State Auto Financial Corporation (NASDAQ:STFC) reported today
that it is revising previously disclosed financial information
related to accounting for its pension and postretirement benefits.
STFC had been pooling the net liabilities and the unrecognized
actuarial gains and losses along with prior service costs recorded
in accumulated other comprehensive income for pension and
postretirement benefits to affiliated companies pursuant to a quota
share reinsurance agreement or pooling agreement. However, STFC and
its auditors have determined that such pooling is not appropriate
for these items. Amounts recognized as pension expense continue to
be appropriately pooled in each period presented.
As a result, STFC's balance sheet has been revised to reverse
the impact of pooling these items by increasing the reported
pension and postretirement benefits liability and reducing reported
stockholders' equity by recording additional unrecognized actuarial
losses and prior service costs within accumulated other
comprehensive income at each reported balance sheet date. For
these adjustments, associated deferred tax benefits have been
established at each reported balance sheet date. For the year ended
December 31, 2017, additional deferred income tax expense of $7.1
million was recorded to reflect an adjustment to deferred taxes for
the reduction of the corporate income tax rate in connection with
the Tax Cut and Jobs Act of 2017 (TCJA). Related earnings and book
value per share amounts have been revised accordingly. These
adjustments are not material to STFC’s previously issued financial
statements. STFC has included with this release a new disclosure
for book value per share excluding accumulated other comprehensive
income, net of tax, along with the appropriate non-GAAP measurement
reconciliation.
As a result of the foregoing changes, STFC's fourth quarter 2017
net loss was $13.8 million1, or $0.331 per diluted share and net
loss from operations2 per diluted share was $0.651. For the year
ended 2017, STFC's net loss was $17.8 million1, or $0.421 per
diluted share and net loss from operations2 per diluted share was
$1.431. The fourth quarter and year ended 2017 net loss and net
loss from operations included a charge of $43.5 million,
or $1.03 per diluted share, related to the enactment of
the TCJA.
Book Value and Return on Equity
As a result of the foregoing changes, STFC’s book value was
$18.91 per share as of Dec. 31, 2018. Adjusted book value per
share3 was $21.13 per share as of Dec. 31, 2018 compared to $19.59
per share as of Dec. 31, 2017.
Except as described above, the change in accounting for pension
and postretirement benefits did not impact STFC’s 2018 financial
results or return on stockholders’ equity.
About State Auto Financial Corporation
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.
1As previously reported, the results for the fourth quarter and
year ended Dec. 31, 2017, have been revised to correct an error
discovered during the first quarter of 2018 relating to the
calculation of deferred acquisition costs (DAC) along with making
other adjustments not previously recorded relating to that same
time period. Results have also been revised for the adjustments
discussed in this release. Although these errors are immaterial to
STFC’s previously issued financial statements, the cumulative
corrections would have a material effect on the 2018 financial
statements. Accordingly, the results for the fourth quarter and
year ended Dec. 31, 2017, throughout this release have been
adjusted to incorporate the revised amounts, where applicable.
Please refer to our quarterly report on Form 10-Q for the period
ending March 31, 2018 for further information.
2 Net earnings (loss) from operations, a non-GAAP financial
measure that STFC believes is informative to its management and
investors, differs from GAAP net income (loss) only by the
exclusion of net investment (loss) gain, net of applicable taxes,
on investment activity for the periods being reported. For STFC,
this amounted to income of $0.32 per diluted share and $1.01 per
diluted share for the fourth quarter and year ended Dec. 31, 2017,
respectively.
3 Adjusted book value per share, a non-GAAP financial measure
that STFC believes is informative to its management and investors,
differs from GAAP book value per share only by the exclusion of
accumulated other comprehensive (loss) income, net of applicable
taxes, for the periods being reported. For STFC, this amounted to a
decrease of $2.23 per share and an increase of $0.09 per share for
the years ended Dec. 31, 2018 and 2017, respectively.
* * * * * *
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
Selected Consolidated Financial Data
Three months ended December 31 Year ended December 31
2018 2017 1
2018 2017 1 Net written premiums
$
297.6 $ 300.9
$ 1,210.3 $
1,270.3 Earned premiums
308.8 318.9
1,238.0 1,276.1 Net investment income
22.7 22.3
84.9 78.8 Net investment (loss) gain
(67.9 )
21.3
(49.7 ) 65.1 Other income from affiliates
0.8 0.6
2.6 2.3 Total
revenue
264.4 363.1
1,275.8
1,422.3 (Loss) income before federal income taxes
(32.5 ) 38.1
12.9 35.0 Federal income
tax (benefit) expense
(8.0 ) 51.9
0.1
52.8 Net (loss) income
$ (24.5 )
$ (13.8 )
$ 12.8 $ (17.8 ) (Loss)
earnings per common share: - basic
$ (0.57 ) $
(0.33 )
$ 0.30 $ (0.42 ) - diluted
$
(0.57 ) $ (0.33 )
$ 0.29 $ (0.42 )
Earnings (loss) per share from operations (A): - basic
$
0.68 $ (0.65 )
$ 1.21 $ (1.43 ) - diluted
$ 0.67 $ (0.65 )
$ 1.20 $ (1.43 )
Weighted average shares outstanding: - basic
43.1 42.3
42.9 42.1 - diluted
43.1 42.3
43.4 42.1 Return
on average equity (LTM)
1.5 % (2.1 )% Book value per
share
$ 18.91 $ 19.68 Adjusted book value per share
(B)
$ 21.13 $ 19.59 Dividends paid per share
$
0.10 $ 0.10
$ 0.40 $ 0.40 Total shares
outstanding
43.2 42.4 GAAP ratios: Cat loss and ALAE
ratio
2.6 2.6
5.8 9.7 Non-cat loss and ALAE ratio
54.2 60.1
58.5 62.3 Loss
and LAE ratio
56.8 62.7
64.3 72.0 Expense ratio
37.8 38.0
36.3 35.7
Combined ratio
94.6 100.7
100.6
107.7 (A)Reconciliation of non-GAAP financial
measure: Net income (loss) from operations: Net (loss) income
$ (24.5 ) $ (13.8 )
$ 12.8 $
(17.8 ) Net investment (loss) gain, net of tax
(53.6
) 13.8
(39.3 ) 42.3 Net income
(loss) from operations
$ 29.1 $ (27.6 )
$ 52.1 $ (60.1 ) (B) Reconciliation of
non-GAAP financial measure: Adjusted stockholders' equity: Total
stockholders' equity
$ 818.5 $ 835.0 Accumulated
other comprehensive (loss) income
(96.4 ) 3.8
Adjusted stockholders equity
$ 914.9 $ 831.2
STATE AUTO FINANCIAL CORPORATION AND
SUBSIDIARIES
Condensed Consolidated Balance Sheets ($ and
shares in millions, except per share amounts)
(unaudited) December 31 December 31
2018 2017
1
ASSETS
Fixed maturities, available-for-sale, at
fair value (amortized cost$2,188.2 and $2,173.1, respectively)
$ 2,159.5 $ 2,192.8 Equity securities
315.0
365.3 Other invested assets
48.8 56.0 Other invested assets,
at cost
5.6 5.6 Notes receivable from affiliate
70.0
70.0 Total investments
2,598.9 2,689.7
Cash and cash equivalents
59.8 91.5 Accrued investment
income and other assets
32.4 36.5 Deferred policy
acquisition costs
101.9 110.3 Reinsurance recoverable on
losses and loss expenses payable
5.5 3.1 Prepaid reinsurance
premiums
6.6 6.4 Current federal income taxes
5.9 4.8
Net deferred federal income taxes
77.8 69.5 Property and
equipment, net
7.1 7.3
Total assets
$ 2,895.9 $ 3,019.1
LIABILITIES Losses and loss expenses payable
$
1,146.8 $ 1,255.6 Unearned premiums
584.2 611.8 Notes
payable (affiliates $15.2 and $15.2, respectively)
122.0
122.1 Pension and postretirement benefits
83.0 99.3 Due to
affiliate
22.4 18.6 Other liabilities
119.0
76.7
Total liabilities 2,077.4 2,184.1
STOCKHOLDERS' EQUITY
Common stock, without par value.
Authorized 100.0 shares; 50.0 and49.2 shares issued, respectively,
at stated value of $2.50 per share
125.0 123.0 Treasury stock, 6.8 and 6.8 shares,
respectively, at cost
(117.0 ) (116.8 ) Additional
paid-in capital
194.2 171.8 Accumulated other comprehensive
(loss) income
(96.4 ) 3.8 Retained earnings
712.7 653.2
Total stockholders’ equity
818.5 835.0
Total liabilities and
stockholders’ equity $ 2,895.9 $ 3,019.1
STATE AUTO FINANCIAL CORPORATION AND
SUBSIDIARIES
Condensed Consolidated Statements of Income ($ in
millions, except per share amounts)
(unaudited) Three months ended December 31 Year ended December 31
2018 2017 1
2018 2017 1 Earned premiums
$
308.8 $ 318.9
$ 1,238.0 $ 1,276.1 Net
investment income
22.7 22.3
84.9 78.8 Net investment
(loss) gain
(67.9 ) 21.3
(49.7 ) 65.1
Other income from affiliates
0.8 0.6
2.6 2.3
Total revenues 264.4
363.1
1,275.8 1,422.3
Losses and loss expenses
175.3 200.1
796.4 918.3
Acquisition and operating expenses
116.8 121.3
449.8
455.2 Interest expense
1.2 1.5
5.7 5.9 Other expenses
3.6 2.1
11.0 7.9
Total
expenses 296.9 325.0
1,262.9
1,387.3
(Loss) income before federal income
taxes (32.5 ) 38.1
12.9 35.0 Federal
income tax (benefit) expense: Current
— 0.4
(1.1
) 0.4 Deferred
(8.0 ) 51.5
1.2
52.4 Federal income tax (benefit) expense
(8.0
) 51.9
0.1 52.8
Net (loss)
income $ (24.5 ) $ (13.8 )
$
12.8 $ (17.8 ) (Loss) earnings per common share:
Basic
$ (0.57 ) $ (0.33 )
$ 0.30
$ (0.42 ) Diluted
$ (0.57 ) $ (0.33 )
$ 0.29 $ (0.42 ) Dividends paid per common
share
$ 0.10 $ 0.10
$
0.40 $ 0.40
STATE AUTO FINANCIAL CORPORATION AND
SUBSIDIARIES
Consolidated Statements of Comprehensive Income ($ in
millions) (unaudited) Three months
ended December 31 Year ended December 31
2018 2017 1
2018 2017 1 Net (loss) income
$ (24.5 )
$ (13.8 )
$ 12.8 $ (17.8 ) Other comprehensive income
(loss), net of tax: Net unrealized holding gain (loss) on
available-for-sale investments: Unrealized holding gain (loss)
15.2 3.4
(46.4 ) 69.0 Reclassification
adjustments for gains realized in net income
(0.3 )
(21.3 )
(2.0 ) (65.1 ) Income tax (expense) benefit
(3.2 ) 6.9
10.1 (0.7 ) Total net
unrealized holding gain (loss) on available- for-sale investments
11.7 (11.0 )
(38.3 ) 3.2 Net
unrecognized benefit plan obligations: Net actuarial loss arising
during the period
(4.3 ) (1.5 )
(4.3 )
(1.5 ) Reclassification adjustments for amortization to net (loss)
income: Prior service credit
(1.5 ) (1.5 )
(6.3 ) (6.3 ) Net actuarial loss
3.3 3.2
13.2 12.5 Income tax expense (benefit)
0.5
(0.1 )
(0.6 ) (1.7 ) Total net unrecognized benefit
plan obligations
(2.0 ) 0.1
2.0
3.0 Other comprehensive income (loss)
9.7
(10.9 )
(36.3 ) 6.2
Comprehensive loss
$ (14.8 ) $ (24.7 )
$ (23.5
) $ (11.6 )
STATE AUTO FINANCIAL CORPORATION AND
SUBSIDIARIES
Condensed Consolidated Statement of Stockholders'
Equity ($ and shares in millions) (unaudited)
Year Ended Year Ended
December 31 December 31
2018 2017 1
Common shares: Balance at beginning of
year
49.2 48.6 Issuance of shares
0.8 0.6
Balance at end of year
50.0 49.2
Treasury shares: Balance at beginning of year and year ended
(6.8 ) (6.8 )
Common stock: Balance at
beginning of year
$ 123.0 $ 121.6 Issuance of shares
2.0 1.4 Balance at end of year
125.0
123.0
Treasury stock: Balance at
beginning of year
$ (116.8 ) $ (116.5 ) Shares
acquired on stock award exercises
(0.2 ) (0.3 )
Balance at end of year
(117.0 ) (116.8 )
Additional paid-in capital: Balance at beginning of year
$ 171.8 $ 159.9 Issuance of common stock
13.3
8.8 Stock awards granted
9.1 3.1 Balance at
end of year
194.2 171.8
Accumulated
other comprehensive (loss) income: Balance at beginning of year
$ 3.8 $ (2.4 )
Cumulative effect of change in accounting
for equity securities and otherinvested assets and reclassification
of stranded tax effects as of January 1, 2018
(63.9 ) — Adjusted beginning balance at
January 1, 2018
(60.1 ) — Change in unrealized (loss)
gain on available-for-sale investments, net of tax
(38.3
) 3.2 Change in unrecognized benefit plan obligations, net
of tax
2.0 3.0 Balance at end of year
(96.4 ) 3.8
Retained earnings:
Balance at beginning of year
$ 653.2 $ 687.9
Cumulative effect of change in accounting
for equity securities and otherinvested assets and reclassification
of stranded tax effects as of January 1, 2018
63.9 — Adjusted beginning balance at January
1, 2018
717.1 — Net income (loss)
12.8 (17.8 )
Dividends declared (affiliates $10.4 and $10.4, respectively)
(17.2 ) (16.9 ) Balance at end of year
712.7
653.2
Total stockholders’ equity at end of
year $ 818.5 $ 835.0
STATE AUTO FINANCIAL CORPORATION AND
SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow ($
millions) (unaudited) Year ended December 31
2018 2017 1
Cash flows from operating activities: Net
income (loss)
$ 12.8 $ (17.8 ) Adjustments to
reconcile net income (loss) to net cash (used in) provided by
operating activities: Depreciation and amortization, net
8.9
12.5 Share-based compensation
11.1 4.2 Net investment loss
(gain)
49.7 (65.1 ) Changes in operating assets and
liabilities: Deferred policy acquisition costs
8.4 11.5
Accrued investment income and other assets
3.9 3.5
Postretirement and pension benefits
(16.9 ) (14.8 )
Other liabilities and due to/from affiliate, net
47.6 11.3
Reinsurance recoverable on losses and loss expenses payable and
prepaid reinsurance premiums
(2.6 ) 0.2 Losses and
loss expenses payable
(108.8 ) 74.0 Unearned premiums
(27.6 ) (6.0 ) Deferred tax expense on share-based
awards
0.9 — Federal income taxes
(0.8 ) 54.4
Net cash (used in) provided by operating activities
(13.4 ) 67.9
Cash flows from investing
activities: Purchases of fixed maturities available-for-sale
(349.6 ) (505.4 ) Purchases of equity securities
available-for-sale
(91.4 ) (185.9 ) Purchases of
other invested assets
(1.8 ) (1.4 ) Maturities, calls
and principal reductions of fixed maturities available-for-sale
229.8 233.6 Sales of fixed maturities available-for-sale
98.0 184.8 Sales of equity securities available-for-sale
97.8 252.7 Sales of other invested assets available-for-sale
1.2 1.1
Net cash used in investing
activities (16.0 ) (20.5 )
Cash flows from
financing activities: Proceeds from issuance of common stock
15.4 10.2 Payments to acquire treasury shares
(0.2
) (0.3 ) Payment of dividends
(17.1 ) (16.9 )
Payment of credit facility issue costs
(0.4 ) —
Net cash used in financing activities (2.3
) (7.0 ) Net (decrease) increase in cash and cash
equivalents
(31.7 ) 40.4 Cash and cash equivalents at
beginning of period
91.5 51.1
Cash and cash
equivalents at end of period $ 59.8 $ 91.5
Supplemental
disclosures:
Federal income tax refund
$ — $ (1.6 )
Interest paid (affiliates $1.0 and $0.8, respectively)
$
5.7 $ 5.7
STATE AUTO FINANCIAL CORPORATION AND
SUBSIDIARIES
Income Taxes ($ in millions)
unaudited
The following table sets forth the tax
effects of temporary differences that give rise to significant
portions of deferred taxassets and deferred tax liabilities:
December 31 December 31
2018 2017 1 Deferred
tax assets: Unearned premiums not currently deductible
$
24.3 $ 25.5 Losses and loss expenses payable discounting
19.9 22.0 Postretirement and pension benefits
21.4
24.3 Net unrealized holding losses on investments
6.1 —
Realized loss on other-than-temporary impairment
1.9 2.1
Other liabilities
14.8 9.2 Net operating loss carryforward
15.1 34.3 Tax credit carryforwards
2.7 3.7 Other
1.7 2.5 Total deferred tax assets
107.9
123.6 Deferred tax liabilities: Deferral of policy acquisition
costs
21.4 23.1 Net unrealized holding gains on investments
— 20.3 Other
8.7 10.7 Total deferred
tax liabilities
30.1 54.1 Net deferred federal
income taxes
$ 77.8 $ 69.5 The
following table sets forth the components of federal income taxes:
Three months ended December 31 Year ended December 31
2018 2017 1
2018 2017 1 (Loss) income before federal
income taxes
$ (32.5 ) $ 38.1
$
12.9 $ 35.0 Federal income tax (benefit) expense: Current
— 0.4
(1.1 ) 0.4 Deferred (A)
(8.0
) 51.5
1.2 52.4
Total federal
income tax (benefit) expense (8.0 ) 51.9
0.1 52.8
Net (loss) income $
(24.5 ) $ (13.8 )
$ 12.8 $ (17.8
)
(A) Deferred federal income taxes for the
three months and year ended December 31, 2017 include $43.5 million
of deferred tax expense as a result of the revaluation of our net
deferred tax asset to the new corporate tax rate of 21.0% under the
legislation commonly known as the Tax Cuts and Jobs Act of
2017.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190304006035/en/
Media: Kyle Anderson, Kyle.Anderson@StateAuto.com,
614-917-5497Investors: Natalie Schoolcraft,
Natalie.Schoolcraft@StateAuto.com, 614-917-4341
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