Add
STFC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| STFC > SEC Filings for STFC > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-2009
Quarterly Report
The term "State Auto Financial" as used below refers only to State Auto Financial Corporation and the terms "our Company," "we," "us," and "our" as used below refer to State Auto Financial Corporation and its consolidated subsidiaries. The term "third quarter" as used below refers to the three months ended September 30. The term "SAP" as used below refers to Statutory Accounting Principles and the term "GAAP" as used below refers to U.S. Generally Accepted Accounting Principles.
The discussion and analysis presented below relates to the material changes in financial condition and results of operations for our consolidated balance sheets as of September 30, 2009, and December 31, 2008, and for the consolidated statements of income for the three-month and nine-month periods ended September 30, 2009 and 2008. This discussion and analysis should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for our year ended December 31, 2008 (the "2008 Form 10-K"), and in particular the discussions in those sections thereof entitled "Executive Summary" and "Critical Accounting Policies." Readers are encouraged to review the entire 2008 Form 10-K, as it includes information regarding our Company not discussed in this Form 10-Q. This information will assist in your understanding of the discussion of our current period financial results.
The discussion and analysis presented below includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "project," "believe" or "continue" or the negative thereof or variations thereon or similar terminology. Forward-looking statements speak only as of the date the statements were made. Although we believe that the expectations reflected in forward-looking statements have a reasonable basis, we can give no assurance that these expectations will prove to be correct. Forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. For a discussion of the most significant risks and uncertainties that could cause our actual results to differ materially from those projected, see "Risk Factors" in Item 1A of the 2008 Form 10-K, updated by Part II, Item 1A of this Form 10-Q. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
We have three significant reportable segments - personal insurance, business insurance, and investment operations. The reportable insurance segments are business units managed separately because of the differences in the type of customers they serve or products they provide or services they offer. The insurance segments operate in 33 states and distribute their products through the independent insurance agency system. The personal insurance segment provides primarily personal auto (standard and nonstandard) and homeowners insurance to the personal insurance market. The business insurance segment provides primarily commercial auto, commercial multi-peril, fire and allied lines, other and product liability and workers' compensation insurance to small-to-medium sized businesses within the commercial insurance market. Our investable assets, the investment operations segment, are managed by our subsidiary Stateco Financial Services, Inc ("Stateco"). Our investment portfolio is comprised primarily of publicly traded fixed income and equity securities. Financial information about our segments is set forth in Note 12 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.
A quota share reinsurance pooling arrangement (the "Pooling Arrangement") exists between State Auto Property & Casualty Insurance Company ("State Auto P&C"), Milbank Insurance Company ("Milbank"), Farmers Casualty Insurance Company ("Farmers"), and State Auto Insurance Company of Ohio ("SA Ohio"), (collectively referred to as the "STFC Pooled Companies") and State Automobile Mutual Insurance Company ("State Auto Mutual") and its subsidiaries and affiliates, State Auto Insurance Company of Wisconsin ("SA Wisconsin"), State Auto Florida Insurance Company ("SA Florida"), Meridian Citizens Mutual Insurance Company ("Meridian Citizens Mutual"), Meridian Security Insurance Company ("Meridian Security"), Patrons Mutual Insurance Company of Connecticut ("Patrons Mutual"), and Litchfield Mutual Fire Insurance Company ("Litchfield") (collectively referred to as the "Patrons Insurance Group") and Beacon National Insurance Company ("Beacon National"), (collectively referred to as the "Mutual Pooled Companies"). Together, the STFC Pooled Companies and Mutual Pooled Companies are collectively referred to as the "Pooled Companies" or the "State Auto Pool." The State Auto Pool has an A.M. Best rating of A+ (Superior). See "Important Defined Terms Used" in the 2008 Form 10-K.
As of January 1, 2008, the Pooling Arrangement was amended to add Beacon National, Patrons Mutual and Litchfield as participants and the middle market business of State Auto Mutual and Meridian Security to the Pooling Arrangement (collectively, the "Pooling Change").
The Pooled Companies and State Auto National Insurance Company ("SA National") are collectively referred to herein as the "State Auto Group."
During the third quarter 2009, the assets of our subsidiary Strategic Insurance Software, Inc., a developer and seller of insurance-related software, were sold to a third party. The assets and operations of this subsidiary were not, and the sale proceeds are not, material to our total operations.
RESULTS OF OPERATIONS
During our third quarter 2009, we recognized net income of $13.0 million compared to a net loss of $14.7 million for the same 2008 period. Income before federal income taxes for the three months ended September 30, 2009 was $13.7 million compared to a pre-tax net loss of $30.2 million for the same 2008 period. The improvement in our third quarter 2009 results was primarily attributable to a reduction in the severity of our catastrophe losses, as well as an increase in our earned premiums.
During the nine months ended September 30, 2009, we recognized a net loss of $4.2 million compared to a net loss of $30.5 million for the same 2008 period. Loss before federal income taxes for the nine months ended September 30, 2009 was $28.9 million compared to $69.4 million for the same 2008 period. The decrease in our pre-tax net loss for the first nine months of 2009 compared to the same period in 2008 was primarily attributable to an increase in our earned premiums, primarily in personal lines, as well as a reduction in the number and severity of our catastrophe losses.
The following table summarizes certain key performance metrics for the three and nine months ended September 30, 2009 and 2008 that we use to monitor our financial performance:
($ millions, except per share amounts) Three months ended Nine months ended
September 30 September 30
GAAP Basis: 2009 2008 2009 2008
Total revenue $ 324.5 300.6 $ 935.4 908.6
Net income (loss) $ 13.0 (14.7 ) $ (4.2 ) (30.5 )
Stockholders' equity $ 834.3 787.8
Book value per share $ 21.00 19.94
Debt to capital ratio 12.3 13.0
Loss and LAE ratio(1) 68.3 % 82.4 74.6 % 81.1
Expense ratio(1) 34.2 % 33.8 33.7 % 33.4
Combined ratio(1) 102.5 % 116.2 108.3 % 114.5
Catastrophe loss and LAE points 3.6 19.5 10.4 19.8
Premium written growth(2) 5.5 % 13.5 5.7 % 18.8
Premium earned growth 6.3 % 11.3 4.3 % 11.1
Investment yield 4.2 % 4.3 3.9 % 4.2
Three months ended Nine months ended
September 30 September 30
SAP Basis : 2009 2008 2009 2008
Loss and LAE ratio(3) 67.4 % 82.0 74.2 % 80.7
Expense ratio(3) 32.3 % 32.4 33.6 % 31.8
Combined ratio(3) 99.7 % 114.4 106.8 % 112.5
|
Twelve months ended September 30 2009 2008 Net premiums written to surplus (4) 1.6 1.4
(1) Defined below in Insurance Segments.
(2) 6.9 points of the percentage increase for the nine months ended September 30, 2008, related to the one-time $53.6 million transfer of unearned premium to us on January 1, 2008, in conjunction with the Pooling Change.
(3) SAP Loss and LAE Ratio is losses and loss expenses as a percentage of net earned premium. SAP Expense Ratio is statutory underwriting expenses and miscellaneous expenses offset by miscellaneous income ("underwriting expenses") as a percentage of net written premiums. SAP Combined Ratio is the sum of the SAP Loss and LAE Ratio and the SAP Expense Ratio.
(4) We use the statutory net premiums written to surplus ratio as there is no comparable GAAP measure. This ratio, also called the leverage ratio, which measures a company's statutory surplus available to absorb losses.
Insurance Segments
Insurance industry regulators require our insurance subsidiaries to report their financial condition and results of operations using SAP. We use SAP financial results, along with industry standard financial measures determined on a SAP basis and certain measures determined on a GAAP basis, to internally monitor the performance of our insurance segments. The more common financial measures used are loss and LAE ratios, underwriting expense ratio, combined ratio, net premiums written and net premiums earned. The combined ratio is the sum of the loss and LAE ratio and the underwriting expense ratio. When the combined ratio is less than 100%, the insurer is operating at an underwriting gain and when it is greater than 100%, the insurer is operating at an underwriting loss. Underwriting gain (loss) is determined by subtracting from net earned premiums, losses and loss expenses and underwriting expenses.
One of the more significant differences between GAAP and SAP is that SAP requires all underwriting expenses to be expensed immediately and not deferred over the same period that the premium is earned. In converting SAP underwriting results to GAAP underwriting results, acquisition costs are deferred and amortized over the periods the related written premiums are earned. For a discussion of deferred policy acquisition costs see "Critical Accounting Policies - Deferred Acquisition Costs" included in Item 7 of our 2008 Form 10-K. The "GAAP Combined Ratio" is the sum of the "GAAP Loss and LAE Ratio" (loss and loss expenses as a percentage of earned premium) plus the "GAAP Expense Ratio" (acquisition and operating expenses as a percentage of earned premiums).
Charges related to the restructuring of our field and claims operations (discussed below) contribute to the difference between our GAAP Expense Ratio and our SAP Expense Ratio. These differences relate mainly to the timing of the recognition of employee termination benefits. SAP requires us to estimate and immediately recognize the entire estimated costs related to severance, while GAAP requires similar estimated costs to be recognized ratably over the remaining service period of the employees impacted.
All references to financial measures or components thereof in this discussion are calculated on a GAAP basis, unless otherwise noted.
The following tables provide a summary of our insurance segments' SAP underwriting loss and SAP Combined Ratio for the three and nine months ended September 30, 2009 and 2008:
($ millions) Three months ended
September 30, 2009
% % %
Personal Ratio Business Ratio Total Ratio
Net written premiums $ 207.3 $ 107.0 $ 314.3
Net earned premiums 186.9 111.4 298.3
Losses and loss expenses 128.1 68.5 73.1 65.6 201.2 67.4
Underwriting expenses 61.5 29.7 40.0 37.4 101.5 32.3
SAP underwriting loss and SAP Combined Ratio $ (2.8 ) 98.2 $ (1.6 ) 103.0 $ (4.4 ) 99.7
($ millions) Three months ended
September 30, 2008
% % %
Personal Ratio Business Ratio Total Ratio
Net written premiums $ 183.2 $ 114.6 $ 297.8
Net earned premiums 167.6 113.1 280.7
Losses and loss expenses 144.8 86.4 85.4 75.5 230.2 82.0
Underwriting expenses 54.4 29.7 42.1 36.7 96.5 32.4
SAP underwriting loss and SAP Combined Ratio $ (31.6 ) 116.1 $ (14.4 ) 112.2 $ (46.0 ) 114.4
|
($ millions) Nine months ended
September 30, 2009
% % %
Personal Ratio Business Ratio Total Ratio
Net written premiums $ 584.2 $ 335.2 $ 919.4
Net earned premiums 541.2 335.7 876.9
Losses and loss expenses 423.7 78.3 226.8 67.6 650.5 74.2
Underwriting expenses 173.4 29.7 125.9 37.5 299.3 32.6
SAP underwriting loss and SAP Combined Ratio $ (55.9 ) 108.0 $ (17.0 ) 105.1 $ (72.9 ) 106.8
($ millions) Nine months ended
September 30, 2008
% % %
Personal Ratio Business Ratio Total Ratio
Net written premiums(1) $ 544.8 $ 378.9 $ 923.7
Net earned premiums 499.6 341.4 841.0
Losses and loss expenses 423.4 84.7 255.2 74.8 678.6 80.7
Underwriting expenses 154.6 28.4 139.5 36.8 294.1 31.8
SAP underwriting loss and SAP Combined Ratio $ (78.4 ) 113.1 $ (53.3 ) 111.6 $ (131.7 ) 112.5
|
(1) Includes the one-time transfer of $53.6 million of unearned premiums to us on January 1, 2008, in conjunction with the Pooling Change ($24.8 million for our personal insurance segment and $28.8 million for our business insurance segment).
Revenue
We measure our top-line growth for our insurance segments based on net written premiums, which represent the premiums on the policies we have issued for a period, net of reinsurance. Net written premiums provide us with an indication of how well we are doing in terms of revenue growth before it is actually earned. Our policies provide a fixed amount of coverage for a stated period of time, often referred to as "the policy term." As such, our written premiums are recognized as earned ratably over the policy term. The unearned portion of written premiums, called unearned premiums, is reflected on our balance sheet as a liability and represents our obligation to provide coverage for the unexpired terms of the policy.
The following table shows the one-time impact on net written premiums for the nine months ended September 30, 2008, of the unearned premiums transferred to us on January 1, 2008, in conjunction with the Pooling Change.
($ millions) Net Written Premiums
Reconciliation Table
Including Pooling Excluding
Pooling Change Pooling
Change Impact Change
Personal insurance segment:
Standard auto $ 305.7 $ 7.9 $ 297.8
Nonstandard auto 33.3 - 33.3
Homeowners 181.3 14.4 166.9
Other personal 24.5 2.5 22.0
Total personal 544.8 24.8 520.0
Business insurance segment:
Commercial auto 92.9 10.0 82.9
Commercial multi-peril 82.3 6.1 76.2
Fire & allied lines 77.5 5.7 71.8
Product & other liability 65.9 3.9 62.0
Workers' compensation 36.8 2.0 34.8
Other business 23.5 1.1 22.4
Total business 378.9 28.8 350.1
Total personal & business $ 923.7 $ 53.6 $ 870.1
|
Personal Insurance Segment Revenue
Our personal insurance segment consists primarily of auto (standard and nonstandard) and homeowners products, with personal auto representing 40.8% of our total consolidated net written premiums.
The following table provides a summary of written and earned premium, net of reinsurance, by major product line of business for our personal insurance segment for the three and nine months ended September 30, 2009 and 2008. The one-time impact of the Pooling Change has been excluded from the nine months ended September 30, 2008 to present net written premiums on a comparative basis (see Net Written Premiums Reconciliation Table above):
($ millions) Three months ended Nine months ended
September 30 September 30
Net Written Premiums
% %
2009 2008 Change 2009 2008 Change
Personal insurance segment:
Standard Auto $ 120.9 103.8 16.5 $ 345.3 297.8 16.0
Nonstandard Auto 9.2 10.8 (14.8 ) 29.6 33.3 (11.1 )
Homeowners 69.3 61.3 13.1 185.6 166.9 11.2
Other personal 7.9 7.3 8.2 23.7 22.0 7.7
Total personal $ 207.3 183.2 13.2 $ 584.2 520.0 12.3
Three months ended Nine months ended
September 30 September 30
Net Earned Premiums
% %
2009 2008 Change 2009 2008 Change
Personal insurance segment:
Standard auto $ 111.0 96.9 14.6 $ 318.9 285.3 11.8
Nonstandard auto 9.5 10.7 (11.2 ) 29.6 32.3 (8.4 )
Homeowners 58.5 53.0 10.4 169.7 160.8 5.5
Other personal 7.9 7.0 12.9 23.0 21.2 8.5
Total personal $ 186.9 167.6 11.5 $ 541.2 499.6 8.3
|
Standard personal auto net written premiums for the three and nine months ended September 30, 2009, increased 16.5% and 16.0%, respectively, compared to the same 2008 periods. The State Auto Group's expansion of its operations within four of our newer states, Texas, Colorado, Arizona and Connecticut, has contributed to approximately one-third of our premium growth in standard personal auto. We believe our new products and advanced technology have strengthened our position with our independent agencies and make us attractive to prospective policyholders looking for greater value in their insurance products. Our auto product, CustomFit, coupled with easier quote capabilities, has resulted in a significant increase in new business quotes in the first nine months of 2009 compared to the same 2008 period. While the number of new business quotes is higher, our issue to quote ratio has remained relatively consistent with prior years. Recent rate increases have also contributed approximately 3% to premium growth for the nine months ended September 30, 2009, compared to the same 2008 period.
Nonstandard auto net written premium for the three and nine months ended September 30, 2009, decreased 14.8% and 11.1%, respectively, compared to the same 2008 periods. In 2008, we began increasing rates and tightening underwriting controls, and in 2009, we began terminating certain agencies that failed to consistently perform to our expectations. During the third quarter 2009, we implemented premium rate increases in three of our operating states, which will result in an average premium rate increase of 5.1% in those states. Rate actions coupled with agency terminations and the impact of general economic conditions have resulted in a reduction of nonstandard new business.
Homeowners net written premiums for the three and nine months ended September 30, 2009, increased 13.1% and 11.2%, respectively, compared to the same 2008 periods. Rate increases in several states have contributed to this premium growth, as well as the expansion of new business in Texas, Colorado, Arizona and Connecticut. We implemented rate changes in ten of our operating states during the third quarter 2009, which will result in an average premium rate increase of 7.3% in affected states. We continue to aggressively address our rate needs in this line of business, and we are seeking higher rates for the remainder of 2009 and into 2010.
Our strategy to grow our personal lines business includes introducing our products, enhanced systems and easier technologies into new states. We introduced our standard auto product and technologies into Connecticut during the first half of 2009, and followed with the introduction of our homeowners product in that state during the third quarter 2009.
Business Insurance Segment Revenue
We focus our business insurance sales on small-to-medium sized businesses within the commercial insurance market and offer a broad range of both property and liability coverages. The following table provides a summary of written and earned premiums, net of reinsurance, by major product line for the three and nine months ended September 30, 2009 and 2008. The one-time impact of the Pooling Change has been excluded from the nine months ended September 30, 2008, to present net written premiums on a comparative basis (see Net Written Premiums Reconciliation Table above):
($ millions) Three months ended Nine months ended
September 30 September 30
Net Written Premiums
% %
2009 2008 Change 2009 2008 Change
. . .
|
|
|