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
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. Read the rest of this transcript for free on seekingalpha.com