State Auto: Net Income Down, Written Premium Up for Q2 1014

August 5, 2014

State Auto Financial Corp. reported net income for the second quarter 2014 that was nearly 50 percent less than its net income for the same period in 2012, while net written premium increased in Q2 2014 compared with Q2 2013

The Columbus, Ohio-based insurer 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 operations per diluted share for the second quarter 2014 was $0.01 versus net income from operation per diluted share of $0.13 for the same 2013 period.

Net written premium for the second quarter of 2014 increased 3.5 percent over the same period in 2013.

By segment, net written premium for the second quarter of 2014 decreased 4.4 percent for personal insurance and increased 6.9 percent and 13.4 percent 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.

The company’s GAAP combined ratio for the second quarter 2014 was 107.3 versus 103.6 for second quarter 2013. Catastrophe losses during the Q2 2014 came in at $21.2 million, essentially equal to the $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 Co., 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.

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 share, 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 percent compared to the same 2013 period. For the first six months of 2014, net written premium for the personal insurance segment decreased 4.4 percent, while the business and specialty insurance segments increased 5.0 percent and 10.3 percent, 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 President and CEO Bob Restrepo commented that the company “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 percent and the improved return on equity result of 8.4 percent. Year to date, net income is up and income from operations is comparable to 2013.”

However, Restropo said, “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.”

He added that aside from RED, the company is pleased with its progress in improving underwriting results.

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