State Auto: How a Regional Carrier Weathers the Storms

Super Regional CEO Restrepo Talks Catastrophe Losses, Premium Growth and Independent Agents

How are regional insurance companies faring in today’s climate — financial and catastrophe? What challenges do they face? How can they grow? Why are they so popular with independent agents?

Insurance Journal put these and other questions to a popular regional carrier leader. Robert P. Restrepo is chairman, CEO and president of Ohio-based State Auto Insurance Companies. Currently, State Auto writes business in 33 states from Michigan to Florida, from Utah to Vermont, through 3,400 independent agencies. Restrepo worked at Aetna, Travelers, Hanover and Main Street America Group before joining State Auto in 2006.

Insurance Journal: A number of insurance companies’ catastrophe losses have included some surprising numbers. What is State Auto’s recent experience with catastrophes?
Restrepo: My experience has been terrible. Over the last year and a half, we’ve had an unusually large frequency of fairly significant wind and hail storms throughout the Midwest and somewhat in the Southeast.

When I started the business, it seemed that all the wind and hail happened in the second quarter, and it was generally along I-30. For whatever reason, some might call it global warming, it seems like these events now happen earlier in the year, the first and the second quarter, and much further north, up towards I-70.

We really haven’t built our business model around that, and we’re unusually affected by that because we are so large in the Midwest. That’s primarily where these storms have their biggest impact, with Midwestern oriented companies such as State Auto.

IJ: That’s the heart of your business.
Restrepo: It’s the heart and what we’ve come to realize over the last year or so is that we can’t control the weather, we can only control our response to it. We put in place this year an aggregate reinsurance treaty, which provides us coverage for high frequency, low severity weather events such as wind and hail if they reach an aggregate amount of, in our case, $80 million. Last year, we had over $100 million in catastrophe losses.

The second thing we’re in the process of doing is rolling on more wind and hail deductibles. We’ve, as has been true throughout the Midwest for competitive reasons, not been very aggressive with wind and hail. Well, again, the weather has changed, the pain is too great. We need to share more of that risk with our policyholders.

We will be rolling out higher peril-specific wind and hail deductibles starting at $1,000. Eventually, when we roll out a new homeowner product, we’re going to one to two percent deductibles in 11 of the 33 states that we operate in. We’re getting more prices, and we are also developing a new product which will allow us to price by peril.

Traditionally, we priced almost entirely based on the fire exposure. Our problem has not been fire. It’s been wind and hail. So, the new rating methodology will allow us to address, by home and by homeowner, the specific perils that relate to that individual’s risk profile; whether it be fire, whether it be water, whether it be wind, whether it be hail.

We’ll have the first generation of this product installed in Missouri at the end of this year, and we plan to roll it out to all affected states next year.

IJ: How do tight credit markets affect a company like State Auto?
Restrepo: They clearly have an effect. We have a certain percentage of our investment portfolio in equities. Those equities have been written down, they’ve lost value. Most property and casualty companies, though, are much more heavily weighted on fixed income.

Because we need liquidity and flexibility to make sure that we can pay the claims whether it’s a big catastrophe tomorrow or a long tail liability claim in the future. So we tend to take a lot less risk on the asset side. We need predictable returns, and we need predictable liquidity, because we take our risk on the liabilities side.

But clearly it’s had an effect on our capital as we’ve had to write down some equity. For companies in the industry that are more heavily weighted towards equities, clearly they’ve had a much bigger impact on their capital.

IJ: What is State Auto’s mix of business and are you happy with that?
Restrepo: We’re just about 60 percent personal lines and 40 percent commercial lines. We’ve been 60 percent personal lines for 40 years. We don’t want to shrink ourselves to greatness; we’d love to have a balance of 50-50.

A lot of our growth, over the last 15 years in particular, has come from acquiring smaller personal lines oriented companies and then cross selling in our commercial lines portfolio. So every time we get a little closer to 50-50, we buy another smaller company which increases the weight towards personal lines. But over time we’d like to have a good balance.

We’re a terrific personal lines company, always have been. We’ve got a nice presence in it …and an increasing presence in the commercial market. But where traditional regional companies have been the strongest is in the smaller commercial risks that require individual underwriting, individual pricing don’t lend themselves to a standardized BOP- like approach. We have not had as much success in that market as many of our regional company competitors. That’s where we see the real opportunity for us in the future.

IJ: All companies preach against gaining market share by cutting prices. What do you see going on in the market place?
Restrepo: It’s still a very competitive market place. Where we compete in personal lines, prices are increasing. Personal lines is a very disciplined market, it tends to be more concentrated and fewer players. The advent of techniques like predictive modeling allow us to really monitor our margins and be much more responsive in making the pricing adjustments we need to preserve profitability.

The commercial lines market place is much more fragmented where we deal with; we really focus primarily on the small to medium size market. That remains very competitive. We’re starting to see price decreases moderate, and I expect in the second, third quarter we’ll start seeing some modest increases. That’s going to be masked by the economy. We’re not going to see the same kind of premium yield that we’ve had in the past because the premium basis is declining, particularly in trades such as construction. But our margins will start increasing because we’ll start getting at least less rate decreases, and I think over time some modest rate increases.

IJ: Are regional carriers, like your own, under pressure to grow? What do you consider healthy growth for State Auto?
Restrepo: Well… we feel under pressure to grow our profitability, but clearly part of demonstrating you’re a responsive carrier over time is to have reasonable profit growth. We call it rational premium growth, rational for us. Our internal goal is to try to grow faster than the economy and faster than the industry. We can have negative growth and still outpace the industry and the economy right now. But we are growing, we’re having positive growth largely on the personal lines side.

We’ve had a lot of success in personal lines growing organically partially because of our product line, partially because of our pricing precision, and partially because of the technology we have in place with our agents right now make it easier to do business with. As a regional company we’re more likeable than a lot of the larger national, often times less personal companies. So we’re growing nicely in personal lines.

Our commercial production is flat, partially because the economy, and partially because of price competition.

IJ: How important are acquisitions for State Auto?
Restrepo: Acquisitions are critical to our long term growth. Our long term strategy is over time to have about half of our growth come through acquisitions, and about half of it to come from organic growth.

Our focus has been on smaller companies, $50,000,000 to $250,000,000 in premium that have good underwriting fundamentals, strong agency relationships and allow us to diversify.

We’ve diversified by affiliating with Patrons in New England; by acquiring a company in Texas, which was a stock company; and most recently with Rock Hill, which is a commercial lines specialty company. Our goal really, put simply, is to diversify. We diversify geographically with a Beacon and a Patron and we’re looking to diversify product lines wise with a commercial lines specialty business such as Rock Hill, which will allow us to better balance our traditional property oriented business with more casualty business.

IJ: Earlier in your career you worked for some large companies. How do you compare that to working for a regional?
Restrepo: Well, the obvious issue is scale. When I was with large companies, I always said that the large companies had a competitive advantage over regional companies primarily because of the companies’ ability to invest in technology and to have the management information that really made our pricing and underwriting and claim decisions more effective because had more data, we had more credible information.

What I’ve come to realize is that what regional companies bring is focus. We don’t play in as many different markets. Our focus on technology is narrower than many of our national competitors. When I look at the data from third party research sources, in terms of ease of doing business, the companies that are identified as being easy to business are largely regional companies, partly because of their technology, partly because of their business model and partly because of their culture.

These are companies that live and die with the independent agent whose interests are totally aligned with independent agents. Independent agents don’t question regional company’s commitment; at least not regional companies such as State Auto. Don’t question the commitment to the independent agency system and to the individual relationship.

[W]e may not be pioneers often in technology, but we can be early adopters in terms of ease of doing business. We have sufficient scale…, supplemented by third party agencies to have statistical credibility; to adequately to price and underwrite our products.

The third thing is we have a culture that’s very attractive to independent agents and a track record of … a committed and stable market.

This is an excerpt from a longer video interview with Restrepo. The interview and additional excerpts may be viewed at www.insurancejournal.tv.

Topics Carriers Auto Agencies Windstorm Tech