UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant
to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 25, 2015 (February 19, 2015)
STATE AUTO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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| Ohio |
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000-19289 |
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31-1324304 |
| (State or other jurisdiction
of incorporation) |
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(Commission
File Number) |
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(IRS Employer
Identification No.) |
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| 518 East Broad Street, Columbus, Ohio |
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43215-3976 |
| (Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (614) 464-5000
Not Applicable
(Former
name or former address, if changed since last report.)
Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| Section 2. |
Financial Information |
| Item 2.02. |
Results of Operations and Financial Condition. |
On February 19, 2015, State Auto Financial
Corporation (the “Company”) issued a press release disclosing the Company’s results of operations for the three-month period and fiscal year ended December 31, 2014 (the “Release”). The full text of the
Release is furnished as Exhibit 99.1 to this Current Report on Form 8-K.
The Release included a non-GAAP financial measure, net income (loss) from
operations per diluted share. Net income (loss) from operations differs from GAAP net income (loss) only by the exclusion of realized capital gains (losses), net of applicable taxes, on investment activity for the periods being reported. For the
three-month periods ended December 31, 2014 and 2013, GAAP net income (loss) was $1.58 per diluted share and $0.40 per diluted share, respectively, while net income (loss) from operations was $1.53 per diluted share and $0.28 per diluted share
for the same respective periods. For the three-month periods ended December 31, 2014 and 2013, realized capital gains, net of applicable taxes, increased the GAAP net income per diluted share by $0.05 and $0.12, respectively. For the fiscal
years ended December 31, 2014 and 2013, GAAP net income (loss) was $2.60 per diluted share and $1.49 per diluted share, respectively, while net income (loss) from operations was $2.28 per diluted share and $1.12 per diluted share for the same
respective periods. For the fiscal years ended December 31, 2014 and 2013, realized capital gains, net of applicable taxes, increased the GAAP net income per diluted share by $0.32 and $0.37, respectively.
Management uses net income (loss) from operations because it believes this calculation better indicates the Company’s operating performance than GAAP net
income (loss) in that net income (loss) from operations excludes the sometimes volatile realized capital gains/losses, net of applicable federal income taxes, that can produce inconsistent results.
The Release also included non-GAAP financial measures as to the combined ratio. The GAAP combined ratio for the three-month periods ended December 31,
2014 and 2013 was 113.3 and 102.1, respectively, and for the fiscal years ended December 31, 2014 and 2013 was 105.5 and 101.8, respectively. Excluding the impact of both the homeowners quota share arrangement(1) and the underwriting results of the terminated program business written through Risk Evaluation & Design LLC (RED), a wholly owned subsidiary of State Automobile Mutual Insurance Company,
which is in run-off, the combined ratio for the three-month periods ended December 31, 2014 and 2013, would have been 87.7 and 92.2, respectively, and for the fiscal years ended December 31. 2014 and 2013 would have been 95.4 and 96.5,
respectively. Management believes these non-GAAP financial measures provide investors with meaningful information concerning the Company’s GAAP combined ratio for the three-month period and fiscal year ended December 31, 2014.
| (1) |
Homeowners quota share arrangement: On December 31, 2011, the State Auto Group entered into a quota share reinsurance agreement with a syndicate of unaffiliated reinsurers covering its homeowners book of business.
This agreement expired December 31, 2014 in accordance with its terms and was replaced with a one-year property aggregate excess catastrophe reinsurance agreement effective January 1, 2015. |
The Release also included a non-GAAP financial measure as to net written premium. Net written premium for the
personal insurance segment for the three-month period and fiscal year ended December 31, 2014 increased 75.5% and 14.5% from the same periods in 2013. Excluding the impact of the homeowners quota share arrangement,(1) net written premium for the personal insurance segment for the three-month period and fiscal year ended December 31, 2014 decreased 5.4% and 4.2%, respectively, from the same periods in 2013.
Management believes this non-GAAP financial measure provides investors with a meaningful comparison of the Company’s current and historical net written premium.
| Item 7.01. |
Regulation FD Disclosure. |
The Company’s management conducted a conference call on
February 19, 2015, at approximately 11:00 a.m., ET, to review the Company’s financial results for the three-month period and fiscal year ended December 31, 2014, and to respond to questions from interested investors and financial
analysts. A transcript of the conference call is furnished as Exhibit 99.2 to this Current Report on Form 8-K.
In addition to the Consolidated
Statements of Income and reconciliation schedules included with the Release, the Company makes available on its website additional supplemental schedules containing financial information for the Company. This information is available at
www.stateauto.com by clicking “News Releases” under the “Investors” tab.
| Section 9. |
Financial Statements and Exhibits |
| Item 9.01. |
Financial Statements and Exhibits. |
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| Exhibit
No. |
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Description |
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| 99.1 |
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Press release issued by State Auto Financial Corporation on February 19, 2015, regarding results of operations for the three-month period and fiscal year ended December 31, 2014. |
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| 99.2 |
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Transcript of conference call held by management of State Auto Financial Corporation on February 19, 2015. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
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STATE AUTO FINANCIAL CORPORATION |
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| Date: February 25, 2015 |
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By |
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/s/ Steven E. English |
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Senior Vice President and Chief Financial Officer |
EXHIBIT INDEX
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| Exhibit
No. |
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Description |
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| 99.1 |
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Press release issued by State Auto Financial Corporation on February 19, 2015, regarding results of operations for the three-month period and fiscal year ended December 31, 2014. |
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| 99.2 |
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Transcript of conference call held by management of State Auto Financial Corporation on February 19, 2015. |
Exhibit 99.1
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| State Auto Financial reports fourth quarter and year 2014 results
• Quarterly income of $1.58 per diluted share
• Quarterly GAAP combined ratio of 113.3
• Return on equity of 13.0%
• Book value per share of $21.32
Columbus, Ohio (February 19, 2015) – State Auto Financial Corporation
(Nasdaq: STFC) today reported fourth quarter 2014 net income of $65.4 million, or $1.58 per diluted share, versus net income of $16.4 million, or $0.40 per diluted share, for the fourth quarter of 2013. Net income from operations per diluted share
for the fourth quarter 2014 was $1.531 versus net income from operations of $0.281 for the same 2013 period.
For the year 2014, STFC had net income of $107.4 million, or $2.60 per diluted share,
compared to net income of $60.8 million, or $1.49 per diluted share, for the same 2013 period. Net income from operations1 per diluted share for the year 2014 was $2.281 versus net income from operations of $1.121 for the same 2013 period. Both the quarter and full year results include the impact of the reversal of
the deferred tax asset valuation allowance, discussed below. Deferred Tax Asset
Valuation Allowance Reversed Net income for the fourth quarter and for the
year 2014 includes a federal income tax benefit of $82.5 million and $80.6 million, respectively, which includes the reversal of the valuation allowance against the company’s deferred tax assets (DTA). Upon completion of its evaluation of the
continued need for a valuation allowance, management concluded that the valuation allowance was no longer necessary. The reversal of the valuation allowance resulted in an increase to net income of $74.4 million, or $1.79 per diluted share, for the
fourth quarter 2014, and an increase to net income of $82.6 million, or $2.00 per diluted share, for the year 2014.
Reserve Strengthening on Program Business in Run-off and Adverse Development Cover Reinsurance Agreement
Prior year loss and loss expense reserves were strengthened by $71.3 million and $96.7
million, respectively, pre-tax for the fourth quarter and year 2014 on program business written through Risk Evaluation & Design LLC (RED), a wholly owned subsidiary of State Automobile Mutual Insurance Company. The reserve strengthening
related primarily to the two largest RED programs, the terminated restaurant and commercial trucking programs, both of which are in run off. The RED reserve strengthening reflects the completion of the previously announced ground up analysis of
outstanding RED case reserves. In addition, effective Dec. 31, |
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News Release
Contact
Tara Shull
Investor Relations and Finance Director
614.917.4478 F 614.887.1793 Tara.Shull@StateAuto.com
Kyle Anderson
AVP/Director of Corporate Communication
614.917.5497 M 614.477.5301
Kyle.Anderson@StateAuto.com |
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Corporate Headquarters 518 E. Broad St.
Columbus, OH 43215 614.464.5000
800.444.9950
For additional information: StateAuto.com/STFC
facebook.com/StateAuto |
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twitter.com/StateAuto |
State Auto Financial reports fourth quarter and year 2014
results, Feb. 19, 2015
Page
2
of 5
2014, the State Auto Group entered into an adverse development cover reinsurance agreement which provides $40
million of coverage for adverse development in excess of carried reserves for the terminated RED restaurant program. The net cost of the adverse development cover is included in the amounts discussed above.
Expired Homeowners Quota Share Reinsurance Arrangement Replaced with Property Aggregate Excess Catastrophe Reinsurance Agreement
The State Auto Group’s homeowners quota share reinsurance arrangement (the “HO QS Arrangement”) expired on Dec. 31, 2014 and was replaced with a
one-year property aggregate excess catastrophe reinsurance agreement effective Jan. 1, 2015. As a result of the expiration of the HO QS Arrangement, $89.5 million of unearned premium and $63.2 million of cash will be returned to STFC. The net
difference of $26.3 million represents the return of ceding commission to the reinsurers and a corresponding increase in deferred policy acquisition costs and reduction of other liabilities. STFC also recognized for the fourth quarter and year 2014
profit commission of $16.1 million and $19.0 million, respectively, in accordance with the terms of the HO QS Arrangement.
Operating Results
STFC’s GAAP combined ratio for the fourth quarter 2014 was 113.3 versus 102.1 for the fourth quarter of 2013. Catastrophe losses during the
fourth quarter 2014 accounted for 0.9 points of the 82.3 total loss ratio points, or $2.4 million, versus 1.5 points of the total 68.8 loss ratio points, or $4.1 million, for the same period in 2013. Excluding the impact of RED’s underwriting
results and the HO QS Arrangement cession, STFC’s GAAP combined ratio for the fourth quarter 2014 was 87.7%2 versus 92.2%2 for the fourth
quarter 2013.
Net written premium for the fourth quarter of 2014 increased 40.8% over the same period in 2013. By segment, net written premium for the
fourth quarter of 2014 increased 75.5% for personal insurance, 2.3% for business insurance and 33.5% for specialty insurance from the same period in 2013. The increase in the personal insurance segment was driven by the return of unearned premium
pursuant to the expiration of the HO QS Arrangement. Excluding the impact of the HO QS Arrangement, net written premium for the personal segment decreased 5.4%3 from the same period in 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 acquired in the second quarter of 2014 by our parent, State Automobile Mutual Insurance Company.
STFC’s GAAP combined ratio for the year 2014 was 105.5 compared to 101.8 for the same 2013 period. Catastrophe losses accounted for 3.0 points, or $32.3
million, during 2014, compared to 3.4 points, or $36.3 million, during 2013. The 2014 and 2013 catastrophe losses both included favorable prior accident years’ development which reduced the loss ratio by 0.5 points, or $5.2 million for 2014,
and 0.5 points, or $5.4 million for 2013. Non-catastrophe unfavorable reserve development increased the loss ratio by 4.7 points, or $50.3 million for 2014, which includes $96.7 million, or 9.0 loss ratio points, of loss and loss expense reserve
strengthening for prior accident years on program business written through RED. Non-catastrophe favorable reserve development decreased the loss ratio by 1.5 points, or $15.8 million for 2013, which included $21.3 million, or 2.0 loss ratio points,
of loss and loss expense reserve strengthening for prior accident years on program business written through RED.
Excluding the impact of RED’s
underwriting results and the HO QS Arrangement cession, STFC’s GAAP combined ratio for 2014 was 95.4%4 versus 96.5%4 for 2013.
State Auto Financial reports fourth quarter and year 2014
results, Feb. 19, 2015
Page
3
of 5
Net written premium for the year 2014 increased 12.4% compared to the same 2013 period. For the year 2014,
net written premium increased 14.3% for the personal insurance segment, 3.8% for the business insurance segment and 23.0% for the specialty insurance segment from the same period in 2013. Excluding the impact of the HO QS Arrangement net written
premium for the personal segment decreased 4.2%3 from the same period in 2013. The specialty insurance segment growth in net written premium was due to premium growth in all units of the specialty
insurance segment.
Book Value and Return on Equity
STFC’s book value was $21.32 per share as of Dec. 31, 2014, an increase of $0.91 per share from STFC’s book value on Sept. 30, 2014. The increase
includes the impact of the revaluation of pension and postretirement benefits at December 31, 2014, which reduced book value by $0.84 per share. The reduction was attributable to (i) a decline in the discount rate to 3.85% at
December 31, 2014 from 4.85% at December 31, 2013 and (ii) changes in mortality rate assumptions. Return on stockholders’ equity for the twelve months ended Dec. 31, 2014, was 13.0% compared to 8.0% for the twelve months ended
Dec. 31, 2013.
Commentary
STFC President, Chairman and CEO Bob Restrepo commented on the quarter and year as follows:
“With the end of 2014, State Auto Financial Corporation moved towards closing the book on several chapters which have distracted investors and masked the
solid underlying improvements in our underwriting results. As previously announced, we strengthened reserves on the terminated RED program business, which is in runoff. We’ve further strengthened our financial position on the terminated RED
restaurant program by entering into an Adverse Development Cover (ADC) reinsurance agreement with Munich Reinsurance America, Inc. Both these actions increase our confidence that this business will not be a drag on future earnings.
“In addition, we replaced the homeowner quota share treaty with a one year property aggregate excess catastrophe reinsurance agreement which covers all
property business underwritten by our personal insurance and business insurance segments, including automobile physical damage. This treaty allows us to retain the now profitable homeowner business and protect earnings from excessive and unexpected
catastrophe losses, minimizing volatility and preserving capital.
“Lastly, the allowance for deferred tax assets was reversed contributing to a
return on equity of 13%.
“Book value increased to $21.32. The benefit from the tax allowance reversal was somewhat offset by increased pension
liability resulting from revised mortality assumptions and a lower discount rate.
“Now that we have all the moving pieces behind us, we can focus on
the quality of our underwriting results. Setting aside the impact of the RED charges and our homeowner quota share treaty, our combined ratio for the quarter and full year was 87.7%2 and 95.4%4 , respectively. In the quarter, our loss ratios benefitted from excellent property results, low catastrophe experience and improved personal automobile results. Commercial automobile and liability
results continue to be good.
“In personal insurance, personal auto results improved for the quarter and year as compared to 2013 periods. We’re
pleased with our progress, but expect further improvements as price increases earn out and we maintain strong retention. Homeowner results continue to benefit from our multi-year remediation plan and favorable weather. Production remains an issue.
The collateral damage from our homeowner remediation plan has affected our new business flow. We’re now implementing programs to stimulate a more normal flow of new business and stabilize our personal lines production.
State Auto Financial reports fourth quarter and year 2014
results, Feb. 19, 2015
Page
4
of 5
“Business insurance loss ratios were good for the quarter in all lines. Price increases are moderating,
but remain positive. Production results also benefitted from a recovering economy with exposures up approximately 2%.
“Excluding RED, the specialty
segment finished with superior results. Our E&S business posted superior loss ratios and solid growth. Programs are achieving scale and acceptable loss ratios. We are pleased with the profitability of our workers compensation business and our
niche marketing strategy.
“Expense ratio results were essentially the same as 2013. A substantial profit commission from our homeowner quota share
reinsurance partners was offset by increased bonus accruals for agents and associates and the costs associated with our IT sourcing initiative.
“We’re pleased to have taken strong, affirmative action at year end to address our terminated RED programs and look forward to producing excellent
underwriting results and improved returns for our shareholders.”
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. STFC stock is traded on the NASDAQ Global Select Market, which represents the top
fourth of all NASDAQ listed companies.
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 (loss) from operations, a non-GAAP financial measure which management believes is informative to Company management and investors, differs from GAAP net income (loss) 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 $0.05 per diluted share for the fourth quarter 2014 and income of $0.32 per diluted share for 2014 versus income
of $0.12 per diluted share for the fourth quarter 2013 and income of $0.37 per diluted share for 2013. |
| 2 |
Represents a non-GAAP financial measure as to the fourth quarter 2014 and 2013 combined ratios. A reconciliation of the difference between this non-GAAP financial measure with the most directly comparable GAAP financial
measure is included in Schedule 1A that is part of this release. |
| 3 |
Represents a non-GAAP financial measure as to net written premium for the fourth quarter and year 2014. A reconciliation of the difference between this non-GAAP financial measure with the most directly comparable GAAP
financial measure is included in Schedule 2 that is part of this release. |
| 4 |
Represents a non-GAAP financial measure as to the years 2014 and 2013 combined ratios. A reconciliation of the difference between this non-GAAP financial measure with the most directly comparable GAAP financial measure
is included in Schedule 1B that is part of this release. |
State Auto Financial reports fourth quarter and year 2014
results, Feb. 19, 2015
Page
5
of 5
STFC has scheduled a conference call with interested investors for Thursday, Feb. 19 at 11 a.m. ET to discuss
the company’s fourth quarter and year 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 noon ET, Feb. 19, by calling 855-859-2056,
conference ID 72354335. Supplemental schedules detailing the company’s fourth quarter and year 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.
– 30 –
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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Three months ended December 31 |
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Year ended December 31 |
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2014 |
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2013 |
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2014 |
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2013 |
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| Net premiums written |
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$ |
356.7 |
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$ |
253.4 |
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$ |
1,194.2 |
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$ |
1,062.1 |
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| Earned premiums |
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273.1 |
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264.2 |
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1,074.1 |
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1,055.0 |
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| Net investment income |
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17.7 |
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17.4 |
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74.7 |
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72.8 |
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| Net realized gain on investments |
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3.1 |
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7.5 |
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20.7 |
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23.2 |
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| Other income |
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1.8 |
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0.6 |
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3.2 |
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2.0 |
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| Total revenue |
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295.7 |
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289.7 |
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1,172.7 |
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1,153.0 |
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| (Loss) income before federal income taxes |
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(17.1 |
) |
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16.3 |
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26.8 |
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61.3 |
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| Federal income tax (benefit) expense |
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(82.5 |
) |
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(0.1 |
) |
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(80.6 |
) |
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0.5 |
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| Net income |
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$ |
65.4 |
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$ |
16.4 |
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$ |
107.4 |
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$ |
60.8 |
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| Earnings per common share: |
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| - basic |
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$ |
1.60 |
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$ |
0.40 |
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$ |
2.63 |
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$ |
1.50 |
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| - diluted |
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$ |
1.58 |
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$ |
0.40 |
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$ |
2.60 |
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$ |
1.49 |
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| Earnings per share from operations (A): |
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| - basic |
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$ |
1.55 |
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$ |
0.28 |
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$ |
2.30 |
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$ |
1.13 |
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| - diluted |
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$ |
1.53 |
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$ |
0.28 |
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$ |
2.28 |
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$ |
1.12 |
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| Weighted average shares outstanding: |
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| - basic |
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40.9 |
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40.7 |
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40.9 |
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40.6 |
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| - diluted |
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41.5 |
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41.1 |
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41.2 |
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40.7 |
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| Return on average equity (LTM) |
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13.0 |
% |
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8.0 |
% |
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| Book value per share |
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$ |
21.32 |
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$ |
19.27 |
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| Dividends paid per share |
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$ |
0.10 |
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$ |
0.10 |
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$ |
0.40 |
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$ |
0.40 |
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| Total shares outstanding |
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40.9 |
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40.7 |
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| GAAP ratios: |
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| Cat loss and ALAE ratio |
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0.9 |
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1.5 |
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3.0 |
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3.4 |
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| Non-cat loss and LAE ratio |
|
|
81.4 |
|
|
|
67.3 |
|
|
|
68.8 |
|
|
|
64.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
82.3 |
|
|
|
68.8 |
|
|
|
71.8 |
|
|
|
68.2 |
|
| Expense ratio |
|
|
31.0 |
|
|
|
33.3 |
|
|
|
33.7 |
|
|
|
33.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Combined ratio |
|
|
113.3 |
|
|
|
102.1 |
|
|
|
105.5 |
|
|
|
101.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (A) Reconciliation of non-GAAP financial
measure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
65.4 |
|
|
$ |
16.4 |
|
|
$ |
107.4 |
|
|
$ |
60.8 |
|
| Less net realized gain on investments, less applicable federal income taxes |
|
|
2.0 |
|
|
|
4.8 |
|
|
|
13.5 |
|
|
|
15.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income from operations |
|
$ |
63.4 |
|
|
$ |
11.6 |
|
|
$ |
93.9 |
|
|
$ |
45.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-30-
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 December 31, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
December 31, 2014 |
|
| ($ millions) |
|
As Reported |
|
|
HO QS Cession |
|
|
Pro Forma without
HO QS Cession |
|
|
RED |
|
|
Pro Forma
without HO QS
Cession and RED |
|
|
|
|
|
|
|
| Earned Premiums |
|
$ |
273.1 |
|
|
$ |
43.4 |
|
|
$ |
316.5 |
|
|
$ |
— |
|
|
$ |
316.5 |
|
| Losses and LAE Incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE |
|
|
2.4 |
|
|
|
(0.2 |
) |
|
|
2.2 |
|
|
|
— |
|
|
|
2.2 |
|
| Non-cat loss and LAE |
|
|
222.3 |
|
|
|
11.0 |
|
|
|
233.3 |
|
|
|
71.3 |
|
|
|
162.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE |
|
|
224.7 |
|
|
|
10.8 |
|
|
|
235.5 |
|
|
|
71.3 |
|
|
|
164.2 |
|
| Acquisition and operating expenses |
|
|
84.7 |
|
|
|
28.7 |
|
|
|
113.4 |
|
|
|
— |
|
|
|
113.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net underwriting (loss) gain |
|
$ |
(36.3 |
) |
|
$ |
3.9 |
|
|
$ |
(32.4 |
) |
|
$ |
(71.3 |
) |
|
$ |
38.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE ratio |
|
|
0.9 |
% |
|
|
(0.5 |
)% |
|
|
0.7 |
% |
|
|
|
|
|
|
0.7 |
% |
| Non-cat loss and LAE ratio |
|
|
81.4 |
% |
|
|
25.4 |
% |
|
|
73.7 |
% |
|
|
|
|
|
|
51.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
82.3 |
% |
|
|
24.9 |
% |
|
|
74.4 |
% |
|
|
|
|
|
|
51.9 |
% |
| Expense ratio |
|
|
31.0 |
% |
|
|
66.1 |
% |
|
|
35.8 |
% |
|
|
|
|
|
|
35.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Combined ratio |
|
|
113.3 |
% |
|
|
91.0 |
% |
|
|
110.2 |
% |
|
|
|
|
|
|
87.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
December 31, 2013 |
|
| ($ millions) |
|
As Reported |
|
|
HO QS Cession |
|
|
Pro Forma without
HO QS Cession |
|
|
RED |
|
|
Pro Forma
without HO QS
Cession and RED |
|
|
|
|
|
|
|
| Earned Premiums |
|
$ |
264.2 |
|
|
$ |
44.1 |
|
|
$ |
308.3 |
|
|
$ |
1.3 |
|
|
$ |
307.0 |
|
| Losses and LAE Incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE |
|
|
4.1 |
|
|
|
3.5 |
|
|
|
7.6 |
|
|
|
(0.2 |
) |
|
|
7.8 |
|
| Non-cat loss and LAE |
|
|
177.8 |
|
|
|
14.5 |
|
|
|
192.3 |
|
|
|
17.0 |
|
|
|
175.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE |
|
|
181.9 |
|
|
|
18.0 |
|
|
|
199.9 |
|
|
|
16.8 |
|
|
|
183.1 |
|
| Acquisition and operating expenses |
|
|
88.1 |
|
|
|
12.8 |
|
|
|
100.9 |
|
|
|
0.7 |
|
|
|
100.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net underwriting (loss) gain |
|
$ |
(5.8 |
) |
|
$ |
13.3 |
|
|
$ |
7.5 |
|
|
$ |
(16.2 |
) |
|
$ |
23.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE ratio |
|
|
1.5 |
% |
|
|
8.0 |
% |
|
|
2.5 |
% |
|
|
(13.0 |
)% |
|
|
2.5 |
% |
| Non-cat loss and LAE ratio |
|
|
67.3 |
% |
|
|
32.9 |
% |
|
|
62.3 |
% |
|
|
1,344.7 |
% |
|
|
57.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
68.8 |
% |
|
|
40.9 |
% |
|
|
64.8 |
% |
|
|
1,331.7 |
% |
|
|
59.6 |
% |
| Expense ratio |
|
|
33.3 |
% |
|
|
29.0 |
% |
|
|
32.7 |
% |
|
|
56.8 |
% |
|
|
32.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Combined ratio |
|
|
102.1 |
% |
|
|
69.9 |
% |
|
|
97.5 |
% |
|
|
1,388.5 |
% |
|
|
92.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 years ended December 31, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve Months Ended
December 31, 2014 |
|
| ($ millions) |
|
As Reported |
|
|
HO QS Cession |
|
|
Pro Forma without
HO QS Cession |
|
|
RED |
|
|
Pro Forma
without HO QS
Cession and RED |
|
|
|
|
|
|
|
| Earned Premiums |
|
$ |
1,074.1 |
|
|
$ |
175.6 |
|
|
$ |
1,249.7 |
|
|
$ |
— |
|
|
$ |
1,249.7 |
|
| Losses and LAE Incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE |
|
|
32.3 |
|
|
|
19.0 |
|
|
|
51.3 |
|
|
|
— |
|
|
|
51.3 |
|
| Non-cat loss and LAE |
|
|
739.0 |
|
|
|
66.8 |
|
|
|
805.8 |
|
|
|
96.7 |
|
|
|
709.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE |
|
|
771.3 |
|
|
|
85.8 |
|
|
|
857.1 |
|
|
|
96.7 |
|
|
|
760.4 |
|
| Acquisition and operating expenses |
|
|
361.9 |
|
|
|
70.0 |
|
|
|
431.9 |
|
|
|
— |
|
|
|
431.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net underwriting (loss) gain |
|
$ |
(59.1 |
) |
|
$ |
19.8 |
|
|
$ |
(39.3 |
) |
|
$ |
(96.7 |
) |
|
$ |
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE ratio |
|
|
3.0 |
% |
|
|
10.8 |
% |
|
|
4.1 |
% |
|
|
|
|
|
|
4.1 |
% |
| Non-cat loss and LAE ratio |
|
|
68.8 |
% |
|
|
38.1 |
% |
|
|
64.5 |
% |
|
|
|
|
|
|
56.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
71.8 |
% |
|
|
48.9 |
% |
|
|
68.6 |
% |
|
|
|
|
|
|
60.8 |
% |
| Expense ratio |
|
|
33.7 |
% |
|
|
39.8 |
% |
|
|
34.6 |
% |
|
|
|
|
|
|
34.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Combined ratio |
|
|
105.5 |
% |
|
|
88.7 |
% |
|
|
103.2 |
% |
|
|
|
|
|
|
95.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve Months Ended
December 31, 2013 |
|
| ($ millions) |
|
As Reported |
|
|
HO QS Cession |
|
|
Pro Forma without
HO QS Cession |
|
|
RED |
|
|
Pro Forma
without HO QS
Cession and RED |
|
|
|
|
|
|
|
| Earned Premiums |
|
$ |
1,055.0 |
|
|
$ |
177.0 |
|
|
$ |
1,232.0 |
|
|
$ |
23.7 |
|
|
$ |
1,208.3 |
|
| Losses and LAE Incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE |
|
|
36.3 |
|
|
|
22.7 |
|
|
|
59.0 |
|
|
|
0.3 |
|
|
|
58.7 |
|
| Non-cat loss and LAE |
|
|
683.5 |
|
|
|
70.0 |
|
|
|
753.5 |
|
|
|
44.6 |
|
|
|
708.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE |
|
|
719.8 |
|
|
|
92.7 |
|
|
|
812.5 |
|
|
|
44.9 |
|
|
|
767.6 |
|
| Acquisition and operating expenses |
|
|
354.8 |
|
|
|
51.4 |
|
|
|
406.2 |
|
|
|
8.6 |
|
|
|
397.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net underwriting (loss) gain |
|
$ |
(19.6 |
) |
|
$ |
32.9 |
|
|
$ |
13.3 |
|
|
$ |
(29.8 |
) |
|
$ |
43.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE ratio |
|
|
3.4 |
% |
|
|
12.9 |
% |
|
|
4.8 |
% |
|
|
1.2 |
% |
|
|
4.9 |
% |
| Non-cat loss and LAE ratio |
|
|
64.8 |
% |
|
|
39.5 |
% |
|
|
61.2 |
% |
|
|
188.3 |
% |
|
|
58.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
68.2 |
% |
|
|
52.4 |
% |
|
|
66.0 |
% |
|
|
189.5 |
% |
|
|
63.6 |
% |
| Expense ratio |
|
|
33.6 |
% |
|
|
29.0 |
% |
|
|
33.0 |
% |
|
|
36.1 |
% |
|
|
32.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Combined ratio |
|
|
101.8 |
% |
|
|
81.4 |
% |
|
|
99.0 |
% |
|
|
225.6 |
% |
|
|
96.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
RECONCILIATION OF RED LOSS AND LOSS ADJUSTMENT EXPENSE RESULTS
(unaudited)
The following table sets forth a
reconciliation of the former RED unit’s losses on the Specialty segment’s loss and loss adjustment expenses on a pro forma SAP basis as if the the RED losses had been excluded for the three and twelve months ended December 31, 2014
and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
SAP Pro Forma excluding RED - Specialty Segment |
|
| |
|
Three Months Ended
December 31, 2014 |
|
|
Twelve Months Ended
December 31, 2014 |
|
| ($ millions) |
|
As Reported |
|
|
RED |
|
|
Pro Forma
without RED |
|
|
As Reported |
|
|
RED |
|
|
Pro Forma
without RED |
|
|
|
|
|
|
|
|
| Earned Premiums |
|
$ |
65.6 |
|
|
$ |
— |
|
|
$ |
65.6 |
|
|
$ |
240.9 |
|
|
$ |
— |
|
|
$ |
240.9 |
|
| Losses and LAE Incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE |
|
|
0.2 |
|
|
|
— |
|
|
|
0.2 |
|
|
|
1.9 |
|
|
|
— |
|
|
|
1.9 |
|
| Non-cat loss and LAE |
|
|
92.6 |
|
|
|
65.4 |
|
|
|
27.2 |
|
|
|
209.3 |
|
|
|
90.8 |
|
|
|
118.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE |
|
$ |
92.8 |
|
|
$ |
65.4 |
|
|
$ |
27.4 |
|
|
$ |
211.2 |
|
|
$ |
90.8 |
|
|
$ |
120.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE ratio |
|
|
0.3 |
% |
|
|
|
|
|
|
0.3 |
% |
|
|
0.8 |
% |
|
|
|
|
|
|
0.8 |
% |
| Non-cat loss and LAE ratio |
|
|
141.1 |
% |
|
|
|
|
|
|
41.5 |
% |
|
|
86.9 |
% |
|
|
|
|
|
|
49.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
141.4 |
% |
|
|
|
|
|
|
41.8 |
% |
|
|
87.7 |
% |
|
|
|
|
|
|
50.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
December 31, 2013 |
|
|
Twelve Months Ended
December 31, 2013 |
|
| ($ millions) |
|
As Reported |
|
|
RED |
|
|
Pro Forma
without RED |
|
|
As Reported |
|
|
RED |
|
|
Pro Forma
without RED |
|
|
|
|
|
|
|
|
| Earned Premiums |
|
$ |
55.3 |
|
|
$ |
1.3 |
|
|
$ |
54.0 |
|
|
$ |
226.8 |
|
|
$ |
23.7 |
|
|
$ |
203.1 |
|
| Losses and LAE Incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
— |
|
|
|
1.4 |
|
|
|
0.3 |
|
|
|
1.1 |
|
| Non-cat loss and LAE |
|
|
41.6 |
|
|
|
17.0 |
|
|
|
24.6 |
|
|
|
150.0 |
|
|
|
44.6 |
|
|
|
105.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE |
|
$ |
41.4 |
|
|
$ |
16.8 |
|
|
$ |
24.6 |
|
|
$ |
151.4 |
|
|
$ |
44.9 |
|
|
$ |
106.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE ratio |
|
|
(0.4 |
)% |
|
|
|
|
|
|
— |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
0.5 |
% |
| Non-cat loss and LAE ratio |
|
|
75.2 |
% |
|
|
|
|
|
|
45.6 |
% |
|
|
66.2 |
% |
|
|
|
|
|
|
51.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
74.8 |
% |
|
|
|
|
|
|
45.6 |
% |
|
|
66.8 |
% |
|
|
|
|
|
|
52.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
RECONCILIATION OF RED LOSS AND LOSS ADJUSTMENT EXPENSE RESULTS
(unaudited)
The following table sets forth a
reconciliation of the former RED unit’s losses on the Programs unit’s loss and loss adjustment expenses on a pro forma SAP basis as if the the RED losses had been excluded for the three and twelve months ended December 31, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
SAP Pro Forma excluding RED - Programs Unit |
|
| |
|
Three Months Ended
December 31, 2014 |
|
|
Twelve Months Ended
December 31, 2014 |
|
| ($ millions) |
|
As Reported |
|
|
RED |
|
|
Pro Forma
without RED |
|
|
As Reported |
|
|
RED |
|
|
Pro Forma
without RED |
|
|
|
|
|
|
|
|
| Earned Premiums |
|
$ |
20.8 |
|
|
$ |
— |
|
|
$ |
20.8 |
|
|
$ |
76.1 |
|
|
$ |
— |
|
|
$ |
76.1 |
|
| Losses and LAE Incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Non-cat loss and LAE |
|
|
79.8 |
|
|
|
65.4 |
|
|
|
14.4 |
|
|
|
141.5 |
|
|
|
90.8 |
|
|
|
50.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE |
|
$ |
79.8 |
|
|
$ |
65.4 |
|
|
$ |
14.4 |
|
|
$ |
141.5 |
|
|
$ |
90.8 |
|
|
$ |
50.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE ratio |
|
|
— |
% |
|
|
|
|
|
|
— |
% |
|
|
— |
% |
|
|
|
|
|
|
— |
% |
| Non-cat loss and LAE ratio |
|
|
381.8 |
% |
|
|
|
|
|
|
69.2 |
% |
|
|
185.7 |
% |
|
|
|
|
|
|
66.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
381.8 |
% |
|
|
|
|
|
|
69.2 |
% |
|
|
185.7 |
% |
|
|
|
|
|
|
66.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
December 31, 2013 |
|
|
Twelve Months Ended
December 31, 2013 |
|
| ($ millions) |
|
As Reported |
|
|
RED |
|
|
Pro Forma
without RED |
|
|
As Reported |
|
|
RED |
|
|
Pro Forma
without RED |
|
|
|
|
|
|
|
|
| Earned Premiums |
|
$ |
18.9 |
|
|
$ |
1.3 |
|
|
$ |
17.6 |
|
|
$ |
87.1 |
|
|
$ |
23.7 |
|
|
$ |
63.4 |
|
| Losses and LAE Incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
(0.2 |
) |
| Non-cat loss and LAE |
|
|
29.5 |
|
|
|
17.0 |
|
|
|
12.5 |
|
|
|
87.4 |
|
|
|
44.6 |
|
|
|
42.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE |
|
$ |
29.1 |
|
|
$ |
16.8 |
|
|
$ |
12.3 |
|
|
$ |
87.5 |
|
|
$ |
44.9 |
|
|
$ |
42.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cat loss and ALAE ratio |
|
|
(1.9 |
)% |
|
|
|
|
|
|
(1.1 |
)% |
|
|
0.2 |
% |
|
|
|
|
|
|
(0.3 |
)% |
| Non-cat loss and LAE ratio |
|
|
155.0 |
% |
|
|
|
|
|
|
71.0 |
% |
|
|
100.2 |
% |
|
|
|
|
|
|
67.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss and LAE ratio |
|
|
153.1 |
% |
|
|
|
|
|
|
69.9 |
% |
|
|
100.4 |
% |
|
|
|
|
|
|
67.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule 2
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
NET WRITTEN PREMIUM COMPARISON ($ millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Personal segment |
|
4th Quarter Only |
|
|
YTD |
|
| |
|
12/31/2014 |
|
|
12/31/2013 |
|
|
$ Change |
|
|
% Change |
|
|
12/31/2014 |
|
|
12/31/2013 |
|
|
$ Change |
|
|
% Change |
|
| As reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Personal auto |
|
$ |
83.1 |
|
|
$ |
89.4 |
|
|
$ |
(6.3 |
) |
|
|
(7.0 |
)% |
|
$ |
354.4 |
|
|
$ |
377.2 |
|
|
$ |
(22.8 |
) |
|
|
(6.0 |
)% |
| Homeowners |
|
|
101.7 |
|
|
|
13.6 |
|
|
|
88.1 |
|
|
|
647.8 |
% |
|
|
146.4 |
|
|
|
58.8 |
|
|
|
87.6 |
|
|
|
149.0 |
% |
| Other personal |
|
|
8.3 |
|
|
|
7.0 |
|
|
|
1.3 |
|
|
|
18.6 |
% |
|
|
31.3 |
|
|
|
29.4 |
|
|
|
1.9 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193.1 |
|
|
|
110.0 |
|
|
|
83.1 |
|
|
|
75.5 |
% |
|
|
532.1 |
|
|
|
465.4 |
|
|
|
66.7 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
| Homeowners: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Homeowners cession |
|
|
39.2 |
|
|
|
41.0 |
|
|
|
(1.8 |
) |
|
|
(4.4 |
)% |
|
|
172.8 |
|
|
|
176.9 |
|
|
|
(4.1 |
) |
|
|
(2.3 |
)% |
| Return of ceded unearned premium |
|
|
(89.5 |
) |
|
|
— |
|
|
|
(89.5 |
) |
|
|
— |
% |
|
|
(89.5 |
) |
|
|
— |
|
|
|
(89.5 |
) |
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50.3 |
) |
|
|
41.0 |
|
|
|
(91.3 |
) |
|
|
(222.7 |
)% |
|
|
83.3 |
|
|
|
176.9 |
|
|
|
(93.6 |
) |
|
|
(52.9 |
)% |
|
|
|
|
|
|
|
|
|
| Total excluding HO QS arrangement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Personal auto |
|
|
83.1 |
|
|
|
89.4 |
|
|
|
(6.3 |
) |
|
|
(7.0 |
)% |
|
|
354.4 |
|
|
|
377.2 |
|
|
|
(22.8 |
) |
|
|
(6.0 |
)% |
| Homeowners |
|
|
51.4 |
|
|
|
54.6 |
|
|
|
(3.2 |
) |
|
|
(5.9 |
)% |
|
|
229.7 |
|
|
|
235.7 |
|
|
|
(6.0 |
) |
|
|
(2.5 |
)% |
| Other personal |
|
|
8.3 |
|
|
|
7.0 |
|
|
|
1.3 |
|
|
|
18.6 |
% |
|
|
31.3 |
|
|
|
29.4 |
|
|
|
1.9 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Grand total |
|
$ |
142.8 |
|
|
$ |
151.0 |
|
|
$ |
(8.2 |
) |
|
|
(5.4 |
)% |
|
$ |
615.4 |
|
|
$ |
642.3 |
|
|
$ |
(26.9 |
) |
|
|
(4.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit 99.2
THOMSON REUTERS STREETEVENTS
EDITED TRANSCRIPT
STFC - Q4 2014 State Auto Financial Corp Earnings Call
EVENT
DATE/TIME: FEBRUARY 19, 2015 / 04:00PM GMT
|
|
|
| THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us |
|
|
| © 2015 Thomson Reuters. All rights reserved. Republication or
redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. ‘Thomson Reuters’ and the Thomson Reuters logo are registered trademarks of Thomson
Reuters and its affiliated companies. |
|
1
FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
CORPORATE PARTICIPANTS
Tara Shull State Auto Financial Corporation - Director-Investor Relations
Robert P. Restrepo, Jr. State Auto Financial Corporation - Chairman, President and Chief Executive Officer
Steven E. English State Auto Financial Corporation - SVP - Chief Financial Officer
Joel E. Brown State Auto Financial Corporation - SVP - Standard Lines
Jessica Buss State Auto Financial Corporation - SVP - Specialty Lines
CONFERENCE CALL PARTICIPANTS
Larry
Greenberg Janney Capital Markets - Analyst
Newsome J. Paul Sandler O’Neill - Analyst
Brett Sherriffs KBW - Analyst
PRESENTATION
Operator
Good morning, ladies and gentlemen, thank you for standing by. Welcome to the STFC Fourth Quarter and year 2014 Earnings Call. At this time all
parties are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Today’s call is being recorded, if you have any objections, please disconnect at this time.
I would now like to turn the call over to Investor Relations and Finance Director, Tara Shull. Please go ahead.
Tara Shull - State Auto Financial Corporation - Director-Investor Relations
Thank you, Sally. Good morning and welcome to our fourth quarter 2014 earnings conference call. Today, I’m joined by our Chairman,
President and CEO, Bob Restrepo; Senior Vice President and CFO, Steve English; Senior Vice President of Standard Lines, Joel Brown; Senior Vice President of Specialty, Jessica Buss; Chief Investment Officer, Scott Jones; and Chief Actuarial Officer,
Matt Mrozek.
Today’s call will include prepared remarks, after which we will open the lines for questions. Please note our comments today may
include forward-looking statements, which by their nature involve a number of risk factors and uncertainties, which may affect future financial performance. Such risk factors may cause actual results to differ materially from those contained in our
projections or forward-looking statements. These types of factors are discussed at the end of our press release as well as in our annual and quarterly filings with the Securities and Exchange Commission to which I refer you.
A financial packet containing reconciliations of certain non-GAAP measures along with supplemental financial information is available to all interested
parties on our website, stateauto.com under the Investors Section as an attachment to the press release.
Now, I’ll turn the call over to STFC’s
President, Chairman and CEO, Bob Restrepo.
Robert P. Restrepo State Auto Financial Corporation - Chairman, President and Chief Executive
Officer
Thank you, Tara and good morning everyone. There are quite a few moving pieces involved in our fourth quarter and
year-end results. Following my opening comments, Steve English will discuss in detail the previously announced reserve actions and new adverse development cover arrangement, which covers the terminated RED restaurant program business. In addition,
he’ll provide more color regarding the property aggregate excess catastrophe reinsurance agreement, which replaced the homeowner quota share treaty, which expired at the end of 2014.
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
Lastly, Steve will provide detail regarding the reversal of the deferred tax asset valuation allowance and
the impact of increased pension liability, resulting from new mortality assumptions and a lower discount rate. As you’ll see, the reversal of the deferred tax asset allowance more than offset the impact of higher pension liability and produced
an increase to book value per share which now stands at $21.32. The reversal also contributed to a 13% return on equity for the full year.
Setting all
this aside, we’re very pleased with the quality of our underwriting results for both the quarter and the year. Excluding RED and the expired homeowners quota share treaty, our combined ratio for the quarter was 87.7% and 95.4% for the full
year. Fourth quarter results benefited from low catastrophe levels, exceptionally good property results in all segments and continued improvement in the personal auto line on a year-over-year basis.
We enter 2015 with strong earnings momentum and expect to make continued progress as we earn out price increases, retain strong earnings in our homeowner line
and eliminate the drag from the RED run-off.
Personal auto results deteriorated relative to the third quarter, but this is typical, expected and results
from non-catastrophe weather related accidents, which we usually see in the fourth quarter. Year-over-year, results improved by over three points and we expect continued improvement in 2015 in this all-important line.
Homeowner results continue to be exceptionally good on both an all-in and ex-catastrophe basis. Personal lines production is disappointing, but not
unexpected. Joel Brown will discuss actions we have in place to stabilize our personal lines production this year in 2015 and resume normal low single-digit growth in 2016 and beyond.
Business insurance loss ratios are excellent and we’re planning to undertake a number of initiatives to address our expense ratio, which is higher than
we want and will be under pressure as commercial lines pricing continues to moderate.
Excluding RED, our specialty business had another outstanding
quarter and finished an exceptionally strong year. Jessica Buss will provide the details, but I can tell you the growth and profitability in our E&S lines is exceptional. Workers compensation continues to outperform our expectations and the
industry driven by our niche strategy, and the program line is improving as we achieve scale and maintain our disciplined underwriting and marketing.
Our
expense ratio was flat compared to 2013. Higher accruals for bonuses, contingent commissions paid to agents and the costs associated with our IT outsourcing were offset by a large profit commission from our homeowner quota share reinsurance
partners.
With that, I’ll turn you over to Steven English.
Steven English - State
Auto Financial Corp – SVP - Chief Financial Officer
Thanks, Bob. I will provide additional color on the expiration of
the homeowners quota share treaty, results of our RED ground up analysis, reversing our deferred tax asset valuation allowance as well as comment on the pension and post-retirement benefits revaluation and overall reserve development for 2014.
First, the homeowners quota share treaty expired per its terms on December 31, 2014. Over the past three years, the treaty provided capital support and
additional catastrophe protection. Over the same period, the financial performance of our homeowner book improved due to our actions along with improved weather. The agreement allowed a maximum profit margin for the reinsurers of 9% over the term of
the treaty. We reported last quarter through 33 months STFC was due $2.9 million of profit commission. With a very profitable fourth quarter, an additional $16.1 million was earned bringing the year-to-date total to $19 million, all of which has
been recorded as a reduction to acquisition and operating expenses. These amounts are reflected in the disclosure schedules distributed this morning.
With the expiration of the homeowners quota share treaty, we put in place a one-year property aggregate excess catastrophe reinsurance agreement effective
January 1, 2015 covering property business written by our personal and business segments including auto physical damage. We evaluated various options including alternate quota share structures. We believe our homeowner book is positioned to
generate the needed margins to absorb weather volatility. We were not willing to continue ceding these margins and therefore were only considering significantly reduced cession levels. However, small quota share structures do not provide meaningful
protection in the event of elevated weather catastrophe activity. We opted to pursue an aggregate catastrophe treaty protecting against significant downside earnings risk.
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
At the Group level the treaty provides $75 million of limit in excess of $165 million retention. The State
Auto Group has averaged annually, excluding the homeowner quota share treaty impact, $152 million of catastrophe losses over the past five years and $132 million annually over the past 10 years. There are no occurrence deductibles. Our specialty
segment property exposures were excluded because the primary exposure is Florida hurricane for which we retain, per occurrence, $15 million of the first $55 million with 5% co-participation for the next $285 million.
As disclosed, we completed the RED ground up reserve analysis as we brought claims processing in-house for the two largest programs, the terminated restaurant
and trucking programs. Reserve strengthening reflects the ongoing development of loss experience during the fourth quarter and new information that became known to us.
Total strengthening, including the cost of placing an adverse development cover, or ADC, totaled $71.3 million in the quarter bringing the year-to-date total
to $96.7 million. With new information reflected in our revised estimates and the protection provided by the ADC, these actions increase our confidence, as Bob mentioned, that this business will not be a drag on future earnings.
RED wrote several programs and placing an ADC covering them all was not practical given the differing types of risks involved and the ability of reinsurers to
assess the smaller individual programs. Given the length of time since the last exposure period, the type of claims involved, the amount of open claims, and recent claim reporting trends, we did not believe an ADC was a cost-effective strategy for
the trucking program.
With its materiality, its potential for volatility and the adverse development we have experienced, we made the decision to pursue
a structure to protect us from further charges related to the restaurant program. As we disclosed, the State Auto Group has entered into an ADC with $40 million of limit above our recorded reserves for this program.
To provide additional color, as of December 31, 2014, STFC’s recorded RED reserves totaled $126.4 million, of which 59% related to the restaurant
program. The restaurant program had 898 open claims, the trucking program 277 open claims, while the remainder of the programs only had 207 open claims. In the fourth quarter, the restaurant program reported 39 new claims with only three in suit.
Seventy-one percent of the restaurant claims were in suit as of the end of the year. For the trucking program there were only eight newly reported claims in the fourth quarter.
Moving on to taxes, we concluded it was appropriate to reverse the valuation allowance against our net deferred tax assets. Since the second quarter of 2011,
we have continually evaluated both positive and negative evidence as required by the accounting standards when assessing the recoverability of our net deferred tax assets. Being in a cumulative three-year loss position is considered significant
negative evidence. As we reported at the end of June 2014, STFC emerged from being in a three-year cumulative loss position to being in a cumulative income position. Despite the RED reserving actions we took in 2014, along with ceding 75% of our
homeowner profits, STFC finished 2014 in a three-year cumulative income position eliminating the negative evidence.
Further, when evaluating STFC’s
performance over the past three years, strong results have been achieved excluding the impact of RED and the homeowners quota share treaty. Management concluded, and our auditors concurred, it was appropriate to eliminate the valuation allowance.
Consequently, we removed the allowance by reversing the current year activity, adjusting the allowance to its beginning of the year balance and then reversing the allowance off the balance sheet and through the income tax expense reported on the
income statement. This results in, on a year-to-date basis, an underlying income tax provision, excluding the allowance reversal as if the allowance were not in existence at all during the year.
This provision reflects both current and deferred taxes and our traditional permanent differences, primarily tax-exempt interest income and dividends received
deduction. All this resulted in tax benefits of $82.5 million for the fourth quarter and $80.6 million year-to-date. The impact of the allowance reversal was a fourth quarter increase to net income of $74.4 million and $82.6 million increase in net
income for the year. As is our practice, we allocated tax expense to net realized gains at a 35% effective tax rate, with the balance reflected in operating earnings.
Finally, I would like to comment on the impact of revaluing the pension and post-retirement benefits obligations on our book value per share and comment on
overall reserve development. As you know, interest rates declined throughout 2014. This required us to lower the valuation discount rate from 4.85% to 3.85%. In addition, the Society of Actuaries published revised mortality tables in October of 2014
assuming people will continue to live longer. While not required to be adopted at this time, we elected to reflect the new tables in our estimate of the pension and post-retirement benefits obligations effective as of December 31, 2014.
The net increase to our obligations from these changes reduced other comprehensive
income by $34.3 million net of tax or $0.84 for book value per share. Finally, consistent with past practice, I can provide you an overview of reserve development reflected in our 2014 results. In total, development was adverse by $45.1 million or
4.2 loss ratio points. This compares to net favorable development ranging from 1.6 points to 5.1 points reported over the previous five years.
Excluding
RED, net development was favorable totaling $51.6 million or 4.8 loss ratio points with catastrophe reserves contributing $5.2 million and non-catastrophe reserves contributing $46.4 million. For non-catastrophe reserves, personal lines developed
favorable by $6.3 million primarily from accident year 2013, split between personal auto and homeowners. Business insurance contributed $16.7 million of favorable development from accident years 2012 and prior driven by other and product
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
liability and commercial auto, which developed favorably by $11.9 million and $5.3 million respectively. Specialty non-catastrophe reserves, excluding RED, developed favorably by $10.8 million
with $5.7 million attributable to workers compensation, and $3.9 million to E&S property. Favorable development in these lines was driven by better than anticipated severity, emerging primarily from the 2012 and 2013 accident years.
And in addition, our ULAE reserves developed favorably by $12.6 million, consistent with the loss reserves.
I will now turn you over to Joel Brown.
Joel E. Brown - State
Auto Financial Corporation - SVP - Standard Lines
Thanks Steve. The fourth quarter continued to show profit improvement for
Standard Lines. In the fourth quarter, personal insurance produced a loss ratio which was 3.4 points lower than the fourth quarter loss ratio in 2013.
On
a yearly basis, the personal insurance loss ratio improved nearly four points compared to 2013. Personal Auto was profitable and showed improvement quarter-over-quarter. On a yearly basis, our largest line of business improved over three points
compared to the previous year.
Rate activity was strong for Personal Auto in 2014. Personal Auto rate changes produced a 5.8% increase for the year.
Rates in 2014 were well ahead of our slightly negative pure premium trend. Relative to fast track loss trends, we are performing better from both a frequency and severity standpoint. The industry has seen upward movement in property damage and
collision coverages. Although our pure premium trends are outperforming in both of these areas, we continue to monitor both coverages. Personal Auto direct written premium was down for the year. We still are recovering from prior year agency
terminations and our aggressive homeowners remediation plan. In the fourth quarter, we introduced measures to stimulate new business production. A total of 18 of our 28 states received this new rating approach in 2014. The remaining states will
receive this discount in the first half of 2015. This new pricing, which we’ve named the Start-up Discount, recognizes stability factors in prospective insureds, based upon their buying habits and tenure with previous insurance companies.
Although very early, we are beginning to see month-over-month new business improvement in some key states since introducing this discount.
Retention
improved in Personal Auto in 2014, excluding the five focus states that we have been aggressively re-underwriting. As a reminder, those are: Arizona, Colorado, Georgia, Illinois and Michigan. Our 2014 retention improved to 80%, which is now
approaching our normal historical level. We are also seeing significant retention improvement, 5% or greater in our larger states.
Homeowners continues
to perform very well. Our loss ratio in the fourth quarter demonstrated improvement compared to the same period in 2013. On a yearly basis, the loss ratio showed over a four point improvement, compared to 2013. We do recognize the catastrophe
activity was relatively benign in 2014, but we continue to be encouraged with the improvement in our homeowner non-CAT loss ratio, which is now under 37%.
Rate activity for homeowners was 7.6% for the year and the annual rate impact on earned premium was just under 11%. Our pure premium trend is slightly
negative. Retention also improved in homeowners. On an annualized basis, retention increased 1.6 points compared to 2013.
Moving to standard business
insurance, our business loss ratio result in the fourth quarter was excellent and produced a significant 11 point improvement over the fourth quarter of 2013. This strong quarter helped produce an annual result for 2014, which was almost identical
to 2013’s. By line, commercial auto and commercial multi-peril produced similar loss ratio results to 2013. Other and product liability improved 5.8 points, while the fire and allied loss ratio was 6.9 points higher in 2014. The fire and allied
result was primarily influenced by the exceptionally cold winter in the first quarter and large fire losses in the first and second quarters of the year. In the second half of 2014, large fire losses returned to a normal level.
Rate, which is measured by price per exposure, increased 4.5% for the year as premium increases on renewals continue to moderate in the marketplace. Our
current pricing increase is almost identical to the industry, but less than the 7% price per exposure increase we achieved in 2013. Over the past 36 months, our cumulative price per exposure increase is in the mid-teens. Pricing is consistent with
our models and we continue to produce higher increases on those accounts which have greater exposure and higher hazard potential.
Competition on both new business and renewals is increasing. The competition is now more frequent on larger accounts. However, all accounts are feeling the
impact of a more competitive market. Despite the competition, our business insurance retention improved to just under 81%. Standard business direct written premiums grew 4.4% in 2014. Commercial auto and commercial multi-peril are the fastest
growing lines of business.
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
We continue to put an emphasis on actions to decrease our business insurance expense ratio. In 2014, we
introduced automated underwriting rules to process business. We are now seeing over 50% of renewal accounts processed without human intervention. In 2015, we’ll work to increase the renewal pass ratio without impacting underwriting quality, and
we’ll begin to introduce automated underwriting to new business submissions. We will continue to look at other factors, specifically more efficient ways to process small business, in order to improve our business insurance expense ratio.
In summary, standard lines produced improved profits in 2014, rates are exceeding loss trends and retention levels are improving in all major lines.
I’ll now turn it over to Jessica Buss to discuss Specialty results.
Jessica Buss - State Auto
Financial Corporation - SVP - Specialty Lines
Thanks, Joel. My comments today will focus solely on the on-going operations
and results in Specialty. We could not be more pleased with the continued profitability and growth in all of our Specialty segments. We achieved an overall Specialty loss ratio of 41.8% for the fourth quarter of 2014, which represents a 3.8 point
improvement over the same period 2013 and outperformed expectations. For the year, Specialty had a loss ratio of 50%.
E&S property as a whole
continues to see rate pressure and competition driven by excess capacity in the market. Even amidst a softening market, we posted another fantastic quarter with the loss ratio of negative 15.8%, which is 20 points better than the fourth quarter 2013
loss ratio, aided by lack of catastrophes and better than expected performance on prior accident years.
The overall 2014 loss ratio was 10%. Despite
softening market conditions, we achieved year-over-year premium growth of 16.7% over 2013. Our 2014 results were aided by our ability to sustain rate and reduce reinsurance costs, while maintaining underwriting discipline. In order to strengthen our
market position we have expanded our relationship with an existing partner to manage and grow our wholesale produced commercial property business, which will also allow for greater geographic diversification in 2015.
The overall E&S casualty market has flattened in terms of rate. Our niche approach, coupled with the acquisition of the general liability team made in the
second quarter of 2014, added to better than expected results. Having best in class underwriters and focusing on disciplined underwriting, continues to reward us with profitable growth.
In the fourth quarter of 2014, our loss ratio improved 22.7 points from the same period in 2013. The overall loss ratio for 2014 was 41.3%. In addition to
superior loss ratio performance, we grew premium by 56.9% for the quarter and 45% for the year. Growth was attributable to both inorganic and organic efforts. 67.2% of the total yearly growth resulted from the acquisition of our general liability
team and subsequent book rollover. The acquisition is a good example of a strategy we feel is accretive to growth and profitability and a strategy we will utilize in the future as the right opportunities present themselves. Moreover, we grew 15.4%
organically by doing more of what we do, by hiring more talented underwriters in more geographic locations.
Our programs unit has gained momentum on
building a portfolio of small to medium sized programs with appropriate due diligence and oversight. Our ongoing programs produced a loss ratio for the fourth quarter of 69.2% and for 2014 of 66.6% representing a 0.7 and 0.6 point improvement over
the same periods of 2013 respectively.
We continue to look for new programs with MGUs having proven track record in terms of profitability and
distribution and expect continued improvement from rate and scale. In 2014, we added three new programs and also saw organic growth in existing programs, resulting in year-over-year premium growth of 19.7%. Rate increases for the program’s unit
in 2014 was 5.2%. We continue to see opportunities in this market caused by exiting markets and company insolvencies and we feel we can continue to cherry pick programs that add diversity and are accretive to underwriting profit.
We are very pleased with our workers compensation business, which continues to outperform our expectations. Our niche approach to writing workers compensation
business and select classes, premium bandwidths and states has proved to be a profitable strategy. Our workers compensation book finished the quarter with a 51.5% loss ratio and 58.8% for 2014, aided by a firming price environment, consistent
execution of case and claim management and favorable prior year development. We achieved an overall rate increase of 6% on our workers compensation business in the quarter. Year-over-year growth of 16.5% was driven by our strategy to grow mono-line
business. 55% of our growth resulted from the expansion of our mono-lines small account segment with wholesalers.
We anticipate continued solid underwriting profits from our targeted workers compensation strategy, which focuses on accounts under $10,000 and our
traditionally profitable debit mod business written by RTW.
With that we’ll open for questions.
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
QUESTION AND ANSWER
Operator
(Operator Instructions) Paul
Newsome with Sandler O’Neill.
Newsome J. Paul - Sandler O’Neill - Analyst
Good morning, Thanks for the call folks. What impact prospectively, would you anticipate from pension costs, maybe I missed this on the
earnings?
Robert P. Restrepo - State Auto Financial Corporation - Chairman, President and Chief Executive Officer
Sure, Paul. When you re-value with the discount rate drop in the extra mortality that’s probably at most going to add to STFC’s
expense load a couple million bucks. It’s not going to be significant.
Newsome J. Paul - Sandler
O’Neill - Analyst
Okay. On the other side, it’s interesting that you’re offering new discount. Can you talk
about the size of that potential discount to an individual customer?
Joel E. Brown - State Auto Financial Corporation - SVP - Standard Lines
Hi, Paul. This is Joel Brown. The size varies based upon the state and the competitive marketplace. A discount, probably in the range of 5% is
going to apply. It’s based upon how long the individual was with their previous company. It’s also based on their shopping habits as far as how early they get their quote prior to the effective date of the policy. The discount does roll
off over time and we’ve totally offset that discount from a rate standpoint.
Newsome J. Paul - Sandler
O’Neill - Analyst
Great, thank you very much.
Operator
(Operator Instructions) Larry
Greenberg with Janney Capital.
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
Larry Greenberg - Janney Capital Markets - Analyst
Just wondering if you could talk a little bit more about the expense ratio? It seems like it’s something we’ve been talking about for
a bit now and as you are moving to larger commercial policies that was expected to have some impact. Can you talk about perhaps what the impact from that has been? And then perhaps just give us a little bit more concrete guidance on and what you
might be expecting in 2015 and then 2016?
Robert P. Restrepo - State Auto Financial Corporation - Chairman, President and Chief Executive
Officer
Larry, this is Bob Restrepo. Just as an overview, we’re reasonably comfortable with our personal lines expense
ratio, which has been under pressure as we’ve lost policy count but we’ve reduced headcount. We’ve gotten smarter about managing our outside report expenses and those efforts will continue. And then I’ll flip to the other side,
Specialty. We think we’re quite competitive from an expense ratio standpoint as we’ve achieved scale on all the major segments there.
Our issue
continues to be in the business insurance segment where we are disproportionately focused on smaller accounts, accounts under $5,000. That’s a source of our expense ratio problem. Our larger accounts are what we call middle market, which is
$25,000 to $100,000 accounts. We have an acceptable expense ratio. So we’ve been changing our mix, which is part of our strategy going forward, but again given the moderating price environment, we have to get more aggressive about doing things
differently, particularly as it relates to those policies under $5,000.
And we’re also looking at our commission structures as well. But the main
thing is having more productive and more efficient work flows for small accounts. Joel, I will turn over to you for any more color.
Joel E. Brown - State
Auto Financial Corporation - SVP - Standard Lines
Okay. Thanks, Bob. As I mentioned in my comments, Larry, we introduced
automated underwriting last year and we applied that to our renewal book, and we’re seeing over half of those policies pass now without the need to send to an underwriter. We plan on taking that same approach this year and applying that to new
business, so we have more of a straight through processing approach. We believe that will have a major impact on our overall expenses and also the time that we need for individuals to spend on underwriting new business. We’re looking at
shrinking our overall appetite so we only write those types of accounts from a BOP standpoint that fit.
We believe we can be more efficient as we write
those accounts that are smaller, that are less hazard prone and more homogeneous. As Bob mentioned, we’re also reviewing commissions to see where we are in step or out of step from a market standpoint. And then we’re awaiting more
automation from the standpoint of some of the things we’ve talked about in the past, our new policy administration system and a new portal that we believe will also enhance our efficiency in processing small business.
Larry Greenberg - Janney Capital Markets - Analyst
So will we see some of these benefits show up this year?
Steven English - State
Auto Financial Corp – SVP - Chief Financial Officer
Larry, I think you’ll see some of the benefits show up, which
will somewhat offset the fact that we do have a moderating pricing environment. And as I mentioned, that is putting pressure on our overall expense ratio and we want to see more traction, but we’re not predicting anything revolutionary in terms
of expense ratio reductions in 2015. It will play out over time, but we don’t expect to see significant improvements this year.
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
Joel E. Brown - State Auto Financial Corporation - SVP Standard Lines
Most of what we are working on now Larry, we would expect to see the benefit in 2016. And we didn’t mention it, but we’re also
working harder to achieve scale in business insurance. We need more scale to take care of our overall fixed cost. We have been showing good growth year-over-year and as we achieve scale we know that will help with our expense ratio as well.
Larry Greenberg - Janney Capital Markets - Analyst
Okay and I know, I’ll be able to go in your 10-K and come close to determining your effective tax rate on investment income, but I’m
just wondering if that’s a number you have handy to provide for us?
Steven English - State
Auto Financial Corporation – SVP - Chief Financial Officer
Larry let me look that up and I’ll jump back on here,
and I don’t have that in my head, but I can get you something here in a moment.
Larry Greenberg - Janney
Capital Markets - Analyst
Okay. And then just curious, I know the de minimis number, but the TIPS were actually negative in
the quarter which surprised me a little bit, was there anything going on there?
Steven English - State
Auto Financial Corporation – SVP - Chief Financial Officer
No, we revalue those each quarter according to where the
index goes and those market value changes on a GAAP basis run through the income statement. So it was no error correction it is just the way the numbers worked out.
Larry Greenberg - Janney
Capital Markets - Analyst
Okay, thanks.
Operator
Your next question comes from the line of Brett Sherriffs with KBW. Your line is open.
Brett Sherriffs - KBW - Analyst
Good morning, thanks for taking my questions. A couple for Jessica to start off. I’m just wondering if you could kind of expand on the
decision to expand your E&S property business outside of Florida, especially as it seems like conditions are deteriorating pretty quickly?
Jessica Buss - State Auto
Financial Corporation - SVP - Specialty Lines
Sure. We have historically, Brett, written business on the E&S side
outside of the state of Florida. We’ve written business from Texas to the Carolinas and part of our strategy includes an expanded relationship with an MGU we already do business with on the CAT side that has a team and has more expertise in
business outside of just the state of Florida. What we’re able to achieve with reduced reinsurance rates and what we’re able to get in terms of rate in the market, we feel warrants expanding, gaining scale and geographic diversification
throughout those states. In addition to that, what we have seen is that competition is really most fierce in the state of Florida and that there are actually good opportunities in select parts of other coastal regions.
Larry Greenberg - Janney Capital Markets - Analyst
Okay, great. I think you mentioned two new programs being written during 2014. Can you provide any more detail on those programs and what kind
of exposures you have there?
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
Jessica Buss - State Auto Financial Corporation - SVP - Specialty Lines
Sure, we actually entered into three new programs. One of them is a very niche focus E&O program written in select states, primarily in
Western states. E&O for accountants and lawyers. It’s sort of a small program, $5 million to $10 million will probably be written in 2015.
The
other two programs are mostly focused on niche auto exposures. One has to do with timber hauling. The second has to do with an auto rental program that has previously been with a large carrier and is an expansion of a relationship that we already
had with an auto program that is performing very, very well.
Larry Greenberg - Janney Capital Markets - Analyst
Okay, thank you very much.
Steven English - State
Auto Financial Corporation - SVP - Chief Financial Officer
This is Steve English back to Larry Greenberg’s question in
regards to the effective tax rate on investment income. With the level of tax-exempt interest and dividends received deduction, we’re somewhere in and around 25% on investment income.
Operator
(Operator Instructions) There
are no further questions. At this time, I’ll turn the call back over to you, Ms. Shull. Actually one just came in. Larry Greenberg.
Larry Greenberg - Janney
Capital Markets - Analyst
Thanks. Just wondering if you could elaborate a little bit on commercial auto? The underlying
was, as you mentioned flattish for the year. We hear from the marketplace that that’s, an area that’s getting some of the better price increases. I’m just wondering and where you are from a rate versus loss trend standpoint in that
line?
Robert P. Restrepo State Auto Financial Corporation - Chairman, President and Chief Executive Officer
Larry. I’ll let Joel talk about our standard results, and Jessica because we have a fair amount of commercial auto in our specialty
business as well. But just as kind of background, commercial auto covers all kinds of vehicles, all kind of weights, all kinds of driving businesses and definitely the higher hazard trucking long haul, heavier vehicle exposures have gotten a
significant amount of price increases. We don’t see as much on private passenger, commercial private passenger, pickup trucks, delivery, short-term vehicle deliveries. But I think of all the lines, other than workers compensation, that is the
line we’ve been able to get price increases because we’ve kind of been swept up in the overall unsatisfactory results in the commercial auto line in general, and Joel, I’ll turn it over to you.
Joel E. Brown - State Auto Financial Corporation - SVP - Standard Lines
Thanks, Bob. Bob is correct. We write a different class of commercial auto than many carriers. We write an awful lot of service vehicles and
vehicles to support artisan contractors. So we don’t tend to see some of the heavier exposures that some companies do. We’ve been able to achieve rate on that book of business right around the 4% range. However, that’s pretty
consistent with where we see our pure premium trends. So we feel pretty good about our overall commercial auto results. We are aware that this has been ticking up in the industry. Also, this was coverage where companies were taking decreases quarter
after quarter. We didn’t tend to take those types of decreases. So from a starting point, we didn’t have as much rate that we needed to recover as some of our other competitors. But again I think we feel comfortable where the book is
trending from a loss standpoint. We’re still getting rate, although it’s down now to the low-to-mid single digits.
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
Jessica Buss - State Auto Financial Corporation - SVP - Specialty Lines
And Larry, in the specialty side, most of the commercial auto business we write is through the program business. As you might remember our
largest program is actually commercial auto based, -the tow truck program. We continue to see great rate opportunities in that sector, which is niche focus. It doesn’t quite represent the whole commercial auto sector, but we have seen
double-digit rate increases, compound over the last three years, including 2014 where we were close to a little bit over 10%. We expect to continue to see rate increases. As Joel mentioned, probably more lower mid-single digits into 2015. We also
write some commercial auto business, which represents more similar to what Joel is talking about where we do some delivery vehicles. We’ve seen very good results in that segment of our program business, but those rate increases have been closer
to what I’d consider to be mid-single-digit rate increases.
Larry Greenberg - Janney Capital Markets - Analyst
And then, Steve, just a couple more numbers questions. Do you have the capital and surplus for STFC and then for the Group?
Steven English - State Auto Financial Corporation - SVP - Chief Financial Officer
Statutory STFC is $778 million and the Group is just shy of $1.2 billion.
Operator
(Operator Instructions) There
are no further questions at this time. I’ll turn the call back over to you Ms. Shull.
Tara Shull - State Auto
Financial Corporation - Director-Investor Relations
Thank you, Sally. We would like to thank all of you for participating
in our conference call and for your continued interest and support of State Auto Financial Corporation. We look forward to speaking with you again on our first quarter earnings call, which is currently scheduled for April 30, 2015. Thank you,
and have a good day.
Operator
Thank you. That concludes
today’s fourth quarter and year 2014 Earnings Conference Call. Thank you for participating. You may disconnect at this time.
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FEBRUARY 19, 2015 / 04:00PM GMT, STFC - Q4 2014 State Auto Financial Corp Earnings Call
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