Q3 2020 State Auto Financial Corp Earnings Call
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At this time all parties are in a listen only mode. After the speakers remarks, there will be a question and answer session it'd be with lights off the question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
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 state auto financial corporations director of Investor Relations Natalie Schoolcraft.
Thank you Sir My Rhea Good morning, everyone welcome to our third quarter 2020, <unk> earnings Conference call today, I'm joined by our Chairman President and CEO like Morocco senior.
Senior Vice President and CFO, Steve English senior Vice President of personal and commercial lines and managing director of State Auto Labs Kim Garland.
And your vice President of data and analytics, Jason Bercy.
Actuarial officer, Matt real thick, and Chief investment Officer, Scott Jones, after our prepared remarks, well open the lines for questions.
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.
Such risk factors may cause actual results to differ materially from those contained in our projections or forward looking statements. These.
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.
Antelope schedules containing reconciliations of certain non-GAAP measures along with other supplemental financial information are included as part of our press release.
Additional material titled monitoring our progress has been made available on our website <unk>.
Calm and along with the press release can be found under the investors section now I will turn the call over to Stfcs, Chairman, President and CEO, Mike Morocco.
Thanks, Matt and good morning, everyone first of all I'll say hope you and your families are safe and healthy as we continue to navigate our way through these difficult times.
Well the third quarter continued the story of 2024 state Auto Cat Oh.
We had the third consecutive quarter of cat activity that exceeded our plan number and was significantly higher than the prior year as.
As usual our claims team was terrific handling these claims with the speed and empathy or customers have come to expect from this outstanding team.
The impact of catastrophes and weather in general has obviously been the main story of 2020 regarding our results.
However, the most important message as of quarter end, but here is the ongoing improvement across all of state auto.
It begins with our underlying non cat loss ratios the key indicator when it comes to profit.
Across nearly all lines of business, we continued to make progress in this area I'm very pleased with the pricing and position in the market of our products.
Product management teams have continued to analyze our results.
We view the competitive position and then adjust and improve our pricing models.
I Love all sophistication. This work demonstrates the benefits of our talent and our digital platform.
We built an organization and technology that can deliver continuous improvement Kim.
Jim will cover the details of our non cat loss ratios by product.
Another area, where we see the value of our platform is our ability to efficiently add scale, which of course leads to improved expense ratios in the midst of a pandemic we continue to grow.
Our agents have seen that our technology and our team has not missed a beat during these challenging times.
This is a clear differentiator in the market and our agents have responded.
They know we can issue in service business, regardless of the challenges.
I'm very pleased with the growth we've achieved and we still haven't hit our stride.
Let me speak specifically to auto I'm thrilled with where we're positioned with our auto product. It's a one product where we had to make a number of adjustments and changes to our pricing model.
In addition, as our first product on the digital platform. The slide also had to deal with all the bugs in the system I take full accountability for early missteps now we've overcome these issues and are in the market with a product and platform delivering in this critical why.
Current accident year results demonstrate improvement our mix of new business for preferred true non standard is meeting our expectations more.
More importantly, really frequency and severity numbers are behaving as planned.
I'd like to comment on Cobra, 19, and specifically business interruption coverage under commercial property policies.
I'm pleased to not surprise in the majority of cases early rulings nationwide, mostly had motions to dismiss have found in favor of the industrys position that the pandemic does not create a physical loss.
Or damage to property and that and shirts cannot extend their property coverage for pure economic losses.
We have confidence that as prevailing view will continue and will ensure that coverage will not be expanded beyond what was anticipated and the various policies.
For those very few early rulings that we have seen that do not support the industrys position. We believe these will be the exception then in each case, we believe that we're able to differentiate our situations from those decisions on specific facts related to our approach and position.
Now before I conclude I'd like to take a moment to share a milestone achievement and reflects just a bit.
Last month, we launched our workers comp product on our digital platform connect.
This means that in five years, we were able to bring every one of our products onto this new platform personal auto home dwelling fire personal umbrella commercial auto by CPP commercial umbrella farm and ranch and now workers compensation.
We took an outdated company without dated products and technologies and in five years have transformed it into a digital organization thinking.
Think about that for just a minute.
Tim will cover the impact of what we have done in more detail.
Now before he gets that let me first pass this along to Steve Steve.
Thanks, Mike Good morning, everyone.
For the quarter STFC reported 26 cents net income per diluted share with an operating loss of 10 cents per diluted share. This.
This compares to 25 cents net income and 34 cents operating income for the third quarter of 2019 on the same for share basis for the nine months STFC reported a diluted per share basis net loss of $1.57.
Operating loss of 86 cents and this compares to $1.25 net income per diluted share of 34 cents operating income per diluted share for the first nine months of 2018.
Cat losses, net investment gain and loss in Cove at all impact these period over period comparisons and not necessarily in the same way to putting a focus and whether looking at quarter or year to date results.
Let's start with cats catastrophe losses are a big part of 2020 results with cat loss ratios, increasing 13.3 points for the quarter and 10 and a half point year to date as compared to 2018.
Third quarter 2020 was impacted by two significant storms, one from 2017 to one that occurred in the quarter.
We have spoken about the impact on earned a loss estimates from the legal environment in the state of Florida and the involvement of public Adjusters recent court decisions have caused us to reevaluate we made a decision to increase our estimated ultimate losses by recording additional IP and are we.
We are now fully reserved after the retention of our property cat reinsurance treaty that was in place at the time of the storm and do not expect any significant further adverse development as a consequence.
The second thing given event of the quarter was the duration that primarily impacted the state of Iowa.
Our loss estimate for that storm impacted our cat loss ratio by 4.6 points storm.
Primarily from the 2018 and 2019 accident years commercialized development continues to be favorable.
Across all product lines and in particular small and middle commercial along with workers compensation.
The GAAP expense ratio is essentially flat with 2019 after nine months no significant adjustments were recorded to the bad debt allowance directly as a result of cobot beyond what we booked in the first quarter of 2020.
There were some note payable changes in the quarter in early September we retired Stfcs five year note with the federal home loan bank, replacing it with a new 10 year note in the same amount of 21 and a half million dollars. The new interest rate is fixed at 1.37% versus the expiring rate of 1.73%.
In addition, the $60 million Federal home loan Bank short term loan entered into.
On March 19th matured and was repaid in full on September 22nd.
And with that I will turn the call over to Kim.
Thanks, Steve and good morning, everyone.
On October 29th workers comp connect launched in Texas. This is our last product line to launch on the connect platform, we're thrilled and its probably appropriate to look back at the impact that the connect program has driven at state auto since 2015.
From the first day in 2015, the goals of the connect program where the following.
Increased scale reduce expense ratio reduce our non cat loss and LAE ratio replace and upgrade our technology to give us a competitive advantage replace and upgrade our products and pricing models to compete with the best prices in the industry.
An awful long.
To understand if the strategy is working or not it has worked in three of our four product lines.
Commercial auto as the Best example of this with a 220 16 pre connect expense ratio of 38.5%.
This increased to 46, 25% and 2018 as we made our investment in connect but the year to date 2020 expense ratio is at 34.3 per cent of 4.2 point improvement in van Preke over pre connect.
Over the next two years, we believe the commercial auto expense ratio will get below 30%.
This expense ratio reduction strategy has also worked in small commercial who's pattern is very similar to commercial auto and homeowner's, where this pattern has been slower and more gradual personal auto is the product line, where the strategy has not yet been effective as it expense ratio has actually increased after the implementation of connect as I've told you on prior calls.
We may Miss steps and personal auto with the primary one being our balance between preferred in non standard business skewed too heavily towards non standard which has a very low retention, we were putting inefficient business on an efficient platform. This combination still produces overall inefficiency.
The increase in the personal auto expense ratio is not from a bad strategy, but from poor execution of a good strategy I will update you on our progress and personal auto later in this discussion.
With the connect product builds being completed you should start to see two things one the same pattern of expense ratio reduction to show up in the remain product lines over the next couple of years and two since there are no more new connect builds to invest in improvements in all the product line should result in state autos total expense ratio starting to decline.
Progress on our non cat loss in L. A ratios the non cat Lawson Aly ratios have been driven from the 50, 758% range of 2015 down to the 49% to 51% range currently.
Non cat loss and I'll, let you ratios in the 50 range with declining expense ratios should be sufficient to produce mid nineties combined ratios consistantly overtime.
Progress on evolving our distribution plant insurers categorize agents in a variety of ways, we categorize them in the following way retail agents network agents platform agents and corporate agents and 2015, we were heavily weighted in the world of retail agents, who we love, but we were under waited in the network agent World and we did zero business with <unk>.
That form agents to I eight categories that were rapidly innovating and growing over the last five years, we have seen a significant shift in the distribution of our business by agency category Personalize. It is a good example of this phenomenon and 2015 or Personalised new business was distributed in the following proportions retail 63% <unk>.
At work, 30% platform zero corporate agent seven per cent through nine months of 2020 or personalized new business is distributed in the following proportions retail, 35% networks, 54% platforms, 8% in corporate agents three.
This major change in how our business is distributed as a sign that we are now effectively competing and all the methods of distribution in the independent agency channel.
[noise] progress on our technology products and pricing models for what we call. The connect platform. The historical model for insurance technology products and pricing models was that a carrier would do a big build and then wait an extended period of time two to five years to do another big build our technology product design and pricing models for every single product line happy.
<unk> from the periodic big build model to a continuous improvement model for pricing models, you hear US talk about versions personal auto version two dot one homeowners version three Dot O commercial auto version two daughters small commercial version two dot too and this approach our pricing models are continually improving every quarter enhanced Mister <unk>.
Made and this is a very different impact on the approach we're ones pricing models improve only once every couple of years.
And for our technology, we're converting from the big build teams for connect to small product teams that are continually enhancing different parts of connect and 2015, we starting to somewhat place, where we had fallen behind the industry in a number of areas or conversion to this operational model of continuous improvement is to help ensure that this never happens again that we knew.
Never fall behind and have to dig ourselves out of a hole.
Progress on the participation in the world of ensure tech and being prepared for this era of innovation and disruption in the insurance industry.
And 2015 stayed at her to not participate in the world of insure Tech stay dollar labs stayed all those corporate venture capital Fund was created in 2016 and since that time 24 ensure tech startups have been implemented Interstate auto insurance operations and six investments have been made without connect we would not have been able to integrate this number of ensure texts into.
Our insurance operations it would have been impossible on our legacy system and.
In the first quarter of 2020 coverage or a new source and researcher of the ensure tech World survey the participants to be insured Tech World and released their list of the top 11 insurance corporate venture capital funds and ensure tech partners in the industry stayed auto labs was on that list of the top 11, we believe that the insurance industry is still at the beginning of a period of man.
<unk> innovation disruption and it is critical to be connected into the into your tech world.
As we reflect on the impact of connecting all of the efforts surround and connect we believe it is accomplished all the goals that we established back in 2015, when we started and that has positioned us well to be an extremely successful and sure over the next decade. It is impossible for us to adequately. Thank all of the state auto associates for what they did to implement to connect program.
We have posted to the investors section of our website in greater detail the data I have referenced this morning.
Now on the third quarter results overall, personalize and commercialized statutory results. The following third quarter 20 combined ratio is one O 2.2, compared to 98.7 for third COVID-19.
Third quarter 20 year to date combined ratio is $106 nine compared to the 102.733 219 year to date written premium growth was 9.2% third quarter 20 versus third COVID-19, 11.4% year to date, 2020th compared to 2019 year to date.
For the quarter commercial lines had a combined ratio of 88.9 and written premium growth of 8.3% and personal lines had a combined ratio of 111 25 and written premium growth of 9.7.
To appropriately understand our results there are quite a few things to unwind or.
Or quarterly results catastrophes or again, the story of the quarter catastrophe impact on our third quarter 20 results were the following.
[noise] Personalise intolerance lines Cat loss ratios were 9.9, 0.532, 19, with personalize 11.6 points higher commercial lines 7.6 points higher.
Non tat Lawson Aly ratios are at our plan for three 220, personalizing commercialized non cat loss ratio was 6.3 points lower than three 219.
Personalized being 2.3 points lower than commercial lines being 12.2 point slower.
Non cat Lawson Aly prior accident in your loss ratio impact.
<unk> personalize and commercial lines non cat loss ratio accident, you impact was 0.4 points lower than four 419, the personalized non cat loss ratio. Prior your accident. Your impact was five points higher than three 219, while the commercial lines non cat loss ratio prior accident. Your impact of seven was 7.9 points lower than three.
219.
The overall impact of prior accent yours was roughly the same as last year, but there was a meaningful shift between personalize a commercial lines.
Non cat Lawson Aly current accident your loss ratios, the personalize and commercialized non cat current accident. Your loss ratios were 5.9 points lower than three Q 19, with personal lines being 7.3 points lower than commercialize being four three points lower this improvement in the current accident or is driven by two factors covid.
And the actions that we have taken and personalized to address the issues that we discussed on the first quarter earnings call. We feel very good about where we are positioned catastrophes happen in 2020 is a horrible catastrophe here, but when we look back of a total of the past six years are actual cat loss ratio is virtually identical to our plan cat loss ratio.
We have to we managed over an extended period of time understanding there will be individual a horrible catastrophe years, along the way we feel good about our catastrophe management.
The adverse party prior year reserve development and personal auto as part of the price what you're paying for the personal autumn Miss steps, we made in 2018 and 2019.
The improvement in current accident your loss ratios get them to where they need to be to consistently produced midnight. These combined ratios and as I explained earlier being at the end of the connect program means that expense ratio improvements just start to flow into our total results. Some updates in our in our individual product lines personal auto the personal auto come by.
And ratio for third quarter, 20th was 104.7. This was driven by 7.8 loss ratio points from prior accident years. This is nine points higher nine point higher impact some prior actors in years, then in third COVID-19, and as I said before this adverse prior year reserved development and personal auto as part of the price we are paying for personal auto.
Steps, we made a 2018 and 2019.
The third quarter 20 current accident year lost mail a ratio of 56.4 is 11 points better than a year ago and third quarter 20 year to date is 11.3 points better than a year ago.
Are shifting to less non standard and more preferred is progressing as expected connect version to that one has been approved in 20 states and we are seeing the changes and competitiveness across the preferred through nonstandard risk spectrum that we expected connect.
Connect ultra preferred and prefer policies enforced group is 42% as of 930 20 versus prior year, while connect nonstandard pith growth is minus 13% as of 930 20th versus a prior year.
As of 930, 20th for the first time and connects history Ultra preferred and preferred connective is larger than nonstandard pill.
The shift is driving an increase in personal auto retention as personal auto retention is up 1.7 points to 68.4 since December 31st 19.
In another sign of the shift personal umbrella new business sales were up 123% in third quarter, 20th versus third COVID-19, we were pleased with their progress through 2020 and personal auto, but there's still work to do in this product line.
Homeowners catastrophes or again, the story of the quarter for homeowners, where the cat Lawson a lady ratio of 30.4 compared to 9.2 in third COVID-19 gross continues to be strong and homeowners with written premium growth rate of plus 21.7% policies enforced growth rate plus 16.1% new business.
Account growth rate of 16.2% and retention level of 76, seven which is up 1.2 points. Since December 31st 2019, the improved personal auto right competitiveness from personal auto connect version to that one is helping homeowners retention.
[noise] commercial auto or commercial auto results continue to be just terrific with third quarter 20 results of the combined ratio of 94.3 total written premium growth of 44.4, new business premium growth rate of $46, seven and a premium retention level of 84.1.
Middle market small commercial in workers compensation results in third quarter 20, we're all impacted by prior access to your loss ratios that were much more favorable than a year ago, while middle market and small commercial results in third quarter 20, we're also impacted by much higher cat loss ratios than a year ago.
The workers comp third quarter 20 current accident or loss ratio of 82 point. She was 18 points higher than a year ago, driven by five large losses in the quarter.
Middle market growth, we are seeing a slowdown in middle market submissions agents are telling us the middle market policy holders are more hesitant to move chairs at this moment in time or third quarter 20, middle market, New business written premium declined 39.8% from a year ago and our total middle market New business written premium was flat from a year ago, we rolled out aided.
Digital stays for middle market connecting September, bringing the total states on middle market connect to 16.
Workers compensation growth our workers compensation business has shrunk for several years due to for reasons. One we exited monoline small workers' compensation business sold through wholesalers, which I consistently been unprofitable.
Two we have maintained right discipline, while the market has been significantly decreasing rates over the last several years and this put significant downward pressure on retention three.
Three we are currently non renewing our nursing home workers comp policies and fourth and the last reason is that our workers compensation business was sold on a separate system from the rest of state autos products, making it significantly harder to package worker's comp with the rest of our commercial products. This.
This changed on October 29th with the launch of our first workers comps connect state, Texas Workers' compensation will now be on the same platform as the rest of our products and we anticipate this significantly accelerating our growth of our workers compensation business reversing several years of premium decline. The last few years of work have now positioned our worker's comp business for significant.
Future success.
Farm and ranch results continue to be terrific farm and ranch connected and I launched in 27 states.
Third quarter 20 results versus a year ago or the following new business written premium growth rate of 202% total written premium growth rate of 31.6% Ah combined ratio of 101.4, which includes a catastrophe loss ratio of 22.1, which is 18.9 points higher than third COVID-19 and elevated.
[noise] expense ratio of 45.1% as farm and ranch is at the height of its connect investments and a non cat Los an allergy ratio of 38%, which is 13.5 points lower than third COVID-19, our farm and ranch businesses position incredibly well for future profitable growth. We're excited about how our product lineup is currently position.
[noise] for future success and with that we'll open the line for questions.
As a reminder to ask a question you would need to pass.
And your telephone.
Question passed the pound key please.
<unk>.
[noise] compiled roster.
Your first question and they'll come from Palm Neeson. Please proceed.
Good morning, everyone, hopefully, you're all safe and well.
I wanted to ask about the.
Underlying combined ratio.
Improve it in a year, obviously been positive, but how should we think or do you have any thoughts about how we should think about the the the windfall, but we've had because of the pandemic person sort of the.
Quote unquote real underlying improvement to give us a better sense of where you are as we look past not done with the.
The pandemic.
Kim you want to start off and how may jump in a little bit.
Sure so.
So I think you know how.
How I would think about the the covid benefit is I.
I think second quarter 20 results were probably the the vast majority of the benefit was from Covid and we had just started the process of making improvements in personal auto I think the other thing that is worth mentioning from Ah Ah.
Covid type world and after it is we and others in the industry are in the process of pumping a lot right into commercial property. So that's and not a lot of that right had had gotten into the system. Yet. So I'd say second quarter benefit is mostly covid in third quarter what.
We see is miles driven has gone up cause it's not gone up too tree covid levels and the miles driven are different in some ways. You don't have really rush hours like you had three covid. So there's still covid benefit in the third quarter.
But the the proportions are now that part is shrinking and the larger part is at least for personal auto the actions that we have been taking and more of the the rate is starting to get in to commercial property. It's still early we still have a lot of right that that needs to.
<unk> and for commercial property, but I think in each quarter going forward, you'll see as the Covid quote unquote benefit burns off the sort of action that that percentage of impact on our results will go down but I think we are filling it in with some of the actions that we started back in the first quarter of 22.
<unk>.
Yeah, Paul this tag on a little bit in just a couple of years I completely agree with with Kim I think that directionally or kind of where we believe we can be there's no question that we've taken some real benefit and I'm always hate to talk about benefit from something as tragic as covid.
But the impact you know from a financial standpoint, there's been benefits, but in addition to the right Kim talked about and some of the other changes from a modeling standpoint, we've made some significant improvements in reducing things like lost leakage in in areas in our underwriting organization that.
I believe have been significant our claims and risk engineering organization has had a terrific impact.
During this period of time, they've been able to implement some real digital approaches to handling claims.
They've been able to reduce some of the pending across the spectrum of the many of the older claims and I think when you take into consideration the right.
The modeling changes the underwriting improvements and then the claims and risk engineering organization were emerging from this period of time I think in a in a in a pretty good place. The only thing we all have to be cognizant have is you know people.
You know in here early days of Covid, we're talking about as Kim said miles driven and shelter in place impacts, but you know obviously the impact of Covid, It's gonna extend minimum way through the first quarter of next year now it may trend a little bit differently, but I think the reality of the Covid impact I lost.
Is will linger for you know minimally another six months. So that's the only thing I would add to what can sir.
Thank you that's that's great and then my.
Just keep you give us a sense of the competitive environment, particularly in personalize, obviously lots of talk of.
Right.
At least down for some of the companies that have reported so far and lots of is your tech stuff, which I don't think it's that big a deal, but uhm just give assistance with <unk>. Your markets. What you think is going on from a competitive perspective.
Go ahead came out again follow you yep, Okay. So I think in in personal lines.
You know we.
We have not seen you know sort of a large changes in a couple of the competitive dynamics. So.
For us one of the things you know that there are a number of things to look at I think one is like your your your quote volumes in your new business levels. You know in homeowners. We continue to have all time highs and new business sales.
Great is starting to increase in more state so it's becoming broader so quote volumes.
You know the new business sales and the work we do in trying to understand the competitiveness of our rates, we've not seen big changes in that dynamic. So homeowners is is kind of a minimal.