State Auto Financial's CEO Discusses Q2 2012 Results - Earnings Call Transcript

State Auto Financial Corporation (STFC)

Q2 2012 Earnings Call

August 2, 2012 10:00 a.m. ET

Executives

Steve English - VP, CFO

Bob Restrepo - President, Chairman and CEO

Scott Jones - Chief Investment Officer

Matt Mrozek - Chief Actuarial Officer

Analysts

Larry Greenberg - Janney Capital Markets

Presentation

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I will now introduce your host for today's conference State Auto Financial Corporation’s Chief Financial Officer, Mr. Steve English. Sir, you may begin.

Steve English

Thank you, Christie and good morning everyone and welcome to our second quarter 2012 earnings conference call. Today, I'm joined by our Chairman, President and CEO Bob Restrepo; Chief Investment Officer, Scott Jones; 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 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. Good morning everyone. Second-quarter results were similar to our first quarter but with improved non-catastrophe results and higher catastrophe losses. Our combined ratio of 110.4% was a significant improvement over last year but still produced a modest loss of $2.7 million or $0.07 a share.

State Auto Financial Corporation's book value at the end of the second quarter was $17.82 a share, which is a decrease of $0.13 from our restated book value at year-end. The current book value includes a reduction of $2.60 a share of the deferred tax asset valuation allowance which we established at the end of the second quarter last year.

The second quarter is traditionally difficult for State Auto because of spring storms. 2012 was no exception. For accounting for the homeowners quota-share treaty, our catastrophe loss ratio for the quarter would've been 21.4%, which is pretty close to our five-year average for the second-quarter. This year, though the homeowner quota-share treaty reduced our net catastrophe loss ratio to 13.2%, a significant improvement. We saw 13 catastrophes in the quarter but two of these accounted for over 80% of our catastrophe losses.

Catastrophe number 74 hit St. Louis, Louisville and the state of Tennessee in April. Late June catastrophe number 83, otherwise characterized as derecho, also produced significant losses for us in Ohio, West Virginia and Metro Washington DC. Neither of these catastrophes triggered a recovery from a catastrophe reinsurance treaty but our results did benefit from the homeowners quota-share treaty that we placed last year.

For the entire enterprise the treaty worked as expected. Since second-quarter results and catastrophes included a more normal mix of homeowner losses, the benefit in the second-quarter was more significant than what we experienced in the first quarter of this year. First-quarter featured a larger mix of commercial property and automobile losses due to hail.

This quarter the treaty reduced our underwriting loss by $24.4 million and improved our combined ratio by 6.8 points with a reduction to the loss ratio of 7.2 points and an increase in our expense ratio of 0.4 point. Year-to-date the treaty reduced our underwriting losses by $31.6 million, improving our combined ratio by 3.9 points with a 4.5 point improvement to the loss ratio and a 0.6 increase in our expense ratio.

While disappointed with a quarterly loss, we are encouraged by improvements in our ex-catastrophe loss ratio results in all three segments: personal insurance, business insurance and specialty insurance. We also reported an improvement in our expense ratio despite the impact associated with the homeowners quota share treaty. Improved commercial lines production and our continuing effort to manage expenses reduced our expense ratio in the quarter to 32.3%.

Before turning the call back to Steve, I will comment on our ex-catastrophe loss ratio result and production performance in each of the three segments. In personal auto, our personal auto results improved sequentially and relative to last year resulting from better non-catastrophe non-weather experience, largely driven by lower prior accident year large losses.

I mentioned last quarter we were beginning to see the benefit of liability claim actions we’ve taken over the last two years. We continue to experience increases in bodily injury severity in personal auto but we are managing these trends affectively with new casualty claim processes. Excluding catastrophes, our personal auto loss cost trends compared favorably to industry state results. In addition to improved claim performance, our personal auto line will benefit from increased prices and greater rate sophistication.

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