State Auto Financial Corporation (STFC) Q2 2010 Earnings Conference Call July 29, 2010 10:30 AM ET Executives Steve English - CFO Bob Restrepo - CEO Matt Mrozek - CAO Analysts Paul Newsome - Sandler O'Neill Caroline Steers - Macquarie Larry Greenberg - Lange and McCleany Presentation Operator Welcome to the State Auto Financial second quarter 2010 earnings conference call. (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
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Now I’ll turn the call over to STFC’s Chairman, President and CEO Bob Restrepo.Bob Restrepo Thank you Steve, good morning everyone. After a solid first quarter, we experienced a difficult second quarter despite improving non cash fee results in our first to launch business. As been a widely reported catastrophe have plagued industry results this quarter, this quarter has always been a difficult one for State Auto, the spring is when we see the largest share of our catastrophe losses driven by wind and hail. In addition, we had a rash of flood related claims which affected our automobile physical damage results in both personal and commercial automobiles. Virtually all of this resulted from the unprecedented rain and subsequent flooding in the national area in May. STFC’s combined ratio for the quarter was 115.2%. Catastrophe loss was accounted for 18.6 points or $57.5 million compared to 12.6 points and $36.9 million respectively for the same period 2009. Book value for share declined $1.28. Obviously our underwriting results are a major contributor. In addition, changes to our pension plan and investment evaluations also contributed to the book value per share decline. Steve English will address this in greater detail following my opening comments. Unusually high catastrophe losses masked improvements in our personalized ex-catastrophe loss ratio. Personal auto results continue to improve as we earn out the price increases we’ve been taken for over a year. Over 50% of our premium growth in personal auto is now driven by price. Virtually all the remaining growth is coming from the expansion state of Arizona, Colorado, Connecticut and Texas. All in all, the impact on our written premium and price changes is now a 5% increase. Loss trends have increased a bit in the quarter but these move around from quarter to quarter and we think the trends are anticipated well by our rate actions.
New business is down compared to last year or remain steady. Profit, pricing and production trends look good for our core personal auto book. Homeowner results continue to be adversely affected by the weather, both catastrophe and non catastrophe. Our non cash, non weather results have actually improved quite a bit, driven by lower large losses and price increases.In the second quarter, prices increased 10%. We’ll continue to see the positive impact of our pricing actions as the year progresses and these price increases are announced. In addition to addressing the impacts of catastrophes and weather on our Homeowner results, we’ve also been evaluating the impact of the economy. Last year we saw an increase of large fire losses in state with above average for closure rates. We’ve instituted a new physical inspection program for our home owners who were more than a 150 days behind on their mortgage payments to ensure that the home was built properly and maintained and occupied. If not, we’re taking the appropriate underwriting action. Although this represents a very small part of our overall book, we obviously want to make sure that we’re doing everything possible to ensure the individual risk quality of our homeowner business, while we’re addressing the portfolio and management issues related to weather and then the need for more price. In addition of pricing and underwriting actions, we continue pursuing insurance to value, implementing wind and hail deductibles in 15 states, which accounts for almost two-thirds of our average wind and hail losses and rolling out our new biperil homeowner product which will be in 11 states by the end of this year. Business insurance results were a mixed bag in the quarter. General liability results deteriorated primarily due to reserve increases on five individual cases from prior accident years. Commercial auto liability results remain quite good. Physical damage results that were hurt by large losses and claims related to the national flooding. Read the rest of this transcript for free on seekingalpha.com