State Auto: How a Regional Carrier Weathers the Storms

CEO Restrepo Talks Cat Losses, Premium Growth and Independent Agents

Regional property/casualty insurance companies don’t make headlines like the large institutions. They simply go about their business serving customers and independent agents — and paying claims. How are regional insurance companies faring in today’s climate? What challenges do they face? How can they grow? And why are they so popular with independent agents?

Insurance Journal‘s Andrew G. Simpson put these questions to a popular regional carrier leader. Robert P. Restrepo is chairman, CEO and president of Ohio-based State Auto Insurance Companies. State Auto writes in 33 states from Utah to Vermont, through about 3,400 independent agencies. Restrepo worked at national and regional insurers including Aetna, Travelers, Hanover and Main Street America Group before joining State Auto in 2006.

Insurance Journal: A number of insurance companies have reported catastrophe losses. What is State Auto’s experience with catastrophes, and what can be done to mitigate these losses?
Bob Restrepo: My experience has been terrible. In the past 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, generally along I-30. These events now happen earlier in the year … and much further north, up toward I-70.

We 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 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 [to cover] 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 more than $100 million in cat losses.

We’re in the process of 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. 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 1 percent to 2 percent deductibles in 11 of the 33 states we operate in. We’re getting more prices, and we are also developing a new product that 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. 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.

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: Larger financial institutions and insurance companies have been getting into trouble. Some are considered too large to fail. As a competitor, do the prospect of bailouts concern you?
Restrepo: The prospect of bailouts concerns me both as a taxpayer and potentially as a competitor. We’ve not had much of an impact on property and casualty-specific companies. It’s been more of a life insurance issue than a property/casualty insurance issue.

The P/C industry doesn’t need bailout money. We’ve tended to take risk on the liability side as opposed to the asset side. What has been demonstrated through all of this crisis is just how well-managed the industry has been from a risk standpoint.

Companies that do have life insurance companies, particularly life insurance companies that have been focused on retirement and investments, that’s where the risk has been. There’s a much higher degree of risk on the asset side that is not very complementary to the kind of risk we take on the liability side.

We have seen some opportunities in the marketplace, but frankly they’ve been minimal. The biggest opportunities have been for specialty companies and for companies that focus on much larger commercial accounts than we tend to focus on.

IJ: Do tight credit markets and the overall investment environment affect 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/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: I wonder if you see a trend of independent agents becoming either more or less dependent upon their regional carriers as oppose to their national carriers.
Restrepo: I spent most of my early career with large national companies. One reason I left was because I was very attracted to the regional company model, because I saw the growth and the increased competitiveness among regional companies competing for market share and shelf space with independent agents.

Independent agents have increasingly relied on regional companies, particularly in the small to medium commercial space, which is where most independent agents make most of their commission income. They like the reliability, the accessibility, and the relationships that they have on a day-to-day basis with smaller regional companies. The kind of data that I’ve seen over the years reported by organizations such as the Big I demonstrates to me that that is paying off, that the regional companies are getting an increasing share of independent agent’s business, both renewal business as well as new business. More on the commercial line side, but increasingly we see it on the personal side as well.

IJ: What is State Auto’s mix of personal lines and commercial 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, in the past 15 years has come from acquiring smaller personal lines-oriented companies and then cross-selling in our commercial lines portfolio. Every time we get a little closer to 50-50, we buy another smaller company, which increases the weight toward personal lines. 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 marketplace?
Restrepo: It’s still a very competitive marketplace. 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 our 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: All companies preach against gaining market share by cutting prices. What do you see going on in the marketplace?
Restrepo: It’s still a very competitive marketplace. Where we compete in personal lines, prices are increasing. Personal lines is a very disciplined market. It tends to be more concentrated and have 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 our profitability.

The commercial lines marketplace is more fragmented where we deal with; we really focus 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 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 over time some modest rate increases.

IJ: Are regional carriers under pressure to grow?
Restrepo: 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. Our internal goal is 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 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. 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?
Restrepo: Acquisitions are critical to our long-term growth. Our long-term strategy over time is 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 million to $250 million in premium that have good underwriting fundamentals, strong agency relationships and allow us to diversify.

Our goal is to diversify … to allow us to better balance our traditional property oriented business with more casualty business.

IJ: Early in your career you worked for some very large insurance companies. How do you compare that experience 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, [Travelers, for example] and its 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. …

I think the strength that we have is that we may not be pioneers often in technology, but we can be early adopters in terms of ease of doing business. We have sufficient scale, certainly at State Auto, 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 consistently being committed; a committed and stable market.

The above 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 Property Property Casualty Casualty