“We strongly believe our industry is at the cusp of transformative changes.”
— Mike LaRocco

DEAR SHAREHOLDERS, 

In my 37-year insurance industry career, 2016 was the best bad year I’ve experienced.
Our financial results declined, and we failed to meet our profit and growth goals.
We own the results and accept responsibility for the performance. At the same time,
we made tremendous progress in turning around State Auto. In 2016, we completed
much of our foundational work. We enter 2017 ready to deliver the results our
associates, shareholders, agents and policyholders deserve.

 

PRODUCT STRATEGY

Our core products in personal and commercial lines needed updating. Today, the combination of publicly available data, analytics and talented associates allow us to build products that better match rate with risk. During 2016, we rebuilt pricing and underwriting models for our personal and commercial products. Some of these changes were launched immediately, while others will be delivered with the implementation of our new digital technology. We’re very proud that we can now offer our agents an auto product option based on telematics, otherwise known as a usage-based insurance product, that charges premium based on how the vehicle is driven. This will also be offered soon for commercial auto risks. On the homeowners line, we now have discounts for smart homes, allowing us to reward customers who monitor their home’s security, water flow, use of utilities and more. We believe these new products will make us more competitive while better positioning us to make an underwriting profit.
 

We believe we made some hard but necessary decisions to discontinue products that weren’t core to our strategy. We finished our exit of large commercial and large transportation business that began in 2015. In 2016, we announced our planned exit of Specialty program business. These changes were needed to allow us to use our resources to focus on our core businesses of auto, home, farm and ranch, small and mid-sized commercial, workers’ compensation and excess and surplus property and casualty. We enter 2017 not only with a stronger operational foundation, but with a focused product strategy. We have the right leaders in each line and a crystal clear understanding that each line must be profitable.
 

ONE TEAM. ONE GOAL.

While we’ve invested heavily in updating our technology platform, we know a key to offering competitive products is a lower expense ratio. We’re developing road maps to deliver a significantly improved cost structure. Whether it’s identifying internal opportunities for cost reductions, retiring legacy technology applications or consolidating real estate, we have clear plans for how we’ll become a more efficient company going forward.
 

We also restructured our compensation plan. Last year we aligned as an organization behind a vision and a single goal: profitable growth. Our associates understand this and we approach everything as One Team. Getting all of us aligned and working together is critical in our effort to not only turn around State Auto, but launch it forward to be an industry leader. Compensation must support that approach. Our bonus compensation is now based simply on a combination of profit and growth. This direct match of pay and performance solidifies our alignment as One Team. We simplified job titles and pay grades, eliminating unnecessary complexity and allowing for greater flexibility on hiring new associates and rewarding current ones. It’s critical that we continue to attract and retain top talent in order to meet our goals today and in the future, and we have simplified our internal practices so that we can compete and win in the tight talent market. 


CULTURE

Finally, and most importantly, we continue to emphasize the critical importance of our culture.We cannot afford to lose one voice and must have an environment in which all associates speak up, offer their opinions and challenge one another in a candid and productive manner. That can’t happen unless our culture allows for all associates to participate. We believe our culture is one of diversity and inclusion; one that makes everyone feel welcome and respected as members of our team.

Let me close by sharing what I’m most proud of from 2016: our people. At State Auto,
we understand our obligation to produce strong financial results and take it very seriously. We also feel a deep commitment to give back to our communities and especially those less fortunate than ourselves. Throughout 2016, our associates gave back selflessly. While they certainly did that through financial support, more impressive were the number of hours that they gave through volunteerism. I couldn’t be more proud.


2016 was the best bad year of my career –
adecline in financial results mixed with unprecedented foundational development.
We strongly believe our industry is at the cusp of transformative changes. The foundation we’ve built will position us to take advantage of these changes as they occur. I’m more confident than ever that State Auto is poised to emerge as an industry leader in profit, growth and exceeding the expectations of our customers and shareholders.

 

Best,

MIke.jpg
 
 
 

Michael E. LaRocco
President, Chairman of the board & Chief Executive office