State Auto Financial Corporation (Nasdaq:STFC) today reported a
first quarter 2012 net loss of $2.0 million, or $0.05 per diluted
share, versus net income of $12.8 million, or $0.32 per diluted
share, for the first quarter of 2011. Net loss from operations* per
diluted share for the first quarter 2012 was $0.16 versus net
income from operations* of $0.18 for the same 2011 period.
STFC’s GAAP combined ratio for the first quarter 2012 was 109.4
versus 103.0 for the first quarter of 2011. Catastrophe losses, net
of reinsurance recoveries, for the first quarter 2012 accounted for
7.8 points of the 75.0 total loss ratio points, or $20.0 million,
versus 4.6 points of the total 69.3 loss ratio points, or $16.0
million, for the same period in 2011.
The State Auto Group’s recently implemented homeowners quota
share reinsurance arrangement reduced STFC’s underwriting loss by
$7.1 million or 1.1 points on the combined ratio. Pursuant to the
arrangement, STFC ceded $36.2 million of written premium, $41.7
million of earned premium, $17.4 million of catastrophe losses and
$19.3 million of non-catastrophe losses, and recognized $12.1
million of ceded commissions. This cession reduced STFC’s overall
catastrophe loss ratio 4.8 points, increased the overall
non-catastrophe loss ratio 2.9 points and increased the overall
expense ratio 0.8 points.
Net written premium for the first quarter of 2012 decreased
30.2% 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 first quarter of 2012
decreased 40.4% for personal insurance, 15.3% for business
insurance and 24.5% 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 first
quarter of 2012 increased 7.5%** from the same period in 2011, with
the specialty insurance segment contributing primarily to the
overall growth. The specialty segment growth was principally driven
by the Rockhill and RED business units. Excluding the impact of the
quota share and pooling change, net written premium for the first
quarter decreased 3.1%** for the personal insurance segment and
increased 4.3%** for the business insurance segment from the same
period in 2011.
STFC President and CEO Bob Restrepo commented on the quarter as
follows:
“We continue to improve our ex-catastrophe
loss ratio performance. Personal auto remains profitable and we’re
implementing price increases higher than loss cost trends. Accident
year homeowners results improved with more normal ex-catastrophe
weather losses and price increases ahead of target. Standard
commercial lines performance improved significantly, particularly
for liability and commercial auto, and we expect mid-single digit
price increases by the end of the year. Rockhill’s surplus lines
results continue to be strong. Rockhill is finding opportunities in
a firming market and producing excellent underwriting results.
Workers Compensation results are largely on target with the
exception of middle market where we had a tough quarter. The
disappointment in our ex-catastrophe loss results is with our
managing general underwriting unit, RED. As reported previously, we
non-renewed a large commercial automobile program which began
running off in April.
“Catastrophe loss ratios for the first
quarter benefited from our new homeowners quota share treaty and a
recovery from our corporate catastrophe treaty. Without the quota
share treaty, our catastrophe loss ratio would have been 12.6%.***
Although the treaty reduced our catastrophe loss ratio and improved
results, it does come with a cost. Ex-catastrophe combined ratio
results were inflated in the loss ratio due to the ceded premium
impact on our results and added another 0.8% points to the expense
ratio. Overall, the treaty worked as expected in the first quarter,
and we anticipate the long term benefits of our homeowner actions
will be a more predictable and profitable book of homeowners
business and reduced risk to our capital base.
“We were relatively cat free with one
significant exception – an early March event which affected our
largest states of Kentucky, Indiana, Ohio and Tennessee. Over half
our claims were in Kentucky, where the town of West Liberty was
particularly hard hit. Once again, our claim folks were put to the
test and passed with flying colors. Property claim operations
continue to excel in achieving high service, at lower cost, and
with minimal indemnity leakage.
“This catastrophe featured a higher than
usual mix of commercial property claims. Usually, only 15-20% of
our catastrophe claims are commercial. In this case, approximately
40% of the losses affected commercial property results.
“We look for continued improvements in our
operating results as we achieve prices greater than our loss costs
in personal lines, get price increases in our commercial lines
book, and leverage investments in our specialty operations with
Rockhill and RTW.”
As previously reported, STFC 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. As a result, the impact at
Dec. 31, 2011, was a reduction to shareholders’ equity of $34.5
million, or $0.86 per share, resulting in an adjusted book value of
$17.95 per share. The previously reported book value per share as
of Dec. 31, 2011 was $18.81 per share. All applicable prior period
amounts have been adjusted to conform to current period
presentation, as a result of adopting this new accounting
standard.
STFC’s book value was $18.16 per share as of March 31, 2012, an
increase of $0.21 per share from STFC’s adjusted book value on Dec.
31, 2011. Book value per share as of March 31, 2012, included a
reduction of $2.49 for a deferred tax asset valuation allowance.
Return on stockholders’ equity for the twelve months ended March
31, 2012, was negative 22.3% compared to a positive 2.8% for the
twelve months ended March 31, 2011.
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.
* 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 first quarter 2012 versus income of $0.14 for the
same 2011 period.
** 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.
*** Represents a non-GAAP financial measure as to catastrophe
loss ratio. 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.
STFC has scheduled a conference call with interested investors
for Tuesday, May 8 at 10 a.m. ET to discuss the company’s first
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, May 8, by calling
1-800-395-6236. Supplemental schedules detailing the company’s
first 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 March 31 (In millions, except per share amounts)
2012 2011 As Adjusted Net premiums written $ 263.3 $
377.1 (B) Earned premiums 254.9 350.2 Net investment
income 17.5 21.0 Net realized gain on investments 7.1 8.2 Other
income 0.8 0.8 Total revenue
280.3 380.2 (Loss) income before
federal income taxes (2.0 ) 15.6 Federal income tax expense
- 2.8 Net (loss) income $ (2.0 ) $ 12.8
(Loss) earnings per common share: - basic $ (0.05 ) $
0.32 - diluted $ (0.05 ) $ 0.32 (Loss) earnings per share
from operations (A): - basic $ (0.16 ) $ 0.18 - diluted $ (0.16 ) $
0.18 Weighted average shares outstanding: - basic 40.3 40.1
- diluted 40.3 40.3 Return on equity (LTM) -22.3 % 2.8 %
Book value per share $ 18.16 $ 21.03 Dividends paid
per share $ 0.15 $ 0.15 Total shares outstanding 40.3 40.2
GAAP ratios: Cat loss and ALAE ratio 7.8 4.6 Non-Cat loss
and LAE ratio 67.2 64.7 Loss and LAE
ratio 75.0 69.3 Expense ratio 34.4 33.7
Combined ratio 109.4 103.0
Reconciliation of non-GAAP financial measure: (A) Net income from
operations: Net (loss) income $ (2.0 ) $ 12.8
Less net realized gain on investments,
less applicable federal income taxes
4.6 5.7 Net (loss) income from
operations $ (6.6 ) $ 7.1
(B)
Net premiums written for the three months
ended March 31, 2011, included $34.1 million of unearned premiums
transferred to the Company from the Rockhill Insurers in connection
with the addition of the Rockhill Insurers to the State Auto Pool,
effective January 1, 2011.
The Company adopted Accounting Standards Update 2010-26,
"Accounting for Costs Associated with Acquiring and Renewing
Insurance Contracts" effective Jan. 1, 2012, and has applied its
provisions retrospectively. All applicable prior period amounts
have been adjusted to conform to current period presentation.
Schedule 1
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET WRITTEN PREMIUM, AS REPORTED, TO NET
WRITTEN PREMIUM EXCLUDING POOLING CHANGES AND QUOTA SHARE
ARRANGEMENT (unaudited) For the three months ended March
31, 2012, the following table sets forth the reconciliation of net
written premiums excluding the impact of the quota share
reinsurance agreement covering the Company's homeowners book of
business (the "HO QS Reinsurance Arrangement"). For the three
months ended March 31, 2011, the following table sets forth the
reconciliation of the one-time impact of net written premium of the
unearned premiums transferred by the Rockhill Insurers to the
Company on January 1, 2011, in conjunction with the January 1, 2011
pooling change (the "1.11.11 pool change") and for the three months
ended March 31, 2011, on a pro forma basis which assumes that the
December 31, 2011 pooling participation rate change from 80% to 65%
(the "12.31.11 pool change") had been in effect as of January 1,
2011. ($ in millions)
As of March
31 Personal Segment Business Segment Specialty Segment Total -
All Segments 2012 2011 % Change 2012 2011 % Change 2012 2011 %
Change 2012 2011 % Change As Reported $ 113.0 $ 189.5 -40.4 % $
80.0 $ 94.5 -15.3 % $ 70.3 $ 93.1 -24.5 % $ 263.3 $ 377.1 -30.2 %
2012 - Excluding HO QS Arrangement 36.2 -
- - - - - -
- 36.2 - - Subtotal 149.2
189.5 -21.3 % 80.0 94.5 -15.3 % 70.3 93.1 -24.5 % 299.5 377.1 -20.6
%
2011 - Excluding 1.11.11 pool change
- (34.1 )
(34.1 ) Subtotal 149.2 189.5 -21.3 %
80.0 94.5 -15.3 % 70.3 59.0 19.2 % 299.5 343.0 -12.7 %
2011 - Pro forma 12.31.11 pool change
- (35.5 ) - - (17.8 ) - - (11.0 ) - - (64.3 ) -
Total Pro forma 2012 and 2011 change 149.2
154.0 -3.1 % 80.0 76.7 4.3 %
70.3 48.0 46.5 % 299.5 278.7 7.5
%
Schedule 2
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
RECONCILIATION OF HO QS ARRANGEMENT CESSION (unaudited)
The following table sets forth a reconciliation of the HO QS
Arrangement cession 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 for the three months ended March
31, 2012.
GAAP HO QS Arrangement Cession - Overall
Results ($ millions)
As Reported HO QS
Cession
Pro-Formawithout HOQS
Cession
Earned Premiums $254.9 $41.7 $296.6 Losses and LAE Incurred:
Cat loss and ALAE 20.0 17.4 37.4 Non-Cat loss and LAE 171.3 19.3
190.6 Loss and LAE 191.3 36.7 228.0 Acquisition and operating
expenses 87.6 12.1 99.7 Net underwriting loss (24.0) (7.1) (31.1)
Cat loss and ALAE ratio 7.8% 41.7% 12.6% Non-Cat loss and
LAE ratio 67.2% 46.3% 64.3% Loss and LAE ratio 75.0% 88.0% 76.9%
Expense ratio 34.4% 29.0% 33.6% Combined ratio 109.4% 117.0% 110.5%
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