- Quarterly income of $0.28 per
share
- Quarterly GAAP combined ratio of
102.0
- Return on equity of 7.5%
- Book value per share of $20.41
State Auto Financial Corporation (NASDAQ:STFC) today reported
third quarter 2014 net income of $11.9 million, or $0.28 per
diluted share, versus net income of $18.5 million, or $0.45 per
diluted share, for the third quarter of 2013. Net income from
operations1 per diluted share for the third quarter 2014 was $0.25
versus net income from operations1 of $0.33 for the same 2013
period.
STFC’s GAAP combined ratio for the third quarter 2014 was 102.0
versus 101.4 for the third quarter of 2013. Catastrophe losses, net
of reinsurance recoveries, for the third quarter 2014 accounted for
0.9 points of the 68.2 total loss ratio points, or $2.4 million,
versus 2.4 points of the total 67.2 loss ratio points, or $6.4
million, for the same period of 2013. For the third quarter of
2014, non-catastrophe losses included $13.8 million, or 5.1 loss
ratio points, of loss and loss expense reserve strengthening for
prior accident years on program business written through Risk
Evaluation & Design LLC (RED), a wholly owned subsidiary of
State Automobile Mutual Insurance Company, all of which was
terminated in 2012 and is in runoff.
For the third quarter of 2014, the State Auto Group’s homeowners
quota share reinsurance arrangement increased STFC’s underwriting
loss by $10.0 million or 3.4 points on the combined ratio. Pursuant
to the arrangement, STFC ceded $47.1 million of written premium,
$43.9 million of earned premium, $1.2 million of catastrophe losses
and $17.0 million of non-catastrophe losses, and recognized $12.8
million of ceded commissions in addition to $2.9 million of profit
commission during the third quarter of 2014. This cession decreased
STFC’s overall catastrophe loss ratio 0.2 points, increased the
overall non-catastrophe loss ratio 3.9 points and decreased the
overall expense ratio 0.3 points for the third quarter of 2014.
Net written premium for the third quarter of 2014 increased 6.6%
compared to the same period of 2013. By segment, net written
premium for the third quarter of 2014 decreased 5.1% for personal
insurance, increased 2.9% for business insurance and increased
43.3% for specialty insurance compared to the same period of 2013.
The decline in the personal insurance segment was driven by company
actions to improve profitability. Business insurance premium growth
remained positive, driven by higher average new business premium,
increased renewal pricing and a recovering economy. The growth in
specialty insurance was driven by new business and new distribution
partners, including Partners General Insurance Agency, which was
recently acquired by our parent, State Automobile Mutual Insurance
Company.
For the first nine months of 2014, STFC had a net income of
$42.0 million, or $1.02 per diluted share, compared to $44.4
million, or $1.09 per diluted share, for the same 2013 period.
STFC’s GAAP combined ratio for the first nine months of 2014 was
102.8 compared to 101.7 for the same 2013 period. Catastrophe
losses increased the loss ratio for the first nine months of 2014
by 3.7 points, or $29.9 million, compared to 4.1 points, or $32.2
million for the same 2013 period.
For the first nine months of 2014, the homeowners quota share
reinsurance arrangement increased STFC’s underwriting loss by $15.9
million or 2.1 points on the combined ratio. Pursuant to the
arrangement, STFC ceded $133.6 million of written premium, $132.2
million of earned premium, $19.2 million of catastrophe losses and
$55.8 million of non-catastrophe losses, and recognized $38.4
million of ceded commissions in addition to $2.9 million of profit
commission during the first nine months of 2014. This cession
reduced STFC’s overall catastrophe loss ratio 1.6 points, increased
the overall non-catastrophe loss ratio 3.2 points and increased the
overall expense ratio 0.5 points for the first nine months of
2014.
Net written premiums year to date 2014 increased 3.6% compared
to the same 2013 period. By segment, net written premium for the
first nine months of 2014 decreased 4.6% for personal insurance,
while the business and specialty insurance segments increased 4.3%
and 19.6%, respectively, compared to the same period of 2013. The
specialty insurance segment increase was due to growth in all
specialty units.
STFC’s book value was $20.41 per share as of Sept. 30, 2014, a
decrease of $0.24 per share from STFC’s book value on June 30,
2014, as a result of net income being offset by decreases in our
net unrealized gains. Book value per share as of Sept. 30, 2014,
included a reduction of $1.82 for a deferred tax asset valuation
allowance. Return on stockholders’ equity for the twelve months
ended Sept. 30, 2014, was 7.5% compared to 8.9% for the twelve
months ended Sept. 30, 2013.
STFC President and CEO Bob Restrepo commented on the quarter as
follows:
“State Auto Financial Corporation produced a
solid profit in the third quarter despite additional reserve
strengthening for terminated RED programs in runoff since 2012.
Results benefitted from unusually mild catastrophe experience,
significant profit improvement in our personal automobile line and
strong profit and growth in the specialty segment setting aside the
impact of RED. Book value declined $0.24 a share as a result of
lower investment valuations in all asset classes. Return on equity
declined to 7.5%. Year-to-date net income is down slightly, but
remains strong.
“We remain on track to complete our ground up
analysis of outstanding RED case reserves by year end. Based on
additional information, including the work completed to date, we
strengthened our RED reserves by $13.8M in the third quarter. This
action increased our third quarter combined ratio by 5.1 points.
Year to date, RED reserve strengthening has increased our combined
ratio by 3.2 points.
“Property results benefitted from unusually
benign weather, earned price increases, disciplined underwriting
and claim handling. We are evaluating alternatives to our homeowner
quota share treaty and expect to have a replacement solution in
place by year end. In the third quarter, the net impact of the
homeowner quota share reinsurance treaty increased our combined
ratio by 3.4 points and 2.1 points year to date.
“We are pleased with the underlying quality
of our underwriting results. Excluding the impact of RED and the
homeowner quota share treaty, our third quarter and year to date
combined ratio would have been 94.2% and 98.0%, respectively.2
“Our improving underwriting performance is
heavily influenced by the turnaround in our personal insurance
segment particularly in the personal auto line. Auto results
continue to improve on a quarterly and year-to-date basis and
exceed expectations. We expect to achieve targeted returns in this
crucial line by year end. Homeowner results continue to improve
driven by our multi-year remediation efforts and better weather.
Production declined 5.1% impacted by our homeowner remediation
efforts. Our focus now is to stabilize production and position us
for profitable personal lines growth beginning late next year.
“Business insurance benefitted from good
commercial auto and liability results. Commercial property improved
significantly with fewer large losses relative to our experience in
the first six months and good weather. Commercial multi-peril was
negatively impacted by large losses in the BOP line. For the
quarter and year to date, prices were up 3.5% and 4.7%,
respectively. Production continues to benefit from price increases,
larger new account premiums, a recovering economy and stable
retention.
“The specialty insurance segment continues to
grow profitably, excluding the impact of RED. Our E&S property
and liability results remain strong, program experience (excluding
RED) is improving, and workers compensation remains very
profitable. We continue to upgrade our technology, expand
distribution, and look for new market opportunities. The specialty
segment will be an increasingly strong and stable contributor to
State Auto’s earnings as we grow and diversify our portfolio of
businesses.
“We experienced modest improvement in our
third quarter expense ratio with higher accruals for contingent
commissions and bonuses offset by profit sharing income received
from our homeowner quota share reinsurance partners. Year to date,
expense ratios are somewhat elevated resulting from the second
quarter IT restructuring charge.
“For a company our size, State Auto has
several large moving pieces including the homeowners quota share
treaty, RED runoff and deferred tax asset allowance. Our goal is to
resolve these matters, remove distractions and fully reveal the
high quality underwriting performance which has been building for
several years. We expect to be well positioned for a solid
2015.”
State Auto Financial Corporation, headquartered in Columbus,
Ohio, is a super regional property and casualty insurance holding
company and is proud to be a Trusted Choice® company partner and
one of Forbes’ 50 Most Trustworthy Financial Companies in America.
STFC stock is traded on the NASDAQ Global Select Market, which is a
segment of the NASDAQ Global Market with the highest initial
listing standards of any exchange in the world.
The insurance subsidiaries of State Auto Financial Corporation
are part of the State Auto Group. The State Auto Group markets its
insurance products throughout the United States, through
independent insurance agencies, which include retail agencies and
wholesale brokers. The State Auto Group is rated A (Excellent) by
the A.M. Best Company and includes State Automobile Mutual, State
Auto Property & Casualty, State Auto Ohio, State Auto
Wisconsin, Milbank, Meridian Security, Patrons Mutual, Rockhill
Insurance, Plaza Insurance, American Compensation and Bloomington
Compensation. Additional information on State Auto Financial
Corporation and the State Auto Insurance Companies can be found
online at http://www.StateAuto.com/STFC.
1 Net income from operations, a non-GAAP financial measure which
management believes is informative to Company management and
investors, differs from GAAP net income only by the exclusion of
realized capital gains and (losses), net of applicable taxes, on
investment activity for the periods being reported. For STFC, this
amounted to income of $0.03 per diluted share for the third quarter
2014 and income of $0.28 year to date versus income of $0.12 per
diluted share for the third quarter 2013 and income of $0.25 year
to date.
2 Represents a non-GAAP financial measure as to the third
quarter 2014 and year to date combined ratio. A reconciliation of
the difference between this non-GAAP financial measure with the
most directly comparable GAAP financial measure is included in
Schedules 1A and 1B that is part of this release.
STFC has scheduled a conference call with interested investors
for Tuesday, Nov. 4, at 11 a.m. ET to discuss the company’s third
quarter 2014 performance. Live and archived broadcasts of the call
can be accessed at http://www.StateAuto.com/STFC. A replay of the
call can be heard beginning at 2 p.m. ET on Tuesday, Nov. 4, by
calling 855-859-2056, conference ID 15438954. Supplemental
schedules detailing the company’s third quarter 2014 financial,
sales and underwriting results are made available on
http://www.StateAuto.com/STFC prior to the conference call.
* * * * * *
Except for historical information, all other information in this
news release consists of forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially
from those projected, anticipated or implied. The most significant
of these uncertainties are described in State Auto Financial's Form
10-K and Form 10-Q reports and exhibits to those reports, and
include (but are not limited to) legislative changes at both the
state and federal level, state and federal regulatory rule making
promulgations and adjudications, class action litigation involving
the insurance industry and judicial decisions affecting claims,
policy coverages and the general costs of doing business, the
impact of competition on products and pricing, inflation in the
costs of the products and services insurance pays for, product
development, geographic spread of risk, weather and weather-related
events, and other types of catastrophic events. State Auto
Financial undertakes no obligation to update or revise any
forward-looking statements.
STATE AUTO FINANCIAL CORPORATION AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months endedSeptember 30
Nine months endedSeptember 30
(in millions, except per share amounts) 2014 2013 2014 2013
Net premiums written $ 277.0 $ 259.9 $ 837.5 $ 808.7
Earned premiums 270.2 266.0 801.0 790.8 Net investment
income 18.9 18.8 57.0 55.4 Net realized gain on investments 1.6 7.5
17.6 15.7 Other income 0.6 0.4
1.4 1.4 Total revenue 291.3 292.7
877.0 863.3 Income before federal
income taxes 13.1 18.7 43.9 45.0 Federal income tax expense
1.2 0.2 1.9 0.6 Net
income $ 11.9 $ 18.5 $ 42.0 $ 44.4 Earnings
per common share: - basic $ 0.29 $ 0.46 $ 1.03 $ 1.09 - diluted $
0.28 $ 0.45 $ 1.02 $ 1.09 Earnings per share from operations
(A): - basic $ 0.26 $ 0.34 $ 0.75 $ 0.84 - diluted $ 0.25 $ 0.33 $
0.74 $ 0.84 Weighted average shares outstanding: - basic
40.9 40.6 40.8 40.5 - diluted 41.5 40.9 41.2 40.7 Return on
average equity (LTM) 7.5 % 8.9 % Book value per share $
20.41 $ 18.07 Dividends paid per share $ 0.10 $ 0.10 $ 0.30
$ 0.30 Total shares outstanding 40.9 40.6 GAAP
ratios: Cat loss and ALAE ratio 0.9 2.4 3.7 4.1 Non-cat loss and
LAE ratio 67.3 64.8 64.5
63.9 Loss and LAE ratio 68.2 67.2 68.2 68.0 Expense ratio
33.8 34.2 34.6 33.7 Combined
ratio 102.0 101.4 102.8
101.7 (A) Reconciliation of non-GAAP financial measure: Net
income from operations: Net income $ 11.9 $ 18.5 $ 42.0 $ 44.4 Less
net realized gain on investments, less applicable federal income
taxes 1.1 4.9 11.5 10.2
Net income from operations $ 10.8 $ 13.6 $ 30.5 $
34.2
Schedule 1A
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
RECONCILIATION OF HO QS ARRANGEMENT CESSION AND RED UNDERWRITING
RESULTS (unaudited) The following table sets forth a
reconciliation of the HO QS Arrangement cession and the former RED
unit's underwriting results on the Company's overall results and
key performance indicators on a pro forma GAAP basis as if the HO
QS Arrangement had not been in effect and the RED results had been
excluded for the three months ended September 30, 2014 and 2013.
Three months ended September 30,
2014 ($ millions) As Reported HO QS Cession
Pro Forma withoutHO QS Cession
RED
Pro Forma withoutRED and HO QS Cession
Earned Premiums $ 270.2 $ 43.9 $ 314.1 $ — $ 314.1 Losses
and LAE Incurred: Cat loss and ALAE 2.4 1.2 3.6 — 3.6 Non-cat loss
and LAE 182.0 17.0 199.0
13.8 185.2 Loss and LAE 184.4 18.2
202.6 13.8 188.8 Acquisition and operating expenses 91.4
15.7 107.1 —
107.1 Net underwriting (loss) gain $ (5.6 ) $ 10.0
$ 4.4 $ (13.8 ) $ 18.2 Cat loss and
ALAE ratio 0.9 % 2.8 % 1.1 % 1.1 % Non-cat loss and LAE ratio
67.3 % 38.7 % 63.4 % 59.0 % Loss and
LAE ratio 68.2 % 41.5 % 64.5 % 60.1 % Expense ratio 33.8 %
35.7 % 34.1 % 34.1 % Combined ratio
102.0 % 77.2 % 98.6 % 94.2 % Three
months ended September 30, 2013 ($ millions) As Reported HO QS
Cession
Pro Forma withoutHO QS Cession
RED
Pro Forma withoutRED and HO QS Cession
Earned Premiums $ 266.0 $ 43.9 $ 309.9 $ 4.5 $ 305.4 Losses
and LAE Incurred: Cat loss and ALAE 6.4 5.0 11.4 0.1 11.3 Non-cat
loss and LAE 172.4 16.2 188.6
6.6 182.0 Loss and LAE 178.8
21.2 200.0 6.7 193.3 Acquisition and operating expenses 90.9
12.7 103.6 1.6
102.0 Net underwriting (loss) gain $ (3.7 ) $ 10.0
$ 6.3 $ (3.8 ) $ 10.1 Cat loss and ALAE
ratio 2.4 % 11.3 % 3.7 % 1.1 % 3.7 % Non-cat loss and LAE ratio
64.8 % 36.9 % 60.8 % 147.9 %
59.6 % Loss and LAE ratio 67.2 % 48.2 % 64.5 % 149.0 % 63.3 %
Expense ratio 34.2 % 29.0 % 33.4 % 36.9
% 33.4 % Combined ratio 101.4 % 77.2 %
97.9 % 185.9 % 96.7 %
Schedule 1B
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
RECONCILIATION OF HO QS ARRANGEMENT CESSION AND RED UNDERWRITING
RESULTS (unaudited) The following table sets forth a
reconciliation of the HO QS Arrangement cession and the former RED
unit's underwriting results on the Company's overall results and
key performance indicators on a pro forma GAAP basis as if the HO
QS Arrangement had not been in effect and the RED results had been
excluded for the nine months ended September 30, 2014 and 2013.
Nine months ended September 30,
2014 ($ millions) As Reported HO QS Cession
Pro Forma withoutHO QS Cession
RED
Pro Forma withoutRED and HO QS Cession
Earned Premiums $ 801.0 $ 132.2 $ 933.2 $ — $ 933.2 Losses
and LAE Incurred: Cat loss and ALAE 29.9 19.2 49.1 — 49.1 Non-cat
loss and LAE 516.7 55.8 572.5
25.4 547.1 Loss and LAE 546.6
75.0 621.6 25.4 596.2 Acquisition and operating expenses
277.2 41.3 318.5 —
318.5 Net underwriting (loss) gain $ (22.8 ) $ 15.9
$ (6.9 ) $ (25.4 ) $ 18.5 Cat loss and ALAE
ratio 3.7 % 14.5 % 5.3 % 5.3 % Non-cat loss and LAE ratio
64.5 % 42.3 % 61.3 % 58.6 % Loss and LAE ratio
68.2 % 56.8 % 66.6 % 63.9 % Expense ratio 34.6 % 31.2
% 34.1 % 34.1 % Combined ratio 102.8 %
88.0 % 100.7 % 98.0 % Nine months ended
September 30, 2013 ($ millions) As Reported HO QS Cession
Pro Forma withoutHO QS Cession
RED
Pro Forma withoutRED and HO QS Cession
Earned Premiums $ 790.8 $ 132.8 $ 923.6 $ 22.4 $ 901.2
Losses and LAE Incurred: Cat loss and ALAE 32.2 19.2 51.4 0.5 50.9
Non-cat loss and LAE 505.7 55.5
561.2 27.6 533.6 Loss and LAE
537.9 74.7 612.6 28.1 584.5 Acquisition and operating expenses
266.7 38.5 305.2
7.8 297.4 Net underwriting (loss) gain $ (13.8
) $ 19.6 $ 5.8 $ (13.5 ) $ 19.3 Cat
loss and ALAE ratio 4.1 % 14.5 % 5.6 % 2.0 % 5.6 % Non-cat loss and
LAE ratio 63.9 % 41.8 % 60.7 % 123.1 %
59.2 % Loss and LAE ratio 68.0 % 56.3 % 66.3 % 125.1 % 64.9
% Expense ratio 33.7 % 29.0 % 33.0 %
35.0 % 33.0 % Combined ratio 101.7 % 85.3 %
99.3 % 160.1 % 97.9 %
State Auto Financial CorporationTara Shull, 614-917-4478, F
614-887-1793Investor Relations and Finance
DirectorTara.Shull@StateAuto.comorKyle Anderson, 614-917-5497, M
614-477-5301AVP/Director of Corporate
CommunicationKyle.Anderson@StateAuto.comorFor additional
information:StateAuto.com/STFCfacebook.com/StateAutotwitter.com/StateAuto
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