State Auto Financial's CEO Discusses Q4 2011 Results - Earnings Call Transcript

State Auto Financial Corporation ( STFC)

Q4 2011 Earnings Call

February 16, 2012 10:00 a.m. ET


Steve English - VP, CFO

Bob Restrepo - President, Chairman and CEO

Matt Mrozek - VP, Chief Actuarial Officer

Cindy Powell - VP, CAO and Treasurer

Scott Jones - Chief Investment Officer


Sameer Kher – Capital Returns

Larry Greenberg - Langen McAlenney

Ryan Byrnes - Macquarie Research Equities

Matt Rohrmann - Keefe, Bruyette & Woods



Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer portion of today’s conference. (Operator Instructions).

I would now like to turn the conference over to Steve English. Thank you. You may begin.

Steve English

Thank you. Good morning, and welcome to our fourth quarter 2011 earnings conference call. Today, I’m joined by several members of STFC’s senior management team, our Chairman, President and CEO, Bob Restrepo; Chief Investment Officer, Scott Jones; 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.

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

Bob Restrepo

Thank you, Steve and good morning everyone. State Auto posted a strong quarterly profit and closed an otherwise disappointing year on solid footing. Our fourth quarter GAAP combined ratio of 94% was driven by strong underwriting results, particularly in the property lines, favorable catastrophe experience and a lower expense ratio.

Our net income of $101 million also included help from a tax benefit, a curtailment gain associated with the change to retiree healthcare and net realized investment gains. All this translated to a $2.49 profit per diluted share and drove significant increase in book value.

Other comprehensive income added another $1.50 a share bringing us to a year-end book value per share of $18.81, up $3.87 per share relative to the end of the third quarter. All in, this is a dramatic recovery from year-to-date results reported last quarter.

We realize that there are a lot of moving pieces in our results this quarter and for the year. I will briefly outline the highlights of our operating results. Following that, Steve English will spend more time than usual working you through the changes to our income statement, balance sheet and book value resulting from the capital actions we implemented at the end of 2011. These included revising the inter-company pooling percentage between State Auto Mutual and State Auto Financial Corporation, implementing a new homeowners quota share treaty ceding 75% of our homeowners business to a syndicate of reinsurers and terminating retiree healthcare benefits from most of our employees.

The aggregate impact of these capital actions not only boosted our profits in the fourth quarter but will also enhance our profitability in the future by reducing the volatility and risks in our homeowners line. For the quarter, loss ratio results reflected in average number of large losses. In normal weather, catastrophe loss experience was better than the fourth quarter of 2010 as we released reserves from prior quarters. This was offset somewhat by higher levels of non-catastrophe weather-related claims in the quarter.

For the full year, loss ratios were elevated by both catastrophes and non-catastrophe losses. Our final catastrophe loss ratio of 16.2% far exceeded last year’s result of 7.9% and our prior five year average of 8.4% due to second quarter tornadoes.

Our full year ex-catastrophe loss ratios were hurt by non-catastrophe weather, elevated levels of large bodily injury claims in our casualty lines for both personal and commercial lines, and third quarter case reserves strengthening in workers’ compensation. These actions are behind us as evidenced by the normal large loss trends we saw in the fourth quarter.

The combined impact of unprecedented catastrophes and unusual ex-catastrophe losses contributed to a combined ratio of 116.3% for the year. The difference between 2011 and 2010 was about 12 loss ratio points, 8 points that are cat related and 4 points from non-cat weather, bodily injury loss experience and the workers’ compensation case reserves strengthening I mentioned.

Our personal line segment had an unusually strong quarter driven by property lines. Personal auto results improved somewhat over the fourth quarter of last year. We continue to see elevated peer premium trends in our bodily injury and PIP coverages. Personal auto pricing finished the year with a low single digit price increase. The lump on that somewhat higher price increases in 2012 to reflect higher levels of frequency and severity of bodily injury and medical claims.

The homeowners and other personal lines performed very well and were comparable to the strong results reported in the fourth quarter of last year. More favorable weather and lower catastrophe losses were major contributors.

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