State Auto Financial Corporation (Nasdaq:STFC) today reported fourth quarter 2012 net income of $20.9 million, or $0.51 per diluted share, versus net income of $99.3 million 1, or $2.46 per diluted share 1, for the fourth quarter of 2011. Net income from operations 2 per diluted share for the fourth quarter 2012 was $0.38 versus net income from operations 2 of $2.27 for the same 2011 period 1. Net income for the fourth quarter of 2011 included a $14.9 million postretirement benefit curtailment gain and $35.7 million of federal income tax benefit.
STFC’s GAAP combined ratio for the fourth quarter 2012 was 101.7 versus 94.3 1 for the fourth quarter of 2011. Catastrophe losses during the fourth quarter 2012 accounted for 2.2 points of the 68.7 total loss ratio points, or $5.9 million, versus a favorable impact of 0.5 points of the total 59.7 loss ratio points, or $1.8 million, for the same period in 2011.
The State Auto Group’s homeowners quota share reinsurance arrangement increased STFC’s underwriting loss by $12.5 million or 4.2 points on the combined ratio for the fourth quarter of 2012. Pursuant to the arrangement, STFC ceded $40.9 million of written premium, $40.4 million of earned premium, $2.0 million of catastrophe losses and $14.2 million of non-catastrophe losses, and recognized $11.7 million of ceded commissions. This cession decreased STFC’s overall catastrophe loss ratio 0.4 points, increased the overall non-catastrophe loss ratio 4.1 points and increased the overall expense ratio 0.5 points.
Net written premium for the fourth quarter of 2012 increased 76.7% over the same period in 2011. The homeowners’ quota share reinsurance arrangement and the 2011 year-end pooling change collectively contributed to this increase, as the ceded unearned premium reserve amounts transferred under these two arrangements were reflected as reductions to net written premium in the prior year’s results. By segment, net written premium for the fourth quarter of 2012 increased 207.2% for personal insurance, 64.5% for business insurance and 0.5% for specialty insurance from the same period in 2011. Excluding the impact of the quota share reinsurance arrangement and pooling change, net written premium for the fourth quarter of 2012 increased 2.2% 3 from the same period in 2011, with the business insurance segment contributing primarily to the overall growth. The business segment growth was principally driven by higher average new business premium, increased renewal pricing and a recovering economy. Excluding the impact of the homeowners’ quota share and pooling change, net written premium for the fourth quarter increased 2.3% 3 for the personal insurance segment, increased 20.8% 3 for the business insurance segment and decreased 17.6% 3 for the specialty insurance segment from the same period in 2011. The decline in our specialty segment was due to the termination of substantially all of the business written by the former management team of RED. As previously disclosed, we have reorganized and merged the operations of RED into the Rockhill unit’s program division.For the year 2012, STFC had net income of $10.7 million, or $0.27 per diluted share, compared to a loss of $160.7 million 1, or $4.00 per diluted share 1, for the same 2011 period. STFC’s GAAP combined ratio for 2012 was 107.9 compared to 116.5 1 for the same 2011 period. Catastrophe losses accounted for 6.4 points, or $67.1 million, during 2012, compared to 16.2 points, or $231.1 million, during 2011. The 2012 and 2011 catastrophe losses both included favorable prior accident years’ development which reduced the loss ratio by 1.0 points, or $10.4 million for 2012, and 0.3 points, or $4.3 million for 2011. Non-catastrophe favorable reserve development reduced the loss ratio by 0.6 points, or $6.5 million for 2012, and 2.0 points, or $29.0 million for 2011. For the year 2012, the homeowners quota share reinsurance arrangement reduced STFC’s underwriting loss by $6.0 million and added 0.7 points on the combined ratio. Pursuant to the arrangement, STFC ceded $172.3 million of written premium, $166.2 million of earned premium, $49.5 million of catastrophe losses and $74.5 million of non-catastrophe losses, and recognized $48.2 million of ceded commissions. This cession reduced STFC’s overall catastrophe loss ratio 3.2 points, increased the overall non-catastrophe loss ratio 3.3 points and increased the overall expense ratio 0.6 points.
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