State Auto Financial Corporation (NASDAQ: STFC) today reported a
third quarter 2011 net loss of $58.7 million, or $1.46 per diluted
share, versus net income of $0.2 million, or $0.00 per diluted
share, for the third quarter of 2010. Net loss from operations* per
diluted share for the third quarter 2011 was $1.62, versus a net
loss of $0.04 for the same 2010 period. Included in third quarter
results was a charge related to the deferred tax asset valuation
allowance in the amount of $28.9 million, or $0.72 per share.
STFC’s GAAP combined ratio for the third quarter 2011 was 122.4
versus 105.9 for the third quarter of 2010. Catastrophe losses for
the third quarter 2011 accounted for 17.0 points of the total 88.4
loss ratio points, or $60.8 million, versus 7.5 points of the total
73.1 loss ratio, or $23.7 million, for the same period in 2010.
Net written premium for the third quarter of 2011 increased 6.8%
over the same period in 2010. The Rockhill unit, which is in the
intercompany reinsurance pooling arrangement in 2011, contributed
7.4 points to this growth. For the third quarter of 2011, net
written premium for the personal and business insurance segments
declined 3.8% and 0.8%, respectively, compared to the same period
in 2010. Net written premium for the specialty insurance segment
increased $32.7 million compared to the same period in 2010. STFC’s
book value was $14.94 per share as of Sept. 30, 2011, a decrease of
$1.83 per share from STFC’s book value on June 30, 2011. Book value
per share as of Sept. 30, 2011 has been reduced by $3.58 for a
deferred tax asset valuation allowance. Return on stockholders’
equity for the 12 months ended Sept. 30, 2011 was negative 29.0%
compared to 0.2% for the 12 months ended Sept. 30, 2010.
For the first nine months of 2011, STFC had a
net loss of $247.4 million, or $6.15 per diluted share,
compared to a net loss of $13.1 million, or $0.33 per diluted
share, for the same 2010 period. Included in the results for the
first nine months was a charge related to the deferred tax asset
valuation allowance in the amount of $143.8 million, or $3.58 per
share. STFC’s GAAP combined ratio for the first nine months of 2011
was 124.2 compared to 106.9 for the same 2010 period. Catastrophe
losses increased the loss ratio for the first nine months of 2011
by 22.0 points, or $232.9 million, compared to 9.8 points, or
$91.3 million, for the first nine months of 2010. Net written
premium year to date 2011 increased 9.7% compared to the same
2010 period, with personal and business insurance declining 2.8%
and 0.7%, respectively. Net written premium for the specialty
insurance segment increased $117.2 million compared to the same
period in 2010. The increase in net written premium for the
specialty insurance segment was principally driven by the addition
of Rockhill unit to the pooling arrangement and increased business
written through Risk Evaluation and Design (RED), STFC’s affiliate
for alternative risk and program business.
Additionally, STFC announced proposed changes to the
intercompany pooling agreement, changes to its retiree health care
benefits and consideration of reinsurance solutions to further
reduce risk and volatility. The proposed pooling changes are to be
effective as of Dec. 31, 2011, and include changing the overall
participation of the STFC Pooled Companies and the SAM Pooled
Companies to 65% and 35%, respectively, from their current 80% and
20%, respectively. The pooling changes are subject to regulatory
approval by various departments of insurance. The proposed change
to the overall participation percentages of the STFC Pooled
Companies and the SAM Pooled Companies is the first such change
since 2001.
STFC President, Chairman and CEO Bob Restrepo commented on the
quarter as follows:
“STFC’s third quarter loss was driven by
adverse development from second quarter catastrophes, Hurricane
Irene and other third quarter catastrophic weather events.
Catastrophe losses were more than double what we normally
experience. Our five-year average for the third quarter is
approximately $25 million, far less than the $61 million we
incurred during the quarter. The historic catastrophes of the
second quarter produced unprecedented severity and we experienced
additional development in this quarter. Our GAAP combined ratio for
the quarter was 122.4, including 17 points of catastrophe loss.
“Although bad weather continued to
disproportionately influence our results, we also strengthened
workers compensation reserves on our legacy State Auto business
related to lifetime disability reserves. The net impact was $5.4
million representing 1.5 points on our total loss ratio with 60% of
these losses occurring prior to 2006. We believe our workers
compensation business is now positioned for improved results in the
future.
“We have taken several steps to improve
STFC’s capital position and leverage the strength of the State Auto
Group. Last week, the Boards of State Auto Mutual and STFC approved
revising our intercompany reinsurance pooling arrangement to reduce
STFC’s participation from 80% to 65%, pending regulatory approval.
To further reduce risk and volatility, we plan to put in place by
year end a quota share or similar reinsurance solution ceding a
significant portion of our homeowners business, possibly for a two-
to three-year period, providing us additional time to complete the
aggressive actions we’re taking to achieve homeowners
profitability. These steps will improve our capital position by
reducing leverage and increasing our statutory surplus while
providing additional catastrophe protection. Lastly, we announced
today that we will be terminating retiree health care benefits for
most of our active employees and certain retirees. This will reduce
a significant unfunded liability on our balance sheet and reduce
operating costs.
“From an operational perspective, personal
automobile remains profitable and we’re getting price increases. In
homeowners, we’ll finish this year increasing prices by over 30%
since the end of 2008. We continue to target aggressive price
increases and underwriting actions to improve results on this line.
In business insurance, premium growth is flat, but we are seeing
more stable production results as our new BOP Choice product gets
traction in the market place. Our specialty segment continues to
grow with excellent results in our Rockhill specialty business.
Profitability in this segment was impacted by the workers
compensation reserve strengthening.
“This has been a difficult year for State
Auto. The catastrophe loss activity was historic. The actions we’re
undertaking strengthen our capital position, leverage the
tremendous resources of the State Auto Group, and reduce volatility
from our homeowners line.”
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 third 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, primarily through independent insurance
agencies, in all 50 states and the District of Columbia. 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, State Auto
Florida, Milbank, Farmers Casualty, Meridian Security, Meridian
Citizens Mutual, Beacon National, Beacon Lloyds, Patrons Mutual,
Litchfield Mutual Fire, 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.
*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 difference amounted to income of $0.16 per diluted share
for the third quarter 2011 and $0.41 year to date versus $0.04 per
diluted share for the third quarter 2010 and $0.10 year to
date.
* * * * *
*
STFC has scheduled a conference call with interested investors
for Tuesday, Nov. 8 at 10:00 a.m. ET to discuss the company’s third
quarter 2011 performance. Live and archived broadcasts of the call
can be accessed on www.StateAuto.com. A replay of the call can be
heard beginning at noon ET Nov. 8 by calling 888-568-0133.
Supplemental schedules detailing the company’s third quarter 2011
financial, sales and underwriting results, along with pro forma
information on the pooling changes are made available on
www.StateAuto.com 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
Ended Nine Months Ended September 30 September 30 (In millions,
except per share amounts)
2011 2010
2011 2010 Net premiums written $
375.1 $ 351.3 $ 1,139.3 (B) $ 1,005.9
(C) Earned premiums 356.8 318.3 1,059.4 929.9 Net investment
income 20.3 19.3 66.5 60.6 Net realized gain on investments 10.2
2.8 24.9 6.3 Other income from affiliates 0.7
0.3 1.8 1.4 Total revenue
388.0 340.7 1,152.6 998.2
Loss before federal income taxes (52.0 ) (0.2 )
(174.2 ) (9.6 ) Federal income tax expense (benefit)
6.7 (0.4 ) 73.2 3.5 Net
(loss) income $ (58.7 ) $ 0.2 $ (247.4 ) $ (13.1 )
(Loss) earnings per share: - basic $ (1.46 ) $ 0.01 $ (6.15 ) $
(0.33 ) - diluted $ (1.46 ) $ 0.00 $ (6.15 ) $ (0.33 )
(Loss) earnings per share from operations (A): - basic $ (1.62 ) $
(0.04 ) $ (6.56 ) $ (0.43 ) - diluted $ (1.62 ) $ (0.04 ) $ (6.56 )
$ (0.43 ) Weighted average shares outstanding: - basic 40.3
40.0 40.2 39.9 - diluted 40.3 40.1 40.2 39.9 Return on
equity (LTM) -29.0 % 0.2 % Book value per share $ 14.94 $
21.18 Dividends paid per share $ 0.15 $ 0.15 $ 0.45 $ 0.45
Total shares outstanding 40.2 40.0 GAAP ratios: Loss
and LAE ratio 88.4 73.1 90.6 73.6 Expense ratio 34.0
32.8 33.6 33.3 Combined
ratio 122.4 105.9 124.2
106.9 Reconciliation of non-GAAP financial
measure: (A) Net loss from operations: Net (loss) income $ (58.7 )
$ 0.2 $ (247.4 ) $ (13.1 ) Less net realized gain on investments,
less applicable federal income taxes 6.6 1.8
16.2 4.1 Net loss from
operations $ (65.3 ) $ (1.6 ) $ (263.6 ) $ (17.2 )
(B) Net premiums written for the nine months ended September 30,
2011, includes $34.1 million of unearned premiums transferred to
STFC from the Rockhill Insurers in connection with the addition of
the Rockhill Insurers to the State Auto Pool, effective January 1,
2011. (C) Net premiums written for the nine months ended
September 30, 2010, includes $1.4 million of unearned premiums
transferred from STFC to State Auto Mutual in connection with the
addition of State Auto National to the State Auto Pool, effective
January 1, 2010.
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