State Auto Financial Corporation
Q4 2020 Earnings Call Transcript

Published: 19 Feb 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. I would now like to turn the call over to Investor Relations Director, Natalie Schoolcraft. Please go ahead.

[Natalie Schoolcraft:]

Thank you, Nicole. Good morning, everyone. Welcome to our Fourth Quarter 2020 Earnings Conference Call. Today, I'm joined by our Chairman, President and CEO, Mike LaRocco; Senior Vice President and CFO, Steven 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:]

Thanks, Natalie, and good morning, everyone. Before I begin, I just want to say I hope everyone on this call and your families are safe and healthy as we continue to battle this virus. I do believe we're in the final phase of this challenge, but we have many difficulties ahead of us. I could not be more proud of State Auto and our team as we look back on 2020. My pride is based on both our results and how the team responded through a year in which we had so many challenges. Let me begin with response to this team of associates. In a year where we faced the pandemic, the reality of ongoing racial injustice, a near record-level of catastrophic claims and a divisive political election, our team did not turn away from one another. Rather, we came together. It began with our transition to a primarily work-from-home organization, which took place overnight. Thanks to our outstanding digital platform, not a day was lost. More importantly, our culture putting family and community first allowed our team to work through the personal challenges of making this change, while dealing with the realities of shelter and place, ill family members, kids at home, school challenges and more. We dealt with the issues of racial injustice head on. We had open and candid discussions about race and bias, both conscious and unconscious. They were difficult and emotional, but it was the right thing to do as our culture also requires a workplace, where all are welcome and all are treated fairly. The weather required our teams to meet our customers' needs under difficult and challenging circumstances, made worse by the reality of the pandemic. Words cannot properly express my pride in the way our team delivered our product, which at the end of the day is as promised to be there for our customers in their moment of need. They delivered with speed, fairness and empathy.

[Steven English:]

Okay. Thanks, Mike, and good morning, everyone. STFC reported net income for the fourth quarter of 2020, which exceeded the same period from a year ago, driven by increased net investment gain and a much-improved GAAP combined ratio on a growing book of business. Investment gain reflects greater unrealized gains at FOURTH QUARTER 2020 than a year ago, along with marginally more net realized gains. This caps the year in which catastrophe losses along with COVID-19 dominated the headlines for the first three quarters of 2020. On an operating basis, STFC reported $0.66 income per diluted share for the fourth quarter of 2020, compared to $0.30 in the fourth quarter of 2019. On a year-to-date basis, STFC reported $0.19 loss per diluted share, compared to $0.59 income per diluted share for all of 2019. Fourth quarter 2020 operating earnings reflected improved underwriting results, while year-to-date operating earnings were negatively impacted by greater losses from catastrophes, including additions to specialty casualty loss reserves related to Hurricane Irma from 2017, as well as reduced net investment income. The fourth quarter 2020 GAAP combined ratio of 93.8, were 6.2 points better than the fourth quarter a year ago, with improvement reported in all three metrics

[Kim Garland:]

Thanks, Steve, and good morning, everyone. Our overall personalized and commercial line statutory results are the following. The Q4 2020 combined ratio is 94.5% compared to 97.1% for Q4 2019. Personal auto added 8.9 points to the overall personal and commercial lines combined ratio for the quarter. Our 2020 combined ratio is 103.6 points compared to 101.4 for 2019. Written premium growth was 7.8% for Q4 2020 versus Q4 2019, excluding personal auto written premium growth for the remainder of personal and commercial lines was 16.9% for Q4 2020 versus Q4 2019. Written premium growth is 10.7% for all of 2020 compared to 2019.

[Operator:]

The first question will come from the line of Marlot Becker .

[Unidentified Analyst:]

Thank you. So can you provide any kind of color on severity increases that we're seeing? And I think that's a trend we're seeing across the board. Can you talk about you know what you think behind it and whether you see it as something that is short term or sort of something we should think of as components in the industry?

[Mike LaRocco:]

Kim, you want to start?

[Kim Garland:]

Yes, so I'm going to assume this is a personal auto question. And if it's not, you can reframe me, but.

[Unidentified Analyst:]

I’m sorry, yes. I should have specified.

[Kim Garland:]

That's fine. Yes, we're seeing severity up, but not abnormally high. I mean, we're seeing some severity increases, but clearly dwarfed by the decline in frequency. So I think again, it varies by coverage, I think, collision severities are pretty stable from our perspective, we're seeing sort of more of the severity increases in bodily injury. Will they continue to stay at those levels? Maybe I think the biggest unknown at this point is there's just been a slowdown in the court system. And as the longer BI claims, they open the sort of more expensive they get. So if the speed of that cycle declines, we may see bodily injury severities. You know, sort of the rate of increase go down a bit. If you want to add anything, Mike.

[Mike LaRocco:]

Yes, no, I think you really covered it. But I will add, shifts and it really goes both to auto and quite frankly, all of our coverage’s. I think we're going to continue to see some inflationary pressure. I know that sounds strange, because we're not particularly suffering there. But you know, the cost of paint materials, and on the repair side of our business, whether it's on the property side, or whether it's automobiles, I think it really bears worth watching. So I think your question is super important. And obviously, it's something we keep a very close eye on. And coming out of COVID, there's just going to be a whole lot of things changing. And it really bears watching. But you know, obviously, Kim hit the nail on the head on the auto side. Appreciate the question.

[Unidentified Analyst:]

Okay, thank you for that answer. And then, in terms of what we saw in 2020, with no very severe weather patterns in certain markets, we're continuing to see unusual and very harsh weather into 2021. Does this in any way impact your strategy in terms of writing new business, you know, where you might put the brakes on in the near term or not?

[Mike LaRocco:]

Yes, I'll start and then Kim could agree or quite frankly, disagree; that's what's lovely about us. But again, another important question, I want to having open with that, I wanted to say that, we're obviously minor things right now with a very severe winter weather we're experiencing, particularly for the folks in Texas and we've spent some time making sure our associates are safe. And we're reaching out to our customers and hoping they're safe. This is really, a very severe event for people that aren't accustomed to this and the power outages. So we're thoughts and prayers going out to everybody to be safe. And I know our team is all over the situation and watching it carefully. Having said that, my view is strategically other than what Kim has already said, which is that we would like our property business to be more geographically diverse. And our position in a state like Texas, while it's our largest property, state, we're not that big in Texas. And so our problem isn't necessarily the size of our book in Texas, it's the fact that we need more business in Arizona and Illinois and Colorado, Turkey and all the other states that we're in. Now, having said that, the weather patterns are something that we watch very carefully and so it will affect kind of what we consider as cat loads and how we, that but that's something that Kim could probably address. So I'll turn it over to him.

[Kim Garland:]

Yes, I think Mike nailed it on the head, and how we think about it is just are we doing a good job managing cat risk, whether risk those sorts of things. And so he mentioned one, like, don't be over concentrated have spread a risk. And so, the discussions we've had over the past few quarters about what we're doing in Texas, especially with rate increases address that. I would say, you asked sort of if it changed our strategy, probably the biggest changes that I think is, the other part of this is you have to price the risk appropriately. And so you have to price the weather load and the cat load. And so I think, we will continue to see like reinsurance costs go up, and that gets loaded into the price that we charge consumers. So that's going to put upward pressure on rates. And then every year we like everybody else and we set rates we put in, like how much do we load in for cats. And given trying to pricing is both art and science. We probably smudged up the cat load a little more than maybe the math said this year just to have a little extra margin of safety. I think those are the two biggest things we probably did strategy wise are just sort of we up the cat load in our rates a little bit.

[Unidentified Analyst:]

Okay, thanks very much for those answers.

[Operator:]

The next question will come from the line of Ron Bobman.

[Ronald Bobman:]

Hi, thanks a lot and congrats on the quarter. I had a question about sort of the current, you know, bitter, cold and sort of snow storm that's across the south, and particularly as Texas. Could you go, obviously a lot of experience? Could you talk about the types of claims the industry is going to sort of experience, do you think it's more of a personal lines event typically, when you have severe weather of this nature in this part of the country? Be curious to get your sort of a little bit of a crystal ball. Honestly, state autos -- you know, unique exposure, but sort of the broader insurance industry. Thanks.

[Mike LaRocco:]

Yes, I'll start and then Kim or Steve can tag on. I literally right before this call got off a conversation with our Paul Stachura, our Head of Claims and Risk Engineering in events like this, I think this is going to be much more of a personal lines effect, that does not mean that there won't be some impact, obviously, on small businesses and even larger size, commercial risks. But these types of events where you get a lot of ice and quite frankly, wind and heavy snow, the impact on roofs and the impact on the home structures, I think tends to be a little bit more significant. I can tell you that and give you some state auto information that I can tell you that this will definitely be much more of a personal lines event for us. I know enough at this point. The challenge that we face in events like this is we just can't get in to the area and start helping our customers, which is super frustrating for our team. And the key is really power outages. And that's going to create other losses through the power as well. So these are broad strokes. But I appreciate the question. And I can say that my position is my view is that it'll definitely impact personal lines much more than commercial lines. But Kim or Steve, do you guys want to add to that at all?

[Steven English:]

This, Steve, I don't have anything to add to that.

[Kim Garland:]

Clearly more personalized events from what we're seeing so far.

[Ronald Bobman:]

And when you say personalized, because you mentioned homeowners, so within personal lines, is the kind of thing where basically people are sort of hunkered down at home and the car is probably not that, in any great effect impact is much more of a homeowner's cohort within personal lines that we're saying without specifically saying?

[Mike LaRocco:]

Yes, I mean it's always hard to again, early on, assume a whole lot that tends to happen in the early part of the storm is you get some other significant amount of auto losses, because when people are trying to where they can hunker down, right. So there's, you know, a lot of ice and very difficult driving conditions. But in a case like this, where you have this kind of ongoing weather event in most cases, people are exactly as you suggest, they're not going anywhere. And the event really, and the trauma of the event happens when they have issues with their homes. And that's where the power outages at a high level of complexity and challenge to folks, and it's a very difficult situation, but I think it moves from early days of being some auto losses to becoming much more of a residential challenge.

[Ronald Bobman:]

Okay, thanks for the color. Best of luck.

[Operator:]

We are showing no further audio questions at this time.

[Mike LaRocco:]

Okay. Nicole, thank you very much for that. Natalie, you want to close this out then?

[Natalie Schoolcraft:]

Yes, Mike. 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 first quarter earnings call, which is currently scheduled for Thursday, May 6, 2021. Thank you and have a wonderful day.

[Operator:]

Thank you. That concludes today's fourth quarter 2020 earnings conference call. Thank you for participating. You may disconnect at this time.