State Auto Financial ( STFC)

Q2 2011 Earnings Call

August 2, 2011 10:00 AM ET

Executives

Steven English – VP and CFO

Bob Restrepo – President, Chairman and CEO

Matt Mrozek – VP and Chief Actuarial Officer

Analysts

Paul Newsome

Matt Rohrmann

Larry Greenburg

Presentation

Operator

Welcome and thank you all for standing by. At this time, I would like to remind parties today’s call is being recorded. If you have any objections, you may disconnect at this time. All parties are in a listen-only mode until the question and answer session, at which time you may press star one to ask a question. At this time, I will turn the meeting over to President, Chairman and CEO, Bob Restrepo and Vice President and Chief Financial Officer, Steve English. Thank you. You may begin.

Steven English

Thank you Rose. Good morning and welcome to our second quarter 2011 earnings conference call. Today, I’m joined by members of SFTC’s senior management team, our Chairman, President and CEO Bob Restrepo, Chief Investment Officer, Jim Duemey and our Chief Actuarial Officer, Matt Mrozek.

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 www.stateauto.com under the investor 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. Good morning everyone. Second quarter results for both the industry and State Auto were terrible. In addition to the widely reported and previously disclosed impact of catastrophes, State Auto Financial Corporations earnings and book value were also affected by a valuation allowance we’ve established against our net deferred tax asset.

This allowance reduced earnings by $115 million and our book value by $2.86 per share. The allowance was triggered by the historic and tragic impact of the spring storms throughout our operation territory.

All in, State Auto Financial Corporation reported a second quarter net loss of $201.4 million or $5.01 per diluted share. Year to date, STFC has a net loss of $188.7 million or $4.70 per diluted share. Book value per share now stands at $16.77.

Our GAAP combined ratio for the second quarter was 147% with catastrophe losses accounting for 44.3% of the total loss ratio of 114%. Our X catastrophe loss ratio result was higher than normal because of higher personal auto loss ratios, non-cat weather and increased, unallocated loss adjustment expenses due to higher levels of claim activity.

Although catastrophe related, we historically have only classified allocated, not unallocated loss adjustment expenses as catastrophe expenses.

Following my commentary on earnings and operating results, Steve English will explain the impact of the net tax deferred asset evaluation allowance on our tax and capital position going forward. In addition, he’ll recap investment income results, provide you an update on the status of our major reinsurance treaties, which we renewed effective July 1.

Homeowners was obviously the primary, but not the only line affected by the spring storms. The impact of this line for both the industry and State Auto was truly historic. So far this year, I’ve been in 20 of our operating states, meeting with our agents and employees while outlining our company’s strategy.

Part of my presentation discusses the impact of wind, hail, tornado and lighting losses on industry results going back to 1980. Throughout most of the ‘90’s, and the first part of this century, the industry typically reported annual losses from wind, hail, tornado and lighting of about $5 billion to $6 billion per year.

In 2008, ‘09 and ‘10, experience deteriorated and the industry had approximately $10 billion in losses for the entire year. Based on my rough accounting, April alone will go down as a $10 billion month and May will probably exceed $5 billion.

Given our geographic footprint, we bore our fair share of these losses. Virtually all of our states were affected by catastrophe losses for homeowners, auto physical damage, both personal and commercial and commercial property.

For all these lines, both the frequency and severity of losses were unprecedented. The only states not significantly affected by the storms were on our periphery; out west in Colorado, Utah and in the Dakotas and in the east, Connecticut, Maryland and West Virginia.

Despite the widespread scope of losses, almost 60% of our losses were concentrated in five states. In order of impact, they were Tennessee, Missouri, Ohio, Texas and Alabama. All in, we had almost 32,000 weather related claims in the quarter resulting from both catastrophes and non-catastrophe weather events.

Over half of these were property related catastrophe losses and to give you some perspective, our previous largest loss was hurricane Ike in 2008 where we had 17,000 claims.

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