State Auto Financial Corp (STFC) Q1 2020 Earnings Call Transcript

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. [Operator Instructions]. If you have any objections, please disconnect at this time.To get more auto finance news, you can visit shine news official website.

I would now like to turn the call over to Director of Investor Relations, Natalie Schoolcraft. Thank you. Please go ahead.

Thank you, Shelby. Good morning, everyone. Welcome to our first quarter 2020 earnings conference call. Today, I'm joined by our Chairman, President and CEO, Mike LaRocco; Vice President and CAO, Matt Pollak, who is subbing for Senior Vice President and CFO, Steve English, who was unable to join us today; Senior Vice President of Personal & Commercial Lines and Managing Director of State Auto Labs, Kim Garland; Senior Vice President of Data & 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 in our annual and quarterly filings with the Securities and Exchange Commission. Financial schedules containing reconciliations of certain non-GAAP measures, along with other supplemental financial information are included as part of our press release and available on our website stateauto.com under the Investors section.

Okay. I apologize. Thanks, Natalie, and good morning everyone. First, I hope everyone on the phone is safe and healthy. I want to begin with some observations and comments on COVID. I would be remiss not to start by talking about our State Auto team. Within one day, we transitioned to a remote workforce. The foundation that made this possible was our move to a digital company over the last four years. I cannot emphasize enough the significance of that work. As I've spoken with folks I've met over the last 40 years in this business, I know that many of our competitors struggled and are struggling with effectively working in a remote world. There was no break in the sales, service and claims handling for State Auto agents and policyholders. The other factor that made the transition so seamless was the unique culture we have at State Auto. Our associates embraced the need to work remotely and nimbly made the move. They prioritized the customers and did what was needed to meet their needs. Most importantly, our culture, which places family first, allowed them to meet their personal needs at this challenging time. As a company, we made decisions very quickly to work with customers who need flexibility regarding payments, payment plans and fees when possible. We knew some of our customers were struggling financially as a result of the stay-at-home orders and the economic slowdown. While, there would be some financial impact, it was the right thing to do. We took a bit more time before deciding about any return of premium program due to fewer miles being driven. Being thoughtful before taking action was critical because things were changing so quickly.

Offering a short term return of premium based on one or two months did not seem fair, since with the benefit of time, it was clear the Coronavirus impact would continue well beyond just a couple of months. Our two part plan began by offering a 5% discount on personal auto policyholders as of June 1st their full premium beginning at their next renewal. If approved by our regulators, this will allow us to better recognize the fact that the pandemic will last well beyond the spring and the renewal discount may provide a larger return of premium rather than only giving a partial one or two months' credit. The second part of our plan was to encourage adoption of telematics. COVID is a harsh awakening that usage-based insurance is a smart choice. Since announcing this plan, we have seen an increase in telematics selections and usage. While our focus has been taking care of customers and making sure our associates are safe and healthy, we have had to be aware of the legal and regulatory threat as a result of COVID, especially on issue of business interruption insurance. Our commercial policies require direct physical loss or damage to property and many of them also include a virus exclusion. We are very confident that BI exposure is limited, unless artificially expanded through changes in legal precedent, a national program, or governmental mandate.

Regarding workers' compensation, we support the paying of claims from medical professionals who are on the frontline of this battle. Of course, overall, our comp exposure is very limited, about 5% of our total net written premium and approximately 20% of that is in medical related classes. Overall, we have adjusted well in these unprecedented times and we simply hope our associates, agents and policyholders continue to stay safe and healthy. This quarter was severely impacted by the Nashville tornado and specifically three large commercial losses. The tornado had an 8.3-point impact on the quarter and these three losses were 4.6 points of that total. Overall, cats in the quarter accounted for 12.7 points on our loss ratio versus 5.9 points in 1Q of 2019. It was an unusually high level of activity driven by those three large losses. Excluding the cats, it was another excellent quarter for State Auto and continue to demonstrate how we have emerged as an innovative, creative and competitive P&C player. Commercial lines once again led the way with another quarter of solid performance. All lines, except workers' compensation had excellent growth, another indicator of how agents have embraced our digital platform in commercial lines as well as personal insurance.

In personal lines, we took bold and aggressive steps to complete the process of meaningfully reducing underwriting leakage and improving our pricing model. These actions, along with the reduction of miles driven, should lead us to an earlier return to profitability across our largest line than I had initially anticipated. Homeowners continues to perform well with another strong quarter of growth. Our growth in this line of business has begun to spread across majority of our states, supporting an important piece of our strategy. Finally, we are in the last stages of our digital platform rollout. The only product left to launch is workers' compensation, which should begin by the end of the year. As I've said on previous calls, this move to a completely digital company in this shorter period of time is an amazing accomplishment and has prepared State Auto for a long and successful future. Sadly, it took COVID to demonstrate just how well we have made this transition to digital. As we entered the first quarter. The quality of what we have done has never been clearer.