State Auto Financial Corporation (Nasdaq:STFC) today reported a
third quarter 2012 net loss of $5.5 million, or $0.14 per diluted
share, versus a net loss of $58.7 million1, or $1.46 per diluted
share1, for the third quarter of 2011. Net loss from operations2
per diluted share for the third quarter 2012 was $0.25 versus net
loss from operations2 of $1.62 for the same 2011 period1.
STFC’s GAAP combined ratio for the third quarter 2012 was 110.2
versus 122.41 for the third quarter of 2011. Catastrophe losses,
net of reinsurance recoveries, for the third quarter 2012 accounted
for 2.8 points of the 77.1 total loss ratio points, or $7.2
million, versus 17.0 points of the total 88.4 loss ratio points, or
$60.8 million, for the same period in 2011. Non-catastrophe losses
included $19.5 million of loss and loss expense reserve increases
for prior periods on program business written by Risk Evaluation
& Design LLC (RED), a wholly owned subsidiary of State
Automobile Mutual Insurance Company. The reserve increases related
primarily to a large commercial auto trucking program that, as
previously disclosed, was cancelled as of April 1, 2012.
The State Auto Group’s homeowners quota share reinsurance
arrangement increased STFC’s underwriting loss by $13.1 million or
5.8 points on the combined ratio. Pursuant to the arrangement, STFC
ceded $47.5 million of written premium, $42.4 million of earned
premium, $0.1 million of catastrophe losses and $17.0 million of
non-catastrophe losses, and recognized $12.2 million of ceded
commissions. This cession increased STFC’s overall catastrophe loss
ratio 0.4 points, increased the overall non-catastrophe loss ratio
4.8 points and increased the overall expense ratio 0.6 points.
Net written premium for the third quarter of 2012 decreased
29.1% over the same period in 2011. The homeowners’ quota share
reinsurance arrangement and the year-end pooling change
collectively contributed the entire amount of this decline. By
segment, net written premium for the third quarter of 2012
decreased 42.2% for personal insurance, increased 0.5% for business
insurance and decreased 29.0% for specialty insurance from the same
period in 2011. Excluding the impact of the quota share reinsurance
arrangement and pooling change, net written premium for the third
quarter of 2012 increased 2.9%3 from the same period in 2011, with
the business insurance segment contributing primarily to the
overall growth. The business segment growth was principally driven
by higher average new business premium, increased renewal pricing
and a recovering economy. Additionally, business segment net
written premium includes $7.2 million of unearned premium
transferred from terminating an umbrella quota share reinsurance
arrangement effective July 1, 2012. Excluding the impact of the
homeowners’ quota share and pooling change, net written premium for
the third quarter decreased 0.8%3 for the personal insurance
segment, increased 23.7%3 for the business insurance segment and
decreased 12.6%3 for the specialty insurance segment from the same
period in 2011.
For the first nine months of 2012, STFC had a net loss of $10.2
million, or $0.25 per diluted share, compared to a loss of $260.0
million1, or $6.47 per diluted share1, for the same 2011 period.
STFC’s GAAP combined ratio for the first nine months of 2012 was
110.0 compared to 124.31 for the same 2011 period. Catastrophe
losses increased the loss ratio for the first nine months of 2012
by 7.9 points, or $61.2 million, compared to 22.0 points, or $232.9
million for the first nine months of 2011.
For the first nine months of 2012, the homeowners quota share
reinsurance arrangement reduced STFC’s underwriting loss by $18.5
million or 0.7 points on the combined ratio. Pursuant to the
arrangement, STFC ceded $131.4 million of written premium, $125.9
million of earned premium, $47.5 million of catastrophe losses and
$60.4 million of non-catastrophe losses, and recognized $36.5
million of ceded commissions. This cession reduced STFC’s overall
catastrophe loss ratio 4.2 points, increased the overall
non-catastrophe loss ratio 2.9 points and increased the overall
expense ratio 0.6 points.
Net written premium year to date 2012 decreased 29.9% compared
to the same 2011 period. The homeowners’ quota share reinsurance
arrangement and the year-end pooling change contributed to the
decrease, but were offset by growth in the business and specialty
segments. For the first nine months of 2012, net written premium
for the personal, business and specialty insurance segments
declined 41.8%, 9.0%, and 24.8% respectively, compared to the same
period in 2011. Excluding the impact of the quota share reinsurance
arrangement and pooling change, net written premium for the first
nine months of 2012 decreased 1.9%3 for the personal insurance
segment while business and specialty insurance increased 12.0%, and
7.9%, respectively from the same period in 2011.
STFC’s book value was $18.30 per share as of Sept. 30, 2012, an
increase of $0.48 per share from STFC’s book value on June 30,
2012. Book value per share as of Sept. 30, 2012, included a
reduction of $2.45 for a deferred tax asset valuation allowance.
Return on stockholders’ equity for the twelve months ended Sept.
30, 2012, was 13.6% compared to negative 31.8% for the twelve
months ended Sept. 30, 2011. The 13.6% return on stockholders’
equity includes, in the fourth quarter of 2011, a $35.7 million tax
benefit recorded as a result of intra-period tax allocations and a
$14.9 million postretirement benefit curtailment gain.
STFC President and CEO Bob Restrepo commented on the quarter as
follows:
“Third quarter results were helped by
significantly better weather, continued improvements in our
ex-catastrophe loss ratio performance for our personal, business
and specialty insurance segments, and an improving pricing
environment. These positive developments were offset by the
previously announced reserve adjustment for the RED business now in
run-off. Investment income is also down as interest rates and fixed
income returns remain at historically low levels. While we’re very
disappointed in the RED performance, we have confidence that the
actions we’ve taken will eliminate a drag on our financial
performance.
“Results in property lines, both homeowners
and commercial property, were exceptional in the quarter. We
benefited from a lack of catastrophes and increasing prices.
Performance in personal and commercial auto was relatively
unchanged, but we’re now charging higher prices in excess of loss
trends and anticipate expanding margins in what are traditionally
our most profitable lines. Liability lines also improved as our
changes to the claim process are beginning to pay off. In our
specialty segment, our Rockhill and RTW subsidiaries are producing
solid underwriting profits and good growth. These specialty
businesses will be important contributors to diversifying our
source of future earnings and achieving greater scale in the
commercial lines market place.”
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 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, 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/STFC.
1 The Company adopted Accounting Standards Update 2010-26,
“Accounting for Costs Associated with Acquiring and Renewing
Insurance Contracts” effective Jan. 1, 2012, and has applied its
provisions retrospectively. All applicable prior period amounts
have been adjusted to conform to current period presentation.
2 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 $0.11 per diluted
share for the third quarter 2012 and income of $0.34 year to date
versus income of $0.16 per diluted share for the third quarter 2011
and income of $0.40 year to date.
3 Represents a non-GAAP financial measure as to net written
premium. A reconciliation of the difference between this non-GAAP
financial measure with the most directly comparable GAAP financial
measure is included in Schedule 1 that is part of this release.
STFC has scheduled a conference call with interested investors
for Tuesday, Nov. 6 at 10 a.m. ET to discuss the company’s third
quarter 2012 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, Nov. 6, by calling
866-462-8977. Supplemental schedules detailing the company’s third
quarter 2012 financial, sales and underwriting results are made
available on http://www.StateAuto.com/STFC prior to the conference
call.
Except for historical information, all other information in this
news release consists of forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially
from those projected, anticipated or implied. The most significant
of these uncertainties are described in State Auto Financial's Form
10-K and Form 10-Q reports and exhibits to those reports, and
include (but are not limited to) legislative changes at both the
state and federal level, state and federal regulatory rule making
promulgations and adjudications, class action litigation involving
the insurance industry and judicial decisions affecting claims,
policy coverages and the general costs of doing business, the
impact of competition on products and pricing, inflation in the
costs of the products and services insurance pays for, product
development, geographic spread of risk, weather and weather-related
events, and other types of catastrophic events. State Auto
Financial undertakes no obligation to update or revise any
forward-looking statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended Nine Months Ended September 30
September 30 (In millions, except per share amounts) 2012 2011 2012
2011 As Adjusted (C) As Adjusted (C) Net premiums written $
265.9 $ 375.1 $ 798.6 $ 1,139.3 (B)
Earned premiums 261.4 356.8 774.7 1,059.4 Net investment
income 17.2 20.3 55.2 66.5 Net realized gain on investments 7.0
10.2 20.8 24.9 Other income 0.8 0.7
2.7 1.8 Total revenue 286.4
388.0 853.4 1,152.6
Loss before federal income taxes (5.6 ) (52.0 ) (10.3
) (175.7 ) Federal income tax (benefit) expense (0.1
) 6.7 (0.1 ) 84.3 Net loss $
(5.5 ) $ (58.7 ) $ (10.2 ) $ (260.0 ) Loss per share: -
basic $ (0.14 ) $ (1.46 ) $ (0.25 ) $ (6.47 ) - diluted $ (0.14 ) $
(1.46 ) $ (0.25 ) $ (6.47 ) Loss per share from operations
(A): - basic $ (0.25 ) $ (1.62 ) $ (0.59 ) $ (6.87 ) - diluted $
(0.25 ) $ (1.62 ) $ (0.59 ) $ (6.87 ) Weighted average
shares outstanding: - basic 40.4 40.3 40.4 40.2 - diluted 40.4 40.3
40.4 40.2 Return on equity (LTM) 13.6 % -31.8 % Book
value per share $ 18.30 $ 14.12 Dividends paid per share $
0.15 $ 0.15 $ 0.45 $ 0.45 Total shares outstanding 40.4 40.2
GAAP ratios: Cat loss and ALAE ratio 2.8 17.0 7.9 22.0
Non-cat loss and LAE ratio 74.3 71.4
68.8 68.6 Loss and LAE ratio 77.1 88.4
76.7 90.6 Expense ratio 33.1 34.0
33.3 33.7 Combined ratio 110.2
122.4 110.0 124.3
Reconciliation of non-GAAP financial measure: (A) Net loss
from operations: Net loss $ (5.5 ) $ (58.7 ) $ (10.2 ) $ (260.0 )
Less net realized gain on investments,
less applicable federal income taxes
4.5 6.6 13.5 16.2
Net loss from operations $ (10.0 ) $ (65.3 ) $ (23.7 ) $
(276.2 ) (B) Net premiums written for the nine months ended
September 30, 2011, included $34.1 million of unearned premiums
transferred to the Company from the Rockhill Insurers in connection
with the addition of the Rockhill Insurers to the State Auto Pool,
effective January 1, 2011.
(C) The Company adopted Accounting
Standards Update 2010-26, "Accounting for Costs Associated with
Acquiring and Renewing Insurance Contracts" effective Jan. 1, 2012,
and has applied its provisions retrospectively. All applicable
prior period amounts have been adjusted to conform to current
period presentation.
Schedule 1
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET WRITTEN PREMIUM, AS REPORTED, TO NET
WRITTEN PREMIUM EXCLUDING POOLING CHANGES AND QUOTA SHARE
ARRANGEMENT (unaudited) For the three and nine months
ended September 30, 2012, the following tables set forth the
reconciliation of net written premiums excluding the impact of the
quota share reinsurance agreement covering the Company's homeowners
book of business (the "HO QS Reinsurance Arrangement"). For the
nine months ended September 30, 2011, the following table sets
forth the reconciliation of the one-time impact of net written
premium of the unearned premiums transferred by the Rockhill
Insurers to the Company on January 1, 2011, in conjunction with the
January 1, 2011 pooling change (the "1.11.11 pool change") and for
the three and nine months ended September 30, 2011, on a pro forma
basis which assumes that the December 31, 2011 pooling
participation rate change from 80% to 65% (the "12.31.11 pool
change") had been in effect as of January 1, 2011. ($ in
millions)
For the three months ended September
30 Personal Segment Business Segment Specialty Segment Total -
All Segments 2012 2011 % Change 2012 2011 % Change 2012 2011 %
Change 2012 2011 % Change As Reported $ 120.8 $ 208.9 -42.2 % $
92.6 $ 92.1 0.5 % $ 52.6 $ 74.1 -29.0 % $ 266.0 $ 375.1 -29.1 %
2012 - Excluding HO QS Arrangement 47.5 -
- - - - - -
- 47.5 - - Subtotal 168.3
208.9 -19.4 % 92.6 92.1 0.5 % 52.6 74.1 -29.0 % 313.5 375.1 -16.4 %
2011 - Pro forma 12.31.11 pool change
- (39.2 ) - - (17.2 ) - - (13.9 ) - - (70.3 ) -
Total Pro forma 2012 and 2011 change 168.3
169.7 -0.8 % 92.6 74.9 23.7 %
52.6 60.2 -12.6 % 313.5 304.8
2.9 % ($ in millions)
For the nine months ended September
30 Personal Segment Business Segment Specialty Segment Total -
All Segments 2012 2011 % Change
2012 2011 % Change 2012 2011
% Change 2012 2011 % Change
As Reported $ 355.0 $ 610.1 -41.8 % $ 263.2 $ 289.3 -9.0 % $
180.5 $ 239.9 -24.8 % $ 798.7 $ 1,139.3 -29.9 % 2012 -
Excluding HO QS Arrangement 131.4 - -
- - - - - -
131.4 - - Subtotal 486.4 610.1 -20.3 %
263.2 289.3 -9.0 % 180.5 239.9 -24.8 % 930.1 1,139.3 -18.4 %
2011 - Excluding 1.11.11 pool change
- (34.1 )
(34.1 ) Subtotal 486.4 610.1 -20.3 %
263.2 289.3 -9.0 % 180.5 205.8 -12.3 % 930.1 1,105.2 -15.8 %
2011 - Pro forma 12.31.11 pool change
- (114.4 ) - - (54.2 ) - - (38.6 ) - - (207.2 ) -
Total Pro forma 2012 and 2011 change 486.4
495.7 -1.9 % 263.2 235.1 12.0 %
180.5 167.2 7.9 % 930.1 898.0
3.6 %
Schedule 2
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 RED
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 RED results had been
excluded for the three and nine months ended September 30, 2012.
Three Months Ended
September
30
($ millions) As Reported HO QS Cession
Pro Forma withoutHO QS Cession
RED
Pro Forma withoutHO QS and RED
Earned Premiums $ 261.4 $ 42.4 $ 303.8 $ 22.5 $ 281.3 Losses
and LAE Incurred: Cat loss and ALAE 7.2 0.1 7.3 0.5 $ 6.8 Non-cat
loss and LAE 194.2 17.0 211.2
39.7 $ 171.5 Loss and LAE 201.4 17.1
218.5 40.2 178.3 Acquisition and operating expenses 86.4
12.2 98.6 7.6 $
91.0 Net underwriting (loss) gain (26.4 ) 13.1
(13.3 ) (25.3 ) 12.0 Cat
loss and ALAE ratio 2.8 % 0.2 % 2.4 % 2.2 % 2.4 % Non-cat loss and
LAE ratio 74.3 % 40.1 % 69.5 % 176.4 %
61.0 % Loss and LAE ratio 77.1 % 40.3 % 71.9 % 178.6 % 63.4
% Expense ratio 33.1 % 29.0 % 32.5 %
33.8 % 32.3 % Combined ratio 110.2 % 69.3 %
104.4 % 212.4 % 95.7 % Nine
Months Ended
September
30
($ millions) As Reported HO QS Cession
Pro Forma withoutHO QS Cession
RED
Pro Forma withoutHO QS and RED
Earned Premiums $ 774.7 $ 125.9 $ 900.6 $ 77.6 $ 823.0
Losses and LAE Incurred: Cat loss and ALAE 61.2 47.5 108.7 0.5 $
108.2 Non-cat loss and LAE 533.2 60.4
593.6 91.4 $ 502.2 Loss and LAE
594.4 107.9 702.3 91.9 610.4 Acquisition and operating expenses
257.6 36.5 294.1
30.1 $ 264.0 Net underwriting loss (77.3 )
(18.5 ) (95.8 ) (44.4 ) (51.4 )
Cat loss and ALAE ratio 7.9 % 37.7 % 12.1 % 0.6 % 13.1 % Non-cat
loss and LAE ratio 68.8 % 48.0 % 65.9 %
117.8 % 61.0 % Loss and LAE ratio 76.7 % 85.7 % 78.0 % 118.4
% 74.2 % Expense ratio 33.3 % 29.0 % 32.7 %
38.8 % 32.1 % Combined ratio 110.0 %
114.7 % 110.7 % 157.2 % 106.2 %
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