State Auto Financial Corporation
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Welcome, and thank you for standing by. At this time all parties are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Natalie Schoolcraft, Controller and Investor Relations Director of State Auto Financial Corporation.

[Natalie Schoolcraft:]

Thank you, Laurie. Good morning, everyone. Welcome to our First Quarter 2021 Earnings Conference Call. Today, I'm joined by our Chairman, President and CEO, Mike LaRocco; Senior Vice President and CFO, Steve English; Senior Vice President of Personal and Commercial Lines and Managing Director of State Auto Labs, Kim Garland; Senior Vice President of Data and Analytics, Jason Berkey; Chief Actuarial Officer, Matt Mrozek; and Chief Investment Officer, Scott Jones.

[Mike LaRocco:]

Thank you, Nat, and good morning, everyone. I hope you and your families continue to be safe and healthy as we navigate what we all hope is the final stretch of the pandemic. We just completed a very solid first quarter, coming on the hills of an excellent fourth quarter. Obviously, the headline numbers not look great, but we all know they do not tell the full story. The freeze that primarily hit Texas was the event that drove those headline numbers. It was both unusual and due to Texas infrastructure weaknesses, worse than it should have been, regardless, this catastrophe drove the overall combined ratio for the quarter and unless one takes the time to pull back the covers, overshadowed what was a strong quarter for State Auto. Let's look under the covers. We've been telling you about our assets to get auto back to profitability. Last quarter, I made it clear that we are optimistic that we have turned the corner and expected auto to be profitable in 2021. I'm pleased that the first quarter results showed all of our hard work is delivering. To be clear, we still have much work ahead and no one is declaring victory. But we are pleased with our progress today and remain confident auto will return to consistent profitability. The Texas freeze was primarily a homeowners event and that can be seen in those results. While Kim will cover this in more detail, I remain happy with this business and the way we designed the product and how we're leveraging technology with regard to risk evaluation and inspection. Homeowners insurance pricing and underwriting is changing rapidly with advancing technology and we are built for those changes.

[Steven English:]

Thanks, Mike, and good morning, everyone. I'm not sure who has the most unusual sense of humor, but thanks for the kind words. STFC reported $3.6 million of net income for the first quarter of 2021, compared to a loss of $114.6 million in the same quarter of 2020, of course we all remember what happened to equity investment valuations a year ago. On an operating basis, we reported a loss of $26.6 million or $0.61 per diluted share, compared to a loss of $7.8 million or $0.18 per diluted share in the same period a year ago. Similar to last year, the first quarter of 2021 was significantly impacted by catastrophe losses. Catastrophes comprised 20.1 points of the 112.9 GAAP combined ratio and were driven by winter storms Uri and Viola, which were primarily personal lines events. Approximately 75% of these claims are closed, which is a testament to the hard work of our CARE team, delivering the promise and service our policyholders deserve. 2020's first quarter cat loss ratio of 12.7% was impacted by the Nashville tornado, which was heavily commercial lines. First quarter 2021 GAAP combined ratio was 5.7 points higher in 2020's first quarter ratio of 107.2. Cats were up 7.4 points, while the GAAP, non-GAAP loss and loss adjustment expense ratio was down nine-tenths of a point, and the GAAP expense ratio was also down eight-tenths of a point, compared to the first quarter a year ago. Our winter storm estimates did trigger estimated recoveries from our property cat treaty. As a reminder, our group retention is $90 million for the 5% co-participation, with limits stopping at $270 million. Including reinstatement premium and the co-participation along with our retention, the winter storms added 17 points to the personal and commercial statutory combined ratio, leaving just shy a 4 points from other catastrophes. Last year in the first quarter on the same basis the Nashville tornado contributed 8.3 points, leaving just over 4 points from other catastrophe losses. Net favorable development of prior year non-cat loss and ALAE reserves in the first quarter of 2021 was $24.6 million, compared to $10.5 million of net favorable development in the first quarter of 2020. The difference of $14.1 million relates to, one, personal auto, which was relatively flat in the first quarter of 2021, with favorable development of $800,000, compared to adverse development of $5.2 million in Q1 2020. Two, homeowners, which developed favorably by $2.1 million in Q1 2021, compared to adverse development of $2.2 million in Q1 2020. And three, commercial lines, developing favorably by $21.8 million in Q1 2021, compared to $16.8 million in Q1 2020. We continue to see consistent favorable development in commercial lines across the various product lines, and in particular, workers' compensation.

[Kim Garland:]

Thanks, Steve, and good morning, everyone. Overall, our personal lines and commercial lines statutory results are the following. 1Q '21 combined ratio is 112.8 compared to 107.3 for 1Q '20. Cat loss and LAE related to Uri and Viola contributed 17 points to the overall personal and commercial lines combined ratio for the quarter. Written premium growth was 3.7% for 1Q '21 versus 1Q '20. For the quarter, we continue to be thrilled with the performance of our commercial lines business. Commercial lines had written premium growth of 13% and a 93.6% combined ratio, which includes 7.8 points of cat loss and ALAE, a higher cat loss ratio than we typically see in the first quarter for commercial lines. Our commercial lines 1Q '21 expense ratio of 36.8% is 3.3 points lower than 1Q '20. We are seeing the benefit of finishing the Connect investment and increased scale. We've completed the state rollout of middle market Connect and workers' comp Connect State rollout is scheduled to be completed in August. I cannot say enough good things about the IT and business teams that have worked on building and launching all of our products on the Connect platform. Just a heroic effort by everyone involved. We are continuing to take significant rate in our commercial auto, small commercial and middle market commercial product lines.

[Operator:]

Our first question comes from the line of Derek Han .

[Unidentified Analyst:]

Good morning. Thanks a lot for taking my question. You talked a lot about inflationary pressures and how you're adjusting for those trends for pricing. Can you give us some quantification on how much you're adjusting your loss rates or maybe where the loss trends are running at? And is the -- are the adjustment being mostly made in the personal home business?

[Mike LaRocco:]

Yes, let me start briefly and then turn it over to Kim to be a little more specific. We're definitely seeing, as I mentioned in my comments, there is definitely inflationary pressure. There is no doubt in our mind about that we see it a lot in the property lines of business obviously, but you'll also see it in auto in terms of repair costs and labor rates and so on and so forth. So this is a kind of an across-the-board issue. Some of the largest increases are in materials that are used to rebuild homes and businesses. So that's kind of where we're seeing the most significant. So I'll let Kim kind of touch on how we are addressing that from a rating standpoint.

[Kim Garland:]

Sure. And I'll probably -- I'll try and give you a flavor by a few product lines on the sort of order of magnitude of what we're doing. And when I speak to it for the property lines, I'll probably take into account both rates we are taking and we're also seeing coverage AMLs increase and so we get rate through both of those. In middle markets, these days we are probably taking 13% to 15% in rate with more of that coming in property less in liability, that's our middle market commercial business. In our small commercial business, we are having about 12 points of rate entering the system, again much these rate increases on the small commercial side, property is higher, liability is lower. And in homeowners, I told you, we are taking in Connect 3.0, we're seeing about 30% in premium increases now in State like Texas. Some of that is inflation, but some of that is we've increased cat and weather loads in Texas, as I said, outside of Texas and Michigan, it's about 17, 18 points of rate. And for auto, we are seeing physical damage severity increases in the high-single-digit range, and in commercial auto, these days we're taking about 10 points of rate -- 10, 11 points of rate overall. The personal lines changes are more muted, given the miles-driven drop, things going up, the sort of profitability actions that we're taking are pushing things in the other direction so we're not taking as much overall rate there, but that's what we're seeing.

[Unidentified Analyst:]

Okay, that's really helpful. And then my second question is about the auto Connect product. How many get states is it rolled out and now and really with the New York Connect products that you have for both personal auto and home, how is that impacting your redo retention levels?

[Mike LaRocco:]

Go ahead, Kim.

[Kim Garland:]

Yes. And is this for auto, is this more for personal lines or commercial lines you're asking?

[Unidentified Analyst:]

For the personal lines.

[Kim Garland:]

Also for the personal lines, I guess we are in -- I think there's only a handful of stragglers states for 2.1, they are hard to get approval in. So we're probably in 25-ish of our 28 states, so it's almost everywhere. What we see is, over the past year our preferred Connect's policies in force growth is around 35% to 40%, so we're seeing traction there. While our Connect non-standard PIF has shrunk about 20%, so those are the impacts we're seeing.

[Unidentified Analyst:]

Okay. Thank you for all the answers.

[Mike LaRocco:]

You got it.

[Operator:]

Your next question comes from the line of Paul Newsome . Paul, your line is open. Please state your question. If you have your phone muted, please unmute it.

[Unidentified Analyst:]

I'm sorry if I got muted there for a bit. My congratulations to Steve, been a long time. Great to have you help us out over the years and it very much appreciates your sense of humor as well.

[Steven English:]

Thank you, Paul.

[Unidentified Analyst:]

I wanted to ask about the claim or -- maybe just some more your thoughts on auto claims frequency given the pandemic. I think most people companies are seeing a windfall, it's fairly significant. And that's helped profitability but prospectively presumably driving will come back. And how should we think about that when we look at specifically State Auto's results and some just your thoughts in general on that topic?

[Mike LaRocco:]

Yes. I'll just very briefly start to say that we're -- as well as others seeing a significant drop in frequency, again, Kim can have a little bit more color commentary there. And I think the thing that's unusual Paul about ours is all the good work that Kim and Linzie and the team have done in auto, has also created this seismic shift in our business to more preferred and much, much less nonstandard business. So, we are also seeing the -- in addition to just the COVID affect, I think we're starting to now really start to see the difference in the mix of business that impacts both frequency and severity as well. So, we're pretty excited about that combination of events that are all lining up and helping make us pretty bullish about this line of business. But Kim, you want to -- and I'll come back to comment on Steve, but Paul just a second, but Kim, you want to add some color commentary there?

[Kim Garland:]

Sure. So there are a couple of moving pieces, Paul. I'll try and talk through them as to think about our personal auto results. So I think when you look at last year's results, I think as we talked about last quarter, the biggest difference between us and the rest of the industry and sort of like combined ratio lowering was we had a lot of adverse prior year development in our 2020 results and so that's why this first quarter not seeing adverse development on prior years was sort of a win or a good guide for us that we like to see. And then sort of going forward, I think Mike touched on one of them. So there is this frequency drop that I think is just natural in the industry and there are these severity increases both on physical damage and liability so we see that with like all the others. But I think, if you look at our total auto book, we are probably seeing greater frequency declines than the average carrier, because as we shift out of nonstandard into preferred, preferred just has lower frequencies, so we have the benefit of the overall industry sort of phenomenon and then we add on that our mix shift now. Look, we don't manage our book of business as one big blob, we manage it as preferred standard, non-standard and so we're not letting that sort of extra frequency decline kind of fool us. So, that's sort of how to think about our moving pieces in personal auto.

[Unidentified Analyst:]

Great. That's all I want to ask. Appreciate the call and looking for the rest of the year.

[Mike LaRocco:]

And Paul, just you mentioned Steve and I, it reminded me that when I was growing up I -- of course I had come from an Italian family and my Italian grandmother on my dad side only spoke Italian. I remember when I was a little boy, she used to sit me on her knee and she would say, if you ever reach a position of authority that it had high hopes for me, you need to always have a good consigliere by your side and your trusted advisor and I think she would have been very proud that Steve helped fill that role for me over the last six years. So just wanted to toss that in there as well. Operator, back to you.

[Operator:]

At this time there are no further questions. I will now return the call to Natalie Schoolcraft for closing remarks.

[Natalie Schoolcraft:]

Thanks, everyone for your questions, for participating in our conference call, and for your continued interest in and support of State Auto Financial Corporation. We look forward to speaking with you again on our second quarter earnings call, which is currently scheduled for Thursday, August 5, 2021. Thank you and have a wonderful day.

[Operator:]

Thank you. That concludes today's first quarter 2021 earnings conference call. Thank you for participating. You may disconnect.