call. Initially you will be in listen-only mode. Today’s call is being recorded. If you have any objections, you should disconnect at this time. (Operator Instructions)

At this point, I would like to turn the call over to Mr. Steve English, State Auto’s Chief Financial Officer. Mr. English, you may proceed.

Steve English

Good morning and welcome to our first quarter 2010 earnings conference call.

Today I’m joined by several members of STFC’s senior management team. Our Chairman, President and CEO, Bob Restrepo; Chief Operating Officer, Mark Blackburn; Chief Investment Officer, Jim Duemey; Chief Actuarial Officer, Matt Mrozek; and our Chief Accounting Officer and Treasurer, Cindy Powell.

Today’s call will include prepared remarks by our CEO, Bob Restrepo and me, after which we will open the lines for questions

Please note 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 to which I refer you.

A financial packet containing reconciliations of certain non-GAAP measures along with supplemental financial information was distributed to registered participants prior to this call and made available to all interested parties on our website, under the Investors Section as an attachment to the press release.

Now I’ll turn the call over to STFC’s Chairman, President and CEO, Bob Restrepo.

Bob Restrepo

Thank you, Steve, and good morning, everyone. We had a solid first quarter and we’re pleased to report an underwriting profit, an increase in our book value to $21.65 a share and further improvement to our trailing 12-month return on equity results.

We continue to work towards a double-digit ROE and a result of 4.6% demonstrates the progress we are making. For the quarter, we produced net income from operations of $0.27 a share, despite $0.11 a share for charges resulting from the recently passed Federal Healthcare Reform legislation which eliminated the tax benefit related to Medicare Part D subsidies.

Our GAAP combined ratio for the quarter was 99.7%.

Overall, we are pleased with the improvement we see in our personal automobile business and the solid results we produced in business insurance.

Our 2010 first quarter results were also helped by a return to historical levels of catastrophe losses for the first quarter. We normally experience a 3 or 4 percentage point impact from catastrophes in the first quarter. 2008 and 2009 were outliers with excessively high catastrophe loss ratio results.

Our first quarter this year result of 3.3%, is consistent with normal and expected trends. We still want to improve on underwriting performance in homeowners. Although catastrophe and large loss experience was normal relative to previous year's trends, a non-catastrophe weather related experience produced an unsatisfactory ex-catastrophe loss ratio result.

We expected its bit of an anomaly and remain confident that we have the right plans in place to attain profitability in this line.

This morning, I'll discuss our operating results in a bit more detail, Steve English will then comment on investment performance and the balance sheet.

Our overall underwriting profitability is highly dependent on our personnel automobile business. Improved loss experience, benign pure premium loss cost trends and increased prices all contributed to better loss ratio performance.

Frequency is up a bit, but pure premium trends remained in the low single-digit area. In the first quarter, we achieved a 4.3% price increase, which accounted for a third of our written premium growth in the personal auto line.

Success in the homeowners' line is driven by spread of risk and price adequacy. We are making progress on both fronts. Over a third of our homeowners' growth is coming from four states where we had no presence three years ago.

Almost 50% of our overall premium growth is coming from price increases, which were up over 9% and will continue to increase throughout 2010.

Taking together these two drivers account for approximately 90% of our total homeowners' growth and a good leading indicator of improved loss ratio performance on both the non-catastrophe and catastrophe front

Homeowners’ large loss activity is down significantly from last year, but remains slightly elevated relative to historic trends. The economy must be a factor.

We have new underwriting tools and processes in place to identify prospective foreclosures and to take the appropriate underwriting actions.

The most significant impact on our first quarter homeowner profitability was non-catastrophe weather events. Specifically, our non-catastrophe weather loss ratio was 10 to 15 percentage points higher than normal trends. The states of Maryland, Ohio, Pennsylvania and West Virginia were significant contributors resulting from bad winter weather and heavy snow.

All in all, the weather has somewhat masked the underlying improvements we have made to our homeowners' business.

We expect low double-digit price increases by the end of this year. Retention is holding up extremely well despite these price increases, which indicated that our competitors are also acting particularly in the Midwest and the Southeast.

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