State Auto Financial Corporation March 2016 FINANCIAL STRENGTH - - PowerPoint PPT Presentation

State Auto Financial Corporation

March 2016

FINANCIAL STRENGTH | REPUTATION | RELATIONSHIPS | RELIABILITY | RESPONSIVENESS

2

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.

3

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

4 State Automobile Mutual Insurance Company State Auto Financial Corporation Insurance Subsidiaries Public Investors Insurance Subsidiaries

63% 37%

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.

Rockhill Insurance Group Insurance Subsidiaries

State Auto Group Organizational Chart

5

Vision & Strategy

Organization & Culture Competitive Advantage Technology & Process Improvements Product Management Grow Profitably

6

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”

7

Operating States

MA and OK only Business and Specialty products are written.

8

Product Lines

Personal Insurance

• Personal Auto
• Homeowners
• Farm & Ranch
• Personal Umbrella

Business Insurance

• Business Owners Program

(BOP)

• Commercial Package
• Commercial Auto
• Commercial Property
• Commercial Liability
• Workers’ Compensation

Specialty Insurance

• Property
• Environmental
• General Binding Authority
• General Liability
• Healthcare
• Programs
• Umbrella

9

By Segment By Line of Business

Segment and Product Mix – Dec. 31, 2015

Personal, 46% Business, 37% Specialty, 17%

Personal Auto, 26% Homeowners, 17%

Other Personal, 3%

Commercial Auto, 8% Commercial Multi- Peril, 9% Fire & Allied, 6% Other & Product Liability, 6% Workers' Comp, 7%

Other Commercial, 1% E&S Property , 3%

E&S Casualty, 6%

Programs, 8%

10

STFC Results History

($ in millions)

2011 2012 2013 2014 2015 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%

11

GAAP Combined Ratio History

116.5% 107.9% 101.8% 105.5% 101.5% 102.5% 96.5% 95.4%

2011 2012 2013 2014 2015

Combined Ratio (As Reported) Combined Ratio excluding RED and HO QS Arrangement 1

1Combined 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.

12

STFC Catastrophe History

16.2% 6.4% 3.4% 3.0% 4.0% 10.4% 4.9% 4.1%

2011 2012 2013 2014 2015

CAT Loss Ratio (As Reported) CAT Loss Ratio excluding HO QS

1

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.

STFC Investment Portfolio – December 31, 2015

* 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.

Mix Fixed Income 83.5% Equities 13.0% Other 3.6% Total 100.0% Bond Ratings* AAA 2.3% AA** 62.1% A 21.5% BBB 14.1% Total 100.0%

Total $2.4 Billion (Market Value) Average Maturity: 8.7 years Duration: 4.9 Pre-Tax Yield: 3.1%

13

Taxable Muni Bonds, 4.0% Equities, 13.0% Tax Exempt Bonds, 30.5% MBS, 12.5% Treasury Bonds, 13.7% Agency Bonds, 2.3% Corporate Bonds, 20.6% Other Invested Assets, 3.6%

14

STFC Book and Market Value Per Share

$13.59 $14.94 $21.24 $22.22 $20.59 $17.95 $18.22 $19.27 $21.32 $21.40 0.0 0.2 0.4 0.6 0.8 1.0 1.2 $0 $5 $10 $15 $20 $25

12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015

Market Book Multiple

• 2015 dividend yield 1.9%
• Book value increased

approximately 19% over the last five years

• Five year total return of 55%

Per share Multiple

15

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%

16

Appendix

Non-GAAP Financial Measures

17

STFC Financial Results

Adjusted for HO QS Cession and RED Year Ended December 31, 2012

($ millions)

As Reported HO QS Cession Pro Forma without HO QS Cession RED Pro Forma without HO QS Cession and RED Earned Premiums $1,042.1 $ 166.2 $1,208.3 $ 97.9 $1,110.4 Losses and LAE Incurred: Cat loss and ALAE 67.1 49.5 116.6 0.7 115.9 Non-cat loss and LAE 711.2 74.5 785.7 119.5 666.2 Loss and LAE 778.3 124.0 902.3 120.2 782.1 Acquisition and operating expenses 345.9 48.2 394.1 38.2 355.9 Net underwriting loss $ (82.1) $ (6.0) $ (88.1) $ (60.5) $ (27.6) Cat loss and ALAE ratio 6.4 % 29.8 % 9.6 % 0.7 % 10.4 % Non-cat loss and LAE ratio 68.3 % 44.8 % 65.0 % 122.1% 60.0 % Loss and LAE ratio 74.7% 74.6 % 74.6% 122.8% 70.4 % Expense ratio 33.2 % 29.0 % 32.6 % 39.0% 32.1 % Combined ratio 107.9 % 103.6 % 107.2% 161.8 % 102.5 %

18

STFC Financial Results

Adjusted for HO QS Cession and RED Year Ended December 31, 2013

($ millions)

As Reported HO QS Cession Pro Forma without HO QS Cession RED Pro Forma without HO QS Cession and RED Earned Premiums $1,055.0 $177.0 $1,232.0 $23.7 $ 1,208.3 Losses and LAE Incurred: Cat loss and ALAE 36.3 22.7 59.0 0.3 58.7 Non-cat loss and LAE 683.5 70.0 753.5 44.6 708.9 Loss and LAE 719.8 92.7 812.5 44.9 767.6 Acquisition and operating expenses 354.8 51.4 406.2 8.6 397.6 Net underwriting (loss) gain $ (19.6) $ 32.9 $ 13.3 $ (29.8) $ 43.1 Cat loss and ALAE ratio 3.4 % 12.9 % 4.8 % 1.2 % 4.9 % Non-cat loss and LAE ratio 64.8 % 39.5 % 61.2 % 188.3 % 58.7 % Loss and LAE ratio 68.2 % 52.4 % 66.0 % 189.5 % 63.6 % Expense ratio 33.6 % 29.0 % 33.0 % 36.1 % 32.9 % Combined ratio 101.8 % 81.4 % 99.0 % 225.6 % 96.5 %

19

STFC Financial Results

Adjusted for HO QS Cession and RED Year Ended December 31, 2014

($ millions)

December 31, 2014 As Reported HO QS Cession Pro Forma without HO QS Cession RED Pro Forma without HO QS Cession and RED Earned Premiums $1,074.1 $ 175.6 $1,249.7 $ — $1,249.7 Losses and LAE Incurred: Cat loss and ALAE 32.3 19.0 51.3 — 51.3 Non-cat loss and LAE 739.0 66.8 805.8 96.7 709.1 Loss and LAE 771.3 85.8 857.1 96.7 760.4 Acquisition and operating expenses 361.9 70.0 431.9 — 431.9 Net underwriting (loss) gain $ (59.1) $ 19.8 $ (39.3) $ (96.7) $ 57.4 Cat loss and ALAE ratio 3.0 % 10.8 % 4.1 % 4.1 % Non-cat loss and LAE ratio 68.8 % 38.1 % 64.5 % 56.7 % Loss and LAE ratio 71.8 % 48.9 % 68.6 % 60.8% Expense ratio 33.7 % 39.8 % 34.6 % 34.6 % Combined ratio 105.5 % 88.7 % 103.2 % 95.4%