- 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
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,
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.
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.
“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.
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.
STATE AUTO FINANCIAL CORPORATION AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(unaudited) Three months ended December 31 Year ended
December 31 (in millions, except per share amounts) 2014 2013 2014
2013 Net premiums written $ 356.7 $ 253.4 $
1,194.2 $ 1,062.1 Earned premiums 273.1 264.2 1,074.1
1,055.0 Net investment income 17.7 17.4 74.7 72.8 Net realized gain
on investments 3.1 7.5 20.7 23.2 Other income 1.8
0.6 3.2 2.0 Total revenue
295.7 289.7 1,172.7
1,153.0 (Loss) income before federal income taxes (17.1 )
16.3 26.8 61.3 Federal income tax (benefit) expense
(82.5 ) (0.1 ) (80.6 ) 0.5 Net income $ 65.4
$ 16.4 $ 107.4 $ 60.8 Earnings per
common share: - basic $ 1.60 $ 0.40 $ 2.63 $ 1.50 - diluted $ 1.58
$ 0.40 $ 2.60 $ 1.49 Earnings per share from operations (A):
- basic $ 1.55 $ 0.28 $ 2.30 $ 1.13 - diluted $ 1.53 $ 0.28 $ 2.28
$ 1.12 Weighted average shares outstanding: - basic 40.9
40.7 40.9 40.6 - diluted 41.5 41.1 41.2 40.7 Return on
average equity (LTM) 13.0 % 8.0 % Book value per share $
21.32 $ 19.27 Dividends paid per share $ 0.10 $ 0.10 $ 0.40
$ 0.40 Total shares outstanding 40.9 40.7 GAAP
ratios: Cat loss and ALAE ratio 0.9 1.5 3.0 3.4 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
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 withoutHO QS Cession
RED
Pro Forma without HOQS 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 withoutHO QS Cession
RED
Pro Forma without HOQS 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 withoutHO QS Cession
RED
Pro Forma without HOQS 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 withoutHO QS Cession
RED
Pro Forma without HOQS 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 %
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 )%
State Auto Financial CorporationTara Shull, 614-917-4478, F
614-887-1793Investor Relations and Finance
DirectorTara.Shull@StateAuto.comorKyle Anderson, 614-917-5497, M
614-477-5301AVP/Director of Corporate
CommunicationKyle.Anderson@StateAuto.comorFor additional
information:StateAuto.com/STFCfacebook.com/StateAutotwitter.com/StateAuto
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