Q1 2021 State Auto Financial Corp Earnings Call
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Compared to about 66500, French Bulldogs other top breeds include German shepherds Golden Retrievers Bulldogs and poodles.
Identical twins are not exactly genetically the same according to new research from Iceland, That's published in the journal nature genetics. The associated press. So scientists sequence DNA from nearly 400 pairs of identical twins as well as from their parents children and spouses, which allowed them to find.
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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. If you'd like to ask a 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.
Now I'd like to turn the call over to Natalie Schoolcraft controller, and Investor Relations Director of State Auto Financial Corporation.
Thank you Lori good morning, everyone welcome to our first quarter 2020 One earnings conference call today, I'm joined by our Chairman President and CEO, Mike <unk>, Senior Vice President and CFO, Steve English.
On your 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 after our prepared remarks, we'll 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 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 on our annual and quarterly filings with the Securities and Exchange Commission.
Angel 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 at state auto Dot com and along with the press release can be found under the investors section now I will turn the call over to S. A S east.
Chairman, President and CEO, Mike Morocco.
Thank you, Matt and good morning, everyone I hope you're on your families continue to be safe and healthy as we navigate what we all hope it's the final stretch of the pandemic we.
We just completed a very solid first quarter coming on the heels on an excellent fourth quarter on.
Obviously, the headline numbers look great, but we all know they do not tell for full story.
The freeze that primarily hit Texas was the event that drove those headline numbers. It was both unusual and do the Texas infrastructure weaknesses worse than it should've been.
Regardless this catastrophe drove the overall combined ratio for the quarter and unless one takes the time to pull back recovers overshadowed what was a strong quarter for state auto.
Let's look under the covers.
We've been telling you about our efforts 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 delivery can.
To be clear we saw much work ahead and no one is declaring victory but.
While we are pleased with our progress to date 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 Ken will cover this in more detail on.
We remain happy with this business and the way we've designed the product and how we're leveraging technology with regards to risk evaluation and inspection.
Homeowners insurance pricing and underwriting is changing rapidly with advancing technology and we are built for those changes.
Commercial lines continue to perform exceptionally well in terms of both profitability and growth.
Turnaround over the last five years has been remarkable and we are only on the cost from what we can achieve across these products.
As a regional it's critical to be as diverse as possible, both geographically and byproduct.
We are beginning to deliver on both.
The product diversity can once again be seen in this quarter's commercial results.
It's also important to note that every product line, except homeowners and Bob we're profitable on the first quarter. The only two lines that Miss were disproportionately impacted by unusually bad first quarter cat events.
Any average first quarter cat load over the last five or 10 years and using that lends to review results would show that we indeed did have a solid first quarter.
I'm also pleased with our continued efforts to drive down our expense ratio.
We've taken out a lot of unnecessary expense over the last six years and continue to push process improvement leveraging both technology and operational change.
While these efforts are ongoing and we know that the biggest opportunity is achieving scale. We now have all our products on our connect platform a truly amazing accomplishment for five five for your time period. In addition, we have rebuilt all of the products that were put on that platform.
This work has resulted in an industry, leading digital platform and products that are supported by sophisticated pricing models and strong underwriting or.
Our solid non cat loss ratios reflect these efforts, while we will continue to get better with both platform and products. The key pieces are in place now, it's about adding profitable volume, which will drive down the expense ratios in the coming quarters and years. We are built to do just that.
The industry continues to receive primarily good news regarding the COVID-19 business interruption claims for there've been no changes on our limited number of cases, the industry trends bolster our cautious optimism on these cases.
Now a quick word on rising costs.
We're clearly seeing inflationary pressure as we settle claims.
There are rising prices across labor parts and materials as a result, we are reacting by staying ahead of these trends by taking appropriate rate.
Im not raising an alarm we do feel the trends are real and will impact pricing going forward.
Finally on certainly has seen the news both sad and happy that Steve will be riding off into the sunset at the end of the year.
I want to take just a moment on this call to thank him for all he has done for state auto as our CFO.
I know all of you have benefited from his knowledge insight.
On the unusual sense of humor.
For me personally he has been a trusted advisor and a friend.
He will be missed I cannot be more happy for Steve and his wife Didi. They are looking forward to enjoying the next part of life's journey, and especially those Grandbabies, let me turn it over to Steve.
Thanks, Mike and good morning, everyone I'm not sure who has the most unusual sense of humor, but thanks for the kind words.
S T. A C reported $3 $6 million on 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 <unk> 61 per diluted share compared to a loss of $7 8 million for 18 cents per diluted share the same period a year ago.
Similar to last year, the first quarter of 2021 was significantly impacted by catastrophe losses catastrophes.
Catastrophes comprised 21 points on the $112 nine GAAP combined ratio and were driven by winter storm here, and viola, which were primarily personal lines events.
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 deserved.
2000, Twenty's first quarter cat loss ratio of 12, 7%.
It was impacted by the Nashville tornado, which was heavily commercial lines.
First quarter 2021 GAAP combined ratio was five seven points higher than 2000, Twenty's first quarter ratio of 107 two.
Katz for up seven four points for the GAAP non cat 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.
As a reminder, our group retention is $90 million for the 5% co participation with limit stopping on a $270 million.
Excluding reinstatement premium and the co participation along with our retention for winter storms added 17 points to the personal and commercial statutory combined ratio, leaving.
Leaving just shy of four points from other catastrophes.
Last year in the first quarter on the same basis for Nashville tornado contributed eight three points, leaving just over four points from other catastrophe losses.
Net favorable development on prior year, non cat loss and ALAE reserves from 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 on.
$800000.
Compared to adverse development of $5 2 million in Q1 2022.
Homeowners, which developed favorably by $2 1 million in Q1, 2021 compared to adverse development of $2 2 million in Q1 2020 and.
And three commercial lines developing favorably by $21 8 million in Q1 2021.
Turning 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.
The personal and commercial statutory expense ratio for the quarter of 33, 5% from.
Appears to $34 eight in Q1 2021, three point improvement.
While costs, such as estimated variable comp for agents and associates, along with other expenses such as bad debt can vary quarter over quarter, but we are beginning to see the benefit of our investment in connect.
As more premium is added to the platform and the amount of yearly spend on building and rolling out connect wanes.
Overall net written premium grew three 7% for the quarter compared to Q1 2020 personal lines declined three 2% driven by personal auto as well as property cat reinstatement premium in homeowners.
Commercial lines grew 13% led by commercial auto and farm and ranch.
First quarter equity and other invested asset valuations continue to be on the rise.
While bond values fell due to rising interest rates net.
Investment income for the quarter was lower than Q1 2020.
It was this time last year, we announced our exit from Mlps.
And anticipated.
Net asset class shifts along with persistent low interest rates would put downward pressure on net investment income.
And finally as Mike mentioned, there is not much to report on COVID-19 business interruption. Since we spoke in February we still have had 21 lawsuits filed and we still have 14 currently pending.
And with that I will turn the call over to Kim for more product color on first quarter results.
Thanks, Steve and good morning, everyone.
Overall, our personal lines and commercial lines statutory results for the following <unk> 21, combined ratio was $112 eight compared to 107 three for <unk> 'twenty cat loss in LAE related to Yuri and Viola contributed 17 points to the overall personal and commercial lines combined ratio for the quarter.
Written premium growth was three 7% from <unk> 21 versus <unk> 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% on a 93, 6% combined ratio, which includes seven eight points of cat loss on the O N E. A higher cat loss ratio than we typically see in the first quarter for commercial lines.
Our commercial lines <unk> 'twenty, one expense ratio of 36, 8% is three three points lower than <unk> 'twenty.
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 connects day 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.
Commercial auto or commercial auto results continue to be terrific with $1 21 results of the combined ratio of 98, eight and written premium growth of 49% the.
For commercial auto expense ratio continues to improve as we achieve scale on this product line with a 31, 6% expense ratio in <unk> 21, representing a three four point improvement over first quarter of 2020.
Small commercial <unk> 'twenty, one had a combined ratio of $112 three with written premium growth of nine 7%, including 16 five points of cat loss and LAE ratio.
Higher amount of cat losses than we typically see for small commercial in the first quarter.
Growth continues to accelerate in our small commercial product line and the combination of accelerating growth in our more efficient platform produced a <unk> 21 expense ratio of 32, 8% representing a four two point improvement over first quarter of 2020.
Middle market had a combined ratio for the quarter of 95% with written premium being flat year over year.
<unk> 21, new business written premium was down over 50% versus first quarter of 2020 towards the end of the first quarter, we started to see increasing traction in CPP connect on submissions and we are optimistic that we are getting towards the end of the connect learning curve for middle market, and we anticipate middle market new business picking up in the second.
Quarter of this year.
Workers' compensation had a combined ratio for the quarter of 56, 7% with 55 eight points of favorable prior year development and written premium growth of negative 15% by.
By the end of May we will launch workers' comp connect in 'twenty for states and we will finish the workers' comp connect state rollout in August or early workers' comp can that Mac connect metrics around submissions quota submissions ratios straight through processing ratios on closure ratios look very promising.
After years of our workers' compensation products shrinking we are all looking forward to getting back into growth mode.
Farm and ranch first quarter of 'twenty, one had a combined ratio of 88, 9% in written premium growth of $34 five per cent and absolutely terrific quarter, Our farm and ranch business is beginning to see the impact of the connect investments starting to burn off and the benefit of increased scale as the <unk> 21 expense ratio of <unk>.
39, 9% is a five six point improvement over first quarter of 2020.
For personal lines in the fourth first quarter, we had a combined ratio of $125 nine and written premium growth of negative three point too.
On a direct basis, our personal lines written premium growth was essentially flat.
Our first quarter for personal lines was a tale of two stories first for personal auto we had a very solid quarter of progress on our work of restoring profitability to our personal auto business as our first quarter personal auto results were very close to what we expected per.
Arsenal Auto had a <unk> 21 combined ratio of 98, 9% with written premium shrinkage of 14, 8%.
There was no personal auto prior year adverse reserve development this quarter.
<unk> 21 loss in LAE ratio of $59, two is where it needs to be for us to hit our 96 personal auto target combined ratio.
<unk> 21 expense ratio is down half a point versus first quarter of 2020.
Non standard policies now make up around 12% of our total personal auto policies. This percentage is in line with where we think it should be on.
Personal auto restoration plan is proceeding as expected and it is now time to start to work on adding growth to this profitable foundation.
Sure.
For homeowners the story of the first quarter was the Texas winter storms and continuing to take rate.
Our home product line had a first quarter 'twenty, one combined ratio of 149, 3% and written premium growth of five 6%, which was reduced by four three points of reinsurance reinstatement premiums. This included a cat loss and ALAE.
The ratio of 54, 4% compared to 13% in first quarter of 2020.
We have launched home connect three dot O in 11 states through the end of March and another for state. So far in second quarter through a combination of base rate increases rating segmentation changes policy aging and inflation factors on connect on Kinect three data zero renewals through the end of March we have seen full term renewing.
Premiums on Kinect $3.
30% higher than full term expiring premiums with the Texas, and Michigan average as being higher than 30% and countrywide ex Texas, and Michigan being around 17%.
In first quarter 'twenty, one 6% of our homeowners earned written premium was on connect III auto.
And 46% of our homeowners written premium was on connect three data rates.
We are pleased with where the business is positioned commercial lines is consistently producing profitable growth our personal auto profit restoration plan is proceeding as expected significant rate is flowing into the system across our homeowners commercial auto small commercial and middle market product lines and expense ratios are falling as we add.
The connect investment period and begin to capture these benefits and a lower organizational expense ratio with that we'll open the line for questions.
Thank you as a reminder, if you'd like to ask a question. Please press Star then the number one on your telephone keypad again that is star one to ask a question. Our first question comes from the line of Derek on.
Good morning, Thanks, a lot for taking my question you talked a lot about inflationary pressures on how you are.
Adjusting for those trends for pricing can you give us some quantification on how much youre adjusting your loss picks for maybe where the loss trends are running yet and is it are the adjustments being made.
Mostly made into personal home business.
Yes, let.
Let me start growth and then turn it over to Kim to be able on a more specific.
We're definitely seeing as I as I mentioned in my comments.
There is definitely inflationary pressure, there's no doubt in my 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 on across the board issue some of the largest increases on.
In materials.
Debt.
I used to rebuild homes and businesses so.
That's kind of where we're seeing the most significant so I'll, let Tim kind of touch on how we're addressing that from a ratings standpoint.
Sure and I'll 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 were taken and we're also seeing coverage amounts increase until we get right through both of those.
In middle market. These days, we are probably taken 13% to 15% in rate with more of that coming in property lesson 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 of the.
These rate increases on on the small commercial side property as higher liability is lower and in homeowners I told you.
We are taking in connect three dato, we're seeing about 30% in premium increases now in a state like Texas.
That's inflation, but some of that is we've increases cat and weather loads in Texas as I said outside of Texas, and Michigan, It's about 17 to 18 points of rate.
And.
For auto we are.
We're seeing a 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 dropped things going up are the sort of profitability actions that we're taking are are pushing things on the other direction. So we're not taking as much overall right there, but that's what we're seeing.
Okay. That's really helpful. And then my second question is about the auto connect product.
Many states as they rolled out are now and really with the New York connect products, they get for both personal auto and home.
How is it impacting your retention.
Your retention levels.
Go ahead Kim.
And is this for auto is this more personal lines on commercial lines Youre asking for the personal lines on.
So for the personal lines.
From I guess, we are in.
I think there's only a handful of straggler states for two dot one that are hard to get approval and so we're probably in 25 ish of our 28 states. So it's almost everywhere.
What we see is.
Sure.
Over the past year, our preferred connect policies in force growth is around 35% to 40%. So we're seeing traction there while our connect non standard Pip has shrunk about 20%. So those are the impacts we're seeing.
Sure.
Okay. Thank you for all the answers.
You bet.
Once again, if you'd like to ask a question. Please press star One. Your next question comes from the line of Paul Newsome.
Your line is open please state your question.
If you have your phone muted please on mute it.
I'm, sorry, if I'm on needed there for debt.
My congratulations to steep for the long time, great great. Great have you help us out over the years and very much appreciate it.
Your sense of humor as well.
Thank you Paul.
I wanted to ask about.
Claim or maybe just some more thoughts on auto claim frequency given the pandemic.
I think most people companies as to a windfall that's fairly significant.
And then tell profitability, but.
<unk>.
Presume driving will come back in.
How should we think about that when we look at specifically state on those results and.
Just your thoughts in general on that topic.
Yes, I'll, just very briefly starting to say that we're at.
As well as other we're seeing a significant drop in frequency again timken at a little bit more color commentary there.
And I think the thing that's unusual Paul about ours is all the good work that net came and Lindsay and the team have done an auto has also created this seismic shift in our business to more preferred and much much less non standard business. So youre also seeing the in addition to just for COVID-19 effects.
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 lining up and.
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 Palm, just a second but <unk>.
Jim you want to.
Add some color commentary there sure.
There are couple of moving pieces, Paul on I'll try and talk to them to think about our personal auto results.
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.
Thats why this first quarter not seeing adverse development on prior years.
Sort of a win or a good guy for us, though we like to see.
And then.
Sort of going forward I think Mike touched on one of them. So there is this.
Sure.
So there is this frequency drop that I think is just natural in the industry and there are these severity increases both on non physical damage and liability. So we we see that with with like all the others.
But I think if.
If you look at our total auto book, we're probably seeing greater frequency declines than the average carrier because.
As we shift out of non standard into preferred preferred just has lower frequencies. We have the benefit of the overall industry sort of phenomena and then we add on that our mix shift now.
Look we don't manage our book of business is as one big Blob, we manage it as preferred standard nonstandard.
So we're not letting that sort of extra frequency decline kind of fool us so.
So that's that's sort of how to think about our moving pieces in personal auto.
Great. That's all I wanted to ask I appreciate the call and completing the rest of the year.
And Paul just you mentioned Steve.
It reminded me that when I was growing up by.
Of course.
From an Italian family My Italian grandmother on my debt side only spoke Italian.
When I was a little bullish you should sit down on a knee and she would say you know if you ever reach a position of authority that high hopes for me you need to always have a good considering the aerie by your side and a trusted advisor.
I think she would have been very proud that Steve helps fill that role for me over the last six years. So just wanted to kind of tossed set in there as well operator back to you.
Once again, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
At this time there are no further questions I will now return the call to Natalie Schoolcraft for closing remarks.
Thanks, everyone for your questions for precedent for paving and our conference call and for your continued interest and support of State Auto Financial Corporation, we look for.
For the speaking with you again on our second quarter earnings call, which is currently scheduled for Thursday August five 2021, Thank you and have a wonderful day.
Thank you that concludes today's first quarter 2021 earnings conference call. Thank you for participating you may disconnect.
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