Executives
Robert P. Restrepo – Chairman and Chief Executive Officer
James A. Yano – Vice President, Secretary and General Counsel
Julie Williams – Personal Lines Sales Specialist
State Auto Financial (STFC) Shareholder Analyst Conference Call May 4, 2012 10:00 PM ET
Robert P. Restrepo
Good morning. The 21st Annual Meeting of the Shareholders of State Auto Financial Corporation will now come to order. My name is Bob Restrepo, Chairman and CEO and President of State Auto Financial Corporation. And I would like to welcome all our shareholders, employees, agents and other guests as well as those joining us on the World Wide Web. Those of you attending via the internet have the ability to advance the slides we’ll be using today. I will try to pop you periodically, so you can stay with us.
First of all, I’d like to introduce the members of your Board of Directors. I’ll introduce them to you by company and as that you hold your recognition to all our standing. From State Auto Financial Corporation, STFC, we have Bob Baker; Dave D'Antoni; Eileen Mallesch; Tom Markert; David Meuse; Elaine Roberts; Sandy Trevor; and Paul Williams. Thank you for all you do.
Also joining us from the Board of Directors of State Auto Mutual, are Dennis Blank; Alison Coolbrith; Michael Fiorile; Jim Kunk; Paul Otte; Marsha Ryan; Kenan Schultheis; Ed Simcox; Dwight Smith; and Roger Sugarman. Thank you too for everything. You’re welcome.
The order of business at this morning’s meeting will be as follows. First, we’ll cover the procedural matters required to conduct the meeting. Next, we’ll consider and act upon the matters set forth in the company’s proxy solicitation materials distributed to shareholders in connection with the Annual Meeting. And finally, we’ll present a report on the company’s operations for 2011.
I would like to ask our Secretary and General Counsel, Jay Yano to report on procedural requirements for the meeting.
James A. Yano
Thanks Bob. A complete list of our shareholders of record for State Auto Financial Corporation who are entitled to vote at this meeting, there is a range in the alphabetic order noting the address and number and class of shares held by each sub-shareholder that’s available and subject to inspection, it’s in the hands of Julie William, Win Logan our Inspectors of election are located to my right against the wall over there.
Now we give the notice of the annual meeting of shareholders, a proxy statement and the former proxy was commenced on April 3, 2012, the shareholders of record of STFC, at the close of business on March 9, 2012. I received an after date of the mailing from Broadridge Financial Solutions confirming the fact.
As I stated before the directors have appointed, Win Logan of the company and [Julie], with the law firm at Baker Hostetler as our inspectors of election. They are responsible for the following.
Determining the number of shares outstanding, the voting rates with respect to each such share, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of any proxies that have been delivered. They will receive votes, ballots, consents and waivers, in hear and determine all the challenges and questions arising in connection with the vote. They count and tabulate all votes, consents, waivers and releases, they determine to announce the results and do such other acts are proper to conduct the election and vote with fairness to all shareholders.
I will receive the report from Julie and Win which states that the inspectors have determined that as of March 9, 2012 the record date for this meeting, that the company has issued and has outstanding 40,376,941 common shares of which 39,114,835 shares or 96.87% of the outstanding common shares are represented at this meeting in person and by proxy. Accordingly, I declare whether a quorum is present to conduct business at this meeting.
Robert P. Restrepo
Thank you, Jay. This morning, we’ll be voting by ballot on the matters described in detail on the proxy statement. Proxies will vote in accordance with instructions on the proxy forms. All shareholders should file the proxy forms with the inspectors of election to facilitate the tabulation of votes, unless they wish to vote separately by ballot.
The first order of business is the election of the directors of the company, we’ll be voting on the election of three, Class III Directors. I’ll now direct the meeting. I’ll now declare the meeting open to receive nominations. I will ask Jay Yano to present the formal resolution nominating the individuals recommended for the Nominating and Governance Committee of the company’s Board of Directors.
James A. Yano
Result, that the following individuals are hereby nominated for the elections Class III Directors of the company, each to hold office for a three year term and until a successor is elected and qualified. Eileen A. Mallesch, Robert P. Restrepo Jr., and Paul S. Williams.
Robert P. Restrepo
Are there any other nominations people would like to propose? Saying and hearing none, I declare the nomination is closed and the poll is open for voting. Ms. Woolley will provide you with a ballot, if you wish to vote in person, however any shareholder who has already voted by a proxy need not to vote again, need not vote again. Is there anyone who has not voted, or wishes to ballot? I hereby declare the poll closed, will the inspectors of election please announce our results.
Julie Williams
Directors Mallesch, Restrepo and William have each been reelected as Class III Directors by more than 97% of the votes submitted by the company’s shareholders. The final tabulation will be available after the meeting.
Robert P. Restrepo
Thank you. The next order of business is to vote our proposal two, which is a proposal to modify a material term of the company’s Leadership Bonus Program, and to reaffirm the material terms of the as modified and described in the proxy statement. The modification is being proposed is to expand the list of potential qualifying performance criteria available in determining an award under the plan. Mr. Yano, Jay will present the formal resolution.
James A. Yano
Result of the company’s Leadership Bonus Plan to be modified to expand the list of potential qualified performance criteria available in determining an award under the plan as further described in our proxy statement for this annual meeting. And that the material terms of the plan be reaffirmed as modified and as described in the proxy statement for this meeting.
Robert P. Restrepo
Is there any discussion of the resolution? Well then the discussion is closed and I declare the polls open for voting on the resolution. Which shareholders who wish to vote in person, and who have not received the ballot, please raise your hand and this will leave we’ll once again provide you with the ballot. Completed ballot should be returned to her. I hereby declare the poll closed and with the inspectors of election, report the results of the voting.
Julie Williams
The preliminary results of the balloting show that more than 95% of the outstanding shares represented in person or by proxy at this meeting have been voted in favor of the approval of the resolution. Final tabulation will be available after this meeting.
Robert P. Restrepo
Thanks Julie. The next order of business is to vote on Proposal 3, which is a proposal to modify a material term of the Company’s Long-Term Incentive Plan and to reaffirm the material terms of the plan as modified and described in the proxy statement. The modification being proposed is to expand the list of potential qualifying performance criteria available in determining an award under the plan and Jay again will present this resolution.
James A. Yano
Result of the company’s Long-Term Incentive Plan be modified to expand the list of potential qualifying performance criteria available in determining an award under the plan, as further described in the proxy statement for this meeting and that the material terms of the plan be reaffirmed as modified and as described in the proxy statement.
Robert P. Restrepo
Is there any discussion or questions regarding the resolution? Well then the discussion is closed and I hereby declare the poll is open for voting on the resolution. Once again any shareholder who wish to vote in person or who have not received the ballot please raise your hand and we’ll get you one. I hereby declare the poll closed with the inspectors of election report the results of the voting, please.
Julie Williams
The preliminary results of the balloting show that by more than 95% of the outstanding shares represented in person or by proxy at this meeting have been voted in favor of the approval of the resolution. Final tabulation will be available after the meeting.
Robert P. Restrepo
Thank you. Next order of business is to vote on Proposal 4, which is the proposal to ratify the selection of Ernst & Young LLP as the company’s Independent Registered Public Accounting Firm for 2012 and Jay will present it formal resolution.
James A. Yano
Result of the selection of Ernst & Young LLP as the Company’s Independent Registered Public Accounting Firm b) and hereby is ratified and approved.
Robert P. Restrepo
Any discussion regarding the resolution? The discussion then is closed then I declare the poll is open for voting on a resolution with shareholders who wish vote in person and who have not receive the ballot please raise your hand and we’ll get you one. I declare the poll closed with the inspectors of election report the results of the voting.
Julie William
The preliminary results of the balloting, show that by more than 97% of the outstanding shares represented in person or by the proxy at this meeting have been voted in favor of the approval of the resolution, final tabulation will be available after this meeting.
Robert P. Restrepo
Thanks one again. And the last Proposal will vote on in this meeting is Proposal 5, and that concerns the advisory vote on executive compensation required by the Dodd-Frank Act. Proposal 5 is an advisory vote on compensation paid to our named executive officers as disclosed in the proxy statement of this meeting. And Jay will again present the formal resolution of Proposal 5.
James A. Yano
Result of the shareholders of the company approved on an advisory basis, the compensation the company’s named executive officers as disclosed in the proxy statement for this annual meeting, under the compensation, discussion and analysis section and the tables, notes, and narrative disclosure related to the compensation the named executive officers of the company.
Robert P. Restrepo
Is there any discussion regarding the resolution? Hearing no, the discussion is closed and I declare the poll is open for voting on the resolution. Again any shareholders who wish vote in person or who have not received the ballot, please let us know, we’ll get you one. The polls are hereby closed and with the inspectors of election report the results of the voting.
Julie William
The preliminary results of the balloting show that more than 97% of the outstanding shares represented in person or by the proxy at this meeting have been voted in favor of the approval of the compensation of the company’s named executive officers as disclosed in the proxy statements of this meeting, final tabulation will be available after this meeting.
Robert P. Restrepo
Thanks once again. There is no other business, I would like to motion to close the business part of the meetings that we may proceed to the informational portion of the meeting. And second, Mr. English all those in favor please say aye, aye any opposed motion carried in the business session of the 2012 annual shareholders meeting is now closed.
Before I get into my informational remarks, I’d like to introduce Eric Schreiber and Craig Marshall are here from the firm of Ernst & Young LLP and if anybody has any questions for Eric who was a lead partner on the audit firm and Craig who is the managing partner of the local firm (inaudible) Ernst & Young in Columbus standup and ask your questions. Well thanks, thanks for being here both of you.
Regarding our business, 2011 was a historic year for State Auto. Last year marked our 90th year as a mutual insurance company, now at here in Columbus. And also mark the 20th anniversary of State Auto Financial Corporation, which was established as a publicly owned subsidiary as State Auto Mutual in 1991. We’re proud of our 90 years of service as a mutual insurance company servicing our policyholders and we’re also proud of what we’ve accomplished over the last 20 years as a public company.
I wish I could say I was just proud of 2011 as I was at the preceding two decades. 2011 was a difficult year for all of us and all of our constituents. Shareholders, policyholders, agents and our own associates here at State Auto. Our stock loss value, our policyholders in many states suffered historic losses to their property and in some cases that alive.
Our agents were challenged by a sluggish economy, flat pricing and explaining homeowners, price and coverage changes to their clients. An associate start with an unprecedented increase in weather related activity, which produced a tremendous amount of claims and also our associates worked hard to explain the many changes we’ve had to implement to improve homeowner results to the agents who represent us. Through all of this, we persevered. Thanks to our strong capital position, our longstanding agency relationships and our people who are persevered through adversity.
2011 was State Auto’s most difficult year, certainly in our memory. Our combined ratio and negative return on equity, which we are showing on slide 13, were driven by record property losses from tornado’s wind and hail, which affected not only our homeowner line, but also the personal and commercial automobile lines and our commercial property lines.
Slide 14 makes clear the industry has also experienced an unprecedented increase in wind and hail tornado and thunderstorm losses over the past four years. The losses we experienced in the industry in 2008, 2009 and 2010 exceeded $10 billion a year, much higher than the previous decades. April of last year alone was a $10 billion month for the industry with the annual losses exceeding $25 billion.
With slide 15, we show that State Auto was unusually affected by these losses because of our geographic footprint concentrated in the Midwest and Southeast we taken our fair share of losses since 2007. Our results trend finalized with the industry from year-to-year. But our catastrophe loss ratio from these continues to run higher than the industry trends by a point or two.
Losses from catastrophes have affected our stock price on both an absolute, and relative to book value basis, which appears on slide 16. Historically, we perform better than regional company peers and the industry but this has not been the case since 2009. We need to improve property insurance, profitability by broadening our geographic footprint by shrinking our presence in unprofitable territories and with unprofitable agencies and by continuing to diversify our product portfolio, with a richer and broader mix of commercial and casualty oriented coverage’s. This process is well underway but it will take time to complete.
Although catastrophes have been the primary driver of our inferior results, they’re not the only reason. On slide 17, we see the increase in our ex-catastrophe loss ratio driven by the low average casualty results and above the average ex-catastrophe weather related claim experience. Over the past two years, we’ve introduced a wide variety of claim initiatives to improve service, reduce claim related expenses and minimize indemnity leakage.
These changes are beginning to payoff in our property and automobile physical damage lines, as we have more controlled claim severity and improved service. In 2011 tough we pay a price for our casualty claim initiatives. Our goal in casualty claim is to recognize the ultimate case value as soon as possible in the claims lifecycle. We want to reach earlier settlements and reduce claim expenses particularly legal expense.
The strategy benefits our casualty loss ratios over time and over the long-term, but the short-term price with higher case reserves and higher loss ratio in the casualty lines, which include automobile, our largest lines both personal and commercial, general liability and workers compensation. During the fourth quarter of 2011, we’ve seen these lines return to normal and we’re optimistic for continued improvements in 2012 and beyond.
Slide 17 or slide 18, which were now on demonstrates the second quarter of 2011 catastrophe losses also triggered the establishment of an allowance for our deferred tax assets, hurting STFC’s equity and leverage ratios. As a result, we took several actions to improve the public company’s capital position and leverage the overall strength of the State Auto Group. These actions included reducing STFC’s share under our intercompany pooling arrangement with State Auto Mutual from 80% to 65%.
In addition, we’ve successfully placed an unprecedented homeowners’ quota share reinsurance treaty, were we exceeded 75% of our homeowners business for the next three years. We also made the difficult decision to terminate retiree health care coverage for a large proportion of our employee base.
We continue to implement aggressive agency management actions, which address chronic on profitability and exposed geographic areas. We’re pleased with the progress we’ve made in our ex-catastrophe homeowner loss ratios. Finally, we’re completing the integration of our specialty business operations, which include Rockhill our surplus line subsidiary and RTW, our monoline workers compensation affiliate.
We expect our personalized business will shrink somewhat resulting from the agency and underwriting actions, but we’ll balance this with growth coming from Rockhill and business insurance, both of these businesses future opportunities for both new business and additional price on renewal going forward.
Personalized production as shown on slide 19 is declining due to price increases in personal automobile and most particularly in homeowners. Overall, 80% of our business State Auto was cross sold with both auto and homeowners. So any action we take to improve homeowners’ profitability effects new business for both auto and homeowners.
In addition, the agency management actions and terminations also affect our policy retention. Personalized production will decline in States where we’ve been most aggressive in addressing our homeowners’ profitability issues. So far in 2012 no business is relatively flat and retention is holding, but we expect policy losses throughout the rest of the year, as the impact of agency terminations and unprofitable stakes works its way through.
On the business insurance side both industry pricing and State Auto pricing hasn’t flat for the past couple of years. The slide 20 shows, we’re beginning to see an increase. Industry pricing surveys and company reports indicate affirming market particularly for larger accounts and for specialty business.
We’re seeing accelerating price increases in our middle market and small business pricing has begun to increase. All in we expect to see mid-single digit price increases by year end on our total commercial lines book both standard and specialty.
In addition because of affirming market, we also expect to see higher production levels for both premiums and policies
Slide 21 shows our priorities for 2012, which focused on increasing prices for all lines: personal insurance, business insurance, and specialty insurance. We’ll continue our plans for achieving profitability in the homeowners’ line. Our three year Quota Share Reinsurance treaty advices additional time to complete the fix and it also validates the appropriateness of our plans, given the fact that three large sophisticated reinsurers are willing to assume 75% of this historically unprofitable line.
We will continue to drive exceptional claim performance by enhancing service, reducing allocated loss adjustment expenses and managing indemnity leakage. We will introduce enhanced capabilities and business insurance to more preciously price our product, improved underwriting efficiency and our expense ratio and make it easier for agents to do business with us. We will complete integration of our specialty operation and refocus the strategic direction of our RED, managing general underwriting unit. And finally, we will enhance associate engagement by ensuring that all of our employees understand our strategy, tactics and our individual roles in achieving State Auto success in the future.
With that, I will be happy to take any questions.
Question-and-Answer Session
[No Q&A session for this event]
Robert P. Restrepo
So many of you here are our associates, I thank you for everything you’ve done in 2011. I thanks obviously particularly go the claims folks that have been very busy. And I think as you all know, I spend sometime at West Liberty, Kentucky which was devastated by a tornado March the 2 and you should be very, very proud of what our people have accomplished both speed and the entity with which they have settle those claims. Should also be very proud of our personalized sales folks that are out there working with our agents, particularly here in Ohio trying to not only explain why we’re taking these actions, but also to give them the information necessary to help our agents explain these to their policyholders.
And lastly, our folks and business insurance and specialty insurance are increasingly well positioned to take advantage of what we see as a firming market. And this is a kind of market that we do well in State Auto, everybody does well, but I think we’re pretty well positioned because of the quality relationships we have and spend a lot of time with agents and eight states I think quite added up about 35, 36 large commercial agents and brokers that we have met with those past couple of months. And I can tell you those folks want to do business with State Auto and they want to do business with State Auto primarily because they believe in us, they believe in our future and most importantly they’ve really like doing business with our folks, at particularly the folks they deal with everyday.
So thank you for everything that you’ve done. I am optimistic about 2012 and very optimistic about our future. The meeting is adjourned. Thanks.
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