State Auto Financial Corporation March 2016 FINANCIAL STRENGTH | REPUTATION | RELATIONSHIPS | RELIABILITY | RESPONSIVENESS
Safe Harbor Forward-Looking Statements This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “estimate,” “target,” and similar expressions, among others, identify forward-looking statements. All forward-looking statements are based on assumptions, expectations and other information currently available to management. Such forward-looking statements are subject to certain risks and uncertainties that could cause the Company’s actual results to differ materially from those projected, anticipated or implied. The most significant of these risk and uncertainties are described in STFC’s most recently filed Annual Report on Form 10-K and its other filings with the Securities and Exchange Commission. STFC undertakes no obligation to update or revise any forward-looking statements. Regulation G Certain information and results in STFC’s results are presented in a manner which, on a pro forma basis, may exclude or assume one or more of the following: (i) the impact of the homeowners quota share agreement expired as of December 31, 2014 (the “HO QS”); and (ii) the results of the terminated RED program business in run-off. Management of STFC believes these non-GAAP financial measures will enable investors to (a) better understand the significance of the HO QS cession and the terminated RED program business contributed to STFC’s results, and (b) perform a meaningful comparison of STFC’s historical results. All non-GAAP financial measures are indicated by footnotes. See Appendix Slides 16 through 19 for the reconciliation tables for GAAP and non-GAAP financial measures. 2
State Auto Financial Corporation -- STFC Regional property and casualty insurer – $1.2 billion in 2015 annual net written premiums; 46% personal, 37% business and 17% specialty – Insurance products are distributed through non-exclusive insurance agents and brokers Nasdaq:STFC 63% owned by State Automobile Mutual (SAM) – $1.9 billion in 2015 annual net written premiums of the State Auto Group subject to intercompany pooling arrangement – STFC currently retains 65% of the pool Rated A- (Excellent) by A.M. Best 3
State Auto Group Organizational Chart State Automobile Mutual Insurance Company 63% Public Investors State Auto Rockhill Insurance Financial Corporation Insurance Group Subsidiaries 37% Insurance Insurance Subsidiaries Subsidiaries Insurance company members of the State Auto Group participate in an intercompany reinsurance pooling arrangement. STFC - owned insurance companies share in 65% of the pool. 4
Vision & Strategy Organization & Competitive Culture Advantage Grow Profitably Technology & Product Process Management Improvements 5
Transforming our business A new quote and issue technology platform for new business in 5 states is expected to go live by the end of 2016, with the remaining states following in 2017 – Products impacted: • Personal Auto • Homeowners • Umbrella • Small Business Products – Commercial auto – Business Owners Package Policy “BOP” 6
Operating States MA and OK only Business and Specialty products are written. 7
Product Lines Personal Insurance Personal Auto Farm & Ranch Homeowners Personal Umbrella Business Insurance Business Owners Program Commercial Property (BOP) Commercial Liability Workers’ Compensation Commercial Package Commercial Auto Specialty Insurance Property Healthcare Environmental Programs General Binding Authority Umbrella General Liability 8
Segment and Product Mix – Dec. 31, 2015 By Segment By Line of Business Programs, 8% Specialty, 17% E&S Casualty, 6% E&S Property , 3% Other Commercial, 1% Workers' Comp, 7% Other & Product Liability, 6% Business, Fire & Allied, 6% 37% Commercial Multi- Peril, 9% Commercial Auto, 8% Other Personal, 3% Homeowners, 17% Personal, 46% Personal Auto, 26% 9
STFC Results History 2011 2012 2013 2014 2015 ($ in millions) Net written premiums $1,284.6 $1,055.3 $1,062.1 $1,194.2 $1,273.5 Net Earned premiums $1,428.8 $1,042.1 $1,055.0 $1,074.1 $1,270.5 Net investment income $ 85.4 $ 75.4 $ 72.8 $ 74.7 $ 71.7 Net realized gains on investments $ 37.0 $ 29.0 $ 23.2 $ 20.7 $ 24.3 Other income $ 2.5 $ 3.6 $ 2.0 $ 3.2 $ 2.1 Total revenue $1,533.7 $1,150.1 $1,153.0 $1,172.7 $1,368.6 Net income (loss) $ (160.7) $ 10.7 $ 60.8 $ 107.4 $ 51.2 Diluted earnings per share $ (4.00) $ 0.26 $ 1.49 $ 2.60 $ 1.23 Dividends paid per share $ 0.60 $ 0.55 $ 0.40 $ 0.40 $ 0.40 Book value per share $ 17.95 $ 18.22 $ 19.27 $ 21.32 $ 21.40 Total assets $2,764.4 $2,477.8 $2,496.4 $2,766.9 $2,828.5 Stockholders’ equity $ 723.8 $ 737.2 $ 785.0 $ 872.9 $ 884.6 Return on equity (20.7)% 1.5% 8.0% 13.0% 5.8% 10
GAAP Combined Ratio History Combined Ratio excluding RED and HO QS Arrangement 1 Combined Ratio (As Reported) 116.5% 107.9% 105.5% 102.5% 101.8% 101.5% 96.5% 95.4% 2011 2012 2013 2014 2015 1 Combined Ratio excluding RED and HO QS Arrangement is a non-GAAP financial measure. See slides 17 - 19 for the reconciliation of the non-GAAP financial measure of the Combined Ratio for 2012-2014 to the GAAP financial measure. 11
STFC Catastrophe History 1 CAT Loss Ratio (As Reported) CAT Loss Ratio excluding HO QS 16.2% 10.4% 6.4% 4.9% 4.1% 4.0% 3.4% 3.0% 2011 2012 2013 2014 2015 1 Non-GAAP financial measure. See slides 17 - 19 for the reconciliation of the non-GAAP financial measure of the CAT Loss Ratio for 2012-2014 to the GAAP financial measure. 12
STFC Investment Portfolio – December 31, 2015 Mix Total $2.4 Billion (Market Value) Fixed Income 83.5% Equities 13.0% Other 3.6% Taxable Muni Other Invested Total 100.0% Bonds, 4.0% Corporate Bonds, Assets, 3.6% 20.6% Bond Ratings * Equities, 13.0% AAA 2.3% Agency Bonds, 2.3% AA** 62.1% Treasury Bonds, 13.7% A 21.5% Tax Exempt Bonds, 30.5% BBB 14.1% MBS, 12.5% Total 100.0% Average Maturity: 8.7 years Duration: 4.9 Pre-Tax Yield: 3.1 % * Based on ratings by nationally recognized rating agencies, excluding any credit enhancements. ** Our AA rating category includes securities which have been pre-refunded or escrowed to maturity. 13
STFC Book and Market Value Per Share Per share Multiple 2015 dividend yield 1.9% $25 1.2 $22.22 $21.24 Book value increased $20.59 1.0 $20 approximately 19% over the last five years 0.8 $14.94 $15 $13.59 Five year total return of 55% 0.6 $10 0.4 $5 0.2 $17.95 $18.22 $19.27 $21.32 $21.40 $0 0.0 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 Market Book Multiple 14
Goals Increase quotes and new business policy counts Enhance Agent experience by become easier to do business with us Nimble, Responsive, Creative, Passionate and Driven Grow profitably and achieve expected returns – Target ROE > 10% 15
Appendix Non-GAAP Financial Measures 16
Adjusted for HO QS Cession and RED STFC Financial Results Year Ended December 31, 2012 Pro Forma Pro Forma without HO QS without HO QS Cession and As Reported HO QS Cession Cession RED RED ($ millions) $1,042.1 $ 166.2 $1,208.3 $ 97.9 $1,110.4 Earned Premiums Losses and LAE Incurred: 67.1 49.5 116.6 0.7 115.9 Cat loss and ALAE 711.2 74.5 785.7 119.5 666.2 Non-cat loss and LAE 778.3 124.0 902.3 120.2 782.1 Loss and LAE 345.9 48.2 394.1 38.2 355.9 Acquisition and operating expenses $ (82.1) $ (6.0) $ (88.1) $ (60.5) $ (27.6) Net underwriting loss 6.4 % 29.8 % 9.6 % 0.7 % 10.4 % Cat loss and ALAE ratio 68.3 % 44.8 % 65.0 % 122.1% 60.0 % Non-cat loss and LAE ratio 74.7% 74.6 % 74.6% 122.8% 70.4 % Loss and LAE ratio 33.2 % 29.0 % 32.6 % 39.0% 32.1 % Expense ratio 107.9 % 103.6 % 107.2% 161.8 % 102.5 % Combined ratio 17
Adjusted for HO QS Cession and RED STFC Financial Results Year Ended December 31, 2013 Pro Forma Pro Forma without HO QS without HO QS Cession and As Reported HO QS Cession Cession RED RED ($ millions) $1,055.0 $177.0 $1,232.0 $23.7 $ 1,208.3 Earned Premiums Losses and LAE Incurred: 36.3 22.7 59.0 0.3 58.7 Cat loss and ALAE 683.5 70.0 753.5 44.6 708.9 Non-cat loss and LAE 719.8 92.7 812.5 44.9 767.6 Loss and LAE 354.8 51.4 406.2 8.6 397.6 Acquisition and operating expenses $ (19.6) $ 32.9 $ 13.3 $ (29.8) $ 43.1 Net underwriting (loss) gain 3.4 % 12.9 % 4.8 % 1.2 % 4.9 % Cat loss and ALAE ratio 64.8 % 39.5 % 61.2 % 188.3 % 58.7 % Non-cat loss and LAE ratio 68.2 % 52.4 % 66.0 % 189.5 % 63.6 % Loss and LAE ratio 33.6 % 29.0 % 33.0 % 36.1 % 32.9 % Expense ratio 101.8 % 81.4 % 99.0 % 225.6 % 96.5 % Combined ratio 18
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