- Quarterly income of $0.07 per
share
- Quarterly GAAP combined ratio of
107.3
- Return on equity of 8.4%
- Book value per share of $20.65
State Auto Financial Corporation (NASDAQ:STFC) today reported
second quarter 2014 net income of $3.0 million, or $0.07 per
diluted share, versus net income of $6.2 million, or $0.15 per
diluted share, for the second quarter of 2013. Net loss from
operations1 per diluted share for the second quarter 2014 was $0.01
versus net income from operations1 per diluted share of $0.13 for
the same 2013 period.
STFC’s GAAP combined ratio for the second quarter 2014 was 107.3
versus 103.6 for the second quarter of 2013. Catastrophe losses
during the second quarter 2014 accounted for 7.9 points of the 71.0
total loss ratio points, or $21.2 million, versus 8.1 points of the
total 70.6 loss ratio points, or $21.2 million, for the same period
in 2013. Non-catastrophe losses included $11.4 million, or 4.2 loss
ratio points, of loss and loss expense reserve strengthening for
prior accident years on program business written through Risk
Evaluation & Design LLC (RED), a wholly owned subsidiary of
State Automobile Mutual Insurance Company, all of which was
terminated in 2012 and is in runoff.
The State Auto Group’s homeowners’ quota share reinsurance
arrangement decreased STFC’s underwriting loss for the second
quarter of 2014 by $2.6 million and increased the combined ratio by
0.3 points. Pursuant to this arrangement, STFC ceded $48.6 million
of written premium, $44.1 million of earned premium, $15.6 million
of catastrophe losses and $18.3 million of non-catastrophe losses,
and recognized $12.8 million of ceded commissions. This cession
decreased STFC’s overall catastrophe loss ratio 3.9 points,
increased the overall non-catastrophe loss ratio 3.1 points and
increased the overall expense ratio 1.1 points.
Net written premium for the second quarter of 2014 increased
3.5% over the same period in 2013. By segment, net written premium
for the second quarter of 2014 decreased 4.4% for personal
insurance and increased 6.9% and 13.4% for business insurance and
specialty insurance, respectively, 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
remains positive, driven by higher average new business premium,
increased renewal pricing and a recovering economy. The growth in
specialty insurance was driven by pricing and new business.
For the first six months of 2014, STFC had net income of $30.1
million, or $0.73 per diluted share, compared to a net income of
$25.9 million, or $0.64 per diluted share1, for the same 2013
period. STFC’s GAAP combined ratio for the first six months of 2014
was 103.2 compared to 101.9 for the same 2013 period. Catastrophe
losses increased the loss ratio for the first six months of 2014 by
5.2 points, or $27.5 million, compared to 4.9 points, or $25.8
million for the first six months of 2013. Non-catastrophe losses
included $11.6 million, or 2.2 loss ratio points, of loss and loss
expense reserve strengthening for prior accident years on
terminated program business written through RED.
For the first six months of 2014, the homeowners’ quota share
reinsurance arrangement increased STFC’s underwriting loss by $5.9
million or 1.4 points on the combined ratio. Pursuant to the
arrangement, STFC ceded $86.5 million of written premium, $88.3
million of earned premium, $18.0 million of catastrophe losses and
$38.8 million of non-catastrophe losses, and recognized $25.6
million of ceded commissions. This cession reduced STFC’s overall
catastrophe loss ratio 2.1 points, increased the overall
non-catastrophe loss ratio 2.6 points and increased the overall
expense ratio 0.9 points.
Net written premiums year to date 2014 increased 2.1% compared
to the same 2013 period. For the first six months of 2014, net
written premium for the personal insurance segment decreased 4.4%,
while the business and specialty insurance segments increased 5.0%
and 10.3%, respectively, compared to the same period in 2013. The
specialty insurance segment increase was due to growth in all
specialty units, primarily excess and surplus property and
casualty.
STFC’s book value was $20.65 per share as of June 30, 2014, an
increase of $0.60 per share from STFC’s book value on March 31,
2014. Book value per share as of June 30, 2014, included a
reduction of $1.69 for a deferred tax asset valuation allowance.
Return on stockholders’ equity for the twelve months ended June 30,
2014, was 8.4% compared to 5.8% for the twelve months ended June
30, 2013.
STFC President and CEO Bob Restrepo commented on the quarter as
follows:
“State Auto Financial Corporation produced a
modest profit in the second quarter despite seasonally higher
levels of catastrophe losses, a reserve increase for the terminated
RED programs in runoff since 2012, and a charge of $4.4 million
related to the reorganization of our IT department. We’re pleased
with the increase in book value of almost 3% and the improved
return on equity result of 8.4%. Year to date, net income is up and
income from operations is comparable to 2013.
“We’re disappointed by the adverse
development on the runoff RED business. We’ve been actively
involved in managing larger claim files for about a year, but plan
to take over full file management from third party administrators
for the two largest programs beginning this summer. We expect this
to allow for a more detailed, ground up analysis and a complete
assessment by year end.
“Aside from RED, we remain pleased with the
progress we continue to make in improving our underwriting results.
Personal lines results continue to improve for both the personal
auto and homeowner lines. Excluding the impact of catastrophes,
personal automobile loss ratios improved by 3 points in the quarter
and 3.5 points year to date. Homeowner results continue to improve
and we expect to make a solid underwriting profit in personal lines
this year barring any unusual catastrophe events. The personal
lines segment continues to benefit from higher prices, geographic
diversification, disciplined agency management and strong claim
performance. Year to date, prices are up 5.8% for personal auto and
7.5% for homeowners.
“In the business insurance segment,
commercial auto and liability results continue to improve. Property
results were again affected by an unusually high frequency and
severity of large fire losses. For the quarter, prices are up 4.9%
and 5.1% year to date. Production continues to benefit from price
increases, larger new account premiums and stable retention.
“The specialty insurance segment continues to
grow with superior underwriting results aside from RED. Excess and
surplus (E&S) property had another exceptional quarter,
benefiting from favorable weather and modest price increases
despite a softening property pricing environment. E&S casualty
production is strong with the addition of new underwriters and new
distribution outlets. Production and profitability for E&S
casualty will also benefit from the recent addition of the Partners
General underwriting team. We remain pleased with our production
and profit in the program segment aside from RED. Workers
compensation results continue to be excellent, driven by modest
growth, high single digit price increases, and disciplined market
focus.
“The second quarter expense ratio was
elevated primarily due to the charge associated with the IT
reorganization. As previously disclosed, State Auto is moving to a
new policy administration and billing system as part of a long-term
technology transformation. To support this strategic direction,
we’ve entered into an agreement with a third party to support
approximately 90 applications primarily associated with our legacy
policy administration and billing systems which will be replaced
over the next several years. This initiative will accelerate our
speed to market, provide a more flexible staffing model and reduce
operating costs as we build out new technology platforms for the
future.
“Looking to the future, we’re pleased with
our improving underwriting performance, production momentum and
disciplined market focus. Completing the RED claim file assessment
this year clears the path for more predictable and stable
profitability in the future.”
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 and
one of Forbes’ 50 Most Trustworthy Financial Companies in America.
STFC stock is traded on the NASDAQ Global Select Market, which is a
segment of the NASDAQ Global Market with the highest initial
listing standards of any exchange in the world.
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 $0.08 per diluted
share for the second quarter 2014 and income of $0.25 year to date
2014 versus income of $0.02 per diluted share for the second
quarter 2013 and income of $0.13 year to date 2013.
STFC has scheduled a conference call with interested investors
for Thursday, July 31, at 11 a.m. ET to discuss the company’s
second quarter 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 2 p.m., July 31, by calling
855-859-2056, conference ID 74117262. Supplemental schedules
detailing the company’s second quarter 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 Six Months Ended June 30 June 30 (In
millions, except per share amounts) 2014 2013 2014 2013 Net
premiums written $ 295.1 $ 285.1 $ 560.5 $ 548.8
Earned premiums 268.3 263.5 530.8 524.8 Net investment
income 20.5 19.7 38.1 36.6 Net realized gain on investments 5.3 1.5
16.0 8.2 Other income 0.3 0.6
0.8 1.0 Total revenue 294.4 285.3
585.7 570.6 Income before federal
income taxes 3.1 6.3 30.8 26.3 Federal income tax expense
0.1 0.1 0.7 0.4 Net
income $ 3.0 $ 6.2 $ 30.1 $ 25.9 Earnings per
common share: - basic $ 0.07 $ 0.15 $ 0.74 $ 0.64 - diluted $ 0.07
$ 0.15 $ 0.73 $ 0.64 (Loss) earnings per share from
operations (A): - basic $ (0.01 ) $ 0.13 $ 0.48 $ 0.51 - diluted $
(0.01 ) $ 0.13 $ 0.48 $ 0.51 Weighted average shares
outstanding: - basic 40.8 40.5 40.8 40.5 - diluted 41.2 40.8 41.2
40.7 Return on average equity (LTM) 8.4 % 5.8 % Book
value per share $ 20.65 $ 17.53 Dividends paid per share $
0.10 $ 0.10 $ 0.20 $ 0.20 Total shares outstanding 40.9 40.6
GAAP ratios: Cat loss and ALAE ratio 7.9 8.1 5.2 4.9 Non-cat
loss and LAE ratio 63.1 62.5
63.0 63.5 Loss and LAE ratio 71.0 70.6 68.2 68.4 Expense
ratio 36.3 33.0 35.0 33.5
Combined ratio 107.3 103.6 103.2
101.9 (A) Reconciliation of non-GAAP financial
measure: Net income from operations: Net income $ 3.0 $ 6.2 $ 30.1
$ 25.9
Less net realized gain on investments,
less applicable federal income taxes
3.5 1.0 10.4 5.3 Net
(loss) income from operations $ (0.5 ) $ 5.2 $ 19.7 $ 20.6
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 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 June 30, 2014. GAAP HO QS
Arrangement Cession - Overall Results Three Months
Ended
June 30,
2014
($ millions) As Reported HO QS Cession
Pro Formawithout HO QSCession
Earned Premiums $ 268.3 $ 44.1 $ 312.4 Losses and LAE
Incurred: Cat loss and ALAE 21.2 15.6 36.8 Non-cat loss and LAE
169.2 18.3 187.5 Loss and
LAE 190.4 33.9 224.3 Acquisition and operating expenses 97.3
12.8 110.1 Net underwriting loss
$ (19.4 ) $ (2.6 ) $ (22.0 ) Cat loss and ALAE ratio 7.9 %
35.3 % 11.8 % Non-cat loss and LAE ratio 63.1 % 41.7
% 60.0 % Loss and LAE ratio 71.0 % 77.0 % 71.8 % Expense
ratio 36.3 % 29.0 % 35.2 % Combined ratio
107.3 % 106.0 % 107.0 % 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 June 30,
2013. Three Months Ended
June 30,
2013
($ millions) As Reported HO QS Cession
Pro Formawithout HO QSCession
RED
Pro Forma withoutRED and HO QSCession
Earned Premiums $ 263.5 $ 43.5 $ 307.0 $ 6.9 $ 300.1 Losses
and LAE Incurred: Cat loss and ALAE 21.2 12.2 33.4 0.6 32.8 Non-cat
loss and LAE 164.9 22.0 186.9
7.8 179.1 Loss and LAE 186.1
34.2 220.3 8.4 211.9 Acquisition and operating expenses 87.0
12.6 99.6 2.5
97.1 Net underwriting (loss) gain $ (9.6 ) $ (3.3 ) $
(12.9 ) $ (4.0 ) $ (8.9 ) Cat loss and ALAE ratio 8.1 % 28.0
% 10.9 % 8.7 % 10.9 % Non-cat loss and LAE ratio 62.5 %
50.6 % 60.9 % 113.0 % 59.7 % Loss and
LAE ratio 70.6 % 78.6 % 71.8 % 121.7 % 70.6 % Expense ratio
33.0 % 29.0 % 32.4 % 36.2 % 32.4 %
Combined ratio 103.6 % 107.6 % 104.2 %
157.9 % 103.0 %
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 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
six months ended June 30, 2014. GAAP HO QS
Arrangement Cession - Overall Results Six Months
Ended
June 30,
2014
($ millions) As Reported HO QS Cession
Pro Formawithout HO QSCession
Earned Premiums $ 530.8 $ 88.3 $ 619.1 Losses and LAE
Incurred: Cat loss and ALAE 27.5 18.0 45.5 Non-cat loss and LAE
334.7 38.8 373.5 Loss and
LAE 362.2 56.8 419.0 Acquisition and operating expenses
185.8 25.6 211.4 Net
underwriting (loss) gain $ (17.2 ) $ 5.9 $ (11.3 )
Cat loss and ALAE ratio 5.2 % 20.4 % 7.3 % Non-cat loss and LAE
ratio 63.0 % 43.9 % 60.4 % Loss and LAE ratio
68.2 % 64.3 % 67.7 % Expense ratio 35.0 % 29.0 %
34.1 % Combined ratio 103.2 % 93.3 %
101.8 % 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 six months ended June 30, 2013. Six
Months Ended
June 30,
2013
($ millions) As Reported HO QS Cession
Pro Formawithout HO QSCession
RED
Pro Forma withoutRED and HO QSCession
Earned Premiums $ 524.8 $ 88.9 $ 613.7 $ 17.9 $ 595.8 Losses
and LAE Incurred: Cat loss and ALAE 25.8 14.2 40.0 0.4 39.6 Non-cat
loss and LAE 333.3 39.3 372.6
21.0 351.6 Loss and LAE 359.1
53.5 412.6 21.4 391.2 Acquisition and operating expenses
175.8 25.8 201.6 6.2
195.4 Net underwriting (loss) gain $ (10.1 ) $
9.6 $ (0.5 ) $ (9.7 ) $ 9.2 Cat loss and ALAE
ratio 4.9 % 16.0 % 6.5 % 2.2 % 6.6 % Non-cat loss and LAE ratio
63.5 % 44.2 % 60.7 % 117.3 %
59.0 % Loss and LAE ratio 68.4 % 60.2 % 67.2 % 119.5 % 65.7 %
Expense ratio 33.5 % 29.0 % 32.8 % 34.6
% 32.8 % Combined ratio 101.9 % 89.2 %
100.0 % 154.1 % 98.6 %
State Auto Financial CorporationTara Shull, Investor Relations
and Finance Director, 614-917-4478F
614-887-1793Tara.Shull@StateAuto.comorKyle Anderson, AVP/Director
of Corporate Communication, 614-917-5497M
614-477-5301Kyle.Anderson@StateAuto.comorFor additional
information:StateAuto.com/STFCfacebook.com/StateAutotwitter.com/StateAuto
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