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Frustrated by insurance rates that were unreasonably high and claims settlements that were routinely
handled with disregard, Robert Pein was determined to create a new kind of insurance company
dedicated to serving the needs of the community – not the needs of the insurance executives.
In 1921, State Automobile Mutual Insurance Company was founded. With three employees and a rented
room in downtown Columbus, Ohio, Pein set forth to tackle the inequities in the insurance industry. From
the very beginning, State Auto advocated the independent agency system as the best approach to serving
the needs of its policyholders. To this day, as hometown neighbors, local independent agents continue to
provide efficient, professional and more personalized service than that of their competitors. Just as Robert
Pein had always dreamed.
State Auto Financial Corporation
Meridian Security Insurance Company
State Auto Property & Casualty Insurance Company
Meridian Citizens Mutual Insurance Company
Milbank Insurance Company
Beacon National Insurance Company
Farmers Casualty Insurance Company
Beacon Lloyds Insurance Company
State Auto Insurance Company of Ohio
Patrons Mutual Insurance Company of Connecticut
Stateco Financial Services Inc.
Litchfield Mutual Fire Insurance Company
518 Property Management & Leasing LLC
Rockhill Insurance Company
State Automobile Mutual Insurance Company
Plaza Insurance Company
State Auto Insurance Company of Wisconsin
American Compensation Insurance Company
State Auto Florida Insurance Company
Bloomington Compensation Insurance Company
STATE AUTO FINANCIAL CORPORATION
518 E. BROAD ST.
COLUMBUS, OHIO 43215
STATEAUTO.COM
State Auto Financial Corporation
2011 Annual Report
State Auto Financial Corporation (STFC)
is a super-regional insurance holding company
headquartered in Columbus, Ohio. STFC is affiliated
with State Automobile Mutual Insurance Company
(State Auto Mutual), which owns approximately
63% of STFC. STFC, State Auto Mutual and their
insurance subsidiaries and affiliates (State Auto)
market their insurance products through
independent insurance agencies and brokers
throughout the United States. State Auto’s principal
lines include personal and commercial auto,
homeowners, commercial multi-peril, fire and
general liability insurance.
With a commitment to responsible cost-based
pricing, conservative investments and sound
underwriting practices, STFC has achieved solid
long-term financial performance since becoming a
public company in 1991. State Auto Financial
Corporation is traded on the Nasdaq Global Market
System under the symbol STFC.
Financial Highlights
Earned premiums
Net investment income
Net realized investment gain (loss)
Other income
Total revenue
Net (loss) income
Basic (loss) earnings per share
Diluted (loss) earnings per share
Dividends paid per share
Book value per share
Total assets
Stockholders’ equity
Return on equity
Combined ratio
($ in millions, except per share amounts)
2011
2010
2009
2008
2007
$ 1,428.8
85.4
37.0
2.5
$ 1,533.7
$ (146.8)
(3.65)
$
(3.65)
$
0.60
$
$ 18.81
$ 2,790.8
$ 758.3
1,257.2
80.8
14.9
2.2
1,355.1
24.5
0.61
0.62
0.60
21.23
2,722.0
851.8
(18.2)%
2.9%
116.3
104.6
1,176.5
82.1
(5.2)
3.5
1,256.9
10.2
0.26
0.25
0.60
21.33
1,126.0
87.4
(36.4)
4.9
1,181.9
(31.1)
(0.78)
(0.78)
0.60
19.23
1,011.6
84.7
12.1
5.0
1,113.4
119.1
2.90
2.86
0.50
23.10
2,564.5
849.4
1.3%
105.8
2,443.6
761.0
2,337.9
935.5
(3.7)%
109.8
13.5%
92.8
Cover photos clockwise, from top left: State Auto founder Bob Pein; Susan Hill of Benton-Luttrell-Brown Company, an independent
insurance agency representing State Auto in Van Alstyne, Texas; State Auto Claim Representative Morgan Howard; State Auto’s current
Corporate Headquarters at 518 E. Broad St. in Columbus, Ohio; Catastrophe Claim Representative Kevin McBride with a claimant
following the May 22, 2011, tornado in Joplin, Mo.; the 1932 Christmas display at State Auto’s “Christmas Corner,” now an 80-year
downtown Columbus tradition.
Corporate Information
ANNUAL MEETING
10 a.m. Friday, May 4, 2012 at Corporate Headquarters
SHAREHOLDER INQUIRIES
Larry Adeleye
Assistant Vice President, Treasury and Finance Director
State Auto Financial Corporation
518 E. Broad St.
Columbus, Ohio 43215
Phone (614) 917-5108
FAX (614) 887-1074
Larry.Adeleye@StateAuto.com
INDEPENDENT AUDITORS
Ernst & Young LLP
Huntington Center
41 S. High St., Ste. 1100
Columbus, Ohio 43215
LEGAL COUNSEL
Baker & Hostetler LLP
65 E. State St., Ste. 2100
Columbus, Ohio 43215
SEC FILINGS
This report and other filings with the Securities and
Exchange Commission are available free of charge
on the Company’s website at StateAuto.com.
TRANSFER AGENT/REGISTRAR
Computershare
P.O. Box 43078
Providence, R.I. 02940
Phone (800) 622-6757
www-us.computershare.com/investor/2/contact/index#SCUSSTFC
STOCK TRADING
Common shares are traded in the Nasdaq Global Select
National Market System under the symbol STFC. As of
March 2, 2012, there were 1,285 shareholders of the
Company’s common shares.
MARKET PRICE RANGE,COMMON STOCK
Initial Public Offering – June 28, 1991, $2.25
The high and low sale prices for each quarterly period
for the past two years as reported by Nasdaq and cash
dividends paid per share are:
2011
First Qtr.
Second Qtr.
Third Qtr.
Fourth Qtr.
2010
First Qtr.
Second Qtr.
Third Qtr.
Fourth Qtr.
High
$18.35
18.28
18.00
14.06
High
$19.06
20.38
16.30
17.89
Low
$14.90
15.16
11.83
10.09
Low
$15.11
15.42
13.40
15.06
Dividend
$0.15
0.15
0.15
0.15
Dividend
$0.15
0.15
0.15
0.15
CORPORATE HEADQUARTERS
State Auto Financial Corporation
518 E. Broad St.
Columbus, Ohio 43215
StateAuto.com
(614) 464-5000
FORWARD-LOOkINg STATEMENTS
This Annual Report contains forward-looking statements
within the meaning of the Private Securities Litigation
Reform Act of 1995. Please see “Important Information
Regarding Forward-Looking Statements” preceding
Part I of the Company’s Annual Report on Form 10-K
for the fiscal year ended Dec. 31, 2011, which is
included with this Annual Report.
STFC Board of Directors
Standing from left:
David J. D’Antoni
Retired Senior Vice President - Ashland Inc.
Alexander B. Trevor
President and Director - Nuvocom Inc.
Thomas E. Markert
Senior Vice President, Marketing - Office Depot
David R. Meuse
Principal - Stonehenge Financial Holdings Inc.
Seated from left:
Robert P. Restrepo Jr.
President, Chairman and CEO - State Auto Financial Corporation
Eileen A. Mallesch
CPA, Retired CFO
Robert E. Baker
Executive Vice President - DHR International
S. Elaine Roberts
President and CEO - Columbus Regional Airport Authority
Paul S. Williams
Managing Director - Major, Lindsey & Africa
Executives
Robert P. Restrepo Jr.
President, Chairman and
Chief Executive Officer
Steven E. English
Vice President
Chief Financial Officer
James A. Yano
Vice President
Secretary and General Counsel
Senior Officers
Douglas E. Allen
Vice President, Director of Information Technology
Joel E. Brown
Vice President, Standard Lines
Jessica E. Buss
Vice President, Specialty Lines
Joyce A. Dallessio
Vice President, Standard Lines Products Management
David W. Dalton
Vice President, Director of Internal Audit
Charles E. McShane
Vice President, Director of Business Insurance
Cathy B. Miley
Vice President, Director of Corporate Development
Matthew S. Mrozek
Vice President, Chief Actuarial Officer
Paul E. Nordman
Vice President, Reinsurance
John M. Petrucci
Vice President, Director of Sales
Nancy D. Edwards
Vice President, Chief Security and Continuity Planning Officer
Cynthia A. Powell
Vice President, Chief Accounting Officer and Treasurer
Clyde H. Fitch
Senior Vice President, Chief Sales Officer
Steven R. Hazelbaker
Vice President,
Director of Corporate Enterprise Risk Management
Rick L. Holbein
Vice President, Director of Personal Insurance
Stephen P. Hunckler
Vice President, Chief Claims Officer
Scott A. Jones
Vice President, Investments
Timothy G. Reik
Vice President, RED Operations Director
M. Jean Reynolds
Vice President,
Director of Planning and Expense Management
Lyle D. Rhodebeck
Vice President, Director of Operations
Lorraine M. Siegworth
Vice President,
Chief Strategy and Organization Effectiveness Officer
Larry E. Willeford
Vice President, Claims Field Director
Dear Shareholders,
In 2011, your Board and leadership team took aggres-
sive, forward-looking steps to improve State Auto Financial
Corporation’s capital position and leverage the strength of the
State Auto Group. We responded to catastrophe losses that
were unprecedented in the history of both our company and
our industry. The loss of life and property was devastating. Yet
State Auto associates, time and again, delivered on the prom-
ise we make to our policyholders and agents every day.
Results for both the property and casualty industry and
STFC were disappointing. The industry experienced historic
catastrophe losses worldwide. Here in the United States, the
Tuscaloosa, Ala., and Joplin, Mo., tornadoes were part of an
extended string of tornadic activity that is unprecedented over
the past 40-plus years in both frequency and severity.
State Auto’s geographic footprint and personal lines
orientation negatively impacted our underwriting results and
capital levels. Notwithstanding a solid first quarter and a very
strong fourth quarter, STFC produced a loss for the year of
$146.8 million, or $3.65 per share. In addition to catastro-
phes, our earnings and book value were affected by a valuation
allowance we established against our net deferred tax asset.
State Auto associates,
time and again,
delivered on the
promise we make to
our policyholders
and agents every day.
This allowance reduced
earnings for the year by
$91.2 million and book
value by $2.26 per share.
The combined effect of
underwriting losses and
the deferred tax valua-
tion allowance required us
to take a number of steps
to strengthen capital and
begin restoring book value. Following announcement of third
quarter results, several actions were successfully completed by
year end, including:
• Revising the intercompany reinsurance pooling ar-
rangement between STFC and State Auto Mutual
to reduce STFC’s participation to 65% from 80%. All
necessary regulatory approvals were received and the
change took effect Dec. 31, 2011.
• Completing a significant quota share reinsurance
treaty with third party reinsurers, which was success-
fully placed on Dec. 31, 2011, and covers 75% of our
homeowners business. It will extend over the next three
years, giving us the time to complete our homeowners
remediation actions and validating the quality and ef-
fectiveness of actions we’ve already implemented.
• Discontinuing retiree medical coverage for most ac-
tive associates and certain retirees. This difficult but
necessary action improves our capital position and
earnings going forward.
Although catastrophes were the primary driver of our un-
derwriting results, they weren’t the only factor. Personal and
business lines property results have been hurt by higher costs
to repair and replace property. Since 2008, we’ve experienced
demand surge because of weather-related property damage
and higher building material costs from inflated commod-
ity prices, particularly oil. On the casualty side, short-term
underwriting results were affected by aggressive claim file
management, particularly for bodily injury claims where we’re
focused on setting reserves to the ultimate value earlier in our
investigative process. In the long run, these actions control
the cost of casualty claims, but short term, our calendar year
loss ratios increased.
State Auto is managing through these challenges and
remains a strong company with good prospects.
• Personal auto remains profitable and represents almost
36% of our total book of business.
• Homeowners is now a much smaller part of our over-
all business mix because of the quota share reinsur-
ance treaty.
• Standard business insurance production is improving
and pricing is beginning to increase.
• Specialty insurance has been effectively integrated and
will begin to be an important profit contributor as the
commercial insurance market firms.
• Claim performance has been enhanced by our
restructuring and business process improvement ef-
forts. Implementation of a new platform in 2012 will
solidify these improvements.
• Employee alignment and commitment to our success
is strong.
A summary of current status of each of our major business
segments follows.
Personal Auto
Our personal auto business remains profitable. Somewhat
higher loss ratios reflect increased frequency of bodily injury
Page 4
State Auto Financial Corporation
State Auto Financial Corporation
Page 1
large losses. We completed a review of our busi-
ness and concluded that quality remains good,
modest price increases are needed, and results
will improve as new bodily injury claim processes
are now implemented. Personal auto premiums
are down 6.7%, but price is up 2.2%. The sale of
our non-standard automobile business has reduced produc-
tion. And because auto business is frequently bundled with
homeowners coverage, our homeowners pricing and under-
writing actions also have slowed production in our core states
of Ohio, Indiana, Kentucky and Tennessee.
Homeowners
Both catastrophe and non-catastrophe weather losses
continue to be the story in our homeowners line. In 2011,
our catastrophe loss ratio of 56.7% was significantly higher
than the elevated five-year average of 28.3%. Second quarter
results were unusually hurt by above average severity, which
naturally flowed from the large number of total losses arising
out of Tuscaloosa and Joplin tornadoes. For the year, loss cost
inflation remained in high single digits. Even with over 30%
in price increases over the past three years, another 20-25%
price increase is needed to hit targets. We expect to achieve
most of this in 2012.
Business Insurance
Premium growth was flat with increased new business
coming from our BOPChoice product. We’ve established
renewal pricing goals for each line of business and will be
monitoring our progress on a regular basis to produce mod-
est increases on our renewal book. We expect to be charging
and earning modest price increases in 2012, particularly
in the property lines. As with homeowners, commercial
property results were hurt by catastrophes, non-catastrophe
weather and loss cost inflation. Large bodily injury and
liability losses in the casualty lines stabilized at year end as
our new claim processes continue to mature.
State Auto’s
people remain
our greatest asset.
Specialty Insurance
Specialty was the only segment not af-
fected by the weather. Our Rockhill excess
and surplus business grew and produced
solid underwriting profits. Our managing
general underwriter, Risk Evaluation and
Design LLC (RED), also grew and with the exception of one
large program, performed reasonably well. Workers compensa-
tion results continue to improve with the notable exception of
a revaluation of lifetime disability cases embedded in the State
Auto portfolio. With those cases properly reserved, we expect
improved results going forward.
1.0
Claims
0.8
0.4
0.6
We continue to transform our claim operation knowing
that investments will significantly improve our ex-catastro-
phe underwriting results. Claim service is better, our cost
structure is competitive, and our ability to manage claim
payout has improved. As we expand in-house staff counsel
capability and aggressively manage bodily injury claims, we
expect to see lower casualty loss ratios and ultimate claim
costs. In addition to realigning our claim staff and complet-
ing business process improvement initiatives, we’re in the
final stages of implementing a new claim system to further
improve performance. Implementation will be completed
by year end for all major lines. Claims will be a significant
contributor to improving our ex-catastrophe loss and loss
expense ratio performance.
1.0
1.0
0.2
0.0
0.8
0.8
0.6
Last year was one that won’t soon be forgotten by our claim
0.6
0.4
0.4
associates, in particular. Many of them witnessed the destruc-
tiveness of the seemingly unrelenting weather firsthand. They
grieved with insureds who’d lost loved ones and helped others
recover what they could from the little that was left of their
homes and businesses. At the same time, their colleagues were
working late into the night and over weekends to respond to
the needs of our agents and policyholders, who were contacting
us at record levels. That’s why we’re here. But thanks to our as-
0.2
0.0
0.0
0.2
sociates, State Auto serves its customers better than nearly every
company in the industry.
Municipal
Bonds
34.7%
Associate Engagement
We survey our associates annually to assess their under-
standing of our company’s strategy, their role in making it
successful, and their commitment to helping make it happen.
We’re pleased with the level of engagement among senior
executives, managers and supervisors. We’re using this strong
engagement to further engage the entire organization and
improve our ability to execute our plans.
Keys to our success are leveraging, investing and develop-
ing bench strength. We’ve made significant investments in
our claim organization which are now paying off in improved
results. Analytics enhance our ability to underwrite and price,
so we’ve restructured our product management organization,
invested in analytics, and appointed new leaders for personal
and business insurance product organizations and operations.
Specialty insurance recruited several new and talented under-
writing and program executives who will allow us to profit,
grow and diversify in this critical segment.
State Auto has long benefitted from a conservative and
prudent investment philosophy. Jim Duemey led this effort
and produced solid results for 30 years. At the end of 2011, Jim
retired from State Auto after developing his successor, Scott
Jones. We wish Jim a wonderful retirement and thank him for
his contributions to State Auto over his distinguished career.
State Auto’s people remain our greatest asset. Their persever-
ance during a difficult year, their persistence in enhancing our
products and customer service, and their confidence in State
Auto’s future will restore our historically superior performance.
Robert P. Restrepo Jr.
President, Chairman of the Board and Chief Executive Officer
$0.75
$0.50
$0.25
0
$1.5
$1.0
$0.5
0
$25
$20
$15
$10
DIVIDENDS PAID
(per share)
$0.75
DIVIDENDS PAID
(per share)
NET PREMIUMS
WRITTEN
(in billions)
’05*
’06
’07 ’08
’09
DIVIDENDS PAID
(per share)
DIVIDENDS PAID
NET PREMIUMS
WRITTEN
(in billions)
$0.75
$0.50
$0.25
DIVIDENDS PAID
(per share)
U.S. Government
Agencies and
MBS 24.5%
Notes
Receivable
3.0%
U.S. Treasury
Securities 13.0%
Corporate and Other
Invested Securities 13.9%
’07 ’08 ’09
0
’10
’11
Equity
Securities 10.9%
$1.5
$1.0
$0.5
$0.50
$0.25
0
’07 ’08 ’09
’10
’07 ’08 ’09
’11
NET PREMIUMS
WRITTEN
$1.5
(in billions)
NET PREMIUMS
WRITTEN
(in billions)
0
’10
’11
’07 ’08* ’09
’10*
’11*
*Pooling change year
DIVIDENDS PAID
(per share)
$0.75
$0.50
$0.25
0
$1.5
$1.0
$0.5
$25
$20
$15
$10
$5
0
’05*
’06
’07 ’08
0
’09
’05*
’06
’07 ’08
’09
’05*
’06
’07 ’08*
’09
*Pooling change year
NET PREMIUMS
WRITTEN
(in billions)
$1.5
NET PREMIUMS
WRITTEN
(in billions)
BOOK VALUE
(per share)
$0.75
$0.50
$0.25
0
$1.5
$1.0
$0.5
0
$25
$20
$15
$10
$5
0
(per share)
$0.75
$0.50
$0.25
$1.0
$0.5
0
$20
$15
$10
$5
0
’05*
’06
’07 ’08
’09
’05*
’06
’07 ’08
’09
$25
$20
$15
$10
$5
0
’10*
’11*
BOOK VALUE
(per share)
’07 ’08 ’09
’10
’11
’05*
’06
’07 ’08*
’09
*Pooling change year
’05*
’06
’07 ’08*
*Pooling change year
0
’09
’05*
’06
’07 ’08
’09
$1.0
$0.5
0
’07 ’08* ’09
’10*
*Pooling change year
’07 ’08* ’09
’11*
*Pooling change year
BOOK VALUE
(per share)
$25
BOOK VALUE
(per share)
BOOK VALUE
(per share)
$25
BOOK VALUE
(per share)
$20
$15
$10
$5
0
1
1
0
2
The State Auto Group
exceeds $1.5 billion in
written premium and $2.5
billion in assets, market-
ing insurance products
and services throughout
’10
the United States
’11
0
3
9
1
State Auto is the
largest insurer of
automobiles in Ohio
9
4
9
1
Assets climb to
$20.4 million, with
$14.5 million in
written premium
8
5
9
1
State Auto affiliates with the
Dixie Fire and Casualty Company
and Southern Home Insurance
Company of Greer, S.C.
1
7
9
1
State Auto writes
$127.7 million in
premiums with $370.1
million in assets
0
8
9
1
Written premium reaches
$185 million as the company
markets products in 14 states
1
9
9
1
The initial public offering of
State Auto Financial Corporation
takes place, with a split-
adjusted IPO price of $2.25
0
$5
’07 ’08 ’09
’10
’07 ’08 ’09
’11
1921
1
2
9
1
,
5
1
.
g
u
A
State Auto is founded
with $30,000 in borrowed
funds and a rented
room in downtown
Columbus, Ohio
MI
MI
IL
IL
MO
MO
TN
TN
AL
AL
GA
GA
PAPAA
PA
NC
NC
SC
SC
FL
FL
R
B
M M
State Auto completes
a merger with Meridian
Mutual of Indianapolis, Ind.;
the transaction creates a
company with more than $1
billion of written premium
and $2 billion in assets
1
0
0
2
Page 2
State Auto Financial Corporation
State Auto Financial Corporation
Page 3
large losses. We completed a review of our busi-
ness and concluded that quality remains good,
modest price increases are needed, and results
will improve as new bodily injury claim processes
are now implemented. Personal auto premiums
are down 6.7%, but price is up 2.2%. The sale of
our non-standard automobile business has reduced produc-
tion. And because auto business is frequently bundled with
homeowners coverage, our homeowners pricing and under-
writing actions also have slowed production in our core states
of Ohio, Indiana, Kentucky and Tennessee.
Homeowners
Both catastrophe and non-catastrophe weather losses
continue to be the story in our homeowners line. In 2011,
our catastrophe loss ratio of 56.7% was significantly higher
than the elevated five-year average of 28.3%. Second quarter
results were unusually hurt by above average severity, which
naturally flowed from the large number of total losses arising
out of Tuscaloosa and Joplin tornadoes. For the year, loss cost
inflation remained in high single digits. Even with over 30%
in price increases over the past three years, another 20-25%
price increase is needed to hit targets. We expect to achieve
most of this in 2012.
Business Insurance
Premium growth was flat with increased new business
coming from our BOPChoice product. We’ve established
renewal pricing goals for each line of business and will be
monitoring our progress on a regular basis to produce mod-
est increases on our renewal book. We expect to be charging
and earning modest price increases in 2012, particularly
in the property lines. As with homeowners, commercial
property results were hurt by catastrophes, non-catastrophe
weather and loss cost inflation. Large bodily injury and
liability losses in the casualty lines stabilized at year end as
our new claim processes continue to mature.
State Auto’s
people remain
our greatest asset.
Specialty Insurance
Specialty was the only segment not af-
fected by the weather. Our Rockhill excess
and surplus business grew and produced
solid underwriting profits. Our managing
general underwriter, Risk Evaluation and
Design LLC (RED), also grew and with the exception of one
large program, performed reasonably well. Workers compensa-
tion results continue to improve with the notable exception of
a revaluation of lifetime disability cases embedded in the State
Auto portfolio. With those cases properly reserved, we expect
improved results going forward.
1.0
Claims
0.8
0.6
0.4
We continue to transform our claim operation knowing
that investments will significantly improve our ex-catastro-
phe underwriting results. Claim service is better, our cost
structure is competitive, and our ability to manage claim
payout has improved. As we expand in-house staff counsel
capability and aggressively manage bodily injury claims, we
expect to see lower casualty loss ratios and ultimate claim
costs. In addition to realigning our claim staff and complet-
ing business process improvement initiatives, we’re in the
final stages of implementing a new claim system to further
improve performance. Implementation will be completed
by year end for all major lines. Claims will be a significant
contributor to improving our ex-catastrophe loss and loss
expense ratio performance.
1.0
1.0
0.2
0.0
0.8
0.8
0.6
Last year was one that won’t soon be forgotten by our claim
0.6
0.4
0.4
associates, in particular. Many of them witnessed the destruc-
tiveness of the seemingly unrelenting weather firsthand. They
grieved with insureds who’d lost loved ones and helped others
recover what they could from the little that was left of their
homes and businesses. At the same time, their colleagues were
working late into the night and over weekends to respond to
the needs of our agents and policyholders, who were contacting
us at record levels. That’s why we’re here. But thanks to our as-
0.0
0.2
0.0
0.2
sociates, State Auto serves its customers better than nearly every
company in the industry.
Municipal
Bonds
34.7%
Associate Engagement
We survey our associates annually to assess their under-
standing of our company’s strategy, their role in making it
successful, and their commitment to helping make it happen.
We’re pleased with the level of engagement among senior
executives, managers and supervisors. We’re using this strong
engagement to further engage the entire organization and
improve our ability to execute our plans.
Keys to our success are leveraging, investing and develop-
ing bench strength. We’ve made significant investments in
our claim organization which are now paying off in improved
results. Analytics enhance our ability to underwrite and price,
so we’ve restructured our product management organization,
invested in analytics, and appointed new leaders for personal
and business insurance product organizations and operations.
Specialty insurance recruited several new and talented under-
writing and program executives who will allow us to profit,
grow and diversify in this critical segment.
State Auto has long benefitted from a conservative and
prudent investment philosophy. Jim Duemey led this effort
and produced solid results for 30 years. At the end of 2011, Jim
retired from State Auto after developing his successor, Scott
Jones. We wish Jim a wonderful retirement and thank him for
his contributions to State Auto over his distinguished career.
State Auto’s people remain our greatest asset. Their persever-
ance during a difficult year, their persistence in enhancing our
products and customer service, and their confidence in State
Auto’s future will restore our historically superior performance.
Robert P. Restrepo Jr.
President, Chairman of the Board and Chief Executive Officer
$0.75
$0.50
$0.25
0
$1.5
$1.0
$0.5
0
$25
$20
$15
$10
DIVIDENDS PAID
(per share)
$0.75
DIVIDENDS PAID
(per share)
NET PREMIUMS
WRITTEN
(in billions)
’05*
’06
’07 ’08
’09
DIVIDENDS PAID
(per share)
DIVIDENDS PAID
NET PREMIUMS
WRITTEN
(in billions)
$0.75
$0.50
$0.25
DIVIDENDS PAID
(per share)
U.S. Government
Agencies and
MBS 24.5%
Notes
Receivable
3.0%
U.S. Treasury
Securities 13.0%
Corporate and Other
Invested Securities 13.9%
’07 ’08 ’09
0
’10
’11
Equity
Securities 10.9%
$1.5
$1.0
$0.5
$0.50
$0.25
0
’07 ’08 ’09
’10
’07 ’08 ’09
’11
NET PREMIUMS
WRITTEN
$1.5
(in billions)
NET PREMIUMS
WRITTEN
(in billions)
0
’10
’11
’07 ’08* ’09
’10*
’11*
*Pooling change year
DIVIDENDS PAID
(per share)
$0.75
$0.50
$0.25
0
$1.5
$1.0
$0.5
$25
$20
$15
$10
$5
0
’05*
’06
’07 ’08
0
’09
’05*
’06
’07 ’08
’09
’05*
’06
’07 ’08*
’09
*Pooling change year
NET PREMIUMS
WRITTEN
(in billions)
$1.5
NET PREMIUMS
WRITTEN
(in billions)
BOOK VALUE
(per share)
$0.75
$0.50
$0.25
0
$1.5
$1.0
$0.5
0
$25
$20
$15
$10
$5
0
(per share)
$0.75
$0.50
$0.25
$1.0
$0.5
0
$20
$15
$10
$5
0
’05*
’06
’07 ’08
’09
’05*
’06
’07 ’08
’09
$25
$20
$15
$10
$5
0
’10*
’11*
BOOK VALUE
(per share)
’07 ’08 ’09
’10
’11
’05*
’06
’07 ’08*
’09
*Pooling change year
’05*
’06
’07 ’08*
*Pooling change year
0
’09
’05*
’06
’07 ’08
’09
$1.0
$0.5
0
’07 ’08* ’09
’10*
*Pooling change year
’07 ’08* ’09
’11*
*Pooling change year
BOOK VALUE
(per share)
$25
BOOK VALUE
(per share)
BOOK VALUE
(per share)
$25
BOOK VALUE
(per share)
$20
$15
$10
$5
0
1
1
0
2
The State Auto Group
exceeds $1.5 billion in
written premium and $2.5
billion in assets, market-
ing insurance products
and services throughout
’10
the United States
’11
0
3
9
1
State Auto is the
largest insurer of
automobiles in Ohio
9
4
9
1
Assets climb to
$20.4 million, with
$14.5 million in
written premium
8
5
9
1
State Auto affiliates with the
Dixie Fire and Casualty Company
and Southern Home Insurance
Company of Greer, S.C.
1
7
9
1
State Auto writes
$127.7 million in
premiums with $370.1
million in assets
0
8
9
1
Written premium reaches
$185 million as the company
markets products in 14 states
1
9
9
1
The initial public offering of
State Auto Financial Corporation
takes place, with a split-
adjusted IPO price of $2.25
0
$5
’07 ’08 ’09
’10
’07 ’08 ’09
’11
1921
1
2
9
1
,
5
1
.
g
u
A
State Auto is founded
with $30,000 in borrowed
funds and a rented
room in downtown
Columbus, Ohio
MI
MI
IL
IL
MO
MO
TN
TN
AL
AL
GA
GA
PAPAA
PA
NC
NC
SC
SC
FL
FL
R
B
M M
State Auto completes
a merger with Meridian
Mutual of Indianapolis, Ind.;
the transaction creates a
company with more than $1
billion of written premium
and $2 billion in assets
1
0
0
2
Page 2
State Auto Financial Corporation
State Auto Financial Corporation
Page 3
STFC Board of Directors
Standing from left:
David J. D’Antoni
Retired Senior Vice President - Ashland Inc.
Alexander B. Trevor
President and Director - Nuvocom Inc.
Thomas E. Markert
Senior Vice President, Marketing - Office Depot
David R. Meuse
Principal - Stonehenge Financial Holdings Inc.
Seated from left:
Robert P. Restrepo Jr.
President, Chairman and CEO - State Auto Financial Corporation
Eileen A. Mallesch
CPA, Retired CFO
Robert E. Baker
Executive Vice President - DHR International
S. Elaine Roberts
President and CEO - Columbus Regional Airport Authority
Paul S. Williams
Managing Director - Major, Lindsey & Africa
Executives
Robert P. Restrepo Jr.
President, Chairman and
Chief Executive Officer
Steven E. English
Vice President
Chief Financial Officer
James A. Yano
Vice President
Secretary and General Counsel
Senior Officers
Douglas E. Allen
Vice President, Director of Information Technology
Joel E. Brown
Vice President, Standard Lines
Jessica E. Buss
Vice President, Specialty Lines
Joyce A. Dallessio
Vice President, Standard Lines Products Management
David W. Dalton
Vice President, Director of Internal Audit
Charles E. McShane
Vice President, Director of Business Insurance
Cathy B. Miley
Vice President, Director of Corporate Development
Matthew S. Mrozek
Vice President, Chief Actuarial Officer
Paul E. Nordman
Vice President, Reinsurance
John M. Petrucci
Vice President, Director of Sales
Nancy D. Edwards
Vice President, Chief Security and Continuity Planning Officer
Cynthia A. Powell
Vice President, Chief Accounting Officer and Treasurer
Clyde H. Fitch
Senior Vice President, Chief Sales Officer
Steven R. Hazelbaker
Vice President,
Director of Corporate Enterprise Risk Management
Rick L. Holbein
Vice President, Director of Personal Insurance
Stephen P. Hunckler
Vice President, Chief Claims Officer
Scott A. Jones
Vice President, Investments
Timothy G. Reik
Vice President, RED Operations Director
M. Jean Reynolds
Vice President,
Director of Planning and Expense Management
Lyle D. Rhodebeck
Vice President, Director of Operations
Lorraine M. Siegworth
Vice President,
Chief Strategy and Organization Effectiveness Officer
Larry E. Willeford
Vice President, Claims Field Director
Dear Shareholders,
In 2011, your Board and leadership team took aggres-
sive, forward-looking steps to improve State Auto Financial
Corporation’s capital position and leverage the strength of the
State Auto Group. We responded to catastrophe losses that
were unprecedented in the history of both our company and
our industry. The loss of life and property was devastating. Yet
State Auto associates, time and again, delivered on the prom-
ise we make to our policyholders and agents every day.
Results for both the property and casualty industry and
STFC were disappointing. The industry experienced historic
catastrophe losses worldwide. Here in the United States, the
Tuscaloosa, Ala., and Joplin, Mo., tornadoes were part of an
extended string of tornadic activity that is unprecedented over
the past 40-plus years in both frequency and severity.
State Auto’s geographic footprint and personal lines
orientation negatively impacted our underwriting results and
capital levels. Notwithstanding a solid first quarter and a very
strong fourth quarter, STFC produced a loss for the year of
$146.8 million, or $3.65 per share. In addition to catastro-
phes, our earnings and book value were affected by a valuation
allowance we established against our net deferred tax asset.
State Auto associates,
time and again,
delivered on the
promise we make to
our policyholders
and agents every day.
This allowance reduced
earnings for the year by
$91.2 million and book
value by $2.26 per share.
The combined effect of
underwriting losses and
the deferred tax valua-
tion allowance required us
to take a number of steps
to strengthen capital and
begin restoring book value. Following announcement of third
quarter results, several actions were successfully completed by
year end, including:
• Revising the intercompany reinsurance pooling ar-
rangement between STFC and State Auto Mutual
to reduce STFC’s participation to 65% from 80%. All
necessary regulatory approvals were received and the
change took effect Dec. 31, 2011.
• Completing a significant quota share reinsurance
treaty with third party reinsurers, which was success-
fully placed on Dec. 31, 2011, and covers 75% of our
homeowners business. It will extend over the next three
years, giving us the time to complete our homeowners
remediation actions and validating the quality and ef-
fectiveness of actions we’ve already implemented.
• Discontinuing retiree medical coverage for most ac-
tive associates and certain retirees. This difficult but
necessary action improves our capital position and
earnings going forward.
Although catastrophes were the primary driver of our un-
derwriting results, they weren’t the only factor. Personal and
business lines property results have been hurt by higher costs
to repair and replace property. Since 2008, we’ve experienced
demand surge because of weather-related property damage
and higher building material costs from inflated commod-
ity prices, particularly oil. On the casualty side, short-term
underwriting results were affected by aggressive claim file
management, particularly for bodily injury claims where we’re
focused on setting reserves to the ultimate value earlier in our
investigative process. In the long run, these actions control
the cost of casualty claims, but short term, our calendar year
loss ratios increased.
State Auto is managing through these challenges and
remains a strong company with good prospects.
• Personal auto remains profitable and represents almost
36% of our total book of business.
• Homeowners is now a much smaller part of our over-
all business mix because of the quota share reinsur-
ance treaty.
• Standard business insurance production is improving
and pricing is beginning to increase.
• Specialty insurance has been effectively integrated and
will begin to be an important profit contributor as the
commercial insurance market firms.
• Claim performance has been enhanced by our
restructuring and business process improvement ef-
forts. Implementation of a new platform in 2012 will
solidify these improvements.
• Employee alignment and commitment to our success
is strong.
A summary of current status of each of our major business
segments follows.
Personal Auto
Our personal auto business remains profitable. Somewhat
higher loss ratios reflect increased frequency of bodily injury
Page 4
State Auto Financial Corporation
State Auto Financial Corporation
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
‘ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2011 or
For the transition period from
to
Commission File Number 000-19289
STATE AUTO FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
31-1324304
(I.R.S. Employer Identification No.)
518 East Broad Street, Columbus, Ohio
(Address of principal executive offices)
43215-3976
(Zip Code)
Registrant’s telephone number, including area code:
(614) 464-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ‘ No È
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No È
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer,
or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Indicate by check mark whether
Accelerated filer È
Smaller reporting company ‘
is a shell company (as defined in Rule 12b-2 of
the Registrant
Act). Yes ‘ No È
the
As of June 30, 2011, the last business day of the Registrant’s most recently completed second fiscal quarter, the
aggregate market value (based on the closing sales price on that date) of the voting stock held by non-affiliates of the
Registrant was $260,243,109.
On March 2, 2012, the Registrant had 40,376,941 Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement relating to the annual meeting of stockholders to be held May 4, 2012 (the
“2012 Proxy Statement”), which will be filed within 120 days of December 31, 2011, are incorporated by reference into
Part III of this Form 10-K.
Index to Annual Report on Form 10-K for the year ended December 31, 2011
Form 10-K
Item Description
Part I
1
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
3
4
5
6
7
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7A Qualitative and Quantitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . .
8
9
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . .
11
12
13
14
15
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Exhibits(1)
Consent of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . .
Certifications
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
6
16
17
30
30
31
31
32
34
35
84
85
85
133
133
133
134
134
134
135
135
135
153
154
155
(1)
The financial statement schedules noted at Item 15(a)(2) and the exhibits noted at Item 15(a)(3), other than those exhibits identified in
this Index, have been omitted from the reproduction of this Form 10-K. For the omitted schedules and exhibits, see our Annual Report on
Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission, a copy of which is available
on the SEC’s website at www.sec.gov. Copies of omitted schedules and exhibits are also available on our website at
www.StateAuto.com under “SEC filings” or may be obtained by writing to Lawrence A. Adeleye, Director of Investor Relations, State
Auto Financial Corporation, 518 East Broad Street, Columbus, Ohio 43215.
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical facts, included in this Annual Report on Form 10-K (this
“Form 10-K”) of State Auto Financial Corporation (“State Auto Financial” or “STFC”) or incorporated herein by
reference, including, without limitation, statements regarding State Auto Financial’s future financial position,
business strategy, budgets, projected costs, goals and plans and objectives of management for future operations,
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
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 the date the
statements were made. Although State Auto Financial believes that the expectations reflected in forward-looking
statements have a reasonable basis, it 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 State Auto Financial’s actual results to differ materially from those
projected, see “Risk Factors” in Item 1A of this Form 10-K. Except to the limited extent required by applicable
law, State Auto Financial undertakes no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
1
IMPORTANT DEFINED TERMS USED IN THIS FORM 10-K
Glossary of Terms for State Auto Financial Corporation and Its Subsidiaries and Affiliates
State Auto Financial or STFC . . . . . . . . . Refers to our holding company, State Auto Financial Corporation.
We, us, our or the Company . . . . . . . . . . Refers to STFC and its consolidated subsidiaries, namely State Auto
Property & Casualty Insurance Company (“State Auto P&C”), Milbank
Insurance Company
(“Milbank”), Farmers Casualty Insurance
Company (“Farmers”), State Auto Insurance Company of Ohio (“SA
Ohio”), Stateco Financial Services, Inc. (“Stateco”), and through
December 31, 2010, State Auto National Insurance Company (“SA
National”), which was sold to a third party on December 31, 2010.
State Auto Mutual or our parent
company . . . . . . . . . . . . . . . . . . . . . . . Refers to State Automobile Mutual Insurance Company, which owns
approximately 63% of STFC’s outstanding common shares. State
Auto Mutual also owns Risk Evaluation & Design, LLC (“RED”),
which acts as a managing general underwriter exclusively for the
benefit of our Pooled Companies.
STFC Pooled Companies . . . . . . . . . . . . Refers to State Auto P&C, Milbank, Farmers, SA Ohio, and, from
January 1, 2010 through December 31, 2010, SA National.
Mutual Pooled Companies . . . . . . . . . . . Refers to State Auto Mutual, and certain subsidiaries and affiliates of
State Auto Mutual, namely State Auto Florida Insurance Company
(“SA Florida”), State Auto Insurance Company of Wisconsin (“SA
Wisconsin”), Meridian Security Insurance Company (“Meridian
Security”), Meridian Citizens Mutual Insurance Company (“Meridian
Citizens Mutual”), Beacon National Insurance Company (“Beacon
National”), Patrons Mutual
Insurance Company of Connecticut
(“Patrons Mutual”), Litchfield Mutual Fire Insurance Company
(“Litchfield”) and, as of January 1, 2011, Rockhill Insurance Company
(“RIC”), Plaza Insurance Company (“Plaza”), American Compensation
Insurance Company (“American Compensation”) and Bloomington
Compensation Insurance Company (“Bloomington Compensation”).
Pooled Companies or our Pooled
Companies . . . . . . . . . . . . . . . . . . . . . . Refers to the STFC Pooled Companies and the Mutual Pooled
Companies.
MIGI Insurers . . . . . . . . . . . . . . . . . . . . . Refers to Meridian Security and Meridian Citizens Mutual.
MIGI Companies . . . . . . . . . . . . . . . . . . . Refers to the MIGI Insurers and Meridian Insurance Group, Inc.
Beacon Insurance Group or Beacon
(“MIGI”).
Group . . . . . . . . . . . . . . . . . . . . . . . . . . Refers to Beacon National and Beacon Lloyds Insurance Company
(“Beacon Lloyds”).
Patrons Insurance Group or Patrons
Group . . . . . . . . . . . . . . . . . . . . . . . . . . Refers to Patrons Mutual and Litchfield.
Rockhill Insurance Group . . . . . . . . . . . . Refers to Rockhill Holding Company,
its insurance subsidiaries,
namely RIC, Plaza, American Compensation and Bloomington
including
Compensation, and its other non-insurance subsidiaries,
RTW, Inc. (“RTW”), a holding company that owns 100% of American
Compensation and Bloomington Compensation.
Rockhill Insurers . . . . . . . . . . . . . . . . . . . Refers to RIC, Plaza, American Compensation and Bloomington
Compensation.
State Auto Group . . . . . . . . . . . . . . . . . . . Refers to the Pooled Companies and Beacon Lloyds.
2
Glossary of Selected Insurance and Accounting Terms
Accident year . . . . . . . . . . . . . . . . . . . . . . The calendar year in which loss events occur, regardless of when the
losses are actually reported, booked or paid.
Admitted insurer . . . . . . . . . . . . . . . . . . . An insurer licensed to transact insurance business within a state and
to comprehensive policy rate, form and market conduct
subject
regulation by that state’s insurance regulatory authority.
Allocated loss adjustment expenses or
ALAE . . . . . . . . . . . . . . . . . . . . . . . . . The costs that can be related to a specific claim, which may include
attorney fees, external claims adjusters and investigation costs, among
others.
Book value per share . . . . . . . . . . . . . . . . Total common stockholders’ equity divided by the number of
common shares outstanding.
Captive insurance arrangement . . . . . . . . A closely held insurance arrangement whose primary purpose is to
provide insurance coverage to the captive’s owners and/or their
affiliates.
Catastrophe loss . . . . . . . . . . . . . . . . . . . . Loss and ALAE from catastrophes, where catastrophes are defined as
a severe loss caused by various natural events, including hurricanes,
hailstorms,
severe winter
weather and fires. Our catastrophe losses are those designated by the
Insurance Services Office (“ISO”) Property Claim Services (“PCS”).
PCS defines a catastrophe as an event that causes $25 million or more
in industry insured property losses and affects a significant number of
property and casualty policyholders and insurers.
tornadoes, windstorms,
earthquakes,
Combined ratio . . . . . . . . . . . . . . . . . . . . The sum of the loss and LAE ratio and the expense ratio. A combined
ratio under 100% generally indicates an underwriting profit. A
combined ratio over 100% generally indicates an underwriting loss.
Debt to capital ratio . . . . . . . . . . . . . . . . . The ratio of notes payable to the sum of total stockholders’ equity and
notes payable.
Deferred acquisition costs or DAC . . . . . Expenses that vary with, and are primarily related to, the production
insurance business, and are deferred and
of new and renewal
amortized to achieve a matching of revenues and expenses when
reported in financial statements prepared in accordance with GAAP.
Direct written premiums . . . . . . . . . . . . . The amounts charged by an insurer to insureds in exchange for
coverages provided in accordance with the terms of an insurance
contract. The amounts exclude the impact of all
reinsurance
premiums, either assumed or ceded.
Duration . . . . . . . . . . . . . . . . . . . . . . . . . . A measure of the sensitivity of a financial asset’s price to interest rate
Earned premiums or premiums
movements.
earned . . . . . . . . . . . . . . . . . . . . . . . . . The portion of written premiums that applies to the expired portion of
the policy term. Earned premiums are recognized as revenue under
both SAP and GAAP.
Excess and surplus lines insurance . . . . . Specialized property and liability coverages written by non-admitted
insurers. These coverages include exposures that do not fit within
normal underwriting patterns, involve a degree of risk that is not
commensurate with standard rates and/or policy forms, or are not
written by admitted insurers because of general market conditions.
3
Expense ratio or underwriting expense
ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . For SAP, it is the ratio of (i) the sum of statutory underwriting and
miscellaneous expenses incurred offset by miscellaneous income
(collectively, “underwriting expenses”) to (ii) written premiums. For
GAAP, it is the ratio of acquisition and operating expenses incurred
to earned premiums.
Generally accepted accounting principles
or GAAP . . . . . . . . . . . . . . . . . . . . . . . Accounting practices used in the United States of America
determined by the Financial Accounting Standards Board (“FASB”)
and American Institute of Certified Public Accountants (“AICPA”).
Incurred but not reported reserves or
IBNR . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated losses and LAE that have been incurred but not yet
reported to the insurer. This includes amounts for unreported claims,
development on known cases, and re-opened claims.
Loss adjustment expenses or LAE . . . . . The expenses of settling claims, including legal and other fees, and
the portion of general expenses allocated to claim settlement. LAE is
comprised of ALAE and ULAE.
Loss and LAE ratio or loss ratio . . . . . . . For both SAP and GAAP, it is the ratio of incurred losses and LAE to
earned premiums.
Loss reserves . . . . . . . . . . . . . . . . . . . . . . Liabilities established by insurers and reinsurers to reflect
the
estimated cost of claims incurred that the insurer or reinsurer will
ultimately be required to pay in respect of insurance or reinsurance it
has written. Reserves are established for losses and for LAE, and
consist of case reserves and IBNR reserves.
Managing general underwriter or
MGU . . . . . . . . . . . . . . . . . . . . . . . . . . An independent
insurance professional
firm that acts as an
intermediary between the insurer and retail agents, much like a
wholesaler. MGUs frequently have binding authority to issue
insurance policies on behalf of an insurer that fit into the underwriting
guidelines provided by that insurer. MGUs typically are compensated
by an override commission on the insurance coverages sold by their
sub-agents.
National Association of Insurance
Commissioners or NAIC . . . . . . . . . . . An organization of the insurance commissioners or directors of all 50
states, the District of Columbia and the five U.S. territories organized
to promote consistency of
regulatory practices and statutory
accounting standards throughout the United States.
Net premiums written to surplus ratio or
leverage ratio . . . . . . . . . . . . . . . . . . . . A SAP calculation which measures statutory surplus available to
absorb losses. This ratio is calculated by dividing the net statutory
premiums written for a rolling twelve month period by the ending
statutory surplus for the period. For example, a ratio of 1.5 means that
for every dollar of surplus, the insurer wrote $1.50 in premiums.
Net written premiums . . . . . . . . . . . . . . . Direct written premiums plus assumed reinsurance premiums less
ceded reinsurance premiums.
Non-admitted insurer or surplus lines
carrier
. . . . . . . . . . . . . . . . . . . . . . . . . An insurer that is not required to be licensed in a state but is allowed
to do business in that state subject to certain regulatory oversight by
4
that state’s insurance regulatory authority. Non-admitted insurers are
not subject to most of the rate and form regulations imposed on
admitted insurers because they write specialized property and liability
coverages, also known as excess and surplus lines insurance, which
allows them the flexibility to change coverages offered and rates
charged without time constraints and financial costs associated with
the filing process. As such, these insurers offer an opportunity for
coverage for specialized exposures that otherwise might not be
insurable.
Retail agent or retail agency . . . . . . . . . . An independent insurance professional who represents, and acts as an
intermediary for,
admitted insurers, generally recommending,
marketing and selling insurance products and services to insurance
consumers.
Return on average equity . . . . . . . . . . . . . The percent derived by dividing net
income by average total
stockholders’ equity.
Risk-based capital or RBC . . . . . . . . . . . A measure adopted by the NAIC and state regulatory authorities for
determining the minimum statutory capital and surplus requirements
of insurers. Insurers having total adjusted capital
less than that
required by the RBC calculation will be subject to varying degrees of
regulatory action depending on the level of capital inadequacy.
Risk retention groups . . . . . . . . . . . . . . . An insurance arrangement where members of a similar profession or
Standard insurance . . . . . . . . . . . . . . . . .
business band together to self-insure their exposure.
Insurance which is typically written by admitted insurers. Our
personal and business insurance segments are comprised of standard
insurance.
Statutory accounting practices or SAP . . The practices and procedures prescribed or permitted by state
insurance regulatory authorities in the United States for recording
transactions and preparing financial statements.
Statutory surplus . . . . . . . . . . . . . . . . . . . Under SAP, the amount remaining after all liabilities, including loss
reserves, are subtracted from all admitted assets. Admitted assets are
assets of an insurer prescribed or permitted by a state to be recognized
on the balance sheet prepared in accordance with SAP.
Unallocated loss adjustment expenses or
ULAE . . . . . . . . . . . . . . . . . . . . . . . . . The costs incurred in settling claims, such as in-house processing
costs, which cannot be associated with a specific claim.
Underwriting gain or loss . . . . . . . . . . . . Under SAP, earned premiums less loss and LAE and underwriting
expenses.
Unearned premiums . . . . . . . . . . . . . . . . The portion of written premiums that applies to the unexpired portion
of the policy term. Unearned premiums are not recognized as
revenues under both SAP and GAAP.
Wholesale broker . . . . . . . . . . . . . . . . . . . An independent
insurance professional who offers
specialized
insurance products and serves as an intermediary between a retail
agent and an insurer, while typically having no contact with the
insured. A wholesale broker may represent both admitted and non-
admitted insurers, and may offer both standard and excess and surplus
lines insurance.
5
Item 1. Business
PART I
State Auto Financial is an Ohio domiciled property and casualty insurance holding company incorporated in
1990. We are primarily engaged in writing personal and business insurance. State Auto Financial’s subsidiaries
include State Auto P&C, Milbank, Farmers, and SA Ohio, each of which is a property and casualty insurance
company, and Stateco, which provides investment management services to affiliated insurance companies.
Our parent company is State Auto Mutual, an Ohio domiciled mutual property and casualty insurance
company organized in 1921. It owns approximately 63% of State Auto Financial’s outstanding common shares.
State Auto Mutual’s other subsidiaries and affiliates include SA Florida, SA Wisconsin, Meridian Security,
Meridian Citizens Mutual, Beacon National, Patrons Mutual, Litchfield and the Rockhill Insurers, each of which
is a property and casualty insurance company. In 2009, State Auto Mutual acquired the Rockhill Insurance
Group. State Auto Mutual and its insurance subsidiaries and affiliates, along with State Auto Financial’s
insurance subsidiaries, pool their respective insurance business under the Pooling Arrangement, as further
described below.
Our capital position during 2011 was negatively impacted by a record level of weather-related
catastrophes. At the end of 2011, the State Auto Group implemented several capital management actions to
improve and better manage our capital position. First, the Pooling Arrangement was amended to reduce the
overall participation percentage of the STFC Pooled Companies from 80% to 65%. See “Pooling Arrangement”
discussion below included in this Item 1. Second, the State Auto Group entered into a three-year quota share
reinsurance agreement with a syndicate of reinsurers covering its homeowners book of business. Third, retiree
healthcare benefits were terminated for most active employees and certain retirees. For a more detailed
discussion of these actions, see Item 7 of this Form 10-K “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Overview—Capital Management Actions.”
The State Auto Group markets its insurance products throughout the United States primarily through
independent agencies, which include retail agencies and wholesale brokers. All of the property and casualty
insurance companies in the State Auto Group are admitted insurers, except for RIC, which is a non-admitted
insurer. The operations of the State Auto Group are headquartered in Columbus, Ohio.
Our Pooled Companies are rated A (Excellent) by the A.M. Best Company (“A.M. Best”).
FINANCIAL INFORMATION ABOUT SEGMENTS
Since January 1, 2011, our reportable insurance segments have been personal insurance, business insurance
and specialty insurance (collectively the “insurance segments”). These insurance segments are aligned consistent
with the reporting lines to our principal operating decision makers. Investment operations is also a reportable
segment. See a detailed discussion regarding our segments at Item 7 of this Form 10-K “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Overview” and Note 14 to our
consolidated financial statements included in Item 8 of this Form 10-K.
PERSONAL AND BUSINESS INSURANCE
Products offered in our personal and business insurance segments are marketed exclusively through retail
agents, but the segments are managed separately from each other due to the differences in the types of customers
they serve or products they provide or services they offer.
Products
Personal Insurance
In our personal insurance segment, we write standard insurance covering personal exposures to individuals.
The primary coverages offered are personal auto and homeowners.
6
Business Insurance
In our business insurance segment, we write standard insurance covering small-to-medium sized
commercial exposures. We offer a broad range of coverages which include commercial auto, commercial multi-
peril, business owners, fire & allied and general liability.
Marketing
We market our personal and business insurance through approximately 3,000 retail agencies. We view our
retail agents as our primary customers, because they are in a position to recommend either our insurance products
or those of a competitor to their customers. We strongly support the independent agency system and believe its
maintenance is essential to our present and future success. We continually develop programs and procedures to
enhance our agency relationships, including the following: regular travel by senior management and regional
office staff to meet with agents, in person, in their home states; training opportunities; and incentives related to
profit and growth. In addition, we share the cost of approved advertising with selected agencies.
We actively help our agencies develop the professional sales skills of their staffs. Our training programs
include both products and sales training conducted in our corporate headquarters. Further, our training programs
include disciplined follow-up and coaching for an extended time. Other targeted training sessions are held in our
regional headquarters from time to time, as well as in our agents’ offices.
We provide our retail agents with defined travel and cash incentives if they achieve certain sales and
underwriting profit levels. Further, we recognize our very top agencies—measured by consistent profitability,
achievement of written premium thresholds and growth—as Inner Circle Agencies. Inner Circle Agencies are
rewarded with additional trip and financial incentives.
We have made continuing efforts to use technology to make it easier for our retail agents to do business with us.
We offer internet-based (i) rating, (ii) policy application submission, (iii) execution of changes to policies for certain
products and (iv) claims submission. In addition, we provide our agents with the opportunity to maintain policyholder
records electronically, avoiding the expense of preparing and storing paper records. We believe that, since agents and
their customers realize better service and efficiency through automation, they value their relationship with us.
Automation can make it easier for an agent to do business with us, which attracts prospective agents and enhances
existing agencies’ relationships with us.
Claims
Our internal claims division supports our personal and business insurance segments through emphasis on
timely investigation of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate
case reserves for claims, and control of external claims adjustment expenses. Achievement of these goals
supports our marketing efforts by providing agents and policyholders with prompt and effective service.
We employ a specialized claims model that is skills-based which attempts to yield a quality customer experience
regardless of the type and severity of the claim. We staff field adjusters in locations where we have size, scale and density
of claims whenever possible to control file quality and enhance customer service. We supplement our field staff with
independent adjusters and appraisers in areas in which there is not sufficient volume of claims to warrant staff adjusters.
Claim settlement authority levels are established for each adjuster, supervisor and manager based on his or
her level of expertise and experience. Our claims division is responsible for reviewing the claim, obtaining
necessary documentation and establishing loss and expense reserves of certain claims. Generally, property or
casualty claims estimated to reach $100,000 or above are sent to specialists for direct handling.
We minimize claims adjusting costs by settling as many claims as possible through our internal claims staff
and, if possible, by settling disputes regarding automobile physical damage, bodily injury and property insurance
claims through arbitration or mediation when appropriate. In addition, selected agents have authority to settle
small first party claims, which improves claims service.
We have internal house counsel offices to defend and resolve claims which are in litigation. These offices
are strategically placed where we have size, scale and density of legal cases to warrant their existence. We also
have a list of highly skilled panel counsel we employ for defending our insureds when appropriate.
7
Our Claims Express Centers allow us to improve claims efficiency and economy by concentrating the
handling of smaller, less complex claims in a centralized environment. We provide claim service 24 hours a day,
seven days a week, either through associates in our Claims Express Centers, which are located in Des Moines,
Iowa and Columbus, Ohio, or for a few overnight hours, through a third party service provider.
SPECIALTY INSURANCE
In our specialty insurance segment, we offer commercial coverages that require specialized product
underwriting, claims handling or risk management services through a distribution channel of retail agents and
wholesale brokers, which may include program administrators and other specialty sources. Our specialty
insurance products are written through our admitted and non-admitted insurers. Our specialty insurance segment
is organized into the following three units:
Our RED unit markets and underwrites small-to-medium commercial exposures, offering property and
casualty programs for customers with common risk characteristics or coverage requirements. This unit may also
offer alternative forms of risk protection that include various forms of self-insurance or high deductibles, some of
which may utilize captive insurance arrangements or risk retention groups. Coverages offered by this unit include
commercial auto, workers’ compensation, general liability and property. We use approved external claim
services for claims notification, handling and settlement with centralized management oversight by our home
office team.
Our Rockhill unit markets and underwrites commercial exposures which have unique insurance
requirements, including difficult to place classes of commercial business which may require customized rates and
forms, along with customized insurance programs for specialty niche and homogenous groups of exposures.
Coverages offered by this unit may include commercial auto, property, bonds (fidelity and surety) and general
liability. Our Rockhill unit uses a combination of a dedicated internal claims unit and also approved external
claim services for claims notification, handling and settlement with centralized management oversight by our
home office team.
Our Workers’ Compensation unit serves the small-to-medium account and association business. This unit
has a dedicated internal claims team emphasizing managed care cost containment strategies including focusing
on the injured employee’s early return to work and cost-effective quality care.
INVESTMENT OPERATIONS
The primary objectives of our investment strategy are to maintain adequate liquidity and capital to meet our
responsibilities to policyholders; grow long term economic surplus, thereby increasing our capital position;
provide a consistent level of income to support operations; and manage investment risk. Our investment portfolio
is managed separately from that of our parent company and its subsidiaries and affiliates, and investment results
are not shared by our Pooled Companies through the Pooling Arrangement, as described below. Stateco performs
investment management services for us and our parent company and its subsidiaries and affiliates, although
investment policies implemented by Stateco continue to be set for each company through the Investment
Committee of its respective Board of Directors.
For additional discussion regarding our investments, including the market risks related to our investment
portfolio, see Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Investment Operations Segment.”
POOLING ARRANGEMENT
Our Pooled Companies pool
their respective insurance business in accordance with a quota share
reinsurance agreement which we refer to as the “Pooling Arrangement.” In general, under the Pooling
Arrangement, State Auto Mutual assumes premiums, losses and expenses from each of the remaining Pooled
Companies and in turn cedes to each of the Pooled Companies a specified portion of premiums, losses and
8
expenses based on each of the Pooled Companies’ respective pooling percentages. State Auto Mutual then retains the
balance of the pooled business. The participation percentage for the STFC Pooled Companies had been 80% since
2001. Prior to 2011, the Pooling Arrangement covered all property and casualty insurance written by the Pooled
Companies except for business written by the Rockhill Insurers. As of January 1, 2011, we added the Rockhill Insurers
to the pool with a participation percentage of 0.0%. As of the close of business on December 31, 2011, the Pooling
Arrangement was amended to reduce the overall participation percentage of the STFC Pooled Companies from 80% to
65% and to include the pooling of applicable balance sheet accounts such as accumulated other comprehensive income
related to employee benefit plans. See the detailed discussion of our Pooling Arrangement at Item 7 of this Form 10-K,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Pooling Arrangement.”
GEOGRAPHIC DISTRIBUTION
The following table sets forth the geographic distribution of our direct written premiums for the year ended
December 31, 2011:
State
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arkansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All others(1)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Total
13.0%
8.3
7.8
5.7
5.4
4.6
4.1
3.5
3.4
3.3
3.2
3.1
34.6
100.0%
(1) No other single state accounted for 3.0% or more of the total direct written premiums written in 2011.
MANAGEMENT AGREEMENT
Through various management and cost sharing agreements, State Auto P&C provides the employees to
perform all organizational, operational and management functions for the State Auto Group while State Auto
Mutual provides certain operating facilities, including our corporate headquarters.
Our primary management agreement, which we refer to as the 2005 Management Agreement, has a ten year
term and renews for an additional ten-year period unless terminated sooner in accordance with its terms. If the
2005 Management Agreement was terminated for any reason, we would have to relocate our facilities to continue
our operations. However, we do not currently anticipate the termination of the 2005 Management Agreement.
See “Properties” included in Item 2 of this Form 10-K.
REINSURANCE
liability on individual risks or for individual
Members of the State Auto Group follow the customary industry practice of reinsuring a portion of their
exposures and paying to the reinsurers a portion of the premiums received. Insurance is ceded principally to reduce
net
including catastrophic losses. Although
reinsurance does not legally discharge the individual members of the State Auto Group from primary liability under
their policies, it does make the assuming reinsurer liable to the extent of the reinsurance ceded. See the detailed
discussion of our reinsurance arrangements at Item 7 of this Form 10-K, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital Resources—Reinsurance Arrangements.”
loss occurrences,
See “Regulation” in this Item 1 for a discussion of the Terrorism Acts.
9
LOSS RESERVES
We maintain reserves for the eventual payment of losses and LAE for both reported claims and IBNR. Loss
reserves are management’s best estimate at a given point in time of what we expect to pay to settle all losses
incurred as of the end of the accounting period, based on facts, circumstances and historical trends then known.
During the loss settlement period, additional facts regarding individual claims may become known, and
consequently it often becomes necessary to revise our estimate of the liability. The results of our operations and
financial condition could be impacted, perhaps significantly, in the future if the ultimate payments required to
settle claims vary from the loss reserves currently recorded.
Loss reserves for reported losses are initially established on either a case-by-case or formula basis depending on the
type and circumstances of the loss. The case-by-case reserve amounts are determined based on our reserving practices,
which take into account the type of risk, the circumstances surrounding each claim and applicable policy provisions. The
formula reserves are based on historical paid loss data for similar claims with provisions for trend changes caused by
inflation. Loss reserves for IBNR claims are estimated based on many variables including historical and statistical
information, changes in exposure units, inflation, legal developments, storm loss estimates and economic conditions. Case
and formula basis loss reserves are reviewed on a regular basis. As new data becomes available, estimates are updated
resulting in adjustments to loss reserves. Generally, reported losses initially reserved on a formula basis which have not
settled after six months, are case reserved at that time. Although our management uses many resources to calculate loss
reserves, there is no precise method for determining the ultimate liability. We do not discount loss reserves for financial
statement purposes. For additional information regarding our loss reserves, see Item 7 of this Form 10-K, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Loss and LAE.”
The following table sets forth our one-year development information on changes in the loss reserve for the
years ended December 31, 2011, 2010 and 2009:
($ millions)
Year Ended December 31
2011
2010
2009
Beginning of Year:
Loss and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Reinsurance recoverable on losses and loss expenses payable . . . . . . . . . . .
Net losses and loss expenses payable(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of pooling change, January 1, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses and loss expenses occurring:
$ 893.0
18.8
874.2
124.1
840.2
20.8
819.4
791.2
21.2
770.0
(4.0) —
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,213.3
(33.3)
954.2
(64.6)
899.5
(56.2)
1,180.0
889.6
843.3
Loss and loss expense payments for claims occurring during:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of pooling change, December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of Year:
Total
724.2
543.9
369.1
286.9
1,093.3
830.8
(203.4) —
Net losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Reinsurance recoverable on losses and loss expenses payable . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses and loss expenses payable(3)
881.6
25.5
$ 907.1
874.2
18.8
893.0
524.8
269.1
793.9
—
819.4
20.8
840.2
(1)
(2)
(3)
Includes net amounts assumed from affiliates of $375.8 million, $346.2 million, and $343.0 million at beginning of year 2011, 2010, and 2009,
respectively.
This line item shows decreases in the current calendar year in the provision for losses and loss expenses attributable to claims occurring
in prior years. See discussion regarding the calendar year developments at Item 7 of this Form 10-K Management’s Discussion and
Analysis section at “Results of Operations—Loss and LAE Development.”
Includes net amounts assumed from affiliates of $376.8 million, $375.8 million, and $346.2 million at end of year 2011, 2010, and 2009,
respectively.
The following table sets forth our development of loss reserves from 2001 through 2011. “Net liability for
losses and loss expenses payable” sets forth the estimated liability for unpaid losses and LAE recorded at the
10
balance sheet date, net of reinsurance recoverable, for each year shown. This liability represents the estimated
amount of losses and LAE for claims incurred during the current year or incurred during prior years that are
unpaid at the balance sheet date, including IBNR.
The upper section of the table shows the cumulative amounts paid with respect to the previously reported
loss reserve as of the end of each succeeding year. For example, through December 31, 2011, we have paid
98.4% of the losses and LAE that had been incurred but not paid, as estimated at December 31, 2001.
The lower portion of the table shows the current estimate of the previously reported loss reserve based on
experience as of the end of each succeeding year. The estimate is increased or decreased as more information
becomes known about the claims incurred.
The amounts on the “cumulative redundancy (deficiency)” line represent the aggregate change in the
estimates over all prior years. For example, the year end 2001 loss reserve has developed $37.8 million or 7.4%
deficient through December 31, 2011. This $37.8 million amount has been included in operating results over the
ten years and did not have a significant effect on income in any one year.
In evaluating the information in the table, it should be noted that each amount includes the effects of all
changes in amounts for prior periods. For example, the amount of the redundancy or deficiency evaluated at
December 31, 2003, on claims incurred in 2001 includes the cumulative redundancy or deficiency for years 2001,
2002 and 2003. Conditions and trends that have affected the development of the liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or
deficiencies based on this table.
In 2001, the Pooling Arrangement was amended to increase our share of premiums, losses and expenses. An
amount of assets equal to the increase in net liabilities was transferred to us from our parent company in 2001 in
conjunction with each year’s respective pooling change. In 2005, the MIGI Insurers were added to the pool and our
share of their net liabilities and assets were transferred to us from them. In 2008, Beacon National, the Patrons
Insurance Group, State Auto middle market business and voluntary assumed reinsurance from parties affiliated with
State Auto Mutual were added to the pool, and accordingly net assets equal to the increase in net liabilities were
transferred to us from them. In 2010, SA National and voluntary assumed reinsurance from third parties unaffiliated
with the Pooled Companies that was assumed on or after January 1, 2009 by State Auto Mutual were added to the
pool, and accordingly net assets equal to the increase in net liabilities were transferred to us from them. As of
January 1, 2011, the Rockhill Insurers were added to the pool, and accordingly net assets equal to the increase in net
liabilities were transferred to us from them. As of December 31, 2011, the overall participation percentage of the
STFC Pooled Companies was reduced from 80% to 65%, and accordingly net assets equal to the decrease in net
liabilities were transferred by us to the Mutual Pooled Companies. The amount of the assets transferred along with
the reserve liabilities assumed/ceded in 2001, 2005, 2008, 2010 and 2011 has been netted against and has reduced/
increased the cumulative amounts paid for years prior to 2001, 2005, 2008, 2010 and 2011, respectively.
11
($ millions)
Years Ended December 31
Net liability for losses and loss
expenses payable . . . . . . . . . . .
$509.9
$592.1
$628.8
$ 655.9
$ 711.3
$ 661.0
$ 647.1
$ 770.0
$ 819.4
$ 874.2
$ 881.6
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Paid (cumulative) as of:
One year later . . . . . . . . . . . .
Two years later . . . . . . . . . . .
Three years later . . . . . . . . . .
Four years later . . . . . . . . . . .
Five years later . . . . . . . . . . .
Six years later . . . . . . . . . . . .
Seven years later . . . . . . . . . .
Eight years later . . . . . . . . . .
Nine years later . . . . . . . . . . .
. . . . . . . . . . .
Ten years later
43.4% 41.2% 36.7%
65.3% 60.8% 53.2%
78.4% 71.4% 63.3%
84.4% 77.3% 70.6%
88.5% 82.3% 74.3%
92.3% 85.1% 76.0%
94.7% 86.4% 78.4%
95.9% 88.4% 79.6%
97.8% 89.3%
98.4%
Net liability re-estimate as of:
One year later . . . . . . . . . . . .
Two years later . . . . . . . . . . .
Three years later . . . . . . . . . .
Four years later . . . . . . . . . . .
Five years later . . . . . . . . . . .
Six years later . . . . . . . . . . . .
Seven years later . . . . . . . . . .
Eight years later . . . . . . . . . .
Nine years later . . . . . . . . . . .
. . . . . . . . . . .
Ten years later
102.4% 99.7% 96.5%
105.1% 100.6% 93.2%
106.9% 98.8% 91.0%
106.2% 98.5% 90.6%
107.1% 98.8% 89.8%
107.7% 98.4% 89.7%
107.4% 98.6% 89.7%
107.6% 98.6% 89.4%
107.8% 98.1%
107.4%
Cumulative redundancy
31.6%
48.4%
59.6%
66.1%
69.2%
72.3%
73.8%
93.3%
87.6%
86.9%
86.2%
85.5%
85.2%
84.4%
34.9%
51.1%
60.9%
66.0%
70.3%
72.7%
89.9%
86.4%
85.6%
85.3%
84.7%
84.4%
34.9%
50.5%
60.4%
67.8%
71.3%
31.7%
49.4%
62.6%
69.1%
34.9%
53.2%
62.7%
35.5%
53.2%
40.8%
—
91.7%
90.5%
88.8%
87.4%
86.9%
95.8%
93.7%
91.9%
90.8%
92.7%
89.5%
87.9%
92.1%
89.1%
96.2%
—
(deficiency) . . . . . . . . . . . . . . . .
$ (37.8)
$ 11.0
$ 66.9
$ 102.1
$ 111.1
$
86.6
$
59.7
$
93.3
$
89.0
$
33.3
Cumulative redundancy
(deficiency) . . . . . . . . . . . . . . . .
(7.4%)
1.9% 10.6%
15.6%
15.6%
13.1%
9.2%
12.1%
10.9%
3.8%
—
—
Gross* liability—end of year . . . .
Reinsurance recoverable . . . . . . . .
Net liability—end of year . . . . . . .
Gross liability re-estimated—
$743.7
$233.8
$509.9
$862.4
$270.3
$592.1
$934.0
$305.2
$628.8
$1,006.4
$ 350.5
$ 655.9
$1,111.1
$ 399.8
$ 711.3
$1,032.7
$ 371.7
$ 661.0
$1,029.9
$ 382.8
$ 647.1
$1,198.6
$ 428.6
$ 770.0
$1,293.2
$ 473.8
$ 819.4
$1,391.4
$ 517.2
$ 874.2
$1,411.9
$ 530.3
$ 881.6
latest
. . . . . . . . . . . . . . . . . . . . .
107.4% 99.0% 92.8%
88.3%
87.8%
89.6%
93.3%
89.8%
90.0%
99.2%
Reinsurance recoverable
re-estimated—latest
Net liability re-estimated—
. . . . . . . . .
107.5% 100.9% 98.4%
95.4%
93.8%
94.3%
97.7%
93.2%
91.5%
104.5%
latest
. . . . . . . . . . . . . . . . . . . . .
107.4% 98.1% 89.4%
84.4%
84.4%
86.9%
90.8%
87.9%
89.1%
96.2%
—
—
—
*
Gross liability includes: Direct and assumed losses and loss expenses payable.
As the Pooling Arrangement provides for the right of offset, we have reported losses and loss expenses
payable ceded to our parent company as assets only in situations when net amounts ceded to our parent company
exceed that assumed. The following table provides a reconciliation of the reinsurance recoverable to the amount
reported in our consolidated financial statements at each balance sheet date:
Reinsurance recoverable . . . . . . . .
Amount netted against assumed
$233.8
$270.3
$305.2
$350.5
$399.8
$371.7
$382.8
$428.6
$473.8
$517.2
$530.3
from State Auto Mutual
. . . . . .
Net reinsurance recoverable . . . . .
$219.9
$ 13.9
$261.5
8.8
$
$291.0
$ 14.2
$324.6
$ 25.9
$382.4
$ 17.4
$358.2
$ 13.5
$371.6
$ 11.2
$407.4
$ 21.2
$453.0
$ 20.8
$498.4
$ 18.8
$504.8
$ 25.5
COMPETITION
The property and casualty insurance industry is highly competitive. We compete with numerous insurance
companies, with varying size and financial resources. We compete in the personal and business insurance markets based
on price; product offerings and innovation; underwriting criteria; quality of service to insureds, retail agents and
wholesale brokers; relationships with our retail agents and wholesale brokers; prompt and fair claims handling and
settlement; financial stability; and technology, making us a preferred business partner. In addition, because most of our
retail agents and wholesale brokers represent more than one insurer, we face competition within each agency and broker.
12
REGULATION
Most states, including all the domiciliary states of the State Auto Group, have enacted legislation that regulates
insurance holding company systems. Each insurance company in our holding company system is required to register
with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of
companies within our holding company system that may materially affect the operations, management or financial
condition of the insurers within the system. Pursuant to these laws, the respective insurance departments may examine
any members of the State Auto Group, at any time, require disclosure of material transactions involving insurer
members of our holding company system, and require prior notice and an opportunity to disapprove of certain
“extraordinary” transactions, including, but not limited to, extraordinary dividends to stockholders. Pursuant to these
laws, all transactions within our holding company system affecting any insurance subsidiary within the State Auto
Group must be fair and equitable. In addition, approval of the applicable state insurance commissioner is required prior
to the consummation of transactions affecting the control of an insurer. The insurance laws of all the domiciliary states
of the State Auto Group provide that no person may acquire direct or indirect control of a domestic insurer without
obtaining the prior written approval of the state insurance commissioner for such acquisition.
In addition to being regulated by the insurance department of its state of domicile, each of our insurance
companies is subject to supervision and regulation in the states in which we transact business. Such supervision and
regulation relate to numerous aspects of an insurance company’s business operations and financial condition. The
primary purpose of such supervision and regulation is to ensure financial stability of insurance companies for the
protection of policyholders. The laws of the various states establish insurance departments with broad regulatory
powers relative to granting and revoking licenses to transact business, regulating trade practices, licensing agents,
approving policy forms, setting reserve requirements, determining the form and content of required statutory
financial statements, prescribing the types and amount of investments permitted and requiring minimum levels of
statutory capital and surplus. Although premium rate regulation varies among states and lines of insurance, such
regulations generally require approval of the regulatory authority prior to any changes in rates. In addition, all of the
states in which the State Auto Group transacts business have enacted laws which restrict these companies’
underwriting discretion. Examples of these laws include restrictions on policy terminations, restrictions on agency
terminations and laws requiring companies to accept any applicant for automobile insurance. These laws may
adversely affect the ability of the insurers in the State Auto Group to earn a profit on their underwriting operations.
We are required to file detailed annual reports with the supervisory agencies in each of the states in which
we do business, and our business and accounts are subject to examination by such agencies at any time.
There can be no assurance that such regulatory requirements will not become more stringent in the future
and have an adverse effect on the operations of the State Auto Group.
Dividends. Our insurance subsidiaries generally are restricted by the insurance laws of our respective states
of domicile as to the amount of dividends we may pay without the prior approval of our respective state
regulatory authorities. Generally, the maximum dividend that may be paid by an insurance subsidiary during any
year without prior regulatory approval is limited to the greater of a stated percentage of that subsidiary’s statutory
surplus as of a certain date, or adjusted net income of the subsidiary for the preceding year. Under current law,
$62.5 million is available in 2012 for payment as a dividend from our insurance subsidiaries to STFC without
prior approval from our respective domiciliary state insurance departments. STFC received dividends of $56.4
million and $11.5 million in 2010 and 2009, respectively, from its insurance subsidiaries.
Rates and Related Regulation. Except as discussed below, we are not aware of the adoption of any adverse
legislation or regulation in any state in which we conducted business during 2011 which would materially impact
our business.
Many of the states in which we operate have passed, considered, or are presently considering legislation restricting
or banning the use of “credit scoring” in the rating and risk selection process. The Fair and Accurate Credit Transactions
Act, passed by the United States Congress in 2003, directed the Federal Trade Commission (“FTC”) to consult with the
Office of Fair Housing and Equal Opportunity on, among other things, how the use of credit information may affect the
13
availability and affordability of property/casualty insurance, and whether the use of certain factors by credit scoring
systems could have a disparate impact on minorities. In July of 2007, the FTC released a report on credit scoring and its
impact on automobile insurance. The FTC concluded that credit-based scoring is an effective predictor of risk with
respect to the issuance of automobile insurance policies to consumers, but has little effect as an indicator of racial or
ethnic status of consumers. Despite the FTC’s conclusions, some consumer groups and certain regulatory and legislative
entities continue to resist the use of credit scoring in the rating and risk selection process. In 2008, the FTC asked nine of
the nation’s largest homeowners insurance companies to provide information that the FTC says will allow it to
determine how consumer credit data is used by the companies in underwriting and rate setting in this line of business.
The FTC continues to analyze the responses received from the nine insurance companies and expects to issue its report
to Congress sometime in the future, though no specific release date has been published. Upon release, the results of the
study could affect the future use of credit scoring. Banning or restricting this practice or data mining would limit our
ability, and the ability of other carriers, to take advantage of the predictive value of this information.
In an attempt to make capital and surplus requirements more accurately reflect the underwriting risk of
different lines of insurance, as well as investment risks that attend insurers’ operations, the NAIC annually tests
insurers’ risk-based capital requirements. As of December 31, 2011, each of the Pooled Companies had adequate
levels of capital as defined by the NAIC with its respective risk-based capital requirements.
The property and casualty insurance industry is also affected by court decisions. In general, premium rates are
actuarially determined to enable an insurance company to generate an underwriting profit. These rates contemplate a
certain level of risk. The courts may modify, in a number of ways, the level of risk which insurers had expected to
assume, including eliminating exclusions, expanding the terms of the contract, multiplying limits of coverage, creating
rights for policyholders not intended to be included in the contract and interpreting applicable statutes expansively to
create obligations on insurers not originally considered when the statute was passed. Courts have also undone legal
reforms passed by legislatures, which reforms were intended to reduce a litigant’s rights of action or amounts
recoverable and so reduce the costs borne by the insurance mechanism. These court decisions can adversely affect an
insurer’s profitability. They also create pressure on rates charged for coverages adversely affected, and this can cause a
legislative response resulting in rate suppression that can unfavorably impact an insurer.
The Terrorism Risk Insurance Act of 2002 and its successor, the Terrorism Risk Insurance Extension Act of 2005
(collectively, the “Terrorism Acts”) require the federal government and the insurance industry to share in insured losses
up to $100 billion per year resulting from terrorist attacks within the United States. Under the Terrorism Acts, commercial
property and casualty insurers must offer their commercial policyholders coverage against certified acts of terrorism, but
the policyholders may choose to reject this coverage. If the policyholder rejects coverage for certified acts of terrorism, we
will cover only such acts of terrorism that are not certified acts under the Terrorism Acts and continue to apply policy
exclusions that may limit any coverage from loss due to nuclear, biological or chemical agents. By enacting the Terrorism
Risk Insurance Program Reauthorization Act of 2007, Congress made modest changes to the previous Terrorism Acts—
for example, deleting the distinction between certified and non-certified (essentially foreign and domestic) acts of
terrorism. Lines of business covered, as well as other important features (such as loss triggers, company deductibles and
industry retentions) were not changed. Our current property reinsurance treaties exclude certified acts of terrorism.
The Federal Insurance Office was established in 2010 by the enactment of the Dodd-Frank Act. The Federal
Insurance Office is a separate office within the United States Department of Treasury. The primary objective of the
Federal Insurance Office is to monitor all aspects of the insurance industry, including identifying issues or gaps in the
regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial
system. The Federal Insurance Office also coordinates and develops federal policy on prudential aspects of
international insurance matters, including representing the United States in the International Association of Insurance
Supervisors, assists in negotiating certain international agreements, monitors access to affordable insurance by
traditionally underserved communities and consumers, minorities, and low- and moderate-income persons, and assists
in the administration of the terrorism risk insurance program. However, the Federal Insurance Office has no authority
as a regulator or supervisor of insurance companies.
EMPLOYEES
As of March 2, 2012, we had 2,451 employees. Our employees are not covered by any collective bargaining
agreement. We consider the relationship with our employees to be good.
14
AVAILABLE INFORMATION
Our website address is www.StateAuto.com. Through this website (found by clicking the “Investors” link,
then the “All SEC Filings” link), we make available, free of charge, our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, proxy and information statements and all amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the
“Exchange Act”), as soon as reasonably practicable after we electronically file such material with the Securities
and Exchange Commission (the “SEC”). Also available on our website is information pertaining to our corporate
governance, including the charters of each of our standing committees of our Board of Directors, our corporate
governance guidelines, our employees’ code of business conduct and our directors’ ethical principles.
Any of the materials we file with the SEC may also be read and copied at the SEC’s Public Reference Room
at 100 F Street, NE, Washington, DC 20549. Information on the operation of the SEC’s Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov.
15
Executive Officers of the Registrant
Name of Executive Officer and
Position(s) with Company
Age(1)
Principal Occupation(s)
During the Past Five Years
An Executive Officer
of the Company Since(2)
Robert P. Restrepo, Jr.,
. . . . . .
61 Chairman of the Board and Chief Executive Officer of
2006
Chairman, President and
Chief Executive Officer
STFC and State Auto Mutual, 2/06 to present; President
of STFC and State Auto Mutual, 3/06 to present.
Steven E. English,
. . . . . . . . . .
Vice President and Chief
Financial Officer
51 Vice President of STFC and State Auto Mutual, 5/06 to
present; Chief Financial Officer of STFC and State Auto
Mutual, 12/06 to present.
Joel E. Brown,
. . . . . . . . . . . . .
Vice President
54 Vice President, Standard Lines, of STFC and State Auto
Mutual, 1/11 to present; Vice President, Personal Lines,
and Regional Vice President of STFC and State Auto
Mutual, 1/01 to 1/11.
2006
2011
Jessica E. Buss,
. . . . . . . . . . . .
40 Vice President, Specialty Lines, of STFC and State Auto
2011
Vice President, Specialty
Lines
Mutual, 1/11 to present; Chief Operating Officer of Rockhill
Insurance Company, 11/08 to 1/11; Chief Financial Officer
of Rockhill Insurance Company, 11/05 to 11/08.
Clyde H. Fitch, Jr., . . . . . . . . . .
Senior Vice President and
Chief Sales Officer
61 Senior Vice President and Chief Sales Officer of STFC
2007
and State Auto Mutual, 11/07 to present; Senior Vice
President of Travelers Companies, Inc. for more than
five years prior to 11/07.
Stephen P. Hunckler,
. . . . . . . .
53 Vice President and Chief Claims Officer of STFC and
2011
Vice President and Chief
Claims Officer
State Auto Mutual, 8/09 to present; Chief Claims Officer
of Balboa Insurance Group 8/06 to 8/09.
Scott A. Jones,
. . . . . . . . . . . . .
Vice President and Chief
Investment Officer
47 Vice President and Investment Officer of STFC and State
Auto Mutual, 3/12 to present; Assistant Vice President of
STFC and State Auto Mutual, 8/09 to 3/12; Portfolio
Manager of STFC and State Auto Mutual for more than
five years prior to 3/12.
Cynthia A. Powell, . . . . . . . . . .
Vice President and Treasurer
51 Treasurer of STFC and State Auto Mutual, 6/06 to
present; Vice President of State Auto Mutual, 3/00 to
present; Vice President of STFC, 5/00 to present.
Lorraine M. Siegworth,
. . . . . .
44 Vice President of STFC and State Auto Mutual, 11/06 to
Vice President
present.
James A. Yano,
. . . . . . . . . . . .
Vice President, Secretary
and General Counsel
60 Vice President, Secretary and General Counsel of STFC
and State Auto Mutual, 4/07 to present; Senior Vice
President, Secretary and General Counsel of
Abercrombie & Fitch Co. 5/05 to 3/07.
2012
2000
2006
2007
(1) Age as of March 12, 2012.
(2)
Each of the foregoing officers has been designated by our Board of Directors as an executive officer for purposes of Section 16 of the
Exchange Act.
16
Item 1A. Risk Factors
Statements contained in this Form 10-K may be “forward-looking” within the meaning of the Section 21E
of the Exchange Act. Such forward-looking statements are subject to certain risks and uncertainties that could
cause our operating results to differ materially from those projected. The following factors, among others, in
some cases have affected, and in the future could affect, our actual financial performance. If any risks or
uncertainties discussed here develop into actual events, they could have a material adverse effect on our business,
liquidity, capital resources, financial position or results of operations. In that case, the market price of our stock
could decline materially. The following list of risk factors is not exhaustive and others may exist or develop.
RESERVES
If our estimated liability for losses and loss expenses is incorrect, our loss reserves may be inadequate to
cover our ultimate liability for losses and loss expenses and may have to be increased.
We establish loss reserves based on actuarial estimates of the amount to be paid in the future to settle all
claims incurred as of the end of the accounting period. We maintain loss reserves to cover our estimated ultimate
unpaid liability for losses and loss expenses with respect to reported and unreported claims incurred as of the end
of each accounting period. Loss reserves do not represent an exact calculation of the liability, but instead
represent estimates, generally using actuarial projection techniques at a given accounting date. Our loss reserve
estimates are expectations of what the ultimate settlement and administration of claims will cost based on our
assessment of facts and circumstances then known, historical settlement patterns, estimates of trends in claims
severity and frequency, legal theories of liability and other factors. Variables in the loss reserve estimation
process can be affected by both internal and external events, such as changes in claims handling procedures,
trends in loss costs, economic inflation, legal developments and legislative changes. Many of these items are not
directly quantifiable, particularly on a prospective basis. Additionally, there may be a significant reporting lag
between the occurrence of an insured event and the time a claim is actually reported to the insurer. We refine loss
reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are
reported and settled. We record adjustments to loss reserves in the results of operations for the periods in which
the estimates are changed. In establishing loss reserves, we take into account estimated recoveries for
reinsurance, salvage and subrogation.
Because estimating loss reserves is an inherently uncertain process, currently established loss reserves may
not be adequate. If we conclude the estimates are incorrect and our loss reserves are inadequate, we are obligated
to increase them. An increase in loss reserves results in an increase in losses, reducing our net income for the
period in which the deficiency is identified. Accordingly, an increase in loss reserves could have a material
adverse effect on our results of operations, liquidity and financial condition.
CATASTROPHE LOSSES AND GEOGRAPHIC CONCENTRATIONS
The occurrence of catastrophic events could cause volatility in our results of operations and could
materially reduce our level of profitability.
Our insurance operations expose us to claims arising out of catastrophic events. We have experienced, and
will in the future experience, catastrophe losses that may cause substantial volatility in our financial results for
any fiscal quarter or year and could materially reduce our level of profitability or harm our financial condition,
which in turn could adversely affect our ability to write new business. Catastrophes can be caused by various
natural events, including hurricanes, hailstorms, tornadoes, windstorms, earthquakes, severe winter weather and
fires, none of which are within our control. Catastrophe losses can vary widely and could significantly impact our
results. The frequency and severity of catastrophes are inherently unpredictable. Additionally, catastrophe losses
incurred by residual markets or pooling mechanisms (such as wind pools) in certain states could trigger
assessments to us. Such assessments could be material and may not be recoupable, depending on the applicable
state mechanism.
17
The magnitude of loss from a catastrophe is a function of the severity of the event and the total amount of
insured exposure in the affected area. Accordingly, we can sustain significant
losses from less severe
catastrophes, such as localized windstorms, when they affect areas where our insured exposure is concentrated.
Although catastrophes can cause losses in a variety of our property and casualty lines, most of our catastrophe
claims in the past have related to homeowners, allied lines and commercial multi-peril coverages. The
geographic distribution of our business subjects us to catastrophe exposure from severe thunderstorms, tornadoes
and hail, as well as earthquakes and hurricanes affecting the United States. In the last three years, the largest
catastrophe or series of catastrophes affecting STFC’s results of operations in any one year were as follows: in
2011, losses arising from a hurricane, tornadoes, and wind and hail storms, which impacted 32 of our operating
states, including Hurricane Irene and devastating tornadoes in Tuscaloosa, Alabama and Joplin, Missouri, which
resulted in approximately $130.6 million in pre-tax losses; in 2010, losses from a series of spring storms,
including wind and hail in northern Ohio, and floods in the Nashville, Tennessee area, both which affected our
auto physical damage results in both personal and business insurance auto lines, which resulted in approximately
$22.2 million in pre-tax losses; and in 2009, losses from two winter storms in the South and Midwest, which
resulted in approximately $41.1 million in pre-tax losses.
Increases in the value and geographic concentration of insured properties and the effects of inflation could
increase the severity of claims from catastrophic events in the future. In addition, states have from time to time
passed legislation that limits the ability of insurers to manage catastrophe risk, such as legislation prohibiting
insurers from withdrawing from catastrophe-prone areas. Although we attempt
to reduce the impact of
catastrophes on our business by controlling concentrations of exposures in catastrophe prone areas and through
the purchase of reinsurance covering various categories of catastrophes, reinsurance may prove inadequate if a
major catastrophic loss exceeds the reinsurance limit, or an insurance subsidiary incurs a number of smaller
catastrophes that, individually, fall below the reinsurance retention level.
Along with others in the industry, we utilize catastrophe models developed by third party vendors to help
assess and manage our exposure to catastrophe losses. Such models assume various conditions and probability
scenarios and use historical information about catastrophic events, along with detailed information about our
business. There are limitations to the usefulness of such models, and they do not necessarily accurately predict
future losses. While we use such modeling information in connection with our pricing and risk management
activities, there are limitations with respect to the models’ usefulness in predicting losses in any reporting
period. Such limitations are evidenced by the occurrence of significant variations in estimates between models
and modelers; material increases or decreases in model results due to changes and refinements of the underlying
data elements and assumptions; and differences observed between the results of actual event conditions and
modeled expectations. Climate change, to the extent it affects changes in weather patterns, could impact the
frequency or severity of weather events. Some industry commentators have expressed concerns that hydraulic
fracturing or “fracking,” a process which involves drilling deep underground wells and injecting water, chemicals
and sand into the rock formations in order to extract oil and gas, may cause seismic activity which, among other
things, may affect the frequency of earthquakes. We view fracking as an emerging risk facing the industry.
Our ongoing catastrophe management efforts could negatively impact growth to the extent constraints on
property exposures are deemed necessary in certain territories. In addition, due to the potential impact on cross-
selling opportunities, new business growth in the auto lines could be negatively affected.
UNDERWRITING AND PRICING
Our financial results depend primarily on our ability to underwrite risks effectively and to charge
adequate rates to policyholders.
Our financial condition, cash flows and results of operations depend on our ability to underwrite and set
rates adequately for a full spectrum of risks, across a number of lines of insurance. Rate adequacy is necessary to
generate sufficient premium to pay losses, loss adjustment expenses and underwriting expenses and to earn a
profit.
18
Our ability to underwrite and set rates effectively is subject to a number of risks and uncertainties,
including, without limitation:
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the availability of sufficient, reliable data;
our ability to conduct a complete and accurate analysis of available data;
our ability to timely recognize changes in trends and to project both the severity and frequency of
losses with reasonable accuracy;
uncertainties which are generally inherent in estimates and assumptions;
our ability to project changes in certain operating expense levels with reasonable certainty;
the development, selection and application of appropriate rating formulae or other pricing
methodologies;
our use of predictive modeling or other underwriting tools to assist with correctly and consistently
achieving the intended results in underwriting and pricing;
our ability to establish and consistently follow appropriate underwriting guidelines;
our ability to innovate with new pricing strategies, and the success of those innovations on
implementation;
our ability to secure regulatory approval of premium rates on an adequate and timely basis and
effectively implement such rate changes;
our ability to predict policyholder retention accurately;
unanticipated court decisions, legislation or regulatory action;
unanticipated changes or execution problems in our claim settlement practices;
changing driving patterns for auto exposures; changing weather patterns (including those which may be
related to climate change) for property exposures;
changes in the medical sector of the economy;
unanticipated changes in auto repair costs, auto parts prices and used car prices;
impact of inflation and other factors, such as demand surge on cost of construction materials, labor and
other expenditures;
our ability to monitor and manage property concentration in catastrophe prone areas, such as hurricane,
earthquake and wind/hail regions; and
the general state of the economy in the states in which we operate.
Such risks may result in our rates being based on inadequate or inaccurate data or inappropriate assumptions
or methodologies, and may cause our estimates of future changes in the frequency or severity of claims to be
incorrect. As a result, we could under-price risks, which would negatively affect our margins, or we could
overprice risks, which could reduce our premium reserves and competitiveness. In either event, our operating
results, financial condition and cash flows could be materially adversely affected.
DIVIDENDS
There can be no assurance that we will continue to pay cash dividends consistent with past levels.
We have a history of consistently paying cash dividends to our shareholders. However, the future payment
of cash dividends will depend upon a variety of factors, such as our results of operations, financial condition and
cash requirements, as well as the ability of our insurance subsidiaries to make distributions to STFC. State
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insurance laws restrict the payment of dividends by insurance companies to their shareholders. In addition,
competitive pressures generally require insurance companies to maintain insurance financial strength ratings.
Such restrictions and other requirements and factors may affect the ability of our insurance subsidiaries to make
dividend payments to STFC. Limits on the ability of our insurance subsidiaries to pay dividends could adversely
affect our liquidity, including our ability to pay cash dividends to shareholders.
TECHNOLOGY AND TELECOMMUNICATION SYSTEMS
Our business success and profitability depend,
in part, on effective information technology and
telecommunication systems. If we are unable to keep pace with the rapidly developing technological
advancements in the insurance industry, our ability to compete effectively could be impaired.
We depend in large part on our technology and telecommunication systems for conducting business and
processing claims. Our business success is dependent on maintaining the effectiveness of existing technology and
telecommunication systems and on their continued development and enhancement to support our business
processes and strategic initiatives in a cost effective manner. Since late 2010, we have been involved with the
development of a new claims system which we expect to implement for most lines of business during 2012. This
initiative has involved a significant commitment of resources. The new system is expected to add functionality
and increase our claims efficiency with improved file quality. In spite of our best planning and efforts, it is
possible that the system may not be developed within the planned time frame or budget and/or that the expected
benefits may not be realized upon implementation.
An ongoing challenge during system development and enhancement is the effective and efficient utilization
of current technology in face of a constantly changing technological landscape. There can be no assurance that
the development of current technology for future use will not result in our being competitively disadvantaged,
especially with those carriers that have greater resources. If we are unable to keep pace with the advancements
being made in technology, our ability to compete with other insurance companies who have advanced
technological capabilities will be negatively affected. Further, if we are unable to effectively execute and update
or replace our key legacy technology and telecommunication systems as they become obsolete or as emerging
technology renders them competitively inefficient, our competitive position and/or cost structure could be
adversely affected.
BUSINESS CONTINUITY
Our business depends on the uninterrupted operation of our facilities, systems and business functions,
telecommunications and other business systems. Our business
including our information technology,
continuity and disaster recovery plans may not sufficiently address all contingencies.
Our business is highly dependent upon our ability to execute, in an efficient and uninterrupted fashion,
necessary business functions, such as Internet support and 24-hour claims contact centers, processing new and
renewal business, receiving and processing payment receipts and processing and paying claims. A shut-down of
or inability to access one or more of our facilities, a power outage, a pandemic, or a failure of one or more of our
information technology, telecommunications or other systems could significantly impair our ability to perform
such functions on a timely basis. In addition, because our information technology and telecommunications
systems interface with and depend on third party systems, we could experience service denials if demand for
such service exceeds capacity, or if our system or a third party system fails or experiences an interruption. If
sustained or repeated, such a business interruption, systems failure or service denial could result in a deterioration
of our ability to write and process new and renewal business, provide customer service, receive premium
payments, pay claims in a timely manner or perform other necessary corporate functions. This could result in a
materially adverse effect on our business results and liquidity and may cause reputational damage.
We have established a business continuity plan in an effort to ensure the continuation of core business
operations in the event that normal business operations could not be performed due to a catastrophic event. While
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we continue to test and assess our business continuity plan to ensure it meets the needs of our core business
operations and addresses multiple business interruption events,
there is no assurance that core business
operations could be performed upon the occurrence of such an event, which may result in a material adverse
effect on our financial position and results of operations.
CYBER-SECURITY THREATS
Our highly automated and networked organization is subject to cyber-security threats. These threats
come in a variety of forms, such as viruses and malicious software. Such threats can be difficult to prevent or
detect, and if experienced, could interrupt or damage our operations, harm our reputation or have a material
effect on our operations.
Our
technology and telecommunications systems are highly integrated and connected with other
networks. Cyber-attacks involving these systems could be carried out remotely and from multiple sources and
could interrupt, damage or otherwise adversely affect the operations of these critical systems. Cyber-attacks
could result in the modification or theft of data, the distribution of false information or the denial of service to
users. We obtain, utilize and maintain data concerning individuals and organizations with which we have a
business relationship. Threats to data security can emerge and change in rapid fashion, resulting in the ongoing
need to expend resources to secure our data in accordance with customer expectations and statutory and
regulatory requirements.
We could be subject to liability if confidential customer information is misappropriated from our technology
systems. Despite the implementation of security measures, these systems may be vulnerable to physical break-
ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any well-
publicized compromise of security could deter people from entering into transactions that involve transmitting
confidential information to our systems, which could have a material adverse effect on our business and
reputation.
We rely on services and products provided by many vendors. In the event that one or more of our vendors
fails to protect personal information of our customers, claimants or employees, we may incur operational
impairments, or could be exposed to litigation, compliance costs or reputational damage.
While we have not experienced material cyber-incidents to date, the occurrence and effects of cyber-
incidents may remain undetected for an extended period. We do not carry network-liability insurance concerning
cyber-attacks.
REINSURANCE
Reinsurance may not be available, collectible or adequate to protect us against losses, or may cause us to
constrain the amount of business we underwrite in certain lines of business and locations.
We use reinsurance to help manage our exposure to insurance risks and to manage our capital. The
availability and cost of reinsurance are subject to prevailing market conditions, which can affect our business
volume and profitability. Although the reinsurer is liable to us to the extent of the ceded reinsurance, we remain
liable as the direct insurer on all risks reinsured. Ceded reinsurance arrangements do not eliminate our obligation
to pay claims. As a result, we are subject to counterparty risk with respect to our ability to recover amounts due
from reinsurers. Reinsurance may not be adequate to protect us against losses and may not be available to us in
the future at commercially reasonable rates. In addition, the magnitude of losses in the reinsurance industry
resulting from catastrophes may adversely affect the financial strength of certain reinsurers, which may result in
our inability to collect or recover reinsurance. Reinsurers also may reserve their right to dispute coverage with
respect to specific claims. With respect to catastrophic or other loss, if we experience difficulty collecting from
reinsurers or obtaining additional reinsurance in the future, we will bear a greater portion of the total financial
responsibility for such loss, which could materially reduce our profitability or harm our financial condition.
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Effective December 31, 2011, we entered into a three-year quota share reinsurance agreement covering our
homeowners line of business. Under this agreement, 75% of our homeowners premium revenues, losses and
ALAE are ceded to third party reinsurers. The reduction in net written premiums may put pressure on our
expense ratios with respect to underwriting expenses and ULAE. Consistent with our homeowners profitability
plans, we expect to constrain homeowners policy count growth in certain states with geographic concentrations
and/or unsatisfactory underwriting results.
CYCLICAL NATURE OF THE INDUSTRY
The property and casualty insurance industry is highly cyclical, which may cause fluctuations in our
operating results.
The property and casualty insurance industry, particularly business insurance, has been historically
characterized by periods of intense price competition due to excess underwriting capacity, as well as periods of
shortages of underwriting capacity that result in higher prices and more restrictive contract and/or coverage
terms. The periods of intense price competition may adversely affect our operating results, and the overall
cyclicality of the industry may cause fluctuations in our operating results. While we may adjust prices during
periods of intense competition, it remains our strategy to allow for acceptable profit levels and to decline
coverage in situations where pricing or risk would not result in acceptable returns. Accordingly, our commercial
and specialty lines of business tend to contract during periods of severe competition and price declines and
expand when market pricing allows an acceptable return. This can cause volatility in our premium revenues. Our
specialty insurance units, RED and Rockhill, market and underwrite commercial exposures through wholesale
brokers, program administrators and other specialty sources. The nature of such distribution channels reacting to
price competition may result in the movement of business and volatility of premium revenues.
The personal lines businesses are characterized by an auto underwriting cycle of loss cost trends. Driving
patterns, inflation in the cost of auto repairs and medical care and increasing litigation of liability claims are
some of the more important factors that affect loss cost trends. Inflation in the cost of building materials and
labor costs and demand caused by weather-related catastrophic events affect personal lines homeowners loss cost
trends. Our Company and other personal lines insurers may be unable to increase premiums at the same pace as
coverage costs increase. Accordingly, profit margins generally decline in periods of increasing loss costs.
ECONOMIC CONDITIONS
The current and future difficult economic conditions can adversely affect our business, results of
operations and financial condition.
Current economic conditions and economic declines in future reporting periods could adversely impact our
business and results of operations. While the volatility of the economic climate makes it difficult for us to predict
the complete impact of economic conditions on our business and results of operations, our business may be
impacted in a variety of ways.
The economy has caused a number of consumers and businesses to decrease their spending, which may
impact the demand for our insurance products. For example, declining automotive sales and weaknesses in the
housing market generally impact the purchase of our personal auto and homeowners insurance products by
consumers and business insurance products by businesses involved in these industries. As unemployment rates
continue at high levels, there may be a tendency for the number of workers’ compensation claims to increase, as
laid-off and unemployed workers may seek workers’ compensation benefits to replace their lost healthcare
benefits. Similarly, uninsured and underinsured motorist claims may rise. Vacated homes and business properties
pose increased insurance industry risk.
Volatility and weakness in the financial and capital markets may negatively impact the value of our
investment portfolio.
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We may be adversely affected by business difficulties, bankruptcies and impairments of other parties with
whom we do business, such as independent agents, key vendors and suppliers, reinsurers or banks, which
increases our credit risk and other counterparty risks. Bankruptcies among our current business insurance
customers can negatively affect our retention. Reductions in new business start-ups may negatively affect the
number of future potential business insurance customers.
In addition, departments of insurance, taxing authorities and other state and local agencies may seek to
impose or increase taxes, assessments and other revenue-generating fees in response to funding reductions
caused by economic downturns. These actions may increase the cost of doing business in these states. Economic
strains on states and municipalities could result in downgrades or defaults of certain municipal obligations.
In response to economic conditions, the United States federal government and other governmental and
regulatory bodies have taken action and may take additional actions to address such conditions. There can be no
assurance as to what impact such actions or future actions will have on the financial markets, economic
conditions or our Company.
In addition, government spending and monetary policies or other factors may cause the rate of inflation to
increase in the future. Inflation can have a significant negative impact on property and casualty insurers because
premium rates are established before the amount of losses and loss expenses are known. When establishing rates,
we attempt to anticipate increases from inflation subject to the limitations of modeling economic variables.
Premium rates may prove to be inadequate due to low trend assumptions arising from the use of historical data.
Even when general inflation is relatively modest, price inflation on the goods and services purchased by
insurance companies in settling claims can steadily increase. Reserves may develop adversely and become
inadequate. Retentions and deductibles may be exhausted more quickly. Interest rate increases in an inflationary
environment could cause the values of our fixed income investments to decline.
Adverse capital and credit market conditions may negatively affect our ability to meet unexpected
liquidity needs or to obtain credit on acceptable terms.
The capital and credit markets have experienced significant volatility and disruption. In some cases, the
markets have negatively affected the availability of liquidity and credit capacity. In the event that we need access
to additional capital to pay our operating expenses, make payments on our indebtedness, pay for capital
expenditures or fund acquisitions, our ability to obtain such capital may be constrained and the cost of any such
capital may be significant. Our ability to obtain additional financing will depend on numerous factors, such as
market conditions, the general availability of credit, the overall availability of credit to our industry, our credit
ratings and credit capacity, as well as lenders’ perception of our long- or short-term financial prospects. Our
access to funds may also be constrained if regulatory authorities or rating agencies take negative actions. If
certain factors were to occur, our internal sources of liquidity may prove to be insufficient and we may not be
able to successfully obtain additional financing on satisfactory terms.
DISTRIBUTION SYSTEM
Our retail agents, who are part of the independent agency distribution channel, are our sole distribution
channel for our personal and business insurance segments. Our exclusive use of this distribution channel may
constrain our ability to grow at a comparable pace to our competitors that utilize multiple distribution
channels. In addition, consumers may prefer to purchase insurance products through alternative channels,
such as through the internet, rather than through agents.
We market our insurance products in our personal and business insurance segments exclusively through
independent, non-exclusive insurance agents and brokers, whereas some of our competitors sell their insurance
products through direct marketing techniques, the internet or “captive” insurance agents who sell products
exclusively for one insurance company. Throughout its history, the State Auto Group has supported the
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independent agency system as our distribution channel. However, we recognize that although the number of
distribution locations has expanded, the number of independent agencies in the industry has dramatically shrunk
over the past decade due to agency purchases, consolidations, bankruptcies and agent retirements. We also
recognize that it will be progressively more difficult to expand the number of independent agencies representing
us. If we are unsuccessful in maintaining and increasing the number of agencies in our independent agency
distribution system, our sales and results of operations could be adversely affected.
The retail agents that market and sell our products also sell products of our competitors. These agents may
recommend our competitors’ products over our products or may stop selling our products altogether. Our strategy
of not pursuing market share at prices that are not expected to produce an underwriting profit can have the effect
of making top line growth more difficult. When price competition is intense, this effect is exaggerated by the fact
our independent agent distribution force has products to sell from other carriers that may be more willing to
lower prices to grow top line sales. Consequently, we must remain focused on attracting and retaining productive
agents to market and sell our products. We compete for productive agents primarily on the basis of our financial
position, support services, ease of doing business, compensation and product features. Although we make efforts
to ensure we have strong relationships with our retail agents and to persuade them to promote and sell our
products, we may not be successful in executing these efforts. If we are unsuccessful in attracting and retaining
these agents, our sales and results of operations could be adversely affected.
In addition, consumers are increasingly using the internet and other alternative channels to purchase
insurance products. While our website provides a significant amount of information about our insurance
products, consumers cannot purchase insurance through our website. Instead, consumers must contact one of our
independent agents in order to purchase any of our insurance products or make changes to their existing policies.
This primary distribution system may place us at a disadvantage with consumers who prefer to purchase
insurance products online or through other alternative distribution channels.
REGULATION
Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our
growth.
We are subject to extensive regulation in the states in which we conduct business. This regulation is
generally designed to protect the interests of policyholders, as opposed to stockholders and other investors, and
relates to authorization for lines of business, capital and surplus requirements,
limitations,
transactions with affiliates, dividend limitations (see “Regulation-Dividends” in
underwriting limitations,
Item 1), changes in control, premium rates and a variety of other financial and non-financial components of an
insurance company’s business. The NAIC and state insurance regulators are constantly reexamining existing
laws and regulations, generally focusing on modifications to holding company regulations, interpretations of
existing laws and the development of new laws.
investment
From time to time, some states in which we conduct business have considered or enacted laws that may alter
or increase state authority to regulate insurance companies and insurance holding companies. In other situations,
states in which we conduct business have considered or enacted laws that impact the competitive environment
and marketplace for property and casualty insurance.
Nearly all states require licensed insurers to participate in guaranty funds through assessments covering a
portion of insurance claims against impaired or insolvent insurers. An increase in the magnitude of impaired
companies could result in an increase in our share of such assessments. Residual market or pooling arrangements
exist in many states to provide certain types of insurance coverage to those that are otherwise unable to find
private insurers willing to insure them. Licensed insurers voluntarily writing such coverage are required to
participate in these residual markets or pooling mechanisms. Such participation exposes the Company to possible
to our results of operations. The potential availability of
assessments, some of which could be material
recoupments or premium rate increases, if applicable, may not offset such assessments in the financial statements
nor do so in the same fiscal periods.
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Many of the states in which we operate have passed or are considering legislation restricting or banning the
use of credit scoring in rating and/or risk selection in personal lines of business. Similarly, several states have
considered restricting insurers’ rights to use loss history information maintained in various databases by
insurance support organizations. These tools help us price our products more fairly and enhance our ability to
compete for business that we believe will be profitable. Such regulations would limit our ability, as well as the
ability of all other insurance carriers operating in any affected jurisdiction, to take advantage of these tools.
Currently the federal government does not directly regulate the insurance business. However, in recent years
the state insurance regulatory framework has come under increased federal scrutiny. Congress and some federal
agencies from time to time investigate the current condition of insurance regulation in the United States to
determine whether to impose federal regulation or to allow an optional federal charter, similar to banks. In
addition, changes in federal legislation and administrative policies in several areas, including changes in the
Gramm-Leach-Bliley Act, financial services regulation and federal taxation, or repeal of McCarran-Ferguson Act
(which largely exempts the insurance industry from the federal antitrust laws), could significantly impact the
insurance industry and us.
The Federal Insurance Office was established in 2010 by the enactment of the Dodd-Frank Act. The Federal
Insurance Office is a separate office within the United States Department of Treasury. The primary objective of
the Federal Insurance Office is to monitor all aspects of the insurance industry. The Federal Insurance Office also
coordinates and develops federal policy on prudential aspects of international insurance matters, including
representing the United States in the International Association of Insurance Supervisors, assists in negotiating
certain international agreements, monitors access to affordable insurance by traditionally underserved
communities and consumers, minorities, and low- and moderate-income persons, and assists in the administration
of the terrorism risk insurance program. However, the Federal Insurance Office lacks regulatory authority, and it
is not clear how this federal office will coordinate and interact with the NAIC or state insurance regulators.
We cannot predict with certainty the effect any enacted, proposed or future state or federal legislation or
NAIC initiatives may have on the conduct of our business. Furthermore, there can be no assurance that the
regulatory requirements applicable to our business will not become more stringent in the future or result in
materially higher costs than current requirements. For example, concerns over climate change may prompt
federal, state or local laws intended to protect the environment. Changes in the regulation of our business may
reduce our profitability, limit our growth or otherwise adversely affect our operations.
We could be adversely affected if our controls designed to assure compliance with guidelines, policies, and
legal and regulatory standards are ineffective. Our business is dependent on our ability to regularly engage in a
large number of insurance underwriting, claim processing, personnel and human resources, and investment
activities, many of which are complex. These activities often are subject to internal guidelines and policies, as
well as legal and regulatory requirements. No matter how well designed and executed, control systems provide
only reasonable assurance that the system objectives will be met. If our controls are not effective, it could lead to
financial loss, unexpected risk exposures or damage to our reputation.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of
operations and financial condition.
We are subject to the tax laws and regulations of the United States federal, state and local governments.
From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions.
There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these
initiatives. In addition, United States federal, state and local tax laws and regulations are extremely complex and
subject to varying interpretations. There can be no assurance that our tax positions will not be challenged by
relevant tax authorities or that we would be successful in any such challenge.
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CLAIM AND COVERAGE DEVELOPMENTS
Developing claim and coverage issues in our industry are uncertain and may adversely affect our
insurance operations.
As industry practices and legislative, judicial and regulatory conditions change, unexpected and unintended
issues related to claims and coverage may develop. These issues could have an adverse effect on our business by
either extending coverage beyond our underwriting intent or by increasing the frequency or severity of claims.
The premiums we charge for our insurance products are based upon certain risk expectations. When legislative,
judicial or regulatory authorities expand the burden of risk beyond our expectations, the premiums we previously
charged or collected may no longer be sufficient to cover the risk, and we do not have the ability to retroactively
modify premium amounts. Furthermore, our reserve estimates do not take into consideration a major retroactive
expansion of coverage through legislative or regulatory actions or judicial interpretations.
In particular, court decisions have had, and are expected to continue to have, significant impact on the
property and casualty insurance industry. Court decisions may increase the level of risk which insurers are
expected to assume in a number of ways, such as by eliminating exclusions, increasing limits of coverage,
creating rights in claimants not intended by the insurer and interpreting applicable statutes expansively to create
obligations on insurers not originally considered when the statute was passed. In some cases, court decisions
have been applied retroactively. Court decisions have also negated legal reforms passed by state legislatures.
There is also a growing trend of plaintiffs targeting property and casualty insurers, including us, in
purported class action litigation relating to claim-handling and other practices, particularly with respect to the
handling of personal lines auto and homeowners claims.
There are concerns that the focus on climate change and global warming could affect court decisions or
result in litigation, including potential matters arising from federal, state or local laws intended to protect the
environment.
Many of these issues are beyond our control. The effects of these and other unforeseen claims and coverage
issues are extremely hard to predict and could materially harm our business and results of operations.
LITIGATION
We may suffer losses from litigation, which could materially and adversely affect our operating results or
cash flows and financial condition.
As is typical in our industry, we face risks associated with litigation of various types, including disputes
relating to insurance claims under our policies, as well as other general commercial and corporate litigation.
Litigation is subject to inherent uncertainties and in the event of an unfavorable outcome in one or more litigation
matters, the ultimate liability may be in excess of amounts currently reserved and may be material to our
operating results or cash flows for a particular quarter or annual period and to our financial condition.
TERRORISM
Terrorist attacks, and the threat of terrorist attacks, and ensuing events could have an adverse effect on
us.
Terrorism, both within the United States and abroad, and military and other actions and heightened security
measures in response to these types of threats, may cause loss of life, property damage, reduced economic
activity, and additional disruptions to commerce. Actual terrorist attacks could cause losses from insurance
claims related to the property and casualty insurance operations of the State Auto Group, as well as a decrease in
our stockholders’ equity, net income and/or revenue. The Terrorism Acts require the federal government and the
insurance industry to share in insured losses up to $100 billion per year resulting from certain terrorist attacks
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within the United States. Under the Terrorism Acts, we must offer our commercial policyholders coverage
against certified acts of terrorism. In December 2007, the United States Congress extended the Terrorism Acts
through December 31, 2014, and made some modest changes to the Terrorism Acts. See “Regulation” in this
Item 1 for a discussion of the Terrorism Acts.
In addition, some of the assets in our investment portfolio may be adversely affected by declines in the
equity markets and economic activity caused by the continued threat of terrorism, ongoing military and other
actions and heightened security measures. We cannot predict at this time whether and the extent to which
industry sectors in which we maintain investments may suffer losses as a result of potentially decreased
commercial and economic activity, or how any such decrease might impact the ability of companies within the
affected industry sectors to pay interest or principal on their securities, or how the value of any underlying
collateral might be affected.
INVESTMENTS
The performance of our investment portfolios is subject to investment risks.
Like other property and casualty insurance companies, we depend on income from our investment portfolio for
a portion of our revenues and earnings and are therefore subject to market risk, credit risk, concentration risk,
liquidity risk and the risk that we will incur losses due to adverse changes in equity, interest, commodity or foreign
currency exchange rates and prices. Our primary market risk exposures are to changes in interest rates and equity
prices. Future increases in interest rates could cause the values of our fixed income portfolios to decline, with the
magnitude of the decline depending on the duration of our portfolio. Individual securities in our fixed income
portfolio are subject to credit risk and default. Downgrades in the credit ratings of fixed maturities can have a
significant negative effect on the market valuation of such securities. For example, budget strains on certain states
and local governments could negatively affect the credit quality and ratings of their issued securities.
Our fixed income portfolio includes certain securities with call features permitting them to be redeemed by
the issuers prior to stated maturity. Reinvestment risk exists with such securities as it may not be possible to
reinvest the proceeds from the called securities at equivalent yields.
If the fixed income or equity portfolios, or both, were to be impaired by market, sector or issuer-specific
conditions to a substantial degree, our liquidity, financial position and financial results could be materially
adversely affected. Under these circumstances, our income from these investments could be materially reduced,
and declines in the value of certain securities could further reduce our reported earnings and capital levels. A
decrease in value of our investment portfolio could also put our insurance subsidiaries at risk of failing to satisfy
regulatory minimum capital requirements. If we were not at that time able to supplement our subsidiaries’ capital
from STFC or by issuing debt or equity securities on acceptable terms, our business could be materially
adversely affected. Also, a decline in market rates of fixed income securities or a decline in the fair value of
equity securities could cause the investments in our pension plans to decrease, resulting in additional expense and
increasing required contributions to the pension plan.
In addition, our investments are subject to risks inherent in the nation’s and world’s capital markets. The
functioning of those markets, the values of the investments held by us and our ability to liquidate investments on
favorable terms or short notice may be adversely affected if those markets are disrupted or otherwise affected by
local, national or international events, such as power outages, system failures, wars or terrorist attacks or by
recessions or depressions, a significant change in inflation expectations, a significant devaluation of
governmental or private sector credit, currencies or financial markets and other factors or events.
Changes in tax laws impacting marginal tax rates and/or the preferred tax treatment of municipal obligations
under current law, could adversely affect the market value of municipal obligations. Since a significant portion of
our investment portfolio is invested in tax-exempt municipal obligations, any such changes in tax law could
adversely affect the value of the investment portfolio. Additionally, any such changes in tax law could reduce the
difference between tax-exempt interest rates and taxable rates.
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EMPLOYEES
Our ability to attract, develop and retain talented employees, managers and executives, and to maintain
appropriate staffing levels, is critical to our success.
Our success depends on our ability to attract, train, develop and retain talented, diverse employees,
including executives and other key managers in a specialized industry. Our loss of certain key officers and
employees or the failure to attract and develop talented new executives and managers could have a materially
adverse effect on our business. Talent management is a key consideration in our specialty insurance segment,
which requires specialized product underwriting, claims handling and risk management services and involves
distribution through channels other than our retail agents.
In addition, we must forecast the changing business environments (for multiple business units and in many
geographic markets) with reasonable accuracy and adjust hiring programs and/or employment levels accordingly.
Our failure to recognize the need for such adjustments, or the failure or inability to react appropriately on a
timely basis, could lead either to over-staffing (which would adversely affect our cost structure) or under-staffing
(impairing our ability to execute and effectively service our ongoing and new business) in one or more business
units or locations. In either event, our financial results could be materially adversely affected.
ACQUISITIONS
Acquisitions subject us to a number of financial and operational risks.
Since going public in 1991, we and State Auto Mutual have acquired or affiliated with other insurance
companies, most recently the 2009 acquisition of the Rockhill Insurance Group by State Auto Mutual. It is
possible that we and State Auto Mutual will continue to pursue acquisitions or affiliations of other insurance
companies in the future.
Insurance company acquisitions and affiliations involving State Auto Mutual generally do not have a
material financial impact on State Auto Financial unless and until the target insurers are added to our Pooling
Arrangement, such as the addition of the Rockhill Insurers in 2011.
Acquisitions and affiliations involve numerous risks and uncertainties, such as:
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obtaining necessary regulatory approvals may prove to be more difficult than anticipated;
integrating the business may prove to be more costly than anticipated;
integrating the business without material disruption to existing operations may prove to be more
difficult than anticipated;
anticipated cost savings may not be fully realized (or not realized within the anticipated time frame);
loss results of the acquired or affiliated company or business may be worse than expected;
losses may develop differently than what we expected them to; and
retaining key employees of the acquired company or business may prove to be more difficult than
anticipated.
In addition, other companies in the insurance industry have similar acquisition and affiliation strategies.
Competition for target companies or businesses may intensify or we may not be able to complete such
acquisitions or affiliations on terms and conditions acceptable to us. There is no assurance that any businesses
acquired in the future will be successfully integrated. Ineffective integration may adversely affect our results and
our ability to compete. Also, the acquired business may not perform as projected and anticipated cost savings and
other synergies may not be realized.
28
CREDIT AND FINANCIAL STRENGTH RATINGS
A downgrade in our financial strength ratings may negatively affect our business and a downgrade in our
credit rating could negatively affect the cost and availability of debt financing.
Insurance companies are subject to financial strength ratings produced by external rating agencies. Higher
ratings generally indicate financial stability and a strong ability to pay claims. Ratings are assigned by rating
agencies to insurers based upon factors that they believe are relevant to policyholders and creditors. Ratings are
important to maintaining public confidence in our Company and in our ability to market our products. A
downgrade in our financial strength ratings could, among other things, negatively affect our ability to sell certain
insurance products, our relationships with agents and our ability to compete.
Although other agencies cover the property and casualty industry, we believe our ability to write business is
most influenced by our rating from A.M. Best. According to A.M. Best, its ratings are designed to assess an
insurer’s financial strength and ability to meet ongoing obligations to policyholders. In June 2011, A.M. Best
lowered the financial strength rating of the State Auto Group from A+ (Superior) to A (Excellent) with a stable
outlook. A.M. Best indicated that the downgrade was based on the deterioration in the State Auto Group’s
underwriting and operating earnings in recent years, driven by an increased frequency and severity of property
catastrophe losses. In addition, in November 2011, Standard & Poor’s lowered its financial strength rating on the
State Auto Group from A- to BBB+ and placed this rating on CreditWatch with a negative outlook (Standard &
Poor’s removed this rating from CreditWatch in February 2012), and Moody’s lowered its financial strength
rating on the State Auto Group from A2 to A3 with a stable outlook. Both the Standard and Poor’s and Moody’s
downgrades were based generally on the same reasons as given by A.M. Best.
Generally, credit ratings affect the cost, type and availability of debt financing. Higher rated securities
receive more favorable pricing and terms relative to lower rated securities at the time of issue. In June 2011,
A.M. Best lowered its credit rating on State Auto Financial to bbb+. In November 2011 Standard & Poor’s and
Moody’s lowered their credit ratings on State Auto Financial to BB+ and Baa3, respectively.
Based on future results and developments, we may not be able to maintain our current ratings.
CONTROL BY OUR PARENT COMPANY
Our parent company owns a significant interest in us and may exercise its control in a manner
detrimental to your interests.
As of December 31, 2011, our parent company owned approximately 63% of the voting power of our
Company. Therefore, State Auto Mutual has the power to direct our affairs and is able to determine the outcome
of substantially all matters required to be submitted to stockholders for approval, including the election of all our
directors. State Auto Mutual could exercise its control over us in a manner detrimental to the interests of other
STFC stockholders.
COMPETITION
Our industry is highly competitive, which could adversely affect our sales and profitability.
The property and casualty insurance business is highly competitive, and we compete with a large number of
other insurers. Many of our competitors have well-established national reputations, and substantially greater
financial, technical and operating resources and market share than we. We may not be able to effectively
compete, which could adversely affect our sales or profitability. We believe that competition in our lines of
business is based primarily on price, service, commission structure, product features, financial strength ratings,
producer relationships, reputation and name or brand recognition. Market developments such as the increased use
of vehicle telematics and sales of usage-based auto insurance could potentially result in reduced market share or
adverse selection.
29
Our competitors sell through various distribution channels, including independent agents, captive agents and
directly to the consumer. We compete not only for personal and business insurance customers, but also for
independent agents and brokers to market and sell our products. Our specialty insurance segment faces
competitors attempting to sell their products through the distribution system of wholesale brokers, program
administrators and other specialty sources. Some of our competitors offer a broader array of products, have more
competitive pricing or have higher claims paying ability ratings. In addition, other financial institutions are now
able to offer services similar to our own as a result of the Gramm-Leach-Bliley Act.
The increased transparency that arises from information available from the use of tools such as comparative
rater software, could work to our disadvantage. We may have difficulty differentiating our products or becoming
among the lowest cost providers. Expense efficiencies are important to maintaining and increasing our growth
and profitability. If we are unable to efficiently execute and realize future expense efficiencies, it could affect our
ability to establish competitive pricing and could have a negative effect on new business growth and retention of
existing policyholders.
VOLATILITY OF OUR COMMON STOCK
The price of our common stock could be volatile.
The trading price of our common stock may fluctuate substantially due to a variety of factors, some of
which may not be related to our operating performance and are beyond our control. Such factors include, but are
not limited to, the following: volatility and variations in our actual or anticipated operating results or changes in
the expectations of financial market analysts; investor perceptions of our Company and/or the property and
casualty industry; market conditions in the insurance industry and any significant volatility in the market; and
major catastrophic events.
CHANGES IN ACCOUNTING STANDARDS
Changes in accounting standards issued by the FASB or other standard-setting bodies may adversely
affect our results of operations and financial condition.
Our financial statements are prepared in accordance with GAAP. The FASB, the AICPA and other
accounting standard-setting bodies may periodically issue changes to, interpretations of or guidance with respect
to GAAP. The adoption of such guidance may have an adverse effect on our results of operations and financial
position. See Note 1 to our consolidated financial statements included in Item 8 of this Form 10-K regarding
adoption of recent accounting pronouncements, such as our adoption, effective January 1, 2012, of the updated
guidance regarding the accounting for costs associated with acquiring or renewing insurance contracts.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We share our operating facilities with State Auto Mutual pursuant to the terms of the 2005 Management
Agreement. Our corporate headquarters are located in Columbus, Ohio, in buildings owned by State Auto Mutual
that contain approximately 280,000 square feet of office space. Our Company and State Auto Mutual also own
and lease other office facilities in numerous locations throughout the State Auto Group’s geographical areas of
operation.
30
Item 3. Legal Proceedings
The following describes the significant pending legal proceedings, other than ordinary routine litigation
incidental to our business, to which State Auto Financial or any of its subsidiaries is a party or to which any of
our property is subject:
In December 2010, a putative class action lawsuit (Kelly vs. State Automobile Mutual Insurance Company,
et al.) was filed against State Auto Financial, State Auto P&C and State Auto Mutual in state court in Ohio.
In this lawsuit, plaintiffs alleged that the defendants engaged in deceptive practices by failing to disclose to
plaintiffs the availability, through one or more related companies, of insurance policies providing for
identical coverage and service as those policies purchased by plaintiffs but at a lower premium amount. This
lawsuit was voluntarily dismissed by the plaintiffs without prejudice in December 2011, but the plaintiffs
retained the right to refile such lawsuit within one year. If refiled, we will vigorously defend the lawsuit, as
to pricing, quoting and selling insurance policies are in
we believe that our practices with respect
compliance with all applicable laws.
Other—In addition to the litigation described above, we are involved in numerous lawsuits arising in the
ordinary course of our business operations arising out of or otherwise related to our insurance policies. Certain of
these lawsuits allege extra-contractual damages. These lawsuits are in various stages of development. We
generally contest these matters vigorously but may pursue settlement if appropriate. We consider all such
litigation in establishing our
loss and loss adjustment expense reserves. Based on currently available
information, we do not believe it is reasonably possible that any such lawsuit or related lawsuits will be material
to our results of operations or have a material adverse effect on our consolidated financial or cash flow positions.
Additionally, from time to time we may be involved in lawsuits arising in the ordinary course of business
but not arising out of or otherwise related to our insurance policies. Based on currently available information, we
do not believe it is reasonably possible that any such lawsuit or related lawsuits will be material to our results of
operations or have a material adverse effect on our consolidated financial or cash flow position.
We accrue for a litigation-related liability when it is probable that such a liability has been incurred and the
amount can be reasonably estimated. Based on currently available information known to us, we believe that our
reserves for litigation-related liabilities are reasonable. Given the inherent uncertainty surrounding the ultimate
resolution of these legal proceedings, an adverse outcome could have a material impact to our results of
operations in a future period, though in the opinion of management, none would likely have a material adverse
effect on our consolidated financial or cash flow position.
Additionally, we may be impacted by adverse regulatory actions and adverse court decisions where
insurance coverages are expanded beyond the scope originally contemplated in our insurance policies. We
believe that the effects, if any, of such regulatory actions and published court decisions are not likely to have a
material adverse effect on our financial or cash flow position.
Item 4. Reserved
31
PART II
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases
of Equity Securities
Market Information; Holders of Record
Our common shares are traded on the NASDAQ Global Select Market under the symbol STFC. As of
March 2, 2012, there were 1,285 stockholders of record of our common shares.
Market Price Ranges and Dividends Declared on Common Shares
Initial Public Offering—June 28, 1991 – $2.25(1). The following table sets forth information with respect to
the high and low sale prices of our common shares for each quarterly period for the past two years as reported by
NASDAQ, along with the amount of cash dividends declared by us with respect to our common shares for each
quarterly period for the past two years:
2011
High
Low
Dividend
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18.35
18.28
18.00
14.06
$14.90
15.16
11.83
10.09
$0.15
0.15
0.15
0.15
2010
High
Low
Dividend
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19.06
20.38
16.30
17.89
$15.11
15.42
13.40
15.06
$0.15
0.15
0.15
0.15
(1) Adjusted for stock splits.
On March 2, 2012, the Board of Directors of State Auto Financial declared a cash dividend of $0.15 per
share. The dividend is payable on March 30, 2012, to shareholders of record on March 14, 2012. Additionally,
see Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Regulatory Considerations,” for additional information regarding
regulatory restrictions on the payment of dividends to State Auto Financial by its insurance subsidiaries.
32
Performance Graph
The line graph below compares the total return on $100.00 invested on December 31, 2006, in STFC’s
shares, the CRSP Total Return Index for the NASDAQ Stock Market (“NASDAQ Index”), and the CRSP Total
Return Index for NASDAQ insurance stocks (“NASDAQ Ins. Index”), with dividends reinvested.
s
r
a
l
l
o
D
200
150
100
50
0
Comparison of Cumulative Total Return
2006
2007
2008
2009
2010
2011
STFC
NASDAQ Index
NASDAQ Ins. Index
STFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Index . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Ins. Index . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
77.28
100.63
100.88
90.09
66.60
91.22
57.43
96.81
94.27
56.09
114.38
111.36
45.62
113.48
117.65
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
12/31/2011
33
Item 6. Selected Consolidated Financial Data
(dollars and shares in millions, except per share data)
Year ended December 31:
2011*
2010*
2009
2008*
2007
Statement of Income Data—
GAAP Basis:
Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earned premium growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Return on average invested assets(1)
$1,428.8
$
85.4
$1,553.7
$ (146.8)
1,257.2
80.8
1,355.1
24.5
13.6% 6.9
3.6% 3.6
1,176.5
82.1
1,256.9
10.2
4.5
3.9
1,126.0
87.4
1,181.9
(31.1)
11.3
4.1
1,011.6
84.7
1,113.4
119.1
(1.2)
4.3
Balance Sheet Data—
GAAP Basis:
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt to capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,229.9
$2,790.8
$ 116.4
$ 758.3
40.3
(18.2)
13.3
2,307.1
2,722.0
116.8
851.8
40.1
2.9
12.1
2,179.1
2,564.5
117.2
849.4
39.8
1.3
12.1
1,941.3
2,443.6
117.6
761.0
39.5
(3.7)
13.4
2,021.2
2,337.9
118.0
935.5
40.5
13.5
11.2
Per Common Share Data—
GAAP Basis:
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (3.65)
$ (3.65)
$
0.60
$ 18.81
Common Share Price:
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close price to book value per share . . . . . . . . . . . . . . . . . . . . .
$ 18.35
$ 10.09
$ 13.59
0.72
0.61
0.62
0.60
21.23
20.38
13.40
17.42
0.82
GAAP Ratios:
Loss and LAE ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statutory Ratios:
Loss and LAE ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums written to surplus . . . . . . . . . . . . . . . . . . . . . . . .
82.6% 70.8
33.7% 33.8
116.3% 104.6
82.4% 70.3
33.9% 32.9
116.3% 103.2
1.7
2.1
0.26
0.25
0.60
21.33
30.25
14.29
18.50
0.87
71.7
34.1
105.8
71.3
33.5
104.8
1.5
(0.78)
(0.78)
0.60
19.23
37.08
17.38
30.06
1.56
75.2
34.6
109.8
74.8
33.1
107.9
1.6
2.90
2.86
0.50
23.10
35.22
23.99
26.30
1.14
58.4
34.4
92.8
57.9
33.2
91.1
1.1
(1)
*
Invested assets include investments and cash equivalents.
Reflects changes in Pooling Arrangement, effective December 31, 2011, January 1, 2011, 2010 and 2008.
34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Capitalized terms used in this Item 7 and not otherwise defined have the meanings ascribed to such terms
under the caption “Important Defined Terms Used in this Form 10-K” which immediately precedes Part I of this
Form 10-K. This discussion should be read in conjunction with the consolidated financial statements and notes
thereto included in Item 8 of this Form 10-K and the narrative description of our business contained in Item 1 of
this Form 10-K.
OVERVIEW
State Auto Financial is a property and casualty insurance holding company. Our insurance subsidiaries are
part of the State Auto Group and Pooling Arrangement described below. The State Auto Group markets its
insurance products throughout the United States primarily through independent agencies, which include retail
agencies and brokers. Our Pooled Companies are rated A (Excellent) by A.M. Best.
State Auto Financial’s principal subsidiaries are State Auto P&C, Milbank, Farmers and SA Ohio, each of
which is a property and casualty insurance company, and Stateco, which provides investment management
services to affiliated insurance companies.
Since January 1, 2011, our reportable insurance segments have been personal insurance, business insurance
and specialty insurance. These insurance segments are aligned with the reporting lines to our principal operating
decision makers. Investment operations is also a reportable segment. See “Personal and Business Insurance” and
“Specialty Insurance” in Item 1 of this Form 10-K for more information about our insurance segments.
We evaluate the performance of our insurance segments using industry financial measurements determined
based on SAP, and certain measures determined under GAAP. We evaluate our investment operations segment
based on investment returns of assets managed. Financial information about our segments for 2011 is set forth in
this Item 7 and in Note 14 to our consolidated financial statements included in Item 8 of this Form 10-K. Prior
period segment information has been restated to conform to current period presentation.
Capital Management Actions
Our 2011 results were negatively impacted by a record level of weather-related catastrophes, with 2011
catastrophe losses totaling $231.1 million, or 16.2 loss ratio points, compared to $99.0 million, or 7.9 loss ratio
points, in 2010. The 2011 catastrophe loss ratio almost doubled our prior five-year average catastrophe loss ratio
of 8.4 points. In addition, at the end of the second quarter of 2011, we determined it was necessary to establish a
valuation allowance against our net deferred tax asset balances, both GAAP and SAP. As a result, equity and
surplus balances of STFC and its insurance subsidiaries were negatively impacted by these events.
During the fourth quarter of 2011, several actions were implemented by the State Auto Group and STFC to
strengthen our capital position and improve our risk profile. The actions included the following:
•
The Pooling Arrangement was amended to reduce the overall participation percentage of the STFC
Pooled Companies from 80% to 65% and to include the pooling of applicable balance sheet accounts
such as accumulated other comprehensive income related to employee benefit plans. See the “Pooling
Arrangement” section in this Item 7.
• We amended our retiree healthcare benefits to significantly change eligibility requirements for
participation of our employees and certain retirees in this plan. See “Critical Accounting Policies –
Pension and Postretirement Benefit Obligations” section in this Item 7.
•
The State Auto Group entered into a three-year quota share reinsurance agreement covering our
homeowners book of business (the “HO QS Arrangement”). See “Liquidity and Capital Resources –
Reinsurance Arrangements” section in this Item 7.
35
As a result of these actions, we believe we have improved our capital position and risk profile by reducing
exposure to sources of earnings volatility including weather-related catastrophes.
The net premiums written to surplus ratio, also called the leverage ratio, is a SAP ratio designed to measure
the ability of an insurer to absorb losses. The leverage ratio is calculated by dividing the net statutory premiums
written for a rolling 12-month period by the ending statutory surplus for the period. For example, a leverage ratio
of 1.5 means that for every dollar of surplus, the insurer wrote $1.50 in premium. The leverage ratio for our
insurance subsidiaries increased to 3.1 at September 30, 2011, as compared to 1.7 at December 31, 2010. At
December 31, 2011, the leverage ratio improved to 2.1 as a result of our profitable fourth quarter and the actions
outlined above.
EXECUTIVE SUMMARY
To deliver operating and financial results, we focus on our three insurance segments—personal insurance,
business insurance and specialty insurance, along with our investment operations segment. Underlying these
segments are performance disciplines that we believe are critical to our success: underwriting profit, rational
growth, risk management, and capital management.
Underwriting Profit
Although our goal is to consistently produce an underwriting profit, our combined ratio has exceeded 100%
for the last four years. This result has largely been due to catastrophe and other weather-related losses in our
property lines of business. Significant effort has been directed towards returning to prior levels of underwriting
profitability.
It is critical that we return our homeowners book of business to underwriting profitability, as it is our second
largest line of business after personal auto. A multi-year effort to implement solutions includes an aggressive
insurance to value program that audits policy coverage against the actual value of the property. We have also
implemented separate, mandatory wind and hail deductibles for properties in select states and by-peril rating for
homeowners in key states. By-peril rating calculates a separate premium component for each peril and allows us
to price more effectively for weather risks, which is the leading cause of homeowners losses. Our claim handling
has become more specialized, with the addition of dedicated large and small property claim handlers and the
formation of a catastrophe claim team, lessening our dependency on independent adjusters. We are also
continuing our efforts to diversify geographically. Finally, we continue to aggressively address our rate needs in
homeowners and have filed rate increases in the high single to low double digit range.
Pricing property and casualty insurance has become a sophisticated science, and to that end we have made
significant investment in our actuarial and financial teams, adding depth and talent to these important functions.
We have enhanced our product management discipline, which uses objective analysis of company results,
competitor results and marketplace dynamics to develop, monitor and communicate state-of-the-art strategies.
Through product management, we are attempting to capitalize on pricing segmentation, risk selection, portfolio
mix and competitive position to improve our results. We are dedicated to cost-based pricing, which seeks to have
each line of business priced to generate a profit.
We believe changes in our claim organization have positively impacted claims efficiency, improved service
and reduced costs. We reduced salvage yard vendor fees through negotiation with vendors. We believe our new
auto physical damage unit significantly reduces independent adjuster expenses and improves claims file
administration. Further the expansion of our house counsel operation not only contributes to lower claim
expenses, but improves service. We feel that claim performance has been enhanced by our business process
improvement efforts, and that
the claim organization will be a significant contributor to improving our
ex-catastrophe loss and expense ratio performance.
36
Rational Growth
There are two primary ways we grow our business. The first is organic. This means we either sell more
policies or increase the price of our products. Ideally, we accomplish both simultaneously. Organic growth is
challenging, especially in a difficult economic environment and within a well-capitalized industry. If our
products are priced too high, customers may go elsewhere and the desired premium increases could be offset by a
reduction in policy count. If our products are priced too low, we are likely to increase our policy count but at the
risk of surrendering profit.
We also seek organic growth in ways other than price. When we are faced with untenably low prices from
our competition, our goal is to remain attractive to our insureds, retail agents and wholesale brokers by stressing
the strengths we believe we bring to the marketplace, such as our product offerings and innovation; underwriting
criteria; quality of service to insureds, retail agents and wholesale brokers; relationships with our retail agents
and wholesale brokers; prompt and fair claims handling and settlement; financial stability; and technology. We
believe these factors make us an attractive and preferred business partner. Nonetheless, we remain attentive to
what the market will allow.
Organic growth in our business insurance and specialty insurance segments has been more difficult for us to
achieve than in our personal insurance segment, though our growth in this segment has been recently challenged
by the actions we have initiated over the last several years to improve profitability in our homeowners book of
business. Growth in our business insurance and specialty insurance segments continue to be impacted by the
to profitable underwriting. These segments have experienced extreme
economy and our commitment
competitiveness in the market over the last several years. Until the market accepts adequately priced products, we
will continue to be challenged to grow our business insurance book. Recently, we have seen some signs of
firming prices, with increasing opportunities to take appropriate rate increases, particularly in the property lines.
Our specialty insurance segment, specifically our excess and surplus lines book of business, which is part of our
Rockhill unit, began experiencing signs of market firming in early 2011, with increased quote activity. While
organic growth in the business insurance and specialty insurance segments have been difficult, we have been able
to compete more effectively in the personal lines market. Since we are heavily cross-sold in personal lines, with
auto coverage frequently packaged with homeowners coverage, our homeowners pricing and underwriting
actions have slowed production in our core states of Ohio, Indiana, Kentucky and Tennessee.
The second way we can grow is by acquiring other companies and their distribution points, entering new
states, offering new products, appointing new agents and offering our products through alternative distribution
channels. This can be generally labeled as growth through acquisition. Historically acquisitions have enabled us
to leverage the acquired companies’ existing channel relationships when introducing State Auto products and
services into a new state or new markets. They have also brought needed talent and competencies to the larger
State Auto Group. We believe it is important to have processes and talent in place to grow both organically and
through acquisitions. In 2009, our parent, State Auto Mutual, took a major growth step by acquiring the Rockhill
Insurance Group, which included the Rockhill Insurers, RED and RTW. The Rockhill Insurers are specialty
property and casualty insurance carriers serving both the standard and excess and surplus lines insurance markets
with product lines that include commercial auto, property, bonds (surety and fidelity) and general liability. RED
acts as a managing general underwriter for a variety of property and casualty coverages in the program and
alternative risk markets. The insurers owned by RTW provide workers’ compensation coverage. While our top
line growth in our specialty insurance segment benefitted from RED in 2010, we saw additional benefit from the
other specialty businesses of the Rockhill Insurers and RTW, now our workers’ compensation unit in our
specialty insurance segment, when the financial results of these units were incorporated into our pooled results
beginning January 1, 2011. The business activity from the Rockhill, RED and workers’ compensation units
comprise our specialty insurance segment. We believe the growth and profit potential from our specialty
insurance segment is excellent and provides diversification to our current product lines.
37
Risk Management
The objective of our enterprise risk management program is to assist management
in identifying,
understanding, communicating and executing strategies to mitigate the risks associated with our business.
Numerous risks are addressed, including a variety of underwriting, operational, market, credit and strategic risks.
All of our business units play important roles in risk identification and in developing and executing risk
mitigation strategies.
Weather-related losses have been the onerous variable in our profitability formula in recent years. We are
committed to geographic diversity, which means reducing our property risk concentrations in certain geographic
regions while at the same time expanding into new states with new relationships. We believe geographic
diversity is a classic but effective way to spread risk and reduce volatility. Our experience during 2011 reinforces
our belief that property exposure management must remain a key area of emphasis as we work to achieve and
sustain improved underwriting results.
In 2011, we made significant progress in the migration of data to our new offsite data center. The data
center’s state-of-the-art design allows it to function securely under work load and environmental pressures. The
commitment to making our data centers and processing systems secure and dependable is ongoing and, given the
nature computer technology, will always be a risk management priority.
Capital Management
Our number one capital management goal is to earn an appropriate risk adjusted return for our shareholder
while growing book value. In response to the record level of weather-related catastrophes in 2011 that impacted
our underwriting results and capital levels, we implemented several actions during the fourth quarter of 2011 to
strengthen our capital position and improve our risk profile. These actions are discussed above at “Capital
Management Actions.”
In addition to the HO QS Arrangement discussed elsewhere, members of the State Auto Group pay a portion
of the premiums received to reinsurers in exchange for reinsuring a portion of our exposures. This is done
primarily to reduce net liability on individual risks or for individual loss occurrences, including catastrophic
losses. We maintain reserves for the eventual payment of losses and loss expenses for both reported claims and
incurred claims that have not yet been reported, based on management’s best estimate at a given point in time.
Although management uses many resources to calculate reserves, there is not a precise method for determining
the ultimate liability. Our objective is to set reserves that reasonably approximate the ultimate liability for insured
losses and loss expenses. We regularly review and adjust loss reserves as appropriate.
We maintain a disciplined investment strategy by owning a well diversified portfolio of investment grade
fixed income securities and equity securities. We manage all of our fixed income securities internally. We
manage our U.S. large-cap equity portfolio internally and utilize outside managers for our U.S. small-cap equities
and international equity funds. We believe that over the long term this diversified portfolio will provide the
Company with the best income and growth possibilities while protecting principal and providing adequate
liquidity to support our business operations.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 1 of the notes to our consolidated
financial statements included in Item 8 of this Form 10-K. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet, revenues and expenses for the period then ended and the financial
entries in the accompanying notes to the financial statements. Such estimates and assumptions could change in
the future, as more information becomes known which could impact the amounts reported and disclosed in this
Item 7. We have identified the policies and estimates described below as critical to our business operations and
the understanding of the results of our operations.
38
Investments
Our fixed maturity, equity security and certain other invested asset
investments are classified as
available-for-sale and carried at fair value. The unrealized holding gains or losses, net of applicable deferred
taxes, are shown as a separate component of stockholders’ equity in accumulated other comprehensive income
(loss), and as such are not included in the determination of net income. Investment income is recognized when
earned, and capital gains and losses are recognized when investments are sold.
We regularly monitor our investment portfolio for declines in value that are other-than-temporarily impaired
(“OTTI”), an assessment that requires significant management judgment regarding the evidence known. Such
judgments could change in the future as more information becomes known which could negatively impact the
amounts reported herein. We consider the following factors when assessing our equity securities and other
invested assets for OTTI: (1) the length of time and/or the significance of decline below cost; (2) our ability and
intent to hold these securities through their recovery periods; (3) the current financial condition of the issuer and
its future business prospects; and (4) the ability of the market value to recover to cost in the near term. We
recognize OTTI charges on our externally managed small-cap equity portfolio and a segment of our large-cap
portfolio, as we are unable to make the assertion regarding our intent to hold these securities that are currently
valued below cost until recovery in the near term. When an equity security or other invested asset has been
determined to have a decline in fair value that is other-than-temporary, we adjust the cost basis of the security to
fair value. This results in a charge to earnings as a realized loss, which is not reversed for subsequent recoveries
in fair value. Future increases or decreases in fair value, if not other-than-temporary, are included in other
comprehensive income (loss).
We also consider the following factors when assessing our fixed maturity investments for OTTI: (1) the
financial condition of the issuer including receipt of scheduled principal and interest cash flows; (2) our intent to
sell; and (3) if it is more likely than not that we will be required to sell the investments before recovery. When a
fixed maturity has been determined to have an other-than-temporary impairment, the impairment charge is
separated into an amount representing the credit loss, which is recognized in earnings as a realized loss, and the
amount related to non-credit factors, which is recognized in other comprehensive income (loss). Future increases
or decreases in fair value, if not other-than-temporary, are included in other comprehensive income (loss).
Deferred Acquisition Costs
Acquisition costs, consisting of commissions, premium taxes and certain underwriting expenses relating to
the production of property and casualty business, are deferred and amortized over the same period in which the
related premiums are earned. The method followed for computing the acquisition costs limits the amount of such
deferred costs to their estimated realizable value. In determining estimated realizable value, the computation
gives effect to the premiums to be earned, losses and loss expenses expected to be incurred, and certain other
costs expected to be incurred as premium is earned. Future changes in estimates, the most significant of which is
expected losses and loss adjustment expenses, that indicate a reduction in expected future profitability may result
in unrecoverable deferred acquisition costs. We have not recorded any significant changes in estimates for the
years ended December 31, 2011, 2010 and 2009, respectively. As of January 1, 2012, we adopted the FASB
guidance Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. See “New
Accounting Standards – Pending Adoption of Accounting Pronouncements-Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts” included in this Item 7 for the impact of this adoption.
Losses and Loss Expenses Payable
Our loss reserves reflect all unpaid amounts for claims that have been reported, as well as for IBNR claims.
Our loss reserves are not discounted to present value.
Loss reserves are management’s best estimates (“MBE”) at a given point in time of what we expect to pay
to settle all claims incurred as of that date based on known facts, circumstances and historical trends. Loss
reserves at the individual claim level are established on either a case reserve basis or formula reserve basis
39
depending on the type and circumstances of the loss. The case reserve amounts are determined by claims
adjusters based on our reserving practices, which take into account
the circumstances
surrounding each claim and applicable policy provisions. The formula reserves are based on historical data for
similar claims with provision for changes caused by inflation. Case reserves and formula reserves are reviewed
on a regular basis, and as new data becomes available, estimates are updated resulting in adjustments to loss
reserves. Generally, reported losses initially reserved on a formula basis and not settled after six months are case
reserved at that time. The process for calculating the IBNR component of the loss reserve is to develop an
estimate of the ultimate losses and allocated loss expenses incurred, and subtract all amounts already paid or held
as case or formula reserves.
the type of risk,
The determination of ultimate losses integrates information and analysis provided by several disciplines
within our Company, including claims, actuarial and accounting. This assessment requires considerable judgment
in understanding how claims mature, which lines of business are the most volatile, and how trends change over
time. Loss reserves represent an estimate at a given point in time based on many variables including historical
and statistical
legal developments, storm loss estimates and economic conditions.
Although we consider many different sources of information, as well as a number of actuarial methodologies to
estimate our loss reserves, there is no single method for determining the exact ultimate liability.
information,
inflation,
Our internal actuarial staff conducts quarterly reviews of projected loss development information to assist
management in making estimates of ultimate losses and loss expenses. Several factors are considered in
estimating ultimate liabilities including consistency in relative case reserve adequacy, consistency in claims
settlement practices, recent legal developments, historical data, actuarial projections, accounting projections,
exposure growth, current business conditions, catastrophe developments and late reported claims. In addition,
reasonableness tests are performed on many of the assumptions underlying each reserving methodology, such as
claim frequency, claim severity and loss ratios. Nonetheless, changes which are not contemplated do occur over
time, and those changes are incorporated in subsequent valuations of our loss reserves.
We use a number of different methodologies to estimate the IBNR component of our loss reserves. Our loss
reserves include amounts related to short tail and long tail lines of business. “Tail” refers to the time period
between the occurrence of a loss and the settlement of the claim. In general, the longer the time span between the
incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary. The
reserving methods and strengths and weaknesses of each are described below.
Short-Tail Business: For short-tail business, claims are typically settled within five years, and the most
common actuarial estimates are based on techniques using link ratio projections of incurred losses, paid losses,
claim counts and claim severities. Each of these methods is described below in detail. Separate projections are
made for catastrophes that are in the very early stages of development based on specific information known
through the reporting date.
Incurred Loss Development Method: The Incurred Loss Development Method is probably the most
common actuarial method used in projecting indicated IBNR reserves. This method uses paid loss experience as
well as the outstanding estimates (formula and case reserves) for claims that have been reported and are still
open. The underlying assumption of the Incurred Loss Development Method is that case reserve adequacy
remains consistent over time. This method’s advantage is its responsiveness to changes in reported losses, which
is particularly valuable in the less mature accident years. The disadvantage of the Incurred Loss Development
Method is that case reserve adequacy changes will distort the IBNR projections.
Paid Loss Development Method: The Paid Loss Development Method uses calculations that are very
similar to the Incurred Loss Development Method. The key difference is that the data used in the paid method
exclude case reserve estimates, so only paid losses are utilized. With this method, a payment pattern is estimated
to project ultimate settlement values for each accident year, with the underlying assumption that claims are
settled at a consistent rate over time. Neither case reserves nor the rate at which claims are reported (except to the
40
extent that the reporting pattern influences the payment pattern) is relevant to the results of this method. This
method’s advantage is the estimates of ultimate loss are independent of case reserve adequacy and are unaffected
by company changes in case reserving philosophy. The disadvantages are that the paid method does not use all of
the available information, and in some cases the liability payment patterns require the application of very large
development factors to relatively small payments in less mature accident years.
Claim Counts and Severities Method: The Counts and Severities Method calculations are very similar to
the other methods. The incurred claim counts reported to date are projected to an ultimate number. Similarly, the
incurred loss severities are projected to an ultimate value. The ultimate incurred count is multiplied by the
ultimate incurred severity, for each accident year, to arrive at the ultimate incurred loss. Finally, as with the other
loss development methods, an estimate of the IBNR reserve is calculated by subtracting the reported losses from
the estimated ultimate losses.
Long-Tail Business: For long-tail business, a material portion of claims may not be settled within five
years. Reserve estimates for long-tail business use the same methods listed above along with several other
methods as determined by the actuary. For example, premium-based methods may be used in developing
ultimate loss estimates, including the Expected Loss Ratio, Bornhuetter-Ferguson, and Least-Squares techniques
as described below. We may also use statistical models when the historical patterns can be reasonably
approximated.
Expected Loss Ratio Method: The Expected Loss Ratio Method generates indicated IBNR by multiplying
an expected loss ratio by earned premiums, then subtracting incurred-to-date losses. For slower reporting lines of
business, new products, or data that is very immature, the actual claim data is often too limited or too volatile for
other projection methods. With this method the premiums are used as a measure of loss exposure, and the loss
ratios can be derived from pricing expectations.
Bornhuetter-Ferguson Method: The Bornhuetter-Ferguson Method is a weighted average of the Expected
Loss Ratio Method and the Incurred Loss Development Method, using the percentage of losses reported as the
weight. This method is particularly useful where there is a low volume of data in the current accident period, or
where the experience is volatile. In general, this method produces estimates that are similar to the Incurred Loss
Development Method.
Least Square Loss Development Method: In the Least Squares Loss Development Method the statistical
technique of least squares regression is applied to a triangle of reported loss ratios to project the ultimate loss
ratio in each accident year. Using historical loss ratios puts the data for each time period on a more consistent
exposure basis, because premium levels are generally correlated with insured exposures. A by-product of the
regression function is an estimate of credibility for each stage of development. In cases where the regression
parameters fall outside of a reasonable range, the projection defaults to the incurred loss method.
Selection Process: In determining which reserving method to use for a particular line of business or
accident year, diagnostic tests of loss ratios and severity trends are considered, as well as the historic case reserve
adequacy and claim settlement rate. In general, the Incurred Loss Development Method is used if the projections
are stable, the data is credible, historic case reserve adequacy is consistent, and the loss ratios and loss severities
are reasonable. Other reserving methods are considered as well for particular lines of business or accident years,
along with supplemental information such as open claim counts and prior period development. For example, if
more than one method provides a reasonable projection, the actuary may select an average of those methods.
There is considerable judgment applied in the analysis of the historical patterns and in applying business
knowledge of our underwriting and claims functions.
Reserve ranges provide a quantification of the variability in the loss reserve projections. The primary
determinant in estimating the loss reserve range boundaries are the variances measured within the historical
reserving data for the various lines of business. MBE of loss reserves considers the expected variation to
41
establish an appropriate position within a range. MBE loss and ALAE reserves for the STFC Pooled Companies’
share of the Pooled Companies’ reserves at December 31, 2011, was $931.1 million, within an estimated range of
$812.0 million to $964.6 million. (These values presented are on a direct basis, gross of salvage and subrogation
recoverable, and before reinsurance, except for the STFC Pooled Companies’ participation in the inter-company
Pooling Arrangement. Therefore, these values cannot be compared to other loss and loss expenses payable tables
included elsewhere within this Form 10-K.)
The potential impact of the loss reserve variability on net income can be illustrated using the range end
points and carried reserve amounts listed above. For example, if ultimate losses reach a level corresponding to
the high point of the range, $964.6 million, the reserve increase of $33.5 million corresponds to an after-tax
decrease of $21.8 million in net income, assuming a tax rate of 35%. Likewise, should ultimate losses decline to
a level corresponding to the low point of the range, $812.0 million, the $119.1 million reserve decrease would
add $77.4 million of after-tax net income. The loss reserve range noted above represents a range of reasonably
likely reserves, not a range of all possible reserves. Therefore,
the ultimate losses could reach levels
corresponding to reserve amounts outside the range provided.
An important assumption underlying the loss reserve estimation methods for the major casualty lines is that
the loss cost trends implicitly built into the loss and ALAE patterns will continue into the future. To estimate the
sensitivity of reserves to an unexpected change in inflation, projected calendar year payment patterns were
applied to the December 31, 2011, other & product liability loss and ALAE reserve to generate estimated annual
incremental loss and ALAE payments for each subsequent calendar year. Then, for purposes of sensitivity
testing, an additional annual loss cost trend of 10% was added to the trend implicitly embedded in the estimated
payment pattern, and revised incremental loss and ALAE payments were calculated. This type of inflationary
increase could arise from a variety of sources including tort
law changes, development of new medical
procedures, social inflation, and other inflationary changes in costs beyond assumed levels.
The estimated cumulative impact that this additional, unexpected 10% increase in the loss cost trend would
have on our results of operations over the lifetime of the underlying claims in other & product liability is an
increase of $86.7 million on reserves, or a $56.4 million reduction to net income, assuming a tax rate of 35%.
Inflation changes have much more impact on the longer tail commercial lines like other & product liability and
workers’ compensation, and much less impact on the shorter tail personal lines’ reserves.
In addition to establishing loss reserves, as described above, we establish reserves for ULAE. Historical
patterns of paid ULAE relative to paid loss are analyzed along with historical claim counts including claims
opened, claims closed, and claims remaining open. The product of this analysis is an estimate of the relationship,
or ratio, between ULAE and loss underlying the current loss reserves. This ratio is applied to the current
outstanding loss reserves to estimate the required ULAE reserve. Consequently, this component of the loss
expense reserve has a proportional relationship to the overall claim inventory and held loss reserves. The method
assumes that the underlying claims process and mix of business do not change materially over time.
42
The following table sets forth a reconciliation of MBE of our direct loss and ALAE reserve to our net loss
and loss expenses payable at December 31, 2011 and 2010. The STFC Pooled Companies net additional share of
transactions assumed from State Auto Mutual
the years ended
December 31, 2011 and 2010, respectively, has been reflected in the table below as assumed by STFC Pooled
Companies.
through the Pooling Arrangement
for
($ millions)
2011
2010
Direct loss and ALAE reserve:
STFC Pooled Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed by STFC Pooled Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total direct loss and ALAE reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$510.0
421.1
931.1
Direct ULAE reserve:
STFC Pooled Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed by STFC Pooled Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total direct ULAE reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct salvage and subrogation recoverable:
STFC Pooled Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed by STFC Pooled Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total direct salvage and subrogation recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance assumed by STFC Pooled Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.6
17.1
45.7
(20.9)
(4.6)
(25.5)
(25.5)
12.6
(56.8)
487.7
396.4
884.1
27.2
24.9
52.1
(18.9)
(9.4)
(28.3)
(18.8)
21.2
(36.1)
Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss
expenses payable of $25.5 and $18.8 in 2011 and 2010, respectively . . . . . . . . . . . . . . . .
$881.6
874.2
The following tables set forth the loss and loss expenses payable by major line of business at December 31,
2011 and 2010:
($ millions)
December 31, 2011
Ending
Loss &
ALAE
Case &
Formula
Ending
Loss &
ALAE
IBNR
Ending
ULAE
Bulk
Total
Reserves
Personal insurance segment:
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total personal
Business insurance segment:
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$133.9
47.1
7.9
188.9
38.5
32.6
21.4
58.5
2.5
153.5
52.3
22.2
3.0
77.5
34.8
36.7
2.2
85.3
1.0
160.0
9.7
2.6
0.3
12.6
3.6
4.2
0.7
14.8
0.1
23.4
195.9
71.9
11.2
279.0
76.9
73.5
24.3
158.6
3.6
336.9
Specialty insurance segment:
Total specialty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total losses and loss expenses payable net of reinsurance recoverable on
losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104.4
151.6
9.7
265.7
$446.8
389.1
45.7
881.6
43
($ millions)
December 31, 2010
Ending
Loss &
ALAE
Case &
Formula
Ending
Loss &
ALAE
IBNR
Ending
ULAE
Bulk
Total
Reserves
Personal insurance segment:
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$171.2
51.5
8.9
Total personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231.6
Business insurance segment:
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial
Total business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty insurance segment:
63.7
26.7
3.6
94.0
43.8
47.4
5.1
99.9
1.6
12.8
2.5
0.3
15.6
4.8
5.2
1.0
16.8
0.3
28.1
247.7
80.7
12.8
341.2
99.2
92.0
31.4
183.1
5.2
410.9
50.6
39.4
25.3
66.4
3.3
185.0
197.8
Total specialty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49.9
63.8
8.4
122.1
Total losses and loss expenses payable net of reinsurance recoverable
on losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
$466.5
355.6
52.1
874.2
See discussion in “Results of Operations—Loss and LAE” section included in this Item 7.
The property and casualty industry has experienced significant loss from claims related to asbestos,
environmental remediation, product liability, mold and other mass torts. Asbestos reserves are $1.2 million, and
environmental reserves are $7.8 million, for a total of $9.0 million, or 1.0% of net losses and loss expenses
payable. Asbestos reserves decreased $0.3 million and environmental reserves decreased $1.0 million from 2010
primarily due to the December 31, 2011 pooling change. Because we have insured primarily product retailers and
distributors, we do not expect to incur the same level of liability, particularly related to asbestos, as companies
that have insured manufacturing risks.
Pension and Postretirement Benefit Obligations
Pension and postretirement benefit obligations are long-term in nature and require management’s judgment
in estimating the factors used to determine these amounts. We review these factors annually, including the
discount rate and expected long-term rate of return on plan assets. Because these obligations are based on
estimates which could change, the ultimate benefit obligation could be different from the amount estimated.
The State Auto Group has a defined benefit pension plan covering substantially all employees hired prior to
January 1, 2010 and a postretirement healthcare plan covering certain associates and retirees (collectively “the
benefit plans”). Several factors, which attempt to anticipate future events, are used in calculating the expense and
liability related to the benefit plans. Key factors include assumptions about the expected rates of return on plan
assets, discount rates, and health care cost trend rates. We consider market conditions, including changes in
investment returns and interest rates, in making these assumptions. The actuarial assumptions used by us in
determining benefit obligations may differ materially from actual results due to changing market and economic
conditions, higher or lower turnover and retirement rates, or longer or shorter life spans of participants. While we
believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions
may materially affect our financial position or results of operations.
44
To calculate the State Auto Group’s December 31, 2011 benefit obligation for each of the benefit plans, we
used a discount rate of 4.40% based on an evaluation of the expected future benefit cash flows of our benefit
plans used in conjunction with the Citigroup Pension Discount Curve at the measurement date. A lower discount
rate results in, all else being equal, a higher present value of the benefit obligation. To calculate our benefit
obligation at December 31, 2011 and net periodic benefit cost for the year ended December 31, 2012, a discount
rate of 4.40% and an expected long-term rate of return on plan assets of 7.50% were used. We selected an
expected long-term rate of return on our plan assets by considering the mix of investments and stability of
investment portfolio along with actual investment experience during the lifetime of the plans. Our assumptions
regarding the discount rate and expected return on plan assets could have a significant effect on the amounts
related to our benefit obligations and net periodic benefit cost depending on the degree of change between
reporting periods.
The following table sets forth an illustration of variability with respect to the discount rate on our share of
the State Auto Group’s December 31, 2011 benefit obligation and expected net periodic benefit cost for the year
ending December 31, 2012, along with the variability of the expected return on plan assets to our expected net
periodic benefit cost for the year ending December 31, 2012. Holding all other assumptions constant, sensitivity
to changes in any one of our key assumptions are as follows:
($ millions)
Pension
Discount rate
Postretirement
Discount rate
-0.25%
4.40%
+0.25%
-0.25%
4.40%
+0.25%
Benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost (benefit) . . . . . . . . . . . . . . . . .
$238.6
$ 13.8
229.6
13.0
221.1
12.3
$27.7
$ (3.5)
27.1
(3.5)
26.5
(3.5)
Net periodic benefit cost (benefit) . . . . . . . . . . . . . . . . .
$ 13.4
13.0
12.7
$ (3.5)
(3.5)
(3.5)
Expected return on plan assets
Expected return on plan assets
-0.25%
7.50%
+0.25%
-0.25%
7.50%
+0.25%
The accumulated benefit obligation (“ABO”) of a defined benefit pension plan represents the actuarial
present value of benefits attributed by the pension benefit formula to employee service rendered prior to the
measurement date and based on current and past compensation levels, while the projected benefit obligation
(“PBO”) is the ABO plus a factor for future compensation levels. The ABO, which considers current
compensations level only, provides information about the obligation an employer would have if the plan were
discontinued at the measurement date. At December 31, 2011, our share of the State Auto Group’s ABO and
PBO was $207.1 million and $229.6 million, respectively. At December 31, 2011, STFC’s share of the defined
benefit pension plan’s fair value of the assets was $147.7 million, which resulted in an underfunded status within
our balance sheet of $81.9 million. On a cash flow basis, we target an annual contribution level that meets at least
the targeted normal cost plus any shortfall amortizations of the plan, as defined by ERISA. Currently, we expect
to make a cash contribution to the pension plan up to $13.0 million in 2012.
The unfunded status on the pension plan and supplemental executive retirement plan increased from $70.2
million at December 31, 2010, to $87.5 million at December 31, 2011. Primarily influencing this increase are
actuarial gains and losses arising from factors that include a decrease in the discount rate and expected to actual
demographic changes, such as retirement age, mortality, turnover, rate of compensation increases and actual
return on plan assets being less than the expected return. The increases were offset by a net decrease of $38.8
million due to the December 31, 2011 amendment to the Pooling Arrangement discussed below.
The benefit obligation on the postretirement medical plan (“retiree healthcare plan”) decreased from $116.7
million at December 31, 2010 to $25.3 million at December 31, 2011. The following factors impacted the decline
in this obligation: (1) the retiree healthcare plan was amended as of November 4, 2011 to eliminate retiree
healthcare coverage for substantially all current associates and reduced or eliminated retiree healthcare coverage
45
for certain retirees on this date, which decreased the obligation by $93.8 million; (2) the December 31, 2011
amendment to the Pooling Arrangement decreased the obligation by $13.5 million; and (3) offsetting these
decreases was a net actuarial loss adjustment on the end of year remeasurement relating to changes in discount
rate, demographic changes and expected to actual claims experience.
See Note 9, “Pension and Postretirement Benefit Plans,” to our consolidated financial statements included in
Item 8 of this Form 10-K for further disclosures regarding our benefit plans.
Deferred Income Taxes
Deferred income tax assets and liabilities represent the tax effect of the differences between the financial
statement carrying value of existing assets and liabilities and their respective tax bases. In accordance with the
FASB’s ASC Income Taxes Topic (“ASC 740”), we periodically evaluate our deferred tax assets, which requires
significant judgment, to determine if they are realizable based upon weighing all available evidence, both
positive and negative, including loss carryback potential, past operating results, existence of cumulative losses in
the most recent years, projected performance of the business, future taxable income, including the ability to
generate capital gains, and prudent and feasible tax planning strategies. In making such judgments, significant
weight is given to evidence that can be objectively verified. If, based on available information, it is more likely
than not that the deferred income tax asset will not be realized, then a valuation allowance must be established
with a corresponding charge to net income and/or other comprehensive income (loss).
During 2011, our deferred tax asset related to our net operating loss carryforward increased to $56.0 million
at December 31, 2011 compared to $4.0 million at December 31, 2010, due to the net loss incurred in 2011. The
2011 net loss was driven by the magnitude of record level of catastrophe storm losses we experienced in the
second quarter of 2011, which significantly exceeded our projections. We considered both positive and negative
evidence and concluded a valuation allowance should be established. A valuation allowance of $91.2 million was
held at December 31, 2011, with a corresponding charge to total tax expense for the year ended December 31,
2011. The $0.5 million of deferred income tax asset remaining after recognition of the valuation allowance
represents a deferred tax asset on the gross unrealized fixed maturity losses where we have concluded this
portion of the asset to be realizable due to our assertion that we have both the ability and intent to hold these
securities through recovery or maturity.
The following table sets forth the components of our federal income tax expense for the year ended
December 31, 2011:
($ millions)
Loss before federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current tax benefit
Deferred tax benefit
$(109.3)
(7.0)
(46.7)
Federal income tax benefit prior to valuation allowance . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(53.7)
91.2
37.5
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(146.8)
In future periods we will re-assess our judgments and assumptions regarding the realization of our net
deferred tax assets, but until such time as the positive evidence exceeds the negative evidence we will maintain a
valuation allowance against our net deferred tax assets. Until that time, as we report net earnings and generate
taxable income, we do not expect our consolidated statements of income to reflect any federal income tax
expense as we utilize our net operating loss carryforward and release a corresponding amount of the net deferred
46
tax asset valuation allowance, unless we are in an “exception” position as described by the intraperiod allocation
guidance included in ASC 740. ASC 740 requires all sources of other income, including other comprehensive
income, to be considered when there is an expected loss from continuing operations for purposes of determining
the amount of tax benefit that results from a loss from continuing operations and that should be allocated to
continuing operations when assessing the ability to realize deferred tax assets. Alternatively, any reported losses
will add to our net operating loss carryforward position and be reserved against by adding to the net deferred tax
asset valuation allowance. See Note 8, “Federal Income Taxes,” to our consolidated financial statements included
in Item 8 of this Form 10-K for further disclosures regarding our income tax matters.
Other
Other items that could have a significant
impact on the financial statements include the risks and
uncertainties listed in Item 1A of this Form 10-K under “Risk Factors.” Actual results could differ materially
using different estimates and assumptions, or if conditions are significantly different in the future.
POOLING ARRANGEMENT
The STFC Pooled Companies and the Mutual Pooled Companies participate in a quota share reinsurance
pooling arrangement referred to as the “Pooling Arrangement.” Under the Pooling Arrangement, State Auto
Mutual assumes premiums, losses and expenses from each of the Pooled Companies and in turn cedes to each of
the Pooled Companies a specified portion of premiums, losses and expenses based on each of the Pooled
Companies’ respective pooling percentages. State Auto Mutual then retains the balance of the pooled business.
In 2011, we made two changes to the Pooling Arrangement. First as of January 1, 2011, we added the
Rockhill Insurers to the pool each with a participation percentage of 0.0% (the “January 1, 2011 pooling
change”). In conjunction with the January 1, 2011 pooling change, the STFC Pooled Companies received $149.8
million ($69.1 million in cash and $80.7 million in investment securities) from the Rockhill Insurers for net
insurance liabilities transferred on January 1, 2011. The following table sets forth the impact on our balance sheet
at January 1, 2011:
($ millions)
(Decrease) /Increase
Losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$124.1
34.1
(0.1)
8.3
Net cash and investment securities received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$149.8
47
Second, at the close of business on December 31, 2011, the Pooling Arrangement was amended to reduce
the overall participation percentage of the STFC Pooled Companies from 80% to 65% and to include the pooling
of applicable balance sheet accounts such as accumulated other comprehensive income related to employee
benefit plans (the “December 31, 2011 pooling change”). In conjunction with the December 31, 2011 pooling
change, the STFC Pooled Companies paid $261.4 million in cash to the Mutual Pooled Companies subsequent to
year end for net liabilities transferred on December 31, 2011. The following table sets forth the impact on our
balance sheet at December 31, 2011:
($ millions)
(Decrease) /Increase
Losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(203.4)
(106.8)
(52.3)
22.1
59.1
(27.3)
7.4
Net cash to be paid (Due to affiliate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(261.4)
In 2010, we made the following changes to the Pooling Arrangement (the “2010 pooling changes”):
•
•
Added SA National to the pool with a participation percentage of 0.0%; and
Included voluntary assumed reinsurance from third parties unaffiliated with the Pooled Companies that
was assumed on or after January 1, 2009 by State Auto Mutual.
In conjunction with the 2010 pooling changes, the STFC Pooled Companies received $3.7 million in cash
from the Mutual Pooled Companies, for net insurance assets transferred on January 1, 2010. The following table
sets forth the impact on our balance sheet at January 1, 2010:
($ millions)
(Decrease) /Increase
Losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(4.0)
(1.4)
(0.6)
(0.2)
(9.5)
Net cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.7
State Auto Financial sold its nonstandard automobile insurance subsidiary, SA National, to a third party on
December 31, 2010. Concurrent with this sale, SA National’s participation in the Pooling Arrangement was
terminated, and we entered into a loss portfolio transfer and a 100% quota share reinsurance agreement on
December 31, 2010 to assume liability for the pre- and post-closing book of business of SA National, including
providing policy and claims service to SA National policyholders, until policies are renewed with the third party
purchaser on such purchaser’s systems during a transition period of up to six months following the effective date
of sale. The transition was completed as of June 30, 2011. However, we continue to service the policies that were
written by us through June 30, 2011. The business assumed by us is subject to the Pooling Arrangement.
48
The following table sets forth the participants and their participation percentages in the Pooling
Arrangement:
January 1,
2009 –
December 31,
2009
January 1,
2010 –
December 31,
2010
January 1,
2011 –
December 31,
2011
Close of
business
December 31,
2011
STFC Pooled Companies:
State Auto P&C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Milbank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Farmers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SA Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SA National . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total STFC Pooled Companies . . . . . . . . . . . . . . . . . . . . . .
State Auto Mutual Pooled Companies:
State Auto Mutual . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SA Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SA Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meridian Security . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Meridian Citizens Mutual
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beacon National
Patrons Mutual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litchfield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plaza . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Compensation . . . . . . . . . . . . . . . . . . . . . . .
Bloomington Compensation . . . . . . . . . . . . . . . . . . . .
Total State Auto Mutual Pooled Companies . . . . . . . . . . . .
59.0%
17.0
3.0
1.0
N/A
80.0
19.0
0.0
0.0
0.0
0.5
0.0
0.4
0.1
N/A
N/A
N/A
N/A
20.0
59.0%
17.0
3.0
1.0
0.0
80.0
19.0
0.0
0.0
0.0
0.5
0.0
0.4
0.1
N/A
N/A
N/A
N/A
20.0
59.0%
17.0
3.0
1.0
N/A
80.0
19.0
0.0
0.0
0.0
0.5
0.0
0.4
0.1
0.0
0.0
0.0
0.0
20.0
51.0%
14.0
0.0
0.0
N/A
65.0
34.0
0.0
0.0
0.0
0.5
0.0
0.4
0.1
0.0
0.0
0.0
0.0
35.0
We anticipate that the STFC Pooled Companies will maintain a 65% participation level in the Pooling
Arrangement for the foreseeable future. However, under applicable governance procedures, if the Pooling
Arrangement were to be amended, management would make recommendations to the Independent Committees
of the Board of Directors of both State Auto Mutual and STFC. The Independent Committees review and
evaluate such factors as they deem relevant and recommend any appropriate pooling change to the Board of
Directors of both State Auto Mutual and STFC subject to regulatory approval by each participant’s respective
domiciliary insurance department. The Pooling Arrangement is terminable by any of our Pooled Companies at
any time by any party by giving twelve months’ notice to the other parties and their respective domiciliary
insurance departments. None of our Pooled Companies currently intends to terminate the Pooling Arrangement.
Under the terms of the Pooling Arrangement, all subject premiums, incurred losses, loss expenses and other
underwriting expenses are prorated among our Pooled Companies on the basis of their participation in the pool.
By spreading the underwriting risk the Pooling Arrangement is designed to produce more uniform and stable
underwriting results for each of our Pooled Companies than any one company would experience individually.
This has the effect of providing each of our Pooled Companies with a similar mix of pooled property and
casualty insurance business on a net basis.
49
RESULTS OF OPERATIONS
Summary
The following table sets forth certain key performance indicators we use to monitor our operations for the
years ended December 31, 2011, 2010 and 2009:
($ millions, except per share data)
2011
2010
2009
GAAP Basis:
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt to capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss and LAE ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Catastrophe Loss and LAE points . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums written growth(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums earned growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SAP Basis:
Loss and LAE ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums written to surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,553.7
1,355.1
$ (146.8)
24.5
$ 758.3
851.8
$ 18.81
21.23
(18.2)
2.9
13.3
12.1
82.6
70.8
33.7
33.8
116.3
104.6
16.2%
7.9
(2.9)% 9.3
13.6%
6.9
3.6%
3.6
82.4
33.9
116.3
2.1
70.3
32.9
103.2
1.7
1,256.9
10.2
849.4
21.33
1.3
12.1
71.7
34.1
105.8
7.7
5.1
4.5
3.9
71.3
33.5
104.8
1.5
(1)
2011 includes (a) an increase of 2.6 points, related to the one-time $34.1 million transfer of unearned premiums by the Rockhill
Insurers in conjunction with the January 1, 2011 pooling change (b) a decrease of 8.1 points, related to the one-time $106.8 million
transfer of unearned premiums to the Mutual Pooled Companies in conjunction with the December 31, 2011 pooling change, and
(c) a decrease of 8.0 points, related to the one-time transfer of $106.3 million of unearned premiums on December 31, 2011 related
to our HO QS Reinsurance Arrangement. 2010 includes a decrease of 0.2 points, related to the one-time $1.4 million transfer of
unearned premiums to the Mutual Pooled Companies on January 1, 2010, in conjunction with the 2010 pooling changes.
2011 Summary
Our 2011 net loss was $146.8 million compared to net income of $24.5 million and net income of $10.2
million in the same 2010 and 2009 periods, respectively. Our 2011 net loss included a non-cash charge of $91.2
million related to a valuation allowance against our net deferred tax asset.
Our 2011 pre-tax loss was $109.3 million compared to pre-tax income of $24.5 million and pre-tax loss of
$12.8 million in the same 2010 and 2009 periods, respectively. Revenues increased to $1,553.7 million in 2011
from $1,355.1 million and $1,256.9 million in 2010 and 2009, respectively, while expenses increased to $1,663.0
in 2011 from $1,330.6 million and $1,269.7 million in 2010 and 2009, respectively.
The following highlights significant factors that impacted 2011 results as compared to 2010 and 2009:
•
Earned premiums in 2011 were $1,428.8 million compared to $1,257.2 million and $1,176.5 million in
2010 and 2009, respectively. This growth was driven by our specialty insurance segment, which is
consistent with our long term plan for product diversification, as well as the January 1, 2011 pooling
change which added the Rockhill Insurers to the pooling arrangement.
50
•
•
•
•
The 2011 results of our personal and business insurance segments were impacted by record level
weather-related catastrophe losses, primarily arising from a hurricane, tornadoes, and wind and hail
storms which impacted 32 of our operating states, including Hurricane Irene and devastating tornadoes
in Tuscaloosa, Alabama and Joplin, Missouri. Our 2011 results included catastrophe losses of $231.1
million (16.2 loss ratio points) compared to $99.0 million (7.9 loss ratio points) and $90.3 million (7.7
loss ratio points), respectively, in the same 2010 and 2009 periods.
Our non-catastrophe loss and ALAE for 2011 was $861.7 million (60.3 loss ratio points) compared to
$717.1 million (57.1 loss ratio points) and $678.2 million (57.6 loss ratio points) for the same 2010 and
2009 periods, respectively. Our 2011 losses were impacted by a higher level of non-catastrophe
weather related losses, a higher number of large bodily injury claims and increase in workers’
compensation reserves on certain life time disability claims.
Our retiree healthcare plan was amended in 2011 to change eligibility requirements for participation of
our employees and certain retirees in the retiree healthcare plan. This amendment resulted in a $14.9
million curtailment gain recognized in earnings in 2011 and a $93.8 million negative plan amendment
recognized in other comprehensive income.
Net realized gains on investments, excluding OTTI, were $44.7 million in 2011, compared to $15.1
million and $3.8 million in 2010 and 2009, respectively. The level of realized gains in 2011 was driven
by reducing our equity holdings to manage our risk parameters as well as selling select securities in
anticipation of the cash transfers in connection with the December 31, 2011 pooling change and HO
QS Arrangement.
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 and reward our employees.
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 acquisition costs, see
“Critical Accounting Policies—Deferred Acquisition Costs” section included in this Item 7.
All references to financial measures or components thereof in this discussion are calculated on a GAAP
basis, unless otherwise noted.
Certain information in this Item 7 as to our net written premiums is presented in a manner which excludes
the one-time impacts of the 2010 pooling change, the January 1, 2011 pooling change and the December 31,
2011 pooling change (collectively, “2010/2011 pooling changes”). In addition, certain information in this Item 7
as to our losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable
(“loss and loss expenses payable”), is presented in a manner which includes or excludes, as to the applicable
balance sheet date, the one-time impacts of the January 1, 2011 pooling change and the December 31, 2011
pooling change. The presentations of net written premiums and loss and loss expenses payable in a manner which
include or exclude the impact of the 2010/2011 pooling changes are non-GAAP financial measures. We believe
that the presentations of net written premiums and loss and loss expenses payable in a manner which include or
exclude the impact of the 2010/2011 pooling changes enables investors to perform a meaningful comparison of
our current and historical net written premiums and loss and loss expenses payable. See the Net Written
Premiums Reconciliation Tables below on pages 53 and 54 for a presentation of the comparable GAAP net
written premiums and a reconciliation to the non-GAAP net written premiums. See our loss and loss expenses
payable table on page 65 for a presentation of the comparable GAAP loss and loss expenses payable and a
reconciliation to the non-GAAP loss and loss expenses payable.
51
SAP underwriting loss
and SAP combined
ratio . . . . . . . . . . . . .
($ millions)
Written premiums(2) . . .
Earned premiums . . . .
Losses and ALAE . . . .
ULAE . . . . . . . . . . . . .
Underwriting
SAP underwriting loss
and SAP combined
ratio . . . . . . . . . . . . .
($ millions)
Written premiums . . . .
Earned premiums . . . .
Losses and ALAE . . . .
ULAE . . . . . . . . . . . . .
Underwriting
The following tables set forth a summary of our insurance segments’ SAP underwriting loss and SAP
combined ratio for the years ended December 31, 2011, 2010 and 2009:
($ millions)
Written premiums(1) . . .
Earned premiums . . . .
Losses and ALAE . . . .
ULAE . . . . . . . . . . . . .
Underwriting
Personal
$647.4
800.6
648.0
50.9
%
Ratio
80.9
6.4
Business
$341.7
379.0
271.8
24.6
%
Ratio
71.7
6.5
2011
Specialty
$295.5
249.2
173.0
9.4
expenses(1) . . . . . . . .
169.1
26.1
153.5
44.9
113.4
%
Ratio
69.4
3.8
38.4
Total
$1,284.6
1,428.8
1,092.8
84.9
436.0
%
Ratio
76.5
5.9
33.9
$ (67.4)
113.4
$ (70.9) 123.1
$ (46.6)
111.6
$ (184.9)
116.3
Personal
$819.9
798.5
528.7
40.7
%
Ratio
66.2
5.1
Business
$377.3
383.5
240.5
20.2
%
Ratio
62.7
5.3
2010
Specialty
$126.3
75.2
46.9
6.2
%
Ratio
62.5
8.2
40.0
Total
$1,323.5
1,257.2
816.1
67.1
435.8
%
Ratio
65.0
5.3
32.9
expenses . . . . . . . . .
238.4
29.1
146.8
38.9
50.6
$ (9.3)
100.4
$ (24.0) 106.9
$ (28.5)
110.7
$ (61.8)
103.2
Personal
$775.1
732.8
511.4
43.4
%
Ratio
69.8
5.9
Business
$389.8
398.2
225.8
22.2
%
Ratio
56.7
5.6
2009
Specialty
$ 45.5
45.5
31.3
4.4
%
Ratio
68.9
9.8
35.0
Total
$1,210.4
1,176.5
768.5
70.0
405.9
%
Ratio
65.4
5.9
33.5
expenses . . . . . . . . .
237.5
30.6
152.4
39.1
16.0
SAP underwriting loss
and SAP combined
ratio . . . . . . . . . . . . .
(1)
Includes:
$ (59.5)
106.3
$ (2.2) 101.4
$ (6.2)
113.7
$ (67.9)
104.8
a.
b.
The one-time transfer of $34.1 million of unearned premiums by the Rockhill Insurers to our specialty insurance segment in
conjunction with the January 1, 2011 pooling change. In connection with this unearned premium transfer, we paid a one-time
ceding commission of $8.3 million to the Rockhill Insurers.
The one-time transfer of $106.8 million of unearned premiums by the STFC Pooled Companies to the Mutual Pooled Companies
in conjunction with the December 31, 2011 pooling change (transfer of $43.4 million, $35.6 million and $27.8 million,
52
respectively, of our personal insurance, business insurance and specialty insurance segments). In connection with this unearned
premium transfer, we recognized a one-time ceding commission of $27.3 million from the Mutual Pooled Companies ($9.1
million, $9.6 million and $8.6 million, respectively, to our personal insurance, business insurance and specialty insurance
segments).
The transfer in our personal insurance segment of $106.3 million of unearned premiums on December 31, 2011 related to our HO
QS Reinsurance Arrangement, for which we recognized ceding commission of $30.8 million.
c.
d. Combined, these transactions impacted our personal insurance, business insurance and specialty insurance segments’ statutory
expense ratio by (0.1) points, 1.7 points and (0.9) points, respectively, and increased the total expense ratio by 0.7 points. See
previous discussion regarding differences between GAAP and SAP.
(2)
Includes the one-time transfer of $1.4 million of unearned premiums to the Mutual Pooled Companies on January 1, 2010, in conjunction
with the 2010 pooling changes (transfer of $2.1 million of our personal insurance segment and receipt of $0.7 million for the Mutual
Pooled Companies’ business insurance segment).
Revenue
We measure our top-line growth for our insurance segments based on net written premiums, which provide
us with an indication of how well we are doing in terms of revenue growth before it is actually earned. Our
policies provide a fixed amount of coverage for a stated period of time, often referred to as the policy term. As
such, our written premiums are recognized as earned ratably over the policy term. Unearned premiums are
reflected on our balance sheet as a liability and represent our obligation to provide coverage for the unexpired
term of the policy.
The following table sets forth the reconciliation of the one-time impacts on net written premiums for the
year ended December 31, 2011, of the unearned premiums transferred to the STFC Pooled Companies by the
Rockhill Insurers on January 1, 2011, in conjunction with the January 1, 2011 pooling change, and the unearned
premiums transferred by the STFC Pooled Companies to the Mutual Pooled Companies in conjunction with the
December 31, 2011 pooling change on December 31, 2011:
($ millions)
Net Written Premiums Reconciliation Table
2011
Net
Written
Premiums
January 1,
2011
Pooling
Change
Impact
December 31,
2011
Pooling
Change
Impact
Excluding
Pooling
Changes
Personal insurance segment:
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 452.1
163.5
31.8
Total personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
647.4
Business insurance segment:
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84.5
98.2
83.0
56.7
19.3
Total business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
341.7
Specialty insurance segment:
RED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rockhill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workers’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total specialty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128.4
91.7
75.4
295.5
Total net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,284.6
—
—
—
—
—
—
—
—
—
—
—
24.3
9.8
34.1
34.1
(32.4)
(7.8)
(3.2)
(43.4)
(8.5)
(10.3)
(8.9)
(5.9)
(2.0)
(35.6)
(13.2)
(8.3)
(6.3)
(27.8)
484.5
171.3
35.0
690.8
93.0
108.5
91.9
62.6
21.3
377.3
141.6
75.7
71.9
289.2
(106.8)
1,357.3
53
The following table sets forth the reconciliation of the one-time impact on net written premiums for the year
ended December 31, 2010, of the unearned premiums transferred to the Mutual Pooled Companies on January 1,
2010, in conjunction with the 2010 pooling changes:
($ millions)
Net Written Premiums
Reconciliation Table
2010
Net
Written
Premiums
2010
Pooling
Change
Impact
Excluding
Pooling
Change
Personal insurance segment:
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 517.1
(2.1)
268.8 —
34.0 —
819.9
(2.1)
Business insurance segment:
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial
Total business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty insurance segment:
RED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rockhill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workers’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total specialty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95.4 —
98.4 —
95.3 —
66.1 —
22.1 —
377.3 —
83.9
0.7
3.5 —
38.9 —
126.3
0.7
125.6
$1,323.5
(1.4)
1,324.9
519.2
268.8
34.0
822.0
95.4
98.4
95.3
66.1
22.1
377.3
83.2
3.5
38.9
Personal Insurance Segment
Net written premiums for our personal insurance segment represented 50%, 62% and 64% of our total
consolidated net written premiums in 2011, 2010 and 2009, respectively. Excluding the one-time impacts of the
2010/2011 pooling changes, net written premiums for our personal insurance segment represented 51%, 62% and
64% of our total consolidated net written premiums in 2011, 2010 and 2009, respectively. The $106.3 million of
unearned premium transferred under the HO QS Arrangement at December 31, 2011, represented 8.0 points of
the total 11.0 point decline from 2010.
The following table sets forth a summary of net written premiums by major product line of business for our
personal insurance segment for the years ended December 31, 2011, 2010 and 2009, excluding the one-time
impacts of the 2010/2011 pooling changes (see Net Written Premiums Reconciliation Tables above).
($ millions)
Personal Insurance Segment:
2011
2010
2009
Net Written Premiums
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total personal
$484.5
171.3
35.0
$690.8
519.2
268.8
34.0
822.0
498.1
245.2
31.8
775.1
54
The following table sets forth a summary of SAP loss and ALAE ratios by major product line of business
for our personal insurance segment with the catastrophe and non-catastrophe impact shown separately for the
years ended December 31, 2011, 2010 and 2009:
($ millions)
Statutory Loss and LAE Ratios
Earned
Premium
Cat Loss
&
ALAE
Non-Cat
Loss &
ALAE
Statutory
Loss &
LAE
Cat
loss
Ratio
Non-Cat
loss
Ratio
Total Loss
and LAE
Ratio
2011
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal . . . . . . . . . . . . . . . . . . . . . . . . . .
Total personal . . . . . . . . . . . . . . . . . . . . . .
ULAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$492.6
272.7
35.3
$800.6
—
$ 16.9
154.4
7.6
$178.9
—
$312.9
139.4
16.8
$469.1
—
$329.8
293.8
24.4
3.4
56.7
21.4
$648.0
22.3
50.9 —
Total Loss and LAE . . . . . . . . . . . . . . . . . . . . . .
$800.6
$178.9
$469.1
$698.9
22.3
2010
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal . . . . . . . . . . . . . . . . . . . . . . . . . .
Total personal . . . . . . . . . . . . . . . . . . . . . .
ULAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$508.1
257.3
33.1
$798.5
—
$
6.6
62.6
4.8
$ 74.0
—
$308.1
133.5
13.1
$454.7
—
$314.7
196.1
17.9
1.3
24.3
15.0
$528.7
9.3
40.7 —
Total Loss and LAE . . . . . . . . . . . . . . . . . . . . . .
$798.5
$ 74.0
$454.7
$569.4
9.3
2009
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal . . . . . . . . . . . . . . . . . . . . . . . . . .
Total personal . . . . . . . . . . . . . . . . . . . . . .
ULAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$471.9
230.0
30.9
$732.8
—
$
4.8
64.9
2.6
$ 72.3
—
$295.2
133.9
10.0
$439.1
—
$300.0
198.8
12.6
1.0
28.3
8.4
$511.4
9.9
43.4 —
Total Loss and LAE . . . . . . . . . . . . . . . . . . . . . .
$732.8
$ 72.3
$439.1
$554.8
9.9
63.6
51.0
47.9
58.6
—
58.6
60.6
51.9
39.0
56.9
—
56.9
62.6
58.2
32.4
59.9
—
59.9
67.0
107.7
69.3
80.9
6.4
87.3
61.9
76.2
54.0
66.2
5.1
71.3
63.6
86.5
40.8
69.8
5.9
75.7
Personal auto net written premiums for the year ended December 31, 2011 decreased 12.6% compared to the
same 2010 period. Excluding the one-time impacts of the 2010/2011 pooling changes, personal auto net written
premiums for the year ended December 31, 2011 decreased 6.7% compared to the same 2010 period. The loss of
premiums was primarily impacted by the sale of our nonstandard automobile insurance subsidiary in 2010. While
we are experiencing a decline in premiums in our personal auto business, we continue to grow premiums in several
states consistent with our strategy to expand our geographic footprint outside the Midwest. Much of this premium
growth is from the states of Texas, Colorado, Connecticut and Georgia. In addition, we have had continued personal
auto growth in underserved Midwest states, such as Illinois and Michigan, during 2011. While the personal auto
quote activity continues to be strong, we are experiencing a slowdown in new business and a lower issue-to-quote
ratio which we believe is attributable to the impact of our rate increases. We also have a high percentage of auto
policies for which we write the companion home policy. Consequently, we believe the aggressive actions we have
been implementing to address profit levels in homeowners are impacting the entire account and causing the loss of
some auto policies, which is also contributing to the slowdown of new business.
The personal auto SAP non-cat loss ratios for the year ended December 31, 2011 increased 3.0 points
compared to the same 2010 period. In 2011, our personal auto line of business was impacted by increases in
liability claim frequency, including an increase in the number of large losses. The personal auto SAP non-cat loss
ratio for the year ended December 31, 2010 improved 2.0 points compared to the same 2009 period, primarily
due to rate increases.
55
Homeowners net written premiums for the year ended December 31, 2011 decreased 39.2% compared to the
same 2010 period. Excluding the one-time impacts of the 2010/2011 pooling changes, homeowners net written
premiums for the year ended December 31, 2011 decreased 36.3% compared to the same 2010 period. As of
December 31, 2011, the State Auto Group entered into the HO QS Arrangement, which is a three-year quota
share reinsurance agreement covering our homeowners line of business. Under the HO QS Arrangement, the
State Auto Group ceded 75% of its unearned premiums in force (or $106.3 million for the STFC Pooled
Companies) to the reinsurers, which impacted our net written premiums by the same amount at December 31,
2011. The HO QS Arrangement accounted for the decline in net written premiums when compared to the same
2010 period. We believe the HO QS Arrangement reduces risk and volatility in this line of business, improves
our capital position by reducing leverage, increases our statutory surplus for our insurance subsidiaries and
provides us with additional catastrophe protection. See “Liquidity and Capital Resources – Reinsurance
Arrangements” section included in this Item 7. As planned, we have seen declines in our policy counts from our
core states of Ohio, Kentucky, and Indiana. However, we have seen policy count growth in states that we have
either expanded into or identified as profitable growth opportunities.
The homeowners SAP non-cat loss ratio for the year ended December 31, 2011 was flat when compared to
the same 2010 period. We continue to aggressively address our rate needs in the homeowners line of business
and have filed rate increases in the high single to low double digit range. Our 2010 homeowners SAP non-cat
loss ratio improved 6.3 points relative to 2009, benefitting from rate actions and implementation of mandatory
wind and hail deductibles in many of our operating states prone to non-cat weather related losses. The 2009
non-cat homeowners loss ratio also included 3.2 points due to the settlement of one threatened class action
lawsuit.
We continue to implement strategies to improve our homeowner results. As of December 31, 2011, our
CustomFitSM homeowners product, which uses by-peril rating, had been deployed in 16 states. We have placed a
priority of introducing our CustomFit homeowners product in states which have historically experienced adverse
catastrophe experience. States in which CustomFit homeowners is currently offered represent approximately
75% of our homeowners premium and account for 82% of our five year wind/hail losses.
In addition to rate increases and the continued deployment of our CustomFit homeowners product, we are
aggressively evaluating and monitoring unprofitable agencies, which includes the review of an agency’s existing
policies, implementation of tighter new business and renewal guidelines for that agency, and/or the application of
other loss mitigation tools for use by that agency, all with the purpose of improving operating results at the
agency level. We are continuing with a proactive insurance to value program, which is designed to have our
insureds maintain an amount of coverage sufficient to replace their home and contents in the case of a total loss
consistent with our loss settlement provisions. In addition, we have implemented mandatory wind and hail
deductibles in all targeted states. We will continue to monitor to determine if this loss mitigation tool is necessary
in additional states.
We continue to execute various initiatives implemented prior to 2011 within our property claims operations,
which we believe will improve our loss ratio results. For example, our dependence on outside appraisers has
declined by deploying in-house property adjusters working from their homes. In addition, virtually all large
property claims and a significant percentage of catastrophe claims are now being handled in-house by State Auto
adjusters. These changes are intended to improve service and reduce expenses, which we believe improve loss
ratio results.
The personal insurance segment’s catastrophe losses for 2011 were $178.9 million (22.3 loss ratio points) as
compared to $74.0 million (9.3 loss ratio points) for 2010 and $72.3 million (9.9 loss ratio points) for 2009. For
the year ended December 31, 2011, our catastrophe losses included losses arising from Hurricane Irene and the
tornadoes in Tuscaloosa, Alabama and Joplin, Missouri, as well as other tornadoes and wind and hail storms.
Over half of the losses generated from catastrophes were concentrated in six states: Tennessee, Ohio, Missouri,
Texas, North Carolina and Alabama. The severity of these storm losses was the highest in our history. During
56
2010, we were impacted by losses from 30 of the 33 storms that were classified as numbered catastrophes by
PCS, including a series of spring storms with wind and hail in northern Ohio and a rash of floods in the
Nashville, Tennessee area, both which affected our auto physical damage results in both personal and business
insurance auto lines. In 2009, we were impacted by losses from 27 of the 28 storms that were classified as
numbered catastrophes by PCS. The losses from these catastrophes have had a significant impact on both our
personal and business insurance property lines.
During 2010 and 2009, members of the State Auto Group maintained a property catastrophe net aggregate
excess of loss reinsurance agreement (the “CAT Aggregate Agreement”). See the “Liquidity and Capital
Resources – Reinsurance Arrangements” section included in this Item 7 for a further discussion of the CAT
Aggregate Agreement.
Business Insurance Segment
In our business insurance segment, our accounts are primarily small-to-medium sized exposures where we
offer a broad range of both property and liability coverage. Net written premiums for our business insurance
segment represented 27%, 29% and 32% of our total consolidated net written premiums for 2011, 2010 and
2009, respectively. Excluding the one-time impacts of the 2010/2011 pooling changes, net written premiums for
our business insurance segment represented 28%, 28% and 32% of our total consolidated net written premiums
for 2011, 2010 and 2009, respectively.
The following table sets forth a summary of net written premiums by major product line of business for our
business insurance segment for the years ended December 31, 2011, 2010 and 2009, excluding the one-time
impacts of the 2010/2011 pooling changes (see Net Written Premiums Reconciliation Tables above).
($ millions)
Business Insurance Segment:
2011
2010
2009
Net Written Premiums
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 93.0
108.5
91.9
62.6
21.3
95.4
98.4
95.3
66.1
22.1
Total business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$377.3
377.3
100.3
94.5
99.3
72.4
23.3
389.8
57
The following table sets forth a summary of SAP loss and ALAE ratios by major product line of business
for our business insurance segment with the catastrophe and non-catastrophe impact shown separately for the
years ended December 31, 2011, 2010 and 2009:
Earned
Premium
Cat Loss
&
ALAE
Non-Cat
Loss &
ALAE
Statutory
Loss &
LAE
Cat
loss
Ratio
Non-Cat
loss
Ratio
Total Loss
and LAE
Ratio
($ millions)
Statutory Loss and LAE Ratios
2011
Business insurance segment:
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril . . . . . . . . . . . . . . . . . . .
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other commercial
Total business . . . . . . . . . . . . . . . . . . . . . .
ULAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 94.0
104.1
93.8
65.4
21.7
$379.0
—
Total Loss and LAE . . . . . . . . . . . . . . . . . . . . . .
$379.0
2010
Business insurance segment:
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril . . . . . . . . . . . . . . . . . . .
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other commercial
Total business . . . . . . . . . . . . . . . . . . . . . .
ULAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 98.6
95.6
97.7
69.0
22.6
$383.5
—
Total Loss and LAE . . . . . . . . . . . . . . . . . . . . . .
$383.5
2009
Business insurance segment:
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril . . . . . . . . . . . . . . . . . . .
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other commercial
Total business . . . . . . . . . . . . . . . . . . . . . .
ULAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$106.2
95.2
97.6
74.8
24.4
$398.2
—
Total Loss and LAE . . . . . . . . . . . . . . . . . . . . . .
$398.2
$ 2.7
21.6
26.7
—
0.6
$51.6
—
$51.6
$ 1.5
7.4
15.6
—
0.5
$25.0
—
$25.0
$ 0.5
5.1
12.2
—
0.2
$18.0
—
$18.0
$ 56.4
52.1
51.1
53.8
6.8
$220.2
—
2.8
$ 59.1
20.7
73.7
77.8
28.5
53.8 —
2.8
7.4
$271.8
13.6
24.6 —
$220.2
$296.4
13.6
$ 55.8
46.5
51.0
54.0
8.2
$215.5
—
1.5
$ 57.3
7.7
53.9
66.6
16.0
54.0 —
2.3
8.7
$240.5
6.5
20.2 —
$215.5
$260.7
6.5
$ 54.0
46.3
54.6
44.5
8.4
$207.8
—
0.5
$ 54.5
5.4
51.4
66.8
12.5
44.5 —
0.8
8.6
$225.8
4.5
22.2 —
$207.8
$248.0
4.5
60.1
50.0
54.4
82.2
31.2
58.1
—
58.1
56.6
48.6
52.1
78.4
35.7
56.2
—
56.2
50.8
48.7
55.9
59.5
34.4
52.2
—
52.2
62.9
70.7
82.9
82.2
34.0
71.7
6.5
78.2
58.1
56.3
68.1
78.4
38.0
62.7
5.3
68.0
51.3
54.1
68.4
59.5
35.2
56.7
5.6
62.3
Net written premiums for the business insurance segment for the year ended December 31, 2011 decreased
by 9.4%, when compared to the same 2010 period. Excluding the one-time impacts of the 2010/2011 pooling
changes, net written premiums for the business insurance segment for the year ended December 31, 2011 were
flat when compared to the same 2010 period. Business insurance continues to be impacted by rate competition,
general economic conditions, and depressed premium bases, such as payrolls, sales and number of vehicles, as
well as ease of doing business. After strengthening our premium per exposure on our renewal policies in the
second half of 2009, our premium per exposure decreased slightly in 2010 and was flat through 2011. Despite
new business growth, we believe it will be difficult to generate measurable premium growth in our current book
of business given the continued impact of the economy on premium bases. However, we are seeking to balance
our traditional underwriting discipline with new products, improved automation and pricing tools that support the
production of profitable new business.
58
In 2011, we began introducing policy download capabilities for most business insurance lines, which allows
agents to import policy information directly into their agency management systems to better serve their
customers. Commercial auto and business owners policies can now be downloaded to our agents, while other
commercial package policies should be available in 2012. Workers’ compensation policies in our specialty
insurance segment can also be downloaded.
We have also expanded the eligibility of our businessowners products to facilitate businesses with greater
liability exposures, such as artisan contractors, auto service garages, manufacturers and restaurants. While we
regularly insure these types of businesses through other insurance products, offering these products in our
businessowners program leverages our bizXpressSM technology, simplifies the agent rating and submission
processes, and allows us to offer broader base coverages for these types of risks. In 2010, we completed the
implementation of our enhanced businessowners product, BOP Choice, which has been introduced in 30 states.
The majority of our new business premium has been generated from this new product, which is included in our
commercial multi-peril line. Our product revisions have also produced a greater proportion of casualty business,
which we believe is desirable given our Midwest property concentrations.
The overall non-cat loss ratio for the year ended December 31, 2011 increased 1.9 points compared to the
same 2010 period. This increase was due primarily to an increase in weather-related losses in the fire & allied
lines and an increase in the number of large losses in the commercial auto and other & product liability lines. The
increase in the number of large losses was primarily driven by a more active claims process whereby the ultimate
liability was recognized earlier in the case reserving process. As these processes continue to mature, we expect
more normalized levels going forward.
Intense competition in the business insurance segment continues to impact our ability to implement price
increases. However, we continue to use modeled pricing in all standard lines of business to more accurately price
individual accounts. In addition, new deductible guidelines have been introduced to require higher, wind only
deductibles on risks that have multiple buildings at a single location susceptible to identified wind zones.
The overall non-cat loss ratio for the year ended December 31, 2010 increased 4.0 points compared to the
same 2009 period. The commercial auto non-cat loss ratio increased 5.8 points primarily due to an increase in the
number of large losses which impacted both the current and prior accident years. The other & product liability
non-cat loss ratio increased by 18.9 points primarily due to an increase in large losses from prior accident years.
Similar to the personal insurance segment, we believe that the continued implementation of the pre-2011
initiatives within our claims operations will improve our business insurance loss ratio, particularly in fire and
commercial multi-peril.
The business insurance segment’s catastrophe losses for 2011 totaled $51.6 million (13.6 loss ratio points)
compared to $25.0 million (6.5 loss ratio points) for 2010 and $18.0 million (4.5 loss ratio points) for 2009. See
“Personal Insurance Segment” section above for a discussion on the catastrophes that impacted both our personal
and business insurance property lines.
In 2011, we embarked on a new commercial lines project what we call the “Business Insurance Evolution”
to enhance our rating and pricing models and business rules and to improve work processes. We believe both
improved underwriting results and lower expenses will result from this project.
Specialty Insurance Segment
In our specialty insurance segment, we offer commercial coverages that require specialized product
underwriting, claims handling or risk management services through a distribution channel of retail agents and
wholesale brokers, which may include program administrators and other specialty sources. Net written premiums
for our specialty insurance segment represented 23%, 10% and 4% of our total consolidated net written
59
premiums for 2011, 2010 and 2009, respectively. Excluding the one-time impacts of the 2010/2011 pooling
changes, net written premiums for our specialty insurance segment represented 21%, 9%, and 4% of our total
consolidated net written premiums for 2011, 2010 and 2009, respectively.
The following table sets forth a summary of net written premiums by unit for our specialty insurance
segment for the years ended December 31, 2011, 2010 and 2009, excluding the one-time impacts of the
2010/2011 pooling changes (see Net Written Premiums Reconciliation Tables above), and for the year ended
December 31, 2010, on a pro forma basis which assumes that the Rockhill Insurers’ business had been included
in the Pooling Arrangement as of January 1, 2010.
($ millions)
Specialty Insurance Segment:
2011
2010
Pro Forma
2010
2009
Net Written Premiums
RED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rockhill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workers’ compensation . . . . . . . . . . . . . . . . . . . . . . .
$141.6
75.7
71.9
83.2
3.5
38.9
83.2
51.9
62.1
Total specialty . . . . . . . . . . . . . . . . . . . . . . . . . . .
$289.2
125.6
197.2
—
2.2
43.3
45.5
Net written premiums for the specialty insurance segment for the year ended December 31, 2011 increased
$169.2 million compared to the same 2010 period. Excluding the one-time impacts of the 2010/2011 pooling
changes, net written premiums for the specialty insurance segment for the year ended December 31, 2011
increased $163.6 million compared to the same 2010 period. The increase in net written premiums for the
specialty insurance segment was principally driven by the addition of the Rockhill Insurers’ business to the
Pooling Arrangement and increased business written through our RED unit.
Net written premiums for our RED unit for the year ended December 31, 2011 increased $44.5 million
compared to the same 2010 period. Excluding the one-time impacts of the 2010/2011 pooling changes, net
written premiums for our RED unit for the year ended December 31, 2011 increased $58.4 million compared to
the same 2010 period. This business was new to us in 2010, as the underwriting management agreement with
RED went into effect during the fourth quarter 2009. Commercial auto coverage primarily contributed to this
growth.
Net written premiums for our Rockhill unit for the year ended December 31, 2011 increased $88.2 million
compared to the same 2010 period. The premium growth in our Rockhill unit was primarily due to the addition of
the Rockhill Insurers’ business into the Pooling Arrangement in 2011. There was a $23.8 million increase when
comparing net written premiums for our Rockhill unit for the year ended December 31, 2011, excluding the
one-time impacts of the 2010/2011 pooling changes, to net written premiums on a pro forma basis for the year
ended December 31, 2010. The increase was impacted by the following.
•
•
•
Increased business opportunities resulting from the Rockhill Insurers’ A.M. Best rating upgrade from
A- to A in 2011.
Increased property business opportunities through our excess and surplus channel for catastrophe
exposed businesses due to recent global catastrophe events and recent industry catastrophe model
changes. This business is written on a nonadmitted basis, which allows us to underwrite unique
insurance requirements using customized rates and forms, and is subject to an individual catastrophe
treaty with a net retention of $7.5 million for each occurrence. See “Liquidity and Capital Resources –
Reinsurance Arrangements” section included in this Item 7.
Recent rate and volume growth in our excess and surplus liability casualty lines, which we believe is
attributable to early signs of stabilization in pricing in the commercial lines market, broker relationship
and marketing initiatives.
60
•
Recent changes in the structure of two liability lines and all other perils reinsurance programs, which
resulted in our retaining additional written premium of $11.7 million for the year ended December 31,
2011. See “Liquidity and Capital Resources – Reinsurance Arrangements” section included in this
Item 7.
Net written premiums for our workers’ compensation unit for the year ended December 31, 2011 increased
$36.5 million compared to the same 2010 period. The net written premium growth in the workers’ compensation
unit was primarily due to the addition of the Rockhill Insurers’ business into the Pooling Arrangement in 2011.
There was a $9.8 million increase when comparing net written premiums for our workers’ compensation unit for
the year ended December 31, 2011, excluding the one-time impacts of the 2010/2011 pooling changes, to net
written premiums on a pro forma basis for the year ended December 31, 2010. The premium growth in our
workers’ compensation unit was driven by increased renewal retention and rate increases in our larger accounts,
which we believe is an indication that pricing levels within this line of business are improving.
The following table sets forth a summary of SAP loss and LAE ratios for our specialty insurance segment
with the catastrophe and non-catastrophe impact shown separately for the years ended December 31, 2011, 2010
and 2009:
($ millions)
Statutory Loss and LAE Ratios
Specialty insurance segment:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ULAE
Total Loss and LAE
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ULAE
Total Loss and LAE
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ULAE
Total Loss and LAE
Earned
Premium
Cat Loss
&
ALAE
Non-Cat
Loss &
ALAE
Statutory
Loss &
LAE
Cat
loss
Ratio
Non-Cat
loss
Ratio
Total Loss
and LAE
Ratio
$249.2
—
$249.2
$ 75.2
—
$ 75.2
$ 45.5
—
$ 45.5
$ 0.6
—
$ 0.6
$172.4
—
$173.0
0.2
9.4 —
$172.4
$182.4
0.2
— $ 46.9
—
—
$ 46.9 —
6.2 —
— $ 46.9
$ 53.1 —
— $ 31.3
—
—
$ 31.3 —
4.4 —
— $ 31.3
$ 35.7 —
69.2
—
69.2
62.5
—
62.5
68.9
—
68.9
69.4
3.8
73.2
62.5
8.2
70.6
68.9
9.8
78.5
In the specialty insurance segment, the total SAP non-cat loss ratio for year ended December 31, 2011
increased 6.7 points from the same 2010 period. The increase was primarily driven by an increase in reserves of
$5.4 million in certain life time disability claims in the workers’ compensation line of business, nearly all of
which are from 2009 and prior years, with approximately 65% from accident years 2006 and prior, as well as
higher levels of large losses in the commercial auto line of business.
61
Loss and LAE Development
Losses and loss expenses for a calendar year represent the combined estimated ultimate liability for claims
occurring in the current calendar year along with any change in estimated ultimate liability for claims occurring
in prior years. The following table sets forth the provision for losses and loss expenses for those claims occurring
in the current and prior years, along with the GAAP loss and LAE ratio for the years ended December 31, 2011,
2010 and 2009:
($ millions)
Provision for losses and loss expenses
occurring:
%
GAAP Loss
and LAE
%
GAAP Loss
and LAE
2009
%
GAAP Loss
and LAE
2010
2011
Current year . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . .
$1,213.3
(33.3)
Total losses and loss expenses . . . . .
$1,180.0
84.9
(2.3)
82.6
$954.2
(64.6)
$889.6
75.9
(5.1)
70.8
$899.5
(56.2)
$843.3
76.5
(4.8)
71.7
As shown above, the 2011 loss and loss expenses attributable to prior years totaled a decrease of $33.3
million, or favorable development, in the estimated ultimate liability for prior years’ claims. The following table
sets forth a tabular presentation of the favorable development by accident year for the year ended December 31,
2011:
($ millions)
Accident Year
2001 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current Year
Development
of Ultimate Liability
Redundancy /(Deficiency)
$ 1.8
0.7
(0.2)
2.5
(2.3)
0.9
4.2
5.1
11.6
9.0
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33.3
While emergence by accident year includes normal fluctuations due to the uncertainty associated with loss
reserve development and claim settlement, the favorable development in 2011 came primarily from accident
years 2009 and 2010. The more notable items contributing to the 2011 favorable development were:
•
•
•
ULAE was $7.6 million lower than anticipated in the reserves at December 31, 2010.
Favorable catastrophe loss development of $4.3 million was primarily within our fire & allied lines,
other personal, personal auto and homeowners lines of business.
In the personal and business insurance segments,
the non-catastrophe loss and ALAE reserves
developed favorably by $28.1 million, primarily in the property lines. Homeowners, commercial multi-
peril and fire & allied lines reserves accounted for $14.2 million, $6.1 million and $4.9 million of the
in these lines was driven by
favorable development, respectively. The favorable development
emergence of lower than anticipated claim severity, primarily from accident year 2010 and, to a lesser
extent, the past five accident years in the commercial multi-peril line of business.
62
•
In the specialty segment, the non-catastrophe loss and ALAE reserves developed adversely by $6.7
million, which was driven by greater than anticipated large losses in the commercial auto line of
business and reserve increases on certain life time disability claims in the workers’ compensation line
of business.
As shown above, the 2010 loss and loss expenses attributable to prior years totaled a decrease of $64.6
million, or favorable development, in the estimated ultimate liability for prior years’ claims. The following table
sets forth a tabular presentation of the favorable development by accident year for the year ended December 31,
2010:
($ millions)
Accident Year
Current Year
Development
of Ultimate Liability
Redundancy /(Deficiency)
2000 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0.5)
(0.2)
0.7
0.1
2.2
1.4
5.7
2.0
13.0
40.2
$64.6
The favorable development in 2010 came primarily from accident year 2009. The more notable items
contributing to the 2010 favorable development were:
•
•
•
ULAE was $12.7 million lower than anticipated in the reserves at December 31, 2009, with
approximately 78% being attributable to the 2009 accident year.
Favorable catastrophe loss development of $3.3 million was primarily associated with the 2009
accident year. This development occurred primarily within our homeowners and commercial multi-
peril lines of business.
Favorable development in the auto liability, homeowners and fire & allied lines accounts for the
majority of the development in the non-catastrophe reserves, with the balance spread across multiple
lines of business. Standard, nonstandard and commercial auto liability reserves developed favorably by
$10.7 million. Homeowners and fire & allied reserves developed lower than anticipated by $10.4
million and $9.0 million, respectively. The favorable development in these lines of business was driven
by emergence of lower than anticipated claim severity, as well as lower than anticipated claim
frequency for fire & allied lines. The favorable development was primarily associated with the 2009
and, to a lesser extent, 2008 accident years.
63
In 2009, loss and loss expenses attributable to prior years totaled a decrease of $56.2 million, or favorable
development, in the estimated ultimate liability for prior years’ claims. The following table sets forth a tabular
presentation of the favorable development by accident year for the year ended December 31, 2009:
($ millions)
Accident Year
Current Year
Development
of Ultimate Liability
Redundancy /(Deficiency)
1999 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.8
(1.0)
(1.1)
0.6
1.4
3.6
(1.6)
8.0
3.1
42.4
$56.2
The favorable development in 2009 came primarily from accident year 2008. The more notable items
contributing to the 2009 favorable development were:
•
•
•
ULAE was $10.9 million lower than anticipated in the reserves at December 31, 2008, with
approximately 75% being attributable to the 2008 accident year.
Favorable catastrophe loss development of $10.9 million was primarily associated with the 2008
accident year. This development occurred primarily within our homeowners, fire & allied and
commercial multi-peril lines of business.
Non-catastrophe reserves for the auto liability lines and other & product liability developed lower than
anticipated. Standard, nonstandard and commercial auto liability reserves developed $9.5 million lower
than anticipated. This favorable
and other & product
development, which was primarily associated with the 2008 accident year, was driven by lower than
anticipated tabular loss severity, as well as lower than anticipated loss frequency for other & product
liability.
liability developed $8.3 million lower
See additional discussion regarding loss and loss expense reserves at the “Critical Accounting Policies –
Losses and Loss Expenses Payable” section included in this Item 7.
64
The following table sets forth loss and loss expenses payable by major line of business (i) at December 31,
2011 and 2010, (ii) at December 31, 2011, on a pro forma basis which assumes no impact from the December 31,
2011 pooling change (see footnote (1), below), and (iii) at December 31, 2010, on a pro forma basis which
assumes the January 1, 2011 pooling change had been effective as of December 31, 2010 (see footnote (2),
below):
($ millions)
December 31,
2011
December 31,
2011 Pooling
Change
impact
Pro Forma
December 31,
2011(1)
December 31,
2010
January 1,
2011
Pooling
Change
impact
Pro Forma
December 31,
2010(2)
Personal insurance segment:
Personal auto . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Other Personal
Total personal . . . . . . . . . . . .
Business insurance segment:
Commercial auto . . . . . . . . . . . . .
. . . . . . . .
Commercial multi-peril
Fire & allied lines . . . . . . . . . . . . .
Other & product liability . . . . . . .
Other commercial . . . . . . . . . . . . .
Total business . . . . . . . . . . . .
. . . .
Specialty insurance segment
Total losses and loss expenses
payable, net of reinsurance
recoverable on losses and loss
expenses payable . . . . . . . . . . .
$195.9
71.9
11.2
279.0
76.9
73.5
24.3
158.6
3.6
336.9
265.7
(45.2)
(16.6)
(2.5)
(64.3)
(17.8)
(16.9)
(5.6)
(36.6)
(0.8)
(77.7)
(61.4)
241.1
88.5
13.7
343.3
94.7
90.4
29.9
195.2
4.4
414.6
327.1
247.7
80.7
12.8
341.2
99.2
92.0
31.4
183.1
5.2
410.9
122.1
—
—
—
—
—
—
—
—
—
—
124.1
247.7
80.7
12.8
341.2
99.2
92.0
31.4
183.1
5.2
410.9
246.2
$881.6
(203.4)
1,085.0
874.2
124.1
998.3
(1)
(2)
The December 31, 2011 loss and loss expenses payable balance has been adjusted for comparative purposes to reflect the loss and loss
expenses payable prior to being ceded to the Mutual Pooled Companies due to the December 31, 2011 pooling change.
The December 31, 2010 loss and loss expenses payable balance has been adjusted for comparative purposes to reflect the loss and loss
expenses payable assumed from the Rockhill Insurers due to the January 1, 2011 pooling change.
The loss and loss expenses payable at December 31, 2011 increased $7.4 million from the loss and loss
expenses payable at December 31, 2010. There was an increase of $86.3 million when comparing the loss and
loss expenses payable at December 31, 2011, assuming no impact from the December 31, 2011 pooling change,
to the loss and loss expenses payable on a pro forma basis at December 31, 2010. This increase was primarily
due to growth in the specialty insurance segment, and reserve increases in the specialty insurance segment related
to large losses in the commercial auto line of business and certain life time disability claims in the workers’
compensation line of business. We conduct quarterly reviews of loss development reports and make judgments in
determining the reserves for ultimate losses and loss expenses payable. Several factors are considered by us when
estimating ultimate liabilities including consistency in relative case reserve adequacy, consistency in claims
settlement practices, recent legal developments, historical data, actuarial projections, accounting projections,
exposure changes, anticipated inflation, current business conditions, catastrophe developments, late reported
claims, and other reasonableness tests.
The risks and uncertainties inherent in our estimates include, but are not limited to, actual settlement
experience different from historical data, trends, changes in business and economic conditions, court decisions
creating unanticipated liabilities, ongoing interpretation of policy provisions by the courts, inconsistent decisions
in lawsuits regarding coverage and additional information discovered before settlement of claims. Our results of
operations and financial condition could be impacted, perhaps significantly, in the future if the ultimate payments
required to settle claims vary from the liability currently recorded.
65
Acquisition and Operating Expenses
Our GAAP expense ratio was 33.7% in 2011 compared to 33.8% and 34.1% in 2010 and 2009, respectively.
Investment Operations Segment
Our investment portfolio and the investment portfolios of other members of the State Auto Group are
managed by our subsidiary, Stateco. Stateco utilizes its own personnel to invest in fixed maturities and large-cap
equities and outside investment managers to invest in small-cap equities and international funds. The Investment
Committee (the “Committee”) of our Board of Directors establishes the investment policies to be followed by
Stateco. Our primary investment objectives are to maintain adequate liquidity and capital
to meet our
responsibilities to policyholders; grow long term economic surplus, thereby increasing our capital position;
provide a consistent level of income to support operations; and manage investment risk. Our current investment
strategy does not rely on the use of derivative financial instruments.
Our decision to make a specific investment is influenced primarily by the following factors: (a) investment
risks; (b) general market conditions; (c) relative valuations of investment vehicles; (d) general market interest
rates; (e) our liquidity requirements at any given time; and (f) our current federal income tax position and relative
spread between after tax yields on tax exempt and taxable fixed maturity investments.
We have investment policy guidelines with respect to purchasing fixed maturity investments for our
insurance subsidiaries which preclude investments in bonds that are rated below investment grade by a
recognized rating service. For the insurance subsidiaries, the maximum investment in any single note or bond is
limited to 5.0% or less of statutory assets, other than obligations of the U.S. government or government agencies,
for which there is no limit. Our fixed maturity portfolio is composed of high quality, investment grade issues,
comprised almost entirely of debt issues rated AAA or AA. At December 31, 2011, there were no fixed maturity
investments rated below investment grade in our available-for-sale investment portfolio.
Our internally managed equity portfolio invests in U.S. large-cap, dividend-paying companies across many
different industries selected based upon their potential for appreciation as well as ability to continue paying
dividends. This diversification across companies and industries reduces volatility in the value of the large-cap
equity portfolio. In addition, our investment policy guidelines limit the purchase of a specific stock to no more
than 2% of the market value of the stock at the time of purchase, and no single equity holding should exceed 5%
of the total equity portfolio.
Our externally managed equity portfolios invest in U.S. small-cap equities and international funds. These
managers are permitted to manage the portfolios according to their own respective portfolio objectives. In
selecting our outside investment managers we confirm that their portfolio objectives, including risk tolerance, are
acceptable to us. However, there may be slight differences in their objectives with respect to dividend payments
and other constraints that we apply to our large-cap equity holdings.
Diversifying our portfolio into small-cap equities and international equity funds was designed to achieve a
greater total return with reduced volatility. We believe that in most market cycles, diversification of the portfolio
will be beneficial to us, and we plan to continue to maintain a diversified portfolio.
At December 31, 2011, our investments in fixed maturities, equity securities and certain other invested
assets were held as available-for-sale and carried at fair value. The unrealized holding gains or losses, net of
applicable deferred taxes, are included as a separate component of stockholders’ equity as accumulated other
comprehensive income (loss) and as such are not included in the determination of net income (loss).
66
Composition of Investment Portfolio
The following table sets forth the composition of our investment portfolio at carrying value at December 31,
2011 and 2010:
($ millions)
Cash and cash equivalents . . . . . . . . . . . . . .
Fixed maturities, at fair value:
Fixed maturities . . . . . . . . . . . . . . . . . .
Treasury inflation-protected
securities . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . .
. . . . . . . . .
Notes receivable from affiliate(1)
Equity securities, at fair value:
Large-cap securities . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . .
Other invested assets, at fair value:
International instruments . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . .
Total other invested assets, at fair
value . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
Other invested assets, at cost
December 31,
2011
$ 356.0
1,674.5
260.4
1,934.9
70.0
122.1
45.2
167.3
52.6
4.6
57.2
0.5
% of
Total
13.8
64.8
10.1
74.9
2.7
4.7
1.7
6.4
2.0
0.2
2.2
0.0
December 31,
2010
$
88.3
1,705.2
195.5
1,900.7
70.0
211.1
45.1
256.2
75.3
4.4
79.7
0.5
% of
Total
3.7
71.2
8.2
79.4
2.9
8.8
1.9
10.7
3.1
0.2
3.3
0.0
Total portfolio . . . . . . . . . . . . . . . .
$2,585.9
100.0
$2,395.4
100.0
(1)
In May 2009, we entered into two separate Credit Agreements with State Auto Mutual. Under these Credit Agreements,
State Auto Mutual borrowed a total of $70.0 million from us on an unsecured basis. Interest is payable semi-annually at a
fixed annual interest rate of 7.00%. Principal is payable May 2019.
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by
contractual maturity at December 31, 2011:
($ millions)
Amortized
Cost
Fair
Value
Due in 1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies residential mortgage-backed securities . . .
$
41.3
360.1
520.6
504.5
390.8
41.7
375.8
562.9
544.3
410.2
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,817.3
1,934.9
Expected maturities may differ from contractual maturities as issuers may have the right to call or prepay
the obligations with or without call or prepayment penalties.
At December 31, 2011, our equity portfolio consisted of approximately 51 different large-cap stocks and 72
small-cap stocks. The largest single position was 2.9% of the equity portfolio based on fair value, and the top ten
positions accounted for 22.5% of the equity portfolio. At December 31, 2010, our equity portfolio consisted of
approximately 65 different large-cap stocks and 75 small-cap stocks. The largest single position was 2.7% of the
67
equity portfolio based on fair value and the top ten positions account for 20.8% of the equity portfolio. Since our
equity portfolio consists primarily of large-cap value-oriented stocks, with a small allocation to small-cap
equities, when large-cap stocks and/or value-oriented stocks perform well our equity portfolio typically performs
well compared to benchmarks. Conversely, when growth stocks outperform value and/or small- to mid-cap
stocks outperform large-cap stocks, our equity portfolio does not perform as well compared to benchmarks.
Market Risk
Our primary market risk exposures are to changes in market prices for equity securities and changes in
interest rates and credit ratings for fixed maturity securities. Our fixed maturity securities are subject to interest
rate risk whereby the value of the securities varies as market interest rates change. We manage this risk by
closely monitoring the duration of the fixed maturity portfolio. The duration of the fixed maturity portfolio was
approximately 3.71 and 5.01 as of December 31, 2011 and 2010, respectively. The following table sets forth our
interest rate risk and the effects of a parallel change in interest rates on the fair value of the available-for-sale
fixed maturity portfolio at December 31, 2011:
($ millions)
Fixed maturities:
Fair Value
-200 bps
Change
-100 bps
Change
Actual
+100 bps
Change
+200 bps
Change
U.S. treasury securities and obligations of U.S.
government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies residential mortgage-backed
$ 498.3
875.6
271.2
481.4
844.1
259.2
468.7
811.2
244.8
449.8
773.8
236.9
433.2
732.2
226.8
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
419.8
417.6
410.2
398.3
383.3
Balance as of December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . .
$2,064.9
2,002.3
1,934.9
1,858.8
1,775.5
This table summarizes only the effects that a parallel change in interest rates could have on the fixed
maturity portfolio. Changes in rates would also change the value of our liabilities and possibly other financial
assets. We caution the reader that this analysis does not take into account nonparallel changes in interest rates. It
is likely that some rates would increase or decrease more than others depending upon market conditions at the
time of the change. This nonparallel change would alter the value of the fixed maturity portfolio. The analysis is
also limited in that it does not take into account any actions that might be taken by us in response to these
changes. As a result, the actual impact of a change in interest rates and the resulting fixed maturity values may
differ significantly from what is shown in the table.
We believe that the fixed maturity portfolio’s exposure to credit risk is minimal as approximately 91.3% of
the bonds we own are rated AA or better. We do not intend to change our investment policy on the quality of our
fixed maturity investments. The fixed maturity portfolio is managed in a laddered-maturity style and considers
business mix and liability payout patterns to ensure adequate cash flow to meet claims as they are presented. We
also manage liquidity risk by maintaining sufficient cash balances, owning some agency and U.S. Treasury
securities at all times, purchasing bonds of major issuers, and purchasing bonds that are part of a medium or large
issue. The fixed maturity portfolio does not have any direct exposure to either exchange rate risk or commodity
risk. We do not rely on the use of derivative financial instruments. To provide us greater flexibility in order to
manage our market risk exposures, we categorize our fixed maturities as available-for-sale. We do not maintain a
trading portfolio.
We have no mortgage backed securities in our fixed maturity portfolio which may be labeled sub-prime
mortgage backed securities. We invest only in conventional mortgage backed securities issued by a federal
68
agency or that are U.S. Government guaranteed. Specifically, approximately $410.2 million or 19.0% of our
available-for-sale investment portfolio as of December 31, 2011, were in either Ginnie Mae pools, which are
guaranteed by the full faith and credit of the U.S. Government, or Fannie Mae or Freddie Mac pools. In 2008,
both Fannie Mae and Freddie Mac received additional U.S. Government backing when they were placed into
conservatorship.
Our fixed maturity investment portfolio at December 31, 2011 included obligations of states and political
subdivisions with a total carrying value of $811.2 million. $334.2 million of these securities, or 41.2% of our
municipal securities portfolio (“Muni Portfolio”), were enhanced by third party monoline insurers (a “Credit
Enhancement”) for the payment of principal and interest in the event of an issuer default. A Credit Enhancement
is not a primary consideration to us when purchasing a municipal security, as we consider the underlying credit
quality of the security as the primary rating factor in our evaluation process. Of the total $811.2 million of
municipal securities in our investment portfolio at December 31, 2011, 93.7% were rated AA or better, without
the benefit of a Credit Enhancement. We do not believe that a loss of a Credit Enhancement would have a
material adverse impact on our results of operations, financial position or liquidity, due to the underlying strength
of the issuers of the securities, as well as our ability and intent to hold the securities. In addition, as of
December 31, 2011, we had no direct investment in any guarantor including any bond insurer.
The following table sets forth the credit ratings of our municipal securities, excluding Credit Enhancements,
based on ratings by nationally recognized rating agencies at December 31, 2011:
Rating
($ millions)
AAA* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair
value
$240.3
520.1
43.7
7.1
$811.2
%
29.6
64.1
5.4
0.9
100.0
*
Our AAA rating category includes securities which have been either pre-funded or escrowed to maturity.
69
The following table sets forth the composition of the insurers providing Credit Enhancements, along with
the corresponding underlying credit rating of the issuer of the security, at December 31, 2011:
Monoline Insurer / Underlying Rating
($ millions)
Assured Guaranty Municipal Corp. (formerly FSA):
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AMBAC:
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FGIC:
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Public Finance Guarantee (formerly MBIA):
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XLCA:
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair
value
$ 18.1
130.6
10.6
6.5
165.8
9.8
55.9
15.2
80.9
4.0
0.3
4.3
8.0
66.6
5.6
0.7
80.9
2.3
Total municipal securities enhanced by third party monoline insurers . . . . . . . . . . . . . . . . . .
$334.2
We believe our Muni Portfolio is well diversified by issuer and state. We have 10.0% invested in securities
which have been either pre-refunded or escrowed to maturity bonds. Within the non pre-refunded and escrowed
to maturity portfolio, no single issuer comprises more than 5% of the portfolio and no more than 10% of the
portfolio is concentrated in any one state. We believe our Muni Portfolio is invested within the strongest sectors
of the municipal bond market. 31.3% of our municipal bonds are general obligation bonds or other tax-backed
bonds. The majority of the remaining Muni Portfolio consists of revenue bonds. Our credit research is an
important part of our investment management process, and we continually monitor all holdings for any signs of
deterioration. We believe that our municipal holdings will maintain their high credit quality and that the issuers
will be able to make all principal and interest payments as they come due.
In 2011, there continued to be a high level of call activity with respect to both our tax exempt and taxable
bonds due to the low interest rate environment. During 2010, the level of call activity in our fixed maturity
portfolio increased when compared to 2009. The proceeds from the call, maturity or sale of securities within our
Muni Portfolio, which are long duration, tax exempt securities, have been reinvested into shorter duration,
taxable fixed income securities with lower rates of return.
As of December 31, 2011, our large-cap equity portfolio had a beta of 1.00 using the S&P 500 Index as a
benchmark. Beta estimates the degree the portfolio’s price will fluctuate based on a given movement in the
market index. The following table sets forth what changes might occur in the value of the large-cap equity
portfolio given a change in the S&P 500 Index at December 31, 2011:
Fair value ($ millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value as % of original value . . . . . . . . . . . . . . . . . . . . . . . . . .
$146.6
$134.4
+20%
120%
+10%
110%
$122.1
0
100%
$109.9
$97.7
-10%
90%
-20%
80%
70
The above analysis is limited in that it does not take into account any actions that might be taken by us in
response to these changes. As a result, the actual impact of a change in equity market prices and the resulting
equity values may differ significantly from what is shown in the table. By investing in mostly large-cap issues we
hope to limit liquidity risk in the equity portfolio. The large-cap equity portfolio does not have any direct
exposure to exchange rate risk since we do not directly hold any foreign stocks. We constantly monitor the equity
portfolio holdings for any credit risk issues that may arise. We do not invest in any commodity futures or
commodity oriented mutual funds.
At December 31, 2011, we have two international funds, Fund 1 and Fund 2, which are included in other
invested assets available-for-sale. Fund 1 and Fund 2 had betas of 0.68 and 0.85, respectively, using the MSCI
EAFE Index as a benchmark. Beta estimates the degree the portfolio’s price will fluctuate based on a given
movement in the index. The following tables set forth what changes might occur in the values of Funds 1 and 2
given a change in the MSCI EAFE Index at December 31, 2011:
Fund 1
Fair value ($ millions)
. . . . . . . . . . . . . . . . . . .
Change in MSCI EAFE Index . . . . . . . . . . . . .
Value as % of original value . . . . . . . . . . . . . .
Fund 2
Fair value ($ millions)
. . . . . . . . . . . . . . . . . . .
Change in MSCI EAFE Index . . . . . . . . . . . . .
Value as % of original value . . . . . . . . . . . . . .
$25.6
$24.1
$22.6
0
+20% +10%
114% 107% 100%
$35.1
$32.6
$30.0
0
+20% +10%
117% 109% 100%
$21.0
$19.5
-10% -20%
86%
93%
$27.5
$24.9
-10% -20%
83%
92%
The above analysis does not take into account any actions that might be taken by the portfolio managers in
response to these changes. As a result, the actual impact of a change in international equity market prices and the
resulting international equity values may differ significantly from what is shown in the tables above.
Investment Operations Revenue
The following table sets forth the components of net investment income for the years ended December 31,
2011, 2010 and 2009:
($ millions)
Gross investment income:
Year Ended December 31
2010
2011
2009
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total gross investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
77.0
4.9
5.7
87.6
2.2
$
71.7
5.4
5.8
82.9
2.1
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
85.4
$
80.8
$
75.7
3.5
4.9
84.1
2.0
82.1
Average invested assets (at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annualized investment yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annualized investment yield, after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income, after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
$2,392.3
$2,235.7
$2,117.0
3.6%
2.8%
66.9
21.7% 18.7%
3.6%
2.9%
65.7
$
3.9%
3.3%
70.5
14.1%
$
$
Our investment operations revenue was primarily impacted by the following factors.
•
•
•
•
•
The amortized cost value of our Treasury Inflation-Protected Securities (“TIPS”) increased to $231.4
million for the year ended December 31, 2011, as compared to $187.6 million and $137.0 million for
the same 2010 and 2009 periods, respectively. The income earned on our TIPS securities, which is
dependent on changes in the CPI Index, increased by $6.6 million in 2011 when compared to the same
2010 period, and decreased by $2.7 million in 2010 when compared to the same 2009 period.
The amount of interest earned on our fixed maturity securities declined due to a portfolio shift to
holding more taxable bonds with shorter durations and lower rates of return and fewer long duration
tax exempt bonds earning higher rates of return. The call activity level on our tax exempt portfolio in
2011 and 2010, as previously discussed, contributed to this portfolio shift.
The current environment of lower interest rates has also impacted the amount of interest earned on our
fixed maturity portfolio. As our higher yielding bonds mature or are called by the issuers, such as in
our tax exempt portfolio, the proceeds from these bonds are being reinvested at a lower interest rate.
In 2011, we sold several of our equity securities for several reasons, including managing our equity
holdings to be consistent with our investment policy, responding to negative outlooks, achieving our
price targets, as well as to accumulate cash to be in a position to settle the transfers related to the
December 31, 2011 pooling change with the Mutual Pooled Companies in early 2012. In 2010, in order
to offset the decline in interest earned on our fixed maturity securities and to improve yield and cash
flows, we began to hold more high dividend paying equities when compared to 2009.
For the years ended December 31, 2011, 2010 and 2009, interest earned on notes receivable from
affiliate was $4.9 million, $4.9 million, and $3.1 million, respectively. Our Credit Agreements with
State Auto Mutual were entered into during the second quarter of 2009.
The following table sets forth realized gains (losses) and the proceeds received on sale for our investment
portfolio for the years ended December 31, 2011, 2010 and 2009:
($ millions)
Realized gains:
2011
2010
2009
Realized
gains
(losses)
Proceeds
received
on sale
Realized
gains
(losses)
Proceeds
received
on sale
Realized
gains
(losses)
Proceeds
received
on sale
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . .
Total realized gains . . . . . . . . . . . .
$ 4.4
41.7
3.9
50.0
167.6
152.9
20.8
341.3
Realized losses:
Fixed maturities—Sales . . . . . . . . . . . . . . . . .
Equity securities:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI
Other invested assets—OTTI . . . . . . . . . . . . .
Other invested assets, at fair
—
—
28.0
(5.3)
(6.6) —
—
—
value—OTTI . . . . . . . . . . . . . . . . . . . . . . .
Total realized losses . . . . . . . . . . . .
Net realized gain (loss) on investments . . . . . . . . .
—
(11.9)
—
28.0
$ 38.1
369.3
2.4
15.8
—
18.2
—
(3.1)
(3.6)
(0.5)
—
(7.2)
11.0
93.6
65.7
—
159.3
—
20.3
—
—
—
20.3
5.9
4.8
—
10.7
—
(6.9)
(9.0)
—
—
(15.9)
322.2
19.2
—
341.4
1.6
14.8
—
—
—
16.4
179.6
(5.2)
357.8
Equity sales were executed for various reasons in 2011, 2010 and 2009, including: (i) in response to
negative outlook announcements or changes in business conditions which in our opinion diminished the future
business prospects of certain securities, (ii) in response to achievement of our price targets for certain securities,
and (iii) in order to manage our equity holdings to be consistent with our investment policy.
72
When a fixed maturity security has been determined to have an other-than-temporary decline in fair value, the
impairment charge is separated into an amount representing the credit loss, which is recognized in earnings, and the
amount related to non-credit factors, which is recognized in accumulated other comprehensive income (loss). See
“Critical Accounting Policies—Investments” included in this Item 7 for OTTI impairment indicators. Future
increases or decreases in fair value, if not other-than-temporary, are included in accumulated other comprehensive
income (loss). We did not recognize OTTI on our fixed maturity portfolio during 2011, 2010 and 2009.
When an equity security or other invested asset has been determined to have a decline in fair value that is
other-than-temporary, we adjust the cost basis of the security to fair value. See “Critical Accounting Policies –
Investments” included in this Item 7 for OTTI impairment indicators. This results in a charge to earnings as a
realized loss, which is not reversed for subsequent recoveries in fair value. Future increases or decreases in fair
value, if not other-than-temporary, are included in accumulated other comprehensive income (loss).
The following table sets forth the realized losses related to OTTI on our investment portfolio recognized for
the year ended December 31, 2011:
($ millions)
Equity Securities:
Large-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of
positions
Total
impairment
4
60
64
$(1.0)
(5.6)
$(6.6)
Gross Unrealized Investment Gains and Losses
Based upon our review of our investment portfolio at December 31, 2011, we determined that there were no
individual investments with an unrealized holding loss that had a fair value significantly below cost continually
for more than one year. The following table sets forth detailed information on our available-for-sale investment
portfolio by lot at fair value for our gross unrealized holding gains (losses) at December 31, 2011:
($ millions, except number of positions)
Cost or
amortized
cost
Gross
unrealized
holding
gains
Number of
gain
positions
Gross
unrealized
holding
losses
Number of
loss
positions
Fair
value
Fixed Maturities:
U.S. treasury securities and obligations
of U.S. government agencies . . . . . . .
$ 433.8
$ 35.0
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . .
U.S. government agencies residential
761.3
231.4
mortgage-backed securities . . . . . . . . .
390.8
Total fixed maturities . . . . . . . . . . .
1,817.3
Equity Securities:
Large-cap securities . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . .
106.4
35.3
141.7
48.6
50.0
13.7
20.3
119.0
18.9
9.9
28.8
8.6
Total available-for-sale investments . . . . . . . .
$2,007.6
$156.4
89
336
83
128
636
41
72
113
3
752
$(0.1)
(0.1)
(0.3)
(0.9)
(1.4)
(3.2)
—
(3.2)
—
$(4.6)
4
5
9
17
35
10
—
10
—
45
$ 468.7
811.2
244.8
410.2
1,934.9
122.1
45.2
167.3
57.2
$2,159.4
73
The following table sets forth our unrealized holding gains by investment type, net of deferred tax that was
included as a component of accumulated comprehensive income (loss) at December 31, 2011 and 2010, and the
change in unrealized holding gains, net of deferred tax, for the year ended December 31, 2011:
($ millions)
Available-for-sale investments
Unrealized gains:
December 31,
2011
December 31,
2010
$
Change
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income tax liability . . . . . . . . . . . . . . . . . . . . .
$117.6
25.6
8.6
151.8
(53.1)
Unrealized gains, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 98.7
38.4
56.0
15.3
109.7
(38.4)
71.3
79.2
(30.4)
(6.7)
42.1
(14.7)
27.4
Fair Value Measurements
We primarily use one independent nationally recognized pricing service in developing fair value estimates.
We obtain one price per security, and our processes and control procedures are designed to ensure the value is
accurately recorded on an unadjusted basis. Through discussions with the pricing service, we gain an
understanding of the methodologies used to price the different types of securities, that the data and the valuation
methods utilized are appropriate and consistently applied, and that
the assumptions are reasonable and
representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service,
we compare to other fair value pricing information gathered from other independent pricing sources. See Note 3,
“Fair Value of Financial Instruments” to our consolidated financial statements included in Item 8 of this Form
10-K for a presentation of our available-for-sale investments within the fair value hierarchy at December 31,
2011.
As of December 31, 2011, Level 3 assets as a percentage of total assets were 0.1%, which we have
determined to be insignificant.
Other Items
Income Taxes
For the year ended December 31, 2011, federal income tax expense was $37.5 million compared to a tax
expense of less than $0.1 million and a tax benefit of $(23.0) million for the same 2010 and 2009 periods,
respectively. The effective tax rate for 2011 of (34)% differs from the statutory rate of 35% principally because
of the valuation allowance that was established during 2011. A valuation allowance of $91.2 million was held at
December 31, 2011, with a corresponding charge to total tax expense for the year ended December 31, 2011.
See “Critical Accounting Policies—Deferred Income Taxes” included in this Item 7. See Note 8, “Federal
Income Taxes” to our consolidated financial statements included in Item 8 of this Form 10-K for a reconciliation
between our actual federal income tax expense (benefit) and the amount computed at the indicated statutory rate
for the years ended December 31, 2011, 2010 and 2009.
LIQUIDITY AND CAPITAL RESOURCES
General
Liquidity refers to our ability to generate adequate amounts of cash to meet our short- and long-term needs.
Our primary sources of cash are premiums, investment income, investment sales and the maturity of fixed
74
income security investments. The significant outflows of cash are payments of claims, commissions, premium
taxes, operating expenses, income taxes, dividends, interest and principal payments on debt and investment
purchases. The cash outflows may vary due to uncertainties regarding settlement of large losses or catastrophe
events. As a result, we continually monitor our investment and reinsurance programs to ensure they are
appropriately structured to enable the insurance subsidiaries to meet anticipated short- and long-term cash
requirements without the need to sell investments to meet fluctuations in claim payments.
Liquidity
Our insurance subsidiaries must have adequate liquidity to ensure that their cash obligations are met.
However, the STFC Pooled Companies do not have the daily liquidity concerns normally associated with an
insurance company due to their participation in, and the terms of, the Pooling Arrangement. Under the terms of
the Pooling Arrangement, State Auto Mutual receives all premiums and pays all losses and expenses associated
with the insurance business produced by the STFC Pooled Companies and the other pool participants, and then it
settles the intercompany balances generated by these transactions with the pool participants within 45 days
following each quarter end. We believe this provides State Auto Mutual with sufficient liquidity to pay losses
and expenses of our insurance operations on a timely basis. When settling the intercompany balances, State Auto
Mutual provides the pool participants with full credit for the premiums written net of losses paid during the
quarter, retaining all receivable amounts from insureds and agents and reinsurance recoverable on paid losses
from unaffiliated reinsurers. Any receivable amounts that are ultimately deemed to be uncollectible are
charged-off by State Auto Mutual and allocated to the pool participant on the basis of its pooling percentage. As
a result, we have an off-balance sheet credit risk related to the balances due to State Auto Mutual from insureds,
agents and reinsurers, which are offset by the unearned premiums from the respective policies. While the total
amount due to State Auto Mutual from policyholders and agents is significant, the individual amounts due are
relatively small at the policyholder and agency level. Based on historical data, this credit risk exposure is not
considered to be material to our financial position, though the impact to income on a quarterly basis may be
material. The State Auto Group mitigates its exposure to this credit risk through its in-house collections unit for
both personal and commercial accounts which is supplemented by third party collection service providers. The
amounts deemed uncollectible by State Auto Mutual and allocated to the STFC Pooled Companies are included
in the other expenses line item in the accompanying consolidated statements of income.
We generally manage our cash flows through current operational activity and maturing investments, without
a need to liquidate any of our other investments. However, should our written premiums decline or paid losses
increase significantly, or a combination thereof, our cash flows from operations could be impacted requiring us to
liquidate investments at losses. This action was not necessary in 2011, 2010 or 2009 despite the increased level
of catastrophe losses.
Net cash provided by operating activities was $43.0 million, $131.4 million and $110.5 million for 2011,
2010 and 2009, respectively. Net cash from operations will vary from period to period if there are significant
changes in underwriting results, primarily a combination of the level of premiums written and loss and loss
expenses paid, changes in cash flows from investment income or federal income tax activity. The decrease in net
cash provided by operating activities for the year ended December 31, 2011 was driven by the significant
increase in the level of loss and loss expenses paid due to the record level of catastrophe losses that occurred in
2011. The 2011 and 2010 operational cash activity included cash inflows of $69.1 million and $3.7 million,
respectively, due to pooling changes.
During 2011, 2010 and 2009, as permitted by regulations of the Internal Revenue Service, we made cash
contributions of $15.0 million, $13.0 million and $15.0 million, respectively, to our defined benefit pension plan
on behalf of our employees. The actuarially determined contribution to our defined benefit pension plan ranges
from the minimum amount we would be required to contribute to the maximum amount that would be tax
deductible. Amounts contributed in excess of the minimum are deemed voluntary while amounts in excess of the
maximum would be subject to an excise tax and may not be deductible for tax purposes. Amounts paid in each of
75
these three years were within the minimum and maximum funding amounts that would be deductible for tax
purposes. The actuarially determined funding amount to the plan is generally not determined until the second
quarter with respect to the contribution year, though we currently expect to make a minimum cash contribution to
our defined benefit pension plan up to $13.0 million during 2012. For a further discussion regarding our defined
benefit pension plan, see “Critical Accounting Policies—Pension and Postretirement Benefit Obligations”
included in this Item 7.
Net cash provided by investing activities was $246.2 million in 2011 compared to net cash used in investing
activities of $112.6 million and $150.2 million in 2010 and 2009, respectively. The following factors
significantly contributed to the fluctuations between those years:
•
•
•
In 2011, we sold equity securities and certain fixed maturity securities in order to accumulate cash to
be in a position to settle the transfers related to the December 31, 2011 pooling change with the Mutual
Pooled Companies in early 2012.
In 2011, we had a cash inflow of $13.2 million, primarily related to our sale of SA National, compared
to a cash outflow of $7.5 million in 2010. The amount paid in 2010 approximated SA National’s cash
position on that date.
At the beginning of 2009, we held higher levels of cash as a result of our conservative approach to
investing as markets weakened in the last half of 2008 and because of our need to pay claims
associated with the higher level of catastrophes occurring during the second half of 2008. During 2009,
as markets improved and claim activity returned to more normal levels after Hurricane Ike, we began
reinvesting as opportunities arose. In addition, we made a $70.0 million loan to State Auto Mutual in
2009.
Borrowing Arrangements
Credit Agreement
State Auto Financial has a $100.0 million unsecured revolving credit facility with a syndicate of lenders
which matures in September 2016 (the “Credit Facility”). During the term of the Credit Facility, we have the
right to increase the total facility to a maximum amount of $150.0 million, provided that no event of default has
occurred and is continuing. The Credit Facility is available for general corporate purposes and provides for
interest-only payments during its term, with principal and interest due in full at maturity. Interest is based on
LIBOR or a base rate plus a calculated margin amount. The Credit Facility includes certain covenants, including
financial covenants that require us to maintain a minimum net worth and not exceed a certain debt
to
capitalization ratio. As of December 31, 2011, State Auto Financial had not made any borrowings and was in
compliance with all of its covenants.
Senior Notes
State Auto Financial has outstanding $100.0 million of unsecured Senior Notes due November 2013. The
Senior Notes bear interest at a fixed rate of 6.25% per annum, which is payable each May 15 and November 15.
The Senior Notes are general unsecured obligations ranking senior to all existing and future subordinated
indebtedness and equal with all existing and future senior indebtedness. The Senior Notes are not guaranteed by
any of State Auto Financial’s subsidiaries and thereby are effectively subordinated to all State Auto Financial’s
subsidiaries’ existing and future indebtedness.
Subordinated Debentures
State Auto Financial’s Delaware business trust subsidiary (the “Capital Trust”) has outstanding $15.0
million liquidation amount of capital securities, due 2033. In connection with the Capital Trust’s issuance of the
capital securities and the related purchase by State Auto Financial of all of the Capital Trust’s common securities
76
(liquidation amount of $0.5 million), State Auto Financial has issued to the Capital Trust $15.5 million aggregate
principal amount of unsecured Floating Rate Junior Subordinated Debt Securities due 2033 (the “Subordinated
Debentures”). The sole assets of the Capital Trust are the Subordinated Debentures and any interest accrued
thereon. Interest on the Capital Trust’s capital and common securities is payable quarterly at a rate equal to the
three-month LIBOR rate plus 4.20%, adjusted quarterly. The applicable interest rates for December 31, 2011 and
2010 were 4.73% and 4.50%, respectively.
Notes Payable Summary
The following table sets forth our notes payable at December 31, 2011:
($ millions)
Senior Notes due 2013: issued $100.0 million, November 2003 with fixed interest . . .
Subordinated Debentures due 2033: issued $15.5 million, May 2003 with variable
Carrying
Value
Fair
Value
Interest
Rate
$100.9
$100.3
6.25%
interest adjusting quarterly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.5
15.5
4.73%
Total notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$116.4
$115.8
Related to our notes payable, our primary market risk exposure is to the change in interest rates and our
credit rating. For a discussion regarding our credit ratings see “Credit and Financial Strength Ratings” included
in this Item 7. Based upon the notes payable carrying value at December 31, 2011, we had $15.5 million notes
payable with variable interest and $100.9 million notes payable with interest fixed at 6.25%, which equated to
approximately 13.3% variable interest debt and 86.7% fixed interest debt. Our decision to obtain fixed versus
variable interest rate debt is influenced primarily by the following factors: (a) current market interest rates;
(b) anticipated future market interest rates; (c) availability of fixed versus variable interest instruments; and
(d) our currently existing notes payable fixed and variable interest rate position. See our contractual obligations
table included in “Contractual Obligations” included in this Item 7.
Reinsurance Arrangements
Members of the State Auto Group follow the customary industry practice of reinsuring a portion of their
exposures and paying to the reinsurers a portion of the premiums received. Insurance is ceded principally to
reduce net liability on individual risks or for individual loss occurrences, including catastrophic losses. Although
reinsurance does not legally discharge the individual members of the State Auto Group from primary liability for
the full amount of limits applicable under their policies, it does make the assuming reinsurer liable to the extent
of the reinsurance ceded.
Homeowners Quota Share Reinsurance Arrangement
On December 31, 2011, the State Auto Group entered into the HO QS Arrangement, which is a three-year
quota share reinsurance agreement covering our homeowners book of business. Under the HO QS Arrangement,
the State Auto Group cedes to reinsurers 75% of its homeowners business under policies in force at the effective
date and new and renewal policies thereafter issued during the term of the agreement. The HO QS Arrangement
remains in place until December 31, 2014. A reinsurer may terminate its participation in the HO QS Arrangement
upon the occurrence of certain events, including, without limitation, if the policyholders’ surplus of the State
Auto Group is reduced by more than 25% from the amount of its surplus as of September 30, 2011 or the State
Auto Group is assigned an A.M. Best rating below A-.
Under the HO QS Arrangement, the State Auto Group receives a 29.0% commission on all premiums ceded
to the reinsurers during the term of the agreement. Subject to the terms and conditions of the HO QS
Arrangement, the State Auto Group may receive a profit commission.
77
The HO QS Arrangement provides the reinsurers with certain contractual rights in the event of a “material
adverse change,” as defined in the agreement, occurs to the State Auto Group. For example, the reinsurers may
request the revision or renegotiation of certain terms of the agreement if the State Auto Group’s homeowners
exposure growth exceeds specified levels or if the State Auto Group makes significant underwriting, claim handling
or business mix changes that adversely impact the business reinsured under the agreement. In the event the parties
do not agree on revised terms, the reinsurers may cancel the HO QS Arrangement. Under the material adverse
change provisions, the reinsurers may reduce the ceding commission proportionally in the event the homeowners
rate changes implemented fall short of our pricing plan by more than certain stipulated contractual amounts.
Under the HO QS Arrangement, the reinsurers have agreed to accept 75% of the State Auto Group’s subject
homeowners net liability. The liability of the reinsurers will not exceed any of the following: $3.0 million as to
any one risk with respect to property losses; $2.0 million as to any one insured with respect to liability losses;
$55.0 million as to all losses arising from any one loss occurrence; 50% of the ceded net earned premium for the
first contract year with respect to all losses arising from all catastrophe loss occurrences commencing during the
first contact year, subject to an amount not to exceed $181.0 million for the first contract year; 40% of the ceded
net earned premium for the second contract year with respect to all losses arising from all catastrophe loss
occurrences commencing during the second contact year, subject to an amount not to exceed $150.0 million for
the second contract year; 30% of the ceded net earned premium for the third contract year with respect to all
losses arising from all catastrophe loss occurrences commencing during the third contract year, subject to an
amount not to exceed $117.0 million for the third contract year; or 34% of the ceded net earned premium for the
term of the agreement with respect to all losses arising from all catastrophe loss occurrences commencing during
the term of the agreement, subject to an amount not to exceed $380.0 million for the term of the contract. A
“catastrophe loss occurrence” is defined as any one loss occurrence which has been assigned a catastrophe
number by the ISO PCS. We believe this reinsurance arrangement reduces risk and volatility in the homeowners
line of business and to our overall book of business while providing us with additional catastrophe protection.
Other Reinsurance Arrangements
Each member of the State Auto Group is party to working reinsurance treaties for casualty, workers’
compensation and property lines with several reinsurers arranged through reinsurance intermediaries. These
agreements are described in more detail below. We have also secured other reinsurance to limit the net cost of
large loss events for certain types of coverage written in certain companies, including reinsurance covering
umbrella liability losses up to a limit of $10.0 million with a maximum of $0.6 million retention. The State Auto
Group also makes use of facultative reinsurance for unique risk situations. The State Auto Group also
participates in state insurance pools and associations. In general, these pools and associations are state sponsored
and/or operated, impose mandatory participation by insurers doing business in that state, and offer coverage for
hard-to-place risks at premium rates established by the state sponsor or operator, thereby transferring risk of loss
to the participating insurers in exchange for premiums which may not be commensurate with the risk assumed.
We also maintain certain reinsurance agreements to provide protection tailored to the specialized risks
written through our Rockhill specialty insurance unit.
Property Catastrophe
Members of the State Auto Group maintain a property catastrophe excess of loss reinsurance agreement,
covering catastrophe related events affecting at least two risks. On a combined basis, the members of the State Auto
Group retain the first $55.0 million of catastrophe loss, each occurrence, with a 5% co-participation on the next
$160.0 million of covered loss, each occurrence. The reinsurers are responsible for 95% of the excess over $55.0
million up to $215.0 million of covered losses, each occurrence. Our companies are responsible for losses above
$215.0 million. The rates for this reinsurance are negotiated annually. Policies underwritten by the Rockhill
specialty insurance unit are not subject to this property catastrophe excess of loss reinsurance agreement.
For property policies underwritten by our Rockhill specialty insurance unit, we maintain a property
catastrophe excess of loss reinsurance agreement covering catastrophe related events affecting at least two risks.
78
Under this agreement, we retain the first $7.5 million of catastrophe loss, each occurrence, and the reinsurers are
responsible for 100% of the excess over $7.5 million up to $85.0 million of covered loss, each occurrence. The
rates for this reinsurance are negotiated annually.
Property Per Risk
The property per risk excess of loss reinsurance agreement provides that each company in the State Auto
Group is responsible for the first $3.0 million of each covered loss, as well as an additional $2.0 million in
aggregate retention per treaty year. The reinsurers are responsible for 100% of the excess over $3.0 million up to
$20.0 million of covered loss. The rates for this reinsurance are negotiated annually. Policies underwritten by the
Rockhill specialty insurance unit are not subject to this property per risk excess of loss reinsurance agreement.
For property policies underwritten by our Rockhill specialty insurance unit, we maintain a property surplus
share agreement for wind-only insurance products. This agreement provides for a proportional share of losses on
all coastal wind policies written with limits greater than $5.0 million and up to $10.0 million of covered loss and
all non coastal wind policies written with limits greater than $10.0 million and up to $16.0 million of covered
loss. The reinsurers’ limit cannot exceed more than $5.0 million on any one risk. For property policies
underwritten by our Rockhill specialty insurance unit, we also maintain a property per risk excess of loss
reinsurance agreement for policies insuring certain other perils. Under this agreement, the Group is responsible
for the first $1.0 million of each covered loss; the reinsurers are responsible for 100% of the excess over $1.0
million up to $15.0 million of covered loss. The rates for these reinsurance agreements are negotiated annually.
Property Catastrophe Aggregate
During 2010 and 2009, members of the State Auto Group were parties to the CAT Aggregate Agreement.
The CAT Aggregate Agreement provided reinsurance coverage on an annual basis for certain qualifying
catastrophic events, including certain events falling below the $55.0 million retention under the property
catastrophe excess of loss reinsurance agreement discussed in the preceding paragraph. Events covered by the
CAT Aggregate Agreement needed to be PCS numbered catastrophes, excluding earthquakes and named storms
such as hurricanes and tropical storms. Of the thirty catastrophes from which we experienced losses during 2010,
nine met the minimum $5.0 million requirement; however, in aggregate the total State Auto Group losses of
$81.9 million related to the nine qualifying catastrophes did not exceed the State Auto Group’s $90.0 million
retention level in 2010. Six of the twenty-seven catastrophes experienced during 2009 met the minimum $5.0
million requirement and in aggregate exceeded the State Auto Group’s $80.0 million retention level in 2009. The
CAT Aggregate Agreement was not renewed for 2011.
Casualty
The casualty excess of loss reinsurance agreement provides that each company in the State Auto Group is
responsible for the first $2.0 million of a covered loss. The reinsurers are responsible for 100% of the excess over
$2.0 million up to $5.0 million of covered loss. Also, certain unusual claim situations involving bodily injury
liability, property damage, uninsured motorist and personal injury protection are covered by an arrangement that
provides for $10.0 million of coverage in excess of $5.0 million retention for each loss occurrence. This layer of
reinsurance sits above the $3.0 million excess of $2.0 million arrangement. The rates for this reinsurance are
negotiated annually. Policies underwritten by the Rockhill specialty insurance unit are not subject to this casualty
excess of loss reinsurance agreement.
For certain casualty lines written through our Rockhill unit, we have a consolidated casualty treaty whereby
we retain the first $1.0 million of covered loss and the reinsurers are responsible for 75% of the excess over $1.0
million up to $6.0 million per risk. The rates for this reinsurance are negotiated annually.
Effective October 1, 2011, we entered into a quota share reinsurance agreement for Management &
Professional Liability arising out of certain classes of business underwritten in our Rockhill unit. For any subject
losses, the treaty pays 40% of 100%, up to 40% of $10.0 million, or $4.0 million. The remaining loss amount is
covered by the consolidated casualty reinsurance agreement.
79
Workers’ Compensation
The workers’ compensation excess of loss reinsurance agreement provides that each company in the State Auto
Group is responsible for the first $1.0 million of covered loss, as well as an additional $1.0 million in aggregate
retention per treaty year. The reinsurers are responsible for 100% of the excess over $1.0 million up to $10.0 million of
covered loss. Net retentions under this agreement may be submitted to the casualty excess of loss agreement, subject to
a limit of $2.0 million per loss occurrence. The rates for this reinsurance are negotiated annually.
In addition to the workers’ compensation reinsurance described above, each company in the State Auto
Group is party to an agreement which provides an additional layer of reinsurance for workers’ compensation
losses involving multiple workers. Subject to $10.0 million of retention, reinsurers are responsible for 100% of
the excess over $10.0 million up to $20.0 million of covered loss. This coverage is subject to a “Maximum Any
One Life” limitation of $10.0 million. This limitation means that losses associated with each worker may
contribute no more than $10.0 million to covered loss under this agreement. The rates for this reinsurance are
negotiated annually.
State Auto National
Concurrent with our sale of SA National, SA National’s participation in the Pooling Arrangement was
terminated, and we entered into a loss portfolio transfer and a 100% quota share reinsurance agreement on
December 31, 2010, to assume liability for the pre- and post-closing book of business of SA National, including
providing policy and claims service to SA National policyholders, until policies are renewed with the third party
purchaser on such purchaser’s systems during a transition period of up to six months following effective date of
sale. This assumed business by us is subject to the Pooling Arrangement.
Contractual Obligations
The following table sets forth our significant contractual obligations at December 31, 2011:
($ millions)
Direct loss and ALAE reserves(1)
Notes payable(2):
Senior Notes due 2013:
Due
1 year
or less
Due
1-3
years
Due
3-5
years
Total
. . . . . . . . . . . . . .
$ 931.1
372.0
307.8
111.7
issued $100.0, November 2003 with fixed
interest(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated Debentures due 2033:
issued $15.5, May 2003 with variable interest(4)
adjusting quarterly . . . . . . . . . . . . . . . . . . . . . . . .
Total notes payable . . . . . . . . . . . . . . . . . . . . .
Interest payable (2):
Senior Notes due 2013:
issued $100.0, November 2003 with fixed
interest(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated Debentures due 2033:
issued $15.5, May 2003 with variable interest(4)
adjusting quarterly . . . . . . . . . . . . . . . . . . . . . . . .
Total interest payable . . . . . . . . . . . . . . . . . . .
Postretirement benefits . . . . . . . . . . . . . . . . . . . . . .
Pension funding(5)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0
—
100.0
15.5
115.5
—
—
—
100.0
—
—
—
12.5
6.3
6.2
—
—
15.8
28.3
20.0
76.0
0.7
7.0
2.2
14.2
1.5
7.7
4.4
29.5
1.5
1.5
4.2
25.3
12.1
12.1
9.2
7.0
$1,170.9
395.4
449.4
142.7
183.4
Due
after 5
years
139.6
—
15.5
15.5
(1) We derived expected payment patterns separately for the direct loss and ALAE reserves. Amounts included the STFC Pooled
Companies net additional share of transactions assumed from State Auto Mutual through the Pooling Arrangement. For a
80
reconciliation of management’s best estimate, see “Critical Accounting Policies – Losses and Loss Expenses Payable” included in
this Item 7. These patterns were applied to the December 31, 2011, loss and ALAE payable to generate estimated annual
incremental loss and ALAE payments for each subsequent calendar year. These amounts are based on historical payment patterns
and do not represent actual contractual obligations. The actual payment amounts and the related timing of those payments could
differ significantly from these estimates.
For a discussion of these debt instruments, see “Liquidity and Capital Resources—Borrowing Arrangements” included in this
Item 7.
The Senior Notes bear interest at a fixed rate of 6.25% per annum, which is payable each May 15 and November 15.
Interest on the subordinated debentures was calculated using an interest rate equal to the three-month LIBOR rate at December 31,
2011 of 0.5269% plus 4.20%, or 4.7269%.
These amounts are estimates of ERISA minimum funding levels based on adjustments to prior year assumptions for our defined
benefit pension plan and do not represent an estimate of our expected contributions. Funding levels generally are not determined
until later in the year with respect to the contribution year. See Note 9, “Pension and Postretirement Benefits Plans” to our
consolidated financial statements included in Item 8 of this Form 10-K for a tabular presentation of STFC’s share of expected
benefit payments from the State Auto Group’s defined benefit pension plan.
(2)
(3)
(4)
(5)
Lease and other purchase obligations of State Auto Mutual are allocated to us through the Pooling
Arrangement.
Regulatory Considerations
At December 31, 2011, 2010 and 2009, each of our insurance subsidiaries was in compliance with statutory
requirements relating to capital adequacy.
The NAIC utilizes a collection of analytical tools designed to assist state insurance departments with an
integrated approach to screening and analyzing the financial condition of insurance companies operating in their
respective states. One such set of analytical tools is 12 key financial ratios that are known in the insurance
industry as the “IRIS” ratios. A “defined range” of results for each ratio has been established by the NAIC for
solvency monitoring. While management utilizes each of these IRIS ratios in monitoring our insurance
companies’ operating performance on a statutory accounting basis (each of our insurance subsidiaries operates
within the defined range for the other measures), the net premiums written to surplus or leverage ratio is
monitored to ensure that each of our insurance subsidiaries continue to operate within the “defined range” of 3.0
to 1.0. The higher the leverage ratio, the more risk a company bears in relation to statutory surplus available to
absorb losses. In considering this range, management also considers the distribution of net premiums between
property and liability lines of business. A company with a larger portion of net premiums from liability lines
should generally maintain a lower leverage ratio.
See “Overview—Capital Position” section included in this Item 7 for a discussion regarding capital
management actions taken during the fourth quarter of 2011 to improve statutory surplus positions and leverage
ratios for our insurance subsidiaries. The following table sets forth the statutory leverage ratios for our insurance
subsidiaries at December 31, 2011, 2010 and 2009:
Statutory Leverage Ratios
2011(1)
2010(1)
2009
State Auto P&C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Milbank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Farmers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SA Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average(2)
2.0
2.7
1.5
1.2
2.1
1.7
1.7
1.5
1.2
1.7
1.6
1.6
1.4
1.1
1.5
(1)
(2)
Table excludes the one-time impact on net written premiums of $34.1 million, $106.8 million and $1.4 million that occurred
in conjunction with the January 1, 2011 pooling change, December 31, 2011 pooling change and 2010 pooling change,
respectively.
2009 includes the SA National statutory leverage ratio of 0.6. State Auto Financial sold SA National to a third party on
December 31, 2010.
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Our insurance subsidiaries pay dividends to State Auto Financial which in turn may be used by State Auto
Financial to pay dividends to stockholders or to make principal and interest payments on debt. Individual states
limit the amount of dividends that our insurance subsidiaries domiciled in those states can pay without prior
approval. Under current law, $62.5 million is available in 2012 for payment as a dividend from our insurance
subsidiaries to State Auto Financial, without prior approval from our respective domiciliary state insurance
departments. In 2010 and 2009, State Auto Financial received $56.4 million and $11.5 million, respectively, in
dividends from its insurance subsidiaries. We are required to notify the insurance subsidiaries’ applicable state
insurance commissioner within five business days after declaration of all such dividends and at least ten days
prior to payment. Additionally, the domiciliary state commissioner of each insurance subsidiary has the authority
to limit a dividend when the commissioner determines, based on factors set forth in the law, that an insurer’s
surplus is not reasonable in relation to the insurer’s outstanding liabilities and adequate to meet its financial
needs. Such restrictions are not expected to limit the capacity of State Auto Financial to meet its cash obligations.
State Auto Financial’s insurance subsidiaries are subject to regulation and supervision by the states in which
they do business. The NAIC has developed risk-based capital requirements, which attempts to relate an
individual insurance company’s statutory surplus to the risk inherent in its overall operations. RBC requires the
calculation of a ratio of total adjusted statutory capital to authorized control level. Insurers with a ratio below
200% are subject to different levels of regulatory intervention and action. At December 31, 2011, the ratio of
total adjusted statutory capital to authorized control level of State Auto Financial’s insurance subsidiaries ranged
from 416.9% to 1,223.2%.
Credit and Financial Strength Ratings
The following table sets forth our credit and insurance company financial strength ratings as of March 2012:
State Auto Financial (credit rating) . . . . . . . . . . . .
State Auto Group (financial strength) . . . . . . . . . .
bbb+
A
Baa3
A3
BB+
BBB+
A.M. Best
Moody’s
Standard & Poor’s
We are reviewed regularly by the independent rating agencies, including those rating agencies listed in the
table above. We believe that these ratings provide a meaningful way for policyholders, agents, creditors,
stockholders and others to compare us to our competitors. Our ratings are influenced by many factors, including
operating and financial performance, asset quality, liquidity, financial leverage, exposure to catastrophe risks and
operating leverage.
The credit ratings set forth above relate to the Senior Notes issued by State Auto Financial and express the
opinion of the rating agency as to the ability of State Auto Financial to meet its ongoing obligations under the
terms of the Senior Notes. Generally, credit ratings affect the cost, type and availability of debt financing. Higher
rated securities receive more favorable pricing and terms relative to lower rated securities at the time of issue.
The financial strength ratings set forth above relate to the State Auto Group and express the opinion of the
rating agency as to the ability of the State Auto Group to meet its ongoing obligations to policyholders. The A.M.
Best financial strength rating influences our ability to write insurance business as agents and policyholders
generally prefer higher rated companies. Lower rated companies may be required to compete for agents and
policyholders by offering higher commissions or lower premiums and expanded coverage, or a combination
thereof.
In November 2011, Standard & Poor’s lowered its credit rating on State Auto Financial from BBB- to BB+
and its financial strength rating on the State Auto Group from A- to BBB+ and placed these ratings on
CreditWatch with a negative outlook. Standard & Poor’s indicated that the downgrade was based on the decline
82
of the State Auto Group’s capital adequacy from historical levels, among other factors. In February 2012,
Standard & Poor’s affirmed the State Auto Financial’s credit rating of BB+ and the State Auto Group’s financial
strength rating of BBB+, both with negative outlook, but removed these ratings from CreditWatch.
In November 2011, Moody’s lowered its credit rating on State Auto Financial from Baa2 to Baa3 and its
financial strength rating on the State Auto Group from A2 to A3. These ratings have a stable outlook. Moody’s
indicated that the downgrade was due to the significant capital deterioration of the State Auto Group during the
second and third quarters of 2011, among other factors.
In June 2011, A.M. Best lowered its credit rating on State Auto Financial from a- to bbb+ and its financial
strength rating on the State Auto Group from A+ (Superior) to A (Excellent) and revised its outlook for all
ratings from negative to stable. A.M. Best indicated that the downgrade was based on the deterioration of the
State Auto Group’s underwriting and operating earnings in recent years, driven by an increased frequency and
severity of property catastrophe losses, among other factors.
OTHER
Impact of Inflation
Inflation can have a significant impact on property and casualty insurers because premium rates are
established before the amount of losses and loss expenses are known. When establishing rates, we attempt to
anticipate increases from inflation subject to the limitations of modeling economic variables. Even when general
inflation, as measured by the Consumer Price Index, is relatively modest, as has been the case over the last
several years, price inflation on the goods and services purchased by insurance companies in settling claims can
steadily increase. For example, medical care costs have risen at a higher rate than general inflation over the last
few years. Costs for building materials typically rise dramatically following widespread natural catastrophes,
such as the industry experienced in 2008 with Hurricane Ike. We continue to adjust our pricing projections to
reflect current and anticipated changes in costs in all lines of business.
We consider inflation when estimating liabilities for losses and loss expenses, particularly for claims having
a long period between occurrence and final settlement. The liabilities for losses and loss expenses are
management’s best estimates of the ultimate net cost of underlying claims and expenses and are not discounted
for the time value of money. In times of high inflation, the normally higher yields on investment income may
partially offset potentially higher claims and expenses.
New Accounting Standards
Adoption of Recent Accounting Pronouncements
Improving Disclosures about Fair Value Measurements
In January 2010, FASB issued guidance to improve the disclosures related to fair value measurements. The
guidance requires the information in the reconciliation of recurring Level 3 measurements about purchases, sales,
issuances and settlements to be presented separately on a gross basis, rather than as one net number. We adopted
this guidance effective January 1, 2011. The disclosures required by this guidance are provided in Note 3 of the
accompanying consolidated financial statements.
Comprehensive Income
In June 2011, FASB issued updated guidance to improve the presentation of comprehensive income. This
new guidance requires an entity to present comprehensive income on the face of the financial statements. We
retrospectively adopted this guidance effective December 31, 2011. The consolidated financial statements present
a separate Statement of Comprehensive Income.
83
Pending Adoption of Accounting Pronouncements
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting of
costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of
acquisition costs to specify that a cost be directly related to the successful acquisition of a new or renewal
insurance contract
in order to be deferred. This guidance is effective for fiscal years beginning after
December 15, 2011. We adopted this guidance, with retrospective application, at January 1, 2012. We anticipate
the cumulative effect of this retrospective adoption of this guidance will reduce stockholders’ equity by
approximately $20.5 million, after-tax, at January 1, 2010. Restated financial information will be presented with
our first quarter 2012 Form 10-Q.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRS
The amendments in this guidance result in common fair value measurement and disclosure requirements in
GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments in the guidance
change the wording used to describe many of the requirements in GAAP for measuring fair value and for
disclosing information about fair value measurements. For many of the requirements, the FASB does not intend
for the amendments in the guidance to result in a change in the application of the requirements in the Fair Value
Measurements Topic. The guidance also clarifies the FASB’s intent about the application of existing fair value
measurement requirements as well as changes to a particular principle or requirement for measuring fair value or
for disclosing information about fair value measurements. This guidance is effective on a prospective basis for
fiscal years and interim periods beginning after December 15, 2011. We adopted this guidance at January 1,
2012, and it did not have a material impact on our consolidated financial statements.
Testing Goodwill for Impairment
In September 2011, the FASB issued updated guidance in relation to testing goodwill for impairment. The
amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely
than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it
is necessary to perform the two-step goodwill impairment. The more-likely-than-not threshold is defined as
having a likelihood of a more than 50 percent. Previous guidance under Topic 350 (Intangibles—Goodwill and
Other), required an entity to test goodwill for impairment on an annual basis. Under this updated guidance, the
test for impairment should be performed on an annual basis unless an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the fair value of
a reporting unit is less than its carrying amount, the second step of the test must be performed to measure the
amount of the impairment loss, if any. However, an entity is not required to calculate the fair value of a reporting
unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.
This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, with early
adoption permitted. We adopted this guidance at January 1, 2012, and it did not have a material impact on our
consolidated financial statements.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Qualitative and Quantitative Disclosures about Market Risk are included in Item 7 of this Form 10-K under
“Results of Operations—Investment Operations Segment—Market Risk.”
84
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, including the notes thereto, and the reports of Ernst & Young LLP on
our consolidated financial statements and our internal controls over financial reporting are as follows:
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
State Auto Financial Corporation
We have audited the accompanying consolidated balance sheets of State Auto Financial Corporation and
income,
subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of
comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2011. Our audits also included the financial statement schedules listed in the Index at
Item 15(a)(2). These
the Company’s
and schedules
management. Our responsibility is to express an opinion on these financial statements and schedules based on
our audits.
responsibility of
statements
financial
the
are
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of State Auto Financial Corporation and subsidiaries at December 31, 2011 and
2010, and the consolidated results of their operations and their cash flows for each of the three years in the period
ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), State Auto Financial Corporation and subsidiaries’ internal control over financial reporting as of
December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2012,
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Columbus, Ohio
March 12, 2012
85
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The Board of Directors and Stockholders of
State Auto Financial Corporation
We have audited State Auto Financial Corporation and subsidiaries’ internal control over financial reporting
as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). State Auto Financial
Corporation’s management is responsible for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, State Auto Financial Corporation and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of State Auto Financial Corporation and subsidiaries as of
December 31, 2011 and 2010, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011, and our
report dated March 12, 2012, expressed an unqualified opinion thereon.
Columbus, Ohio
March 12, 2012
/s/ Ernst & Young LLP
86
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Balance Sheets
(in millions, except per share amounts)
Assets
December 31
2011
2010
Fixed maturities, available-for-sale, at fair value (amortized cost $1,817.3 and
$1,862.3, respectively)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,934.9
1,900.7
Equity securities, available-for-sale, at fair value (cost $141.7 and $200.2,
respectively)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167.3
256.2
Other invested assets, available-for-sale, at fair value (cost $48.6 and $64.4,
respectively)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable from affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57.2
0.5
70.0
79.7
0.5
70.0
2,229.9
2,307.1
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on losses and loss expenses payable (affiliates none) . . . . . . . . .
Prepaid reinsurance premiums (affiliates none) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, at cost, (net of accumulated depreciation of $7.5 and $7.2,
356.0
30.2
118.1
25.5
7.9
—
12.3
0.5
88.3
38.0
150.2
18.8
7.6
6.5
7.6
86.3
respectively)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.4
11.6
$2,790.8
2,722.0
Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliates $376.8 and $375.8, respectively) . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Unearned premiums (affiliates $98.4 and $234.6, respectively)
Notes payable (affiliates $15.5 and $15.5, respectively)
. . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement and pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 907.1
470.2
116.4
112.8
349.4
76.6
893.0
613.2
116.8
186.9
—
60.3
2,032.5
1,870.2
Stockholders’ equity:
Class A Preferred stock (nonvoting), without par value. Authorized 2.5 shares; none
issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B Preferred stock, without par value. Authorized 2.5 shares; none issued . . . . . . .
Common stock, without par value. Authorized 100.0 shares; 47.1 and 46.9 shares
—
—
—
—
issued, respectively, at stated value of $2.50 per share . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, 6.8 and 6.8 shares, respectively, at cost . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
Accumulated other comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117.8
(115.8)
127.3
63.8
565.2
117.3
(115.8)
122.1
(7.9)
736.1
758.3
851.8
$2,790.8
2,722.0
See accompanying notes to consolidated financial statements.
87
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Income
($ millions, except per share amounts)
Earned premiums (ceded to affiliate $803.6, $818.8 and $742.6, respectively) . . . .
Net investment income (affiliates $4.9, $4.9 and $3.1, respectively) . . . . . . . . . . . .
Net realized gain (loss) on investments:
Total other-than-temporary impairment losses . . . . . . . . . . . . . . . . . . . . .
Portion of loss recognized in other comprehensive income . . . . . . . . . . .
Other net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net realized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (affiliates $2.5, $2.2 and $2.2, respectively) . . . . . . . . . . . . . . . . . . .
Year ended December 31
2011
2010
2009
$1,428.8
85.4
1,257.2
80.8
1,176.5
82.1
(6.6)
—
43.6
37.0
2.5
(4.1)
—
19.0
14.9
2.2
(9.0)
—
3.8
(5.2)
3.5
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,553.7
1,355.1
1,256.9
Losses and loss expenses (ceded to affiliate $701.0, $579.1 and $544.9,
respectively)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense (affiliates $0.7, $0.7 and $0.8, respectively) . . . . . . . . . . . . . . . . .
Postretirement benefit curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,180.0
482.2
7.1
(14.9)
8.6
889.6
424.4
7.1
—
9.5
843.3
400.9
7.6
—
17.9
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,663.0
1,330.6
1,269.7
(Loss) income before federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(109.3)
24.5
(12.8)
Federal income tax expense (benefit):
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total federal income tax expense (benefit) . . . . . . . . . . . . . . . . . . .
(7.0)
44.5
37.5
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (146.8)
(Loss) earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (3.65)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (3.65)
Dividends paid per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.60
7.7
(7.7)
—
24.5
0.61
0.62
0.60
(9.5)
(13.5)
(23.0)
10.2
0.26
0.25
0.60
See accompanying notes to consolidated financial statements.
88
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Comprehensive Income
($ millions)
Year ended December 31
2011
2010
2009
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax:
$(146.8)
24.5
10.2
Net unrealized holding gains on investments:
Unrealized holding gain arising during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments for gains (losses) realized in net (loss) income . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net unrealized holding gains on investments . . . . . . . . . . . . . . . . . . . .
Amortization of gain on derivative used in cash flow hedge . . . . . . . . . . . . . . . . . .
Net unrecognized benefit plan obligations:
Net actuarial loss arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Negative plan amendment gain on postretirement healthcare benefit plan . . . . . .
. . . . . . .
Reclassification adjustments for amortization to statements of income:
Transition asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Negative prior service cost
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of December 31, 2011 pooling change . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net unrecognized benefit plan obligations . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80.2
(38.1)
(14.7)
27.4
(0.1)
34.9
(11.5)
(8.2)
15.2
(0.1)
99.0
5.2
(33.9)
70.3
(0.1)
(33.9)
(69.8)
93.8 —
37.3
—
(0.3)
(0.8)
(19.0)
(3.0)
7.2
6.8
59.1 —
(26.6)
10.8
(0.7)
(2.7)
5.2
—
(14.6)
44.4
71.7
(20.1)
(5.0)
24.5
94.7
Comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (75.1)
19.5
104.9
See accompanying notes to consolidated financial statements.
89
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Stockholders’ Equity
(in millions)
Common shares:
Year ended December 31
2011
2010
2009
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury shares:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired on stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.9
0.2
47.1
(6.8)
—
(6.8)
46.6
0.3
46.9
(6.8)
—
(6.8)
46.3
0.3
46.6
(6.8)
—
(6.8)
Common stock:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 117.3
0.5
116.6
0.7
115.9
0.7
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117.8
117.3
116.6
Treasury stock:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired on stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(115.8)
—
(115.7)
(0.1)
(115.5)
(0.2)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(115.8)
(115.8)
(115.7)
Additional paid-in capital:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from stock options exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 122.1
2.2
—
3.0
115.8
2.6
0.3
3.4
109.0
2.8
0.2
3.8
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
127.3
122.1
115.8
Accumulated other comprehensive income (loss):
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gains on investments, net of tax and reclassification
adjustment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of gain on derivative used in cash flow hedge . . . . . . . . . . . . . . . . .
Change in unrecognized benefit plan obligations, net of tax and reclassification
adjustment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(7.9)
(2.9)
(97.6)
27.4
(0.1)
15.2
(0.1)
70.3
(0.1)
44.4
63.8
(20.1)
24.5
(7.9)
(2.9)
Retained earnings:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid (affiliates $15.2, $15.2 and $15.2, respectively) . . . . . . . . . .
$ 736.1
(146.8)
(24.1)
735.6
24.5
(24.0)
749.2
10.2
(23.8)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
565.2
736.1
735.6
Total stockholders’ equity at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 758.3
851.8
849.4
See accompanying notes to consolidated financial statements.
90
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Cash Flows
($ millions)
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized (gain) loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement and pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on losses and loss expenses payable and prepaid
reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities and due to/from affiliates, net
. . . . . . . . . . . . . . . . . . . . . . . . .
Losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits on share-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided from pooling changes, January 1, 2011 and 2010 (Note 6a) . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchases of fixed maturities—available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equity securities—available-for-sale . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities, calls and pay downs of fixed maturities—available-for-sale . . . . . . .
Sales of fixed maturities—available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of equity securities—available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note to affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net additions of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . .
Payments of dividends (affiliates $15.2, $15.2 and $15.2, respectively)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosures:
Interest paid (affiliates $0.7, $0.7 and $0.8, respectively) . . . . . . . . . . . . . . . . . . .
Federal income taxes (received) paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See accompanying notes to consolidated financial statements.
91
Year ended December 31
2011
2010
2009
$(146.8)
24.5
10.2
5.3
3.2
(37.0)
13.2
0.8
(9.9)
(7.0)
89.5
93.0
(70.2)
—
39.8
69.1
43.0
(369.7)
(92.6)
(1.2)
327.2
167.6
180.9
20.8
—
13.2
—
8.8
3.7
(14.9)
(23.2)
2.3
5.6
1.5
1.2
56.8
67.6
0.3
(6.5)
3.7
131.4
11.8
3.7
5.2
(5.0)
4.7
1.8
0.3
(18.2)
49.0
31.9
0.1
15.0
—
110.5
(494.7)
(90.4)
(13.0)
159.0
323.8
34.0
1.2
(70.0)
(546.2)
(87.4)
(21.2)
369.3
93.6
86.0
0.9
—
(7.5) —
(0.1)
(0.1)
246.2
(112.6)
(150.2)
2.6
(24.1)
(21.5)
267.7
88.3
$ 356.0
3.2
(24.0)
3.3
(23.8)
(20.8)
(20.5)
(2.0)
90.3
88.3
(60.2)
150.5
90.3
$
$
7.0
(2.3)
7.0
6.2
7.1
(38.1)
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include State Auto Financial Corporation (“State Auto Financial”), an
Ohio corporation, and the following wholly owned subsidiaries of State Auto Financial:
•
State Auto Property and Casualty Insurance Company (“State Auto P&C”), an Iowa corporation
• Milbank Insurance Company (“Milbank”), an Iowa corporation
•
•
•
Farmers Casualty Insurance Company (“Farmers”), an Iowa corporation
State Auto Insurance Company of Ohio (“SA Ohio”), an Ohio corporation
Stateco Financial Services, Inc. (“Stateco”), an Ohio corporation
The consolidated financial statements also include the operations and financial position of 518 Property
Management and Leasing, LLC (“518 PML”), an Ohio limited liability company whose members are State Auto
P&C and Stateco. The consolidated financial statements also include the operations of State Auto National
Insurance Company (“SA National”), an Ohio corporation and a wholly owned subsidiary of State Auto
Financial through December 31, 2010, the date SA National was sold to a third party.
State Auto Financial is a majority-owned subsidiary of State Automobile Mutual Insurance Company
(“State Auto Mutual”), an Ohio corporation. State Auto Financial and its subsidiaries are referred to herein as the
“Company.” All significant intercompany balances and transactions have been eliminated in consolidation.
On December 31, 2010, State Auto Financial sold SA National to a third party for $14.0 million plus a
contingent earn-out of up to $2.0 million. In 2010, SA National wrote approximately $37.0 million in direct
written premium, with 80% (or approximately $30.0 million) retained by the Company under the Pooling
Arrangement (see Note 6). Included in net realized gain (loss) on investments for the year ended December 31,
2010 was a $3.9 million net gain on the sale of SA National. Included in accrued investment income and other
assets as of December 31, 2010 was $15.0 million in estimated sale proceeds receivable.
b. Description of Business
The Company markets its insurance products throughout the United States primarily through independent
agencies, which include retail agencies and wholesale brokers. The Company’s principal lines of insurance
include personal and commercial automobile, homeowners, commercial multi-peril, workers’ compensation,
general liability and fire insurance. State Auto P&C, Milbank, Farmers and SA Ohio are chartered and licensed
property and casualty insurers. As such, they are subject to the regulations of the applicable Departments of
Insurance of their respective states of domicile (the “Departments”) and the regulations of each state in which
they operate. These property and casualty insurance companies undergo periodic financial examination by the
Departments and insurance regulatory agencies of the states that choose to participate. A large portion of the
Company’s revenues are derived from a reinsurance pooling agreement with State Auto Mutual and its affiliates.
The underwriting activity and geographic distribution of State Auto Mutual and its affiliates is generally the same
as the underwriting activity and geographic distribution of the Company.
Through the employees of State Auto P&C, the Company provides management and operation services
under management agreements for all of its insurance and non-insurance affiliates.
92
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
Through Stateco, the Company provides investment management services to affiliated companies.
518 PML owns and leases property to the Company’s affiliates.
c. Basis of Presentation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted
accounting principles (“GAAP”), which vary in certain respects from statutory accounting practices (“SAP”)
followed by State Auto P&C, Milbank, Farmers and SA Ohio that are prescribed or permitted by the
Departments.
In preparing the consolidated financial statements, management
is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, revenues
and expenses for the periods then ended, and the accompanying notes to the financial statements. Such estimates
and assumptions could change in the future as more information becomes known which could impact the
amounts reported and disclosed herein.
Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of losses and loss expenses payable and the realizability of deferred tax assets. In connection with
the determination of losses and loss expenses payable, management uses historical data, current business
conditions and assumptions about future conditions to formulate estimates of the ultimate cost to settle claims.
Deferred tax assets are evaluated periodically by management to determine if they are realizable, requiring
management to make certain judgments and assumptions. In evaluating the ability to recover deferred tax assets,
management considers all available evidence, including loss carryback potential, past operating results, existence
of cumulative losses in the most recent years, projected performance of the business, future taxable income,
including the ability to generate capital gains, and prudent and feasible tax planning strategies. If, based on
available information, it is more likely than not that the deferred income tax asset will not be realized, then a
valuation allowance must be established with a corresponding charge to net income and/or other comprehensive
income. These estimates by their nature are subject to uncertainties for various reasons.
d. Investments
Investments in fixed maturities, equity securities and certain other invested assets are classified as
available-for-sale and are carried at fair value. The unrealized holding gains and losses, net of applicable deferred
income taxes, are shown as a separate component of stockholders’ equity as a part of accumulated other
comprehensive income (loss) and, as such, are not included in the determination of net income (loss). Realized
gains and losses on the sales of investments are computed using the first-in, first-out method.
that requires significant management
The Company regularly monitors its investments that have fair values less than cost or amortized cost for
signs of other-than-temporary impairment, an assessment
judgment
regarding the evidence known. Such judgments could change in the future as more information becomes known,
which could negatively impact the amounts reported. Among the factors that management considers for fixed
maturity securities are the financial condition of the issuer including receipt of scheduled principal and interest
cash flows, and intent to sell including if it is more likely than not that the Company will be required to sell the
investments before recovery. When a fixed maturity has been determined to have an other-than-temporary
impairment, the impairment charge is separated into an amount representing the credit loss, which is recognized
in earnings as a realized loss, and the amount related to non-credit factors, which is recognized in other
comprehensive income (loss). Future increases or decreases in fair value, if not other-than-temporary, are
included in other comprehensive income (loss).
93
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
Among the factors that management considers for equity securities and other invested assets are the length
of time and/or the significance of decline below cost, the Company’s ability and intent to hold these securities
through their recovery periods, the current financial condition of the issuer and its future business prospects, and
the ability of the market value to recover to cost in the near term. When an equity security or other invested asset
has been determined to have a decline in fair value that is other-than-temporary, the cost basis of the security is
adjusted to fair value. This results in a charge to earnings as a realized loss, which is not reversed for subsequent
recoveries in fair value. Future increases or decreases in fair value, if not other-than-temporary, are included in
other comprehensive income (loss).
e. Cash Equivalents
The Company considers all liquid debt instruments with a maturity of three months or less to be cash
equivalents. The carrying amounts reported approximate their fair value.
f. Deferred Acquisition Costs
Acquisition costs, consisting of commissions, premium taxes and certain underwriting expenses relating to
the production of property and casualty business, are deferred and amortized over the same period in which the
related premiums are earned. The method followed for computing the acquisition costs limits the amount of such
deferred costs to their estimated realizable value. In determining estimated realizable value, the computation
gives effect to the premium to be earned, losses and loss expenses expected to be incurred, and certain other costs
expected to be incurred as premium is earned. Future changes in estimates, the most significant of which is
expected losses and loss adjustment expenses, that indicate a reduction in expected future profitability may result
in unrecoverable deferred acquisition costs. The Company has not recorded any significant changes in estimates
for the years ended December 31, 2011, 2010 and 2009, respectively. See 1.k Pending Adoptions of New
Accounting Standards below.
The following table sets forth net deferred acquisition costs for the years ended December 31, 2011, 2010
and 2009:
($ millions)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of January 1, 2011 and 2010 pooling changes
(Note 6a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs amortized to expense . . . . . . . . . . . . . . . . . .
Effect of December 31, 2011 pooling change (Note 6a) . . . . .
2011
2010
2009
$ 150.2
127.3
122.3
8.3
328.7
(341.8)
(27.3)
(0.2)
304.7
(281.6)
—
—
282.5
(277.5)
—
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 118.1
150.2
127.3
g. Federal Income Taxes
The Company files a consolidated federal income tax return. Pursuant to a written tax sharing agreement,
each entity within the consolidated group pays or receives its share of federal income taxes based on separate
return calculations.
94
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The Company recognizes deferred income tax assets and liabilities for the expected future tax effects
attributable to temporary differences between the financial statement and tax return bases of assets and liabilities,
based on enacted tax rates and other provisions of the tax law. The effect of a change in tax laws or rates on
deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Deferred
tax assets and liabilities include provisions for unrealized investment gains and losses as well as the net funded
status of pension and other postretirement benefit obligations with the changes for each period included in the
respective components of other comprehensive income (loss). Deferred tax assets are reduced by a valuation
allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized.
Interest and penalties related to uncertain tax positions are recorded in the balance sheet as other liabilities,
and recognized in the income statement as other expenses.
h. Losses and Loss Expenses Payable
Losses and loss expenses payable are based on formula and case-basis estimates for reported claims and on
estimates, based on experience and perceived trends, for unreported claims and loss expenses. The liability for
unpaid losses and loss expenses, net of estimated salvage and subrogation recoverable of $25.5 million and $28.3
million at December 31, 2011 and 2010, respectively, has been established to cover the estimated ultimate cost to
settle insured losses. The amounts are based on estimates of future rates of inflation and other factors, and
accordingly, there can be no assurance that the ultimate liability will not vary materially from such estimates.
The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current
operations (see Note 4). Anticipated salvage and subrogation is estimated using historical experience. As such,
losses and loss expenses payable represent management’s best estimate of the ultimate liability related to
reported and unreported claims.
i. Premiums
Premiums are recognized as earned prorata over the policy period. Unearned premiums represent the portion
of premiums written relative to the unexpired terms of coverage.
j. Comprehensive Income (Loss)
Comprehensive income (loss) is defined as all changes in an enterprise’s equity during a period other than
those resulting from investments by owners and distributions to owners. Comprehensive income (loss) includes
net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes all other
non-owner related changes to equity and includes net unrealized gains and losses on available-for-sale
investments, derivative instruments and unrecognized benefit plan obligations, adjusted for deferred federal
income taxes.
k. New Accounting Standards
Adoption of Recent Accounting Pronouncements
Improving Disclosures about Fair Value Measurements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to improve the
disclosures related to fair value measurements. The guidance requires the information in the reconciliation of
recurring Level 3 measurements about purchases, sales, issuances and settlements to be presented separately on a
95
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
gross basis, rather than as one net number. The Company adopted this guidance effective January 1, 2011. The
disclosures required by this guidance are provided in Note 3 of the accompanying consolidated financial
statements.
Comprehensive Income
In June 2011, the Financial Accounting Standards Board (“FASB”) issued updated guidance to improve the
presentation of comprehensive income. This new guidance requires an entity to present comprehensive income
on the face of the financial statements. The Company retrospectively adopted this guidance effective
December 31, 2011. The consolidated financial statements present a separate Statement of Comprehensive
Income.
Improving Disclosures about Fair Value Measurements
In January 2010,
the FASB issued guidance to improve the disclosures related to fair value
measurements. The guidance requires expanded fair value disclosures, including the reasons for significant
transfers between Level 1 and Level 2 and the amount of significant transfers into each level disclosed separately
from transfers out of each level. For Level 3 fair value measurements, information in the reconciliation of
recurring Level 3 measurements about purchases, sales, issuances and settlements shall be presented separately
on a gross basis, rather than as one net number. In addition, clarification is provided about existing disclosure
requirements, such as presenting fair value measurement disclosures for each class of assets and liabilities that
are determined based on their nature and risk characteristics and their placement in the fair value hierarchy (that
is, Level 1, 2, or 3), as opposed to each major category of assets and liabilities, as required in the previous
guidance. Disclosures about the valuation techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements are required for fair value measurement that fall in either Level 2 or Level
3. The Company adopted this guidance effective January 1, 2010, except for the gross presentation of purchases,
sales,
issuances and settlements in the Level 3 reconciliation, which was adopted January 1, 2011. The
disclosures required by the guidance are provided in Note 3.
Other-Than-Temporary Impairments
In April 2009, the FASB issued guidance for the accounting for other-than-temporary impairments. Under
the guidance, which is part of the FASB ASC Topic Investments—Debt and Equity Securities, the indicators
used in considering an impairment of a debt security to be other-than-temporary were modified, from
management asserting it has both the intent and the ability to hold an impaired security for a period of time
sufficient for anticipated recovery in fair value to management asserting that (a) it does not have the intent to sell
the security and (b) it is more likely than not it will not have to sell the security before recovery. Additionally,
this guidance requires that other-than-temporary impairments on debt securities due to credit be recognized in
earnings while non-credit other-than-temporary impairments be recognized in other comprehensive income. This
guidance also requires companies to disclose major security types for both debt and equity securities and to
provide meaningful disclosure about individually significant unrealized losses and all such disclosures are
required to be included in both interim and annual periods. The Company adopted this guidance effective April 1,
2009, and determined it did not have a material effect on the Company’s consolidated financial statements. The
disclosures required by this guidance are provided in Note 2.
96
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
Pending Adoption of Accounting Pronouncements
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting of
costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of
acquisition costs to specify that a cost be directly related to the successful acquisition of a new or renewal
insurance contract
in order to be deferred. This guidance is effective for fiscal years beginning after
December 15, 2011. The Company adopted this guidance, with retrospective application, at January 1, 2012. The
Company anticipates the cumulative effect of this retrospective adoption of this guidance will reduce
stockholders’ equity by approximately $20.5 million, after-tax, at January 1, 2010. Restated financial information
will be presented with the Company’s first quarter 2012 Form 10-Q.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRS
The amendments in this guidance result in common fair value measurement and disclosure requirements in
GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments in the guidance
change the wording used to describe many of the requirements in GAAP for measuring fair value and for
disclosing information about fair value measurements. For many of the requirements, the FASB does not intend
for the amendments in the guidance to result in a change in the application of the requirements in the Fair Value
Measurements Topic. The guidance also clarifies the FASB’s intent about the application of existing fair value
measurement requirements as well as changes to a particular principle or requirement for measuring fair value or
for disclosing information about fair value measurements. This guidance is effective on a prospective basis for
fiscal years and interim periods beginning after December 15, 2011. The Company adopted this guidance at
January 1, 2012 and it did not have a material impact on the consolidated financial statements.
Testing Goodwill for Impairment
In September 2011, the FASB issued updated guidance in relation to testing goodwill for impairment. The
amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely
than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it
is necessary to perform the two-step goodwill impairment. The more-likely-than-not threshold is defined as
having a likelihood of a more than 50 percent. Previous guidance under Topic 350 (Intangibles—Goodwill and
Other), required an entity to test goodwill for impairment on an annual basis. Under this updated guidance, the
test for impairment should be performed on an annual basis unless an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the fair value of
a reporting unit is less than its carrying amount, the second step of the test must be performed to measure the
amount of the impairment loss, if any. However, an entity is not required to calculate the fair value of a reporting
unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.
This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, with early
adoption permitted. The Company adopted this guidance at January 1, 2012 and it did not have a material impact
on the consolidated financial statements.
97
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
2. Investments
The following tables set forth the cost or amortized cost and fair value of available-for-sale securities by lot
at December 31, 2011 and 2010:
($ millions)
At December 31, 2011:
Fixed maturities:
Cost or
amortized
cost
Gross
unrealized
holding
gains
Gross
unrealized
holding
losses
Fair
value
U.S. treasury securities and obligations of U.S. government
agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies residential mortgage-backed
$ 433.8
761.3
231.4
35.0
50.0
13.7
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
390.8
20.3
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,817.3
119.0
Equity securities:
Large-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106.4
35.3
141.7
48.6
18.9
9.9
28.8
8.6
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,007.6
156.4
(0.1)
(0.1)
(0.3)
(0.9)
(1.4)
(3.2)
—
(3.2)
—
(4.6)
468.7
811.2
244.8
410.2
1,934.9
122.1
45.2
167.3
57.2
2,159.4
($ millions)
At December 31, 2010:
Fixed maturities:
Cost or
amortized
cost
Gross
unrealized
holding
gains
Gross
unrealized
holding
losses
Fair
value
U.S. treasury securities and obligations of U.S. government
agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies residential mortgage-backed
$ 450.5
916.6
136.3
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
358.9
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,862.3
Equity securities:
Large-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167.1
33.1
200.2
64.4
12.9
23.6
6.2
8.4
51.1
45.5
12.0
57.5
15.3
(2.3)
(6.6)
(0.1)
461.1
933.6
142.4
(3.7)
363.6
(12.7)
1,900.7
(1.5)
—
(1.5)
—
211.1
45.1
256.2
79.7
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,126.9
123.9
(14.2)
2,236.6
98
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following tables set forth the Company’s gross unrealized losses and fair value on its investments by
lot, aggregated by investment category and length of time for individual securities that have been in a continuous
unrealized loss position at December 31, 2011 and 2010:
($ millions, except # of positions)
At December 31, 2011:
Fixed maturities:
Less than 12 months
12 months or more
Total
Fair
value
Unrealized
losses
Number
of
positions
Fair
value
Unrealized
losses
Number
of
positions
Fair
value
Unrealized
losses
Number
of
positions
U.S. treasury securities and
obligations of U.S.
government agencies . . . . . . $ 5.0
$—
Obligations of states and
political subdivisions . . . . . .
Corporate securities . . . . . . . . .
U.S. government agencies
residential mortgage-backed
securities . . . . . . . . . . . . . . .
Total fixed maturities . . . .
Large-cap equity securities . . . . . . .
Total temporarily impaired
8.9
23.0
(0.1)
(0.3)
18.3
55.2
19.3
(0.1)
(0.5)
(3.0)
1
4
9
4
18
9
$ 9.0
$(0.1)
2.1 —
—
—
35.3
46.4
2.7
(0.8)
(0.9)
(0.2)
3
1
—
13
17
1
$ 14.0
$(0.1)
11.0
23.0
(0.1)
(0.3)
53.6
101.6
22.0
(0.9)
(1.4)
(3.2)
securities . . . . . . . . . . . . . . . . . . . $74.5
$(3.5)
27
$49.1
$(1.1)
18
$123.6
$(4.6)
4
5
9
17
35
10
45
($ millions, except # of positions)
At December 31, 2010:
Fixed maturities:
Less than 12 months
12 months or more
Total
Fair
value
Unrealized
losses
Number
of
positions
Fair
value
Unrealized
losses
Number
of
positions
Fair
value
Unrealized
losses
Number
of
positions
U.S. treasury securities and
obligations of U.S.
government agencies . . . . . $102.0 $ (2.3)
25
$ — $—
— $102.0 $ (2.3)
239.0
12.6
(6.6)
(0.1)
92 —
5 —
—
—
—
—
239.0
12.6
(6.6)
(0.1)
25
92
5
Obligations of states and
political subdivisions . . . . .
Corporate securities . . . . . . . .
U.S. government agencies
residential mortgage-
backed securities . . . . . . . .
Total fixed maturities . . .
Large-cap equity securities . . . . . .
Total temporarily impaired
116.6
470.2
14.8
(3.0)
(12.0)
(1.4)
26
148
6
20.3
20.3
2.2
(0.7)
(0.7)
(0.1)
9
9
1
136.9
490.5
17.0
(3.7)
(12.7)
(1.5)
35
157
7
securities . . . . . . . . . . . . . . . . . . $485.0 $(13.4)
154
$22.5
$(0.8)
10
$507.5 $(14.2)
164
99
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following table sets forth the realized losses related to other-than-temporary impairments on the
Company’s investment portfolio recognized for the years ended December 31, 2011, 2010 and 2009:
($ millions)
Equity securities:
2011
2010
2009
Large-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1.0)
(5.6)
—
(7.8)
(1.2)
(0.3)
(3.3)
(0.5) —
Total other-than-temporary impairments . . . . . . . . . . . . . .
$(6.6)
(4.1)
(9.0)
The Company did not recognize other-than-temporary impairments on its fixed maturity securities in 2011,
2010 and 2009. The Company reviewed its investments at December 31, 2011, and determined no additional
other-than-temporary impairment exists in the gross unrealized holding losses.
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by
contractual maturity at December 31, 2011:
($ millions)
Due in 1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies residential mortgage-backed securities . . . . . . . . . . . . . . . . . . .
Amortized
cost
$
41.3
360.1
520.6
504.5
390.8
Fair
value
41.7
375.8
562.9
544.3
410.2
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,817.3
1,934.9
Expected maturities may differ from contractual maturities because issuers may have the right to call or
prepay the obligations with or without call or prepayment penalties.
Fixed maturities with fair values of approximately $9.9 million and $72.2 million were on deposit with
insurance regulators as required by law at December 31, 2011 and 2010, respectively.
The following table sets forth the components of net investment income for the years ended December 31,
2011, 2010 and 2009:
($ millions)
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, and other . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
$77.0
4.9
5.7
87.6
2.2
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$85.4
2010
71.7
5.4
5.8
82.9
2.1
80.8
2009
75.7
3.5
4.9
84.1
2.0
82.1
100
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The Company’s current investment strategy does not rely on the use of derivative financial instruments.
Proceeds on sales of available-for-sale securities in 2011, 2010 and 2009 were $348.5 million, $179.6
million and $357.8 million, respectively.
The following table sets forth the realized and unrealized holding gains (losses) on the Company’s
investment portfolio for the years ended December 31, 2011, 2010 and 2009:
($ millions)
Realized gains:
2011
2010
2009
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4.4
2.4
41.7
15.8
3.9 —
5.9
4.8
—
Total realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50.0
18.2
10.7
Realized losses:
Equity securities:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets—OTTI
(5.3)
(6.6)
—
(6.9)
(9.0)
(3.1)
(3.6)
(0.5) —
Total realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11.9)
(7.2)
(15.9)
Net realized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 38.1
11.0
(5.2)
Change in unrealized holding gains (losses), net of tax:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income liability thereon . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 79.2
(30.4)
(6.7)
(14.7)
—
(5.3)
21.6
7.1
(8.2)
—
54.1
41.2
8.9
(36.5)
2.6
Change in net unrealized holding gains, net of tax . . . . . . . . . . . . . . . . . . . . .
$ 27.4
15.2
70.3
There was a deferred federal income tax liability on the net unrealized holding gains at December 31, 2011
and 2010 of $53.1 million and $38.4 million, respectively.
3. Fair Value of Financial Instruments
Below is the fair value hierarchy that categorizes into three levels the inputs to valuation techniques that are
used to measure fair value:
•
•
•
Level 1 includes observable inputs which reflect quoted prices for identical assets or liabilities in active
markets at the measurement date.
Level 2 includes observable inputs for assets or liabilities other than quoted prices included in Level 1,
and it includes valuation techniques which use prices for similar assets and liabilities.
Level 3 includes unobservable inputs which reflect the reporting entity’s estimates of the assumptions
that market participants would use in pricing the asset or liability (including assumptions about risk).
101
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The Company utilizes one nationally recognized pricing service to estimate the majority of
its
available-for-sale investment portfolio’s fair value. The Company obtains one price per security and the
processes and control procedures employed by the Company are designed to ensure the value is accurately
the Company gains an
recorded on an unadjusted basis. Through discussions with the pricing service,
understanding of the methodologies used to price the different types of securities, that the data and the valuation
methods utilized are appropriate and consistently applied, and that
the assumptions are reasonable and
representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service,
the Company compares to other fair value pricing information gathered from other independent pricing sources.
At December 31, 2011, the Company did not adjust any of the prices received from the pricing service.
Transfers between level categorizations may occur due to changes in the availability of market observable
inputs. Transfers in and out of level categorizations are reported as having occurred at the beginning of the
quarter in which the transfer occurred. There were no transfers between level categorizations during the years
ended December 31, 2011 and 2010.
The following sections describe the valuation methods used by the Company for each type of financial
instrument carried at fair value:
Fixed Maturities
The Company utilizes a third party pricing service to estimate fair value measurements for the majority of
its fixed maturities. The fair value estimate of the Company’s fixed maturity investments are determined by
evaluations that are based on observable market information rather than market quotes. Inputs to the evaluations
limited to, market prices from recently completed transactions and transactions of
include, but are not
comparable securities, interest rate yield curves, credit spreads, and other market-observable information. The
fixed maturity portfolio pricing obtained from the pricing service is reviewed for reasonableness. Regularly, a
sample of security prices are referred back to the pricing service for more detailed explanation as to how the
pricing service arrived at that particular price. The explanations are reviewed for reasonableness by the portfolio
manager and investment officer. Additionally, the prices and assumptions are verified against an alternative
pricing source for reasonableness and accuracy. Any discrepancies with the pricing are returned to the pricing
service for further explanation and if necessary, adjustments are made. To date, the Company has not identified
any significant discrepancies in the pricing provided by its third party pricing service. Investments valued using
these inputs include U.S. treasury securities and obligations of U.S. government agencies, obligations of states
and political subdivisions, corporate securities (except for one security discussed below), and U.S. government
agencies residential mortgage-backed securities. All unadjusted estimates of fair value for fixed maturities priced
by the pricing service are included in the amounts disclosed in Level 2 of the hierarchy. If market inputs are
unavailable, then no fair value is provided by the pricing service. For these securities, fair value is determined
either by requesting brokers who are knowledgeable about these securities to provide a quote; or the Company
internally determines the fair values by employing widely accepted pricing valuation models, and depending on
the level of observable market inputs, renders the fair value estimate as Level 2 or Level 3. The Company holds
one fixed maturity corporate security for which the Company estimates the fair value of this security using the
present value of the future cash flows. Due to the limited amount of observable market information, the
Company includes the fair value estimates for this security in Level 3.
102
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
Equities
The fair value of each equity security is based on an observable market price for an identical asset in an
active market and is priced by the same pricing service discussed above. All equity securities are recorded using
unadjusted market prices and have been disclosed in Level 1.
Other Invested Assets
Included in other invested assets are two international private equity funds (“the funds”) that invest in equity
securities of foreign issuers and are managed by third party investment managers. The funds had a fair value of
$52.6 million and $75.3 million at December 31, 2011 and 2010, respectively, which was determined using each
fund’s net asset value. The Company employs procedures to assess the reasonableness of the fair value of the
funds including obtaining and reviewing each fund’s audited financial statements. There are no unfunded
commitments related to the funds. The Company may not sell its investment in the funds; however, the Company
may redeem all or a portion of its investment in the funds at net asset value per share with the appropriate prior
written notice. The funds are disclosed in Level 2 within the hierarchy due to the Company’s ability to redeem its
investment in the funds at net asset value per share at the measurement date.
The remainder of the Company’s other invested assets consist primarily of holdings in publicly-traded
mutual funds. The Company believes that its prices for these publicly-traded mutual funds based on an
observable market price for an identical asset in an active market reflect their fair values and consequently these
securities have been disclosed in Level 1.
The following tables set forth the Company’s available-for-sale investments within the fair value hierarchy
at December 31, 2011 and 2010:
($ millions)
At December 31, 2011:
Fixed maturities:
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
U.S. treasury securities and obligations of U.S.
government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies residential mortgage-backed
$ 468.7
811.2
244.8
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
410.2
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
1,934.9
Equity securities:
Large-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
122.1
45.2
167.3
57.2
Total available-for-sale investments . . . . . . . . . . . . . . . . . . . . . .
$2,159.4
—
—
—
—
—
122.1
45.2
167.3
4.6
171.9
468.7
811.2
241.9
410.2
1,932.0
—
—
—
52.6
—
—
2.9
—
2.9
—
—
—
—
1,984.6
2.9
103
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
($ millions)
At December 31, 2010:
Fixed maturities:
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
U.S. treasury securities and obligations of U.S.
government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies residential mortgage-backed
$ 461.1
933.6
142.4
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
363.6
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
1,900.7
Equity securities:
Large-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211.1
45.1
256.2
79.7
Total available-for-sale investments . . . . . . . . . . . . . . . . . . . . . .
$2,236.6
—
—
—
—
—
211.1
45.1
256.2
4.4
260.6
461.1
933.6
139.7
363.6
1,898.0
—
—
—
75.3
—
—
2.7
—
2.7
—
—
—
—
1,973.3
2.7
For assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the
following tables set forth a reconciliation of the beginning and ending balances for 2011 and 2010, separately for
each major category of assets:
($ millions)
Balance at January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized gains (losses)—included in earnings . . . . . . . . . . . . . . . . . . .
Total unrealized gains (losses)—included in other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed
maturities
$ 2.7
—
—
0.6
(0.4)
—
—
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.9
104
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
($ millions)
Balance at January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized gains (losses)—included in earnings . . . . . . . . . . . . . . . . . . .
Total unrealized gains (losses)—included in other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed
maturities
$ 2.3
—
—
0.6
(0.2)
—
—
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.7
The following table sets forth the carrying value and fair value of financial instruments at December 31,
2011:
($ millions)
Assets:
Carrying
value
Fair
value
Reference
Fixed maturities, available-for-sale, at fair value . . . . . . . . . . . . . . . . . .
Equity securities, available-for-sale, at fair value . . . . . . . . . . . . . . . . . .
Other invested assets, available-for-sale, at fair value . . . . . . . . . . . . . .
Notes receivable from affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,934.9
167.3
57.2
70.0
$1,934.9
See above
167.3
See above
57.2
See above
77.5 See Note 6c
Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension plan assets, available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . .
Postretirement plan assets, available-for-sale, at fair value . . . . . . . . . . . . . . .
116.4
145.8
1.8
115.8
145.8
1.8
See Note 7
See Note 9
See Note 9
105
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
4. Losses and Loss Expenses Payable
The following table sets forth the activity in the liability for losses and loss expenses for the years ended
December 31, 2011, 2010 and 2009:
($ millions)
2011
2010
2009
Losses and loss expenses payable, at beginning of year . . . . . . . . . . . . .
Less: reinsurance recoverable on losses and loss expenses payable . . . .
$ 893.0
18.8
Net balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of pooling changes, January 1, 2011 and 2010 (Note 6a) . . . . . .
874.2
124.1
840.2
20.8
819.4
791.2
21.2
770.0
(4.0) —
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,213.3
(33.3)
954.2
(64.6)
899.5
(56.2)
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,180.0
889.6
843.3
Paid related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
724.2
369.1
543.9
286.9
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of pooling change, December 31, 2011 (Note 6a) . . . . . . . . . . . .
1,093.3
830.8
(203.4) —
Net balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: reinsurance recoverable on losses and loss expenses payable . . . .
881.6
25.5
874.2
18.8
524.8
269.1
793.9
—
819.4
20.8
Losses and loss expenses payable, at end of year (affiliates $376.8,
$375.8 and $346.2, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 907.1
893.0
840.2
The Company recorded favorable loss and loss expense reserve development in 2011, 2010 and 2009 of
$33.3 million, $64.6 million and $56.2 million, respectively. The favorable development was the result of
subsequent reserve reviews using more mature claim data. Favorable development of loss adjustment expenses
contributed approximately $7.6 million of the 2011 development, while $4.3 million was attributable to favorable
development on catastrophe reserves. The personal and business insurance segments non-catastrophe loss and
ALAE reserves accounted for $28.1 million of favorable development in 2011, primarily in the homeowners,
commercial multi-peril and fire & allied lines with $14.2 million, $6.1 million and $4.9 million of favorable
development, respectively. The favorable development in these lines was driven by emergence of lower than
anticipated claim severity, primarily from accident years 2010 and 2009 as well as, to a lesser extent, the past
line of business. The specialty insurance segment
five accident years in the commercial multi-peril
non-catastrophe loss and ALAE reserves accounted for $6.7 million of adverse development in 2011, which was
driven by greater than anticipated large losses in the commercial auto line of business and reserve increases on
certain life time disability claims in the workers’ compensation line of business.
Favorable development of loss adjustment expenses contributed approximately $12.7 million of the 2010
development. Of the remaining favorable development in 2010, $10.7 million, $10.4 million and $9.0 million
was attributable to auto liability, both personal and commercial, homeowners and fire & allied lines, respectively.
The favorable development in these lines was driven by emergence of lower than anticipated claim severity, as
well as lower than anticipated claim frequency for fire & allied lines. Much of the favorable development was
attributable to the 2009 and, to a lesser extent, 2008 accident years.
106
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
in 2009 of
Favorable development
loss adjustment expense and catastrophe losses contributed
approximately $10.9 million each. Of the remaining favorable development in 2009, $9.5 million and $8.3
million was attributable to auto liability, both personal and commercial, and other & product
liability,
respectively. The favorable development in those lines was driven by emergence of lower than anticipated claim
severity, as well as lower than anticipated claim frequency for other & product liability.
5. Reinsurance
In the ordinary course of business, the Company assumes and cedes reinsurance with other insurers and
reinsurers and is a member in various pools and associations. See Note 6a for discussion of reinsurance with
affiliates. The voluntary arrangements provide greater diversification of business and limit the maximum net loss
potential arising from large risks and catastrophes. Most of the ceded reinsurance is effected under reinsurance
contracts known as treaties; the remainder is by negotiation on individual risks. Although the ceding of
reinsurance does not discharge the original insurer from its primary liability to its policyholder, the insurance
company that assumes the coverage assumes the related liability.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated
with the reinsured business. The recoverability of these assets depends on the reinsurers’ ability to perform under
the reinsurance agreements. The Company evaluates and monitors the financial condition and concentrations of
credit risk associated with its reinsurers under voluntary reinsurance arrangements to minimize its exposure to
significant losses from reinsurer insolvencies. The Company has reported ceded losses and loss expenses payable
and prepaid reinsurance premiums with other insurers and reinsurers as assets. All reinsurance contracts provide
for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance.
On December 31, 2011, the State Auto Group entered into the Home Owners Quota Share Arrangement,
which is a three-year quota share agreement covering its homeowners book of business. Under this arrangement,
the State Auto Group cedes to reinsurers 75% of its homeowners business under policies in force at the effective
date and new and renewal policies thereafter issued during the term of the agreement. The arrangement remains
in place until December 31, 2014. A reinsurer may terminate its participation in the arrangement upon the
occurrence of certain events, including, without limitation, the following: the policyholders’ surplus of the State
Auto Group has been reduced by more than 25% from the amount of its surplus as of September 30, 2011; or the
State Auto Group has been assigned an A.M. Best’s rating below A-. Under the arrangement, the State Auto
Group will receive a 29.0% commission on all premiums ceded to the reinsurers during the term of the
agreement. Subject to the terms and conditions of the arrangement, the State Auto Group may receive a profit
commission. On December 31, 2011 the Company transferred $106.3 million of unearned premium related to
this arrangement. The amount of ceding commission is limited to the amount of deferred acquisition costs that
would have been deferred if not for entering in the arrangement. At December 31, 2011, the Company has
recorded $6.7 million of excess ceding commission as a deferred liability on the consolidated balance sheet.
107
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following table sets forth the effect of the Company’s external reinsurance on its balance sheets at
December 31, 2011 and 2010, prior to the reinsurance transaction with State Auto Mutual under the Pooling
Arrangement, as discussed in Note 6a:
($ millions)
Losses and loss expenses payable:
December 31
2011
2010
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$517.7
12.6
(25.5)
496.0
21.2
(18.8)
Net losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . .
$504.8
498.4
Unearned premiums:
Direct
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$370.7
1.1
(7.9)
368.0
10.6
(7.6)
Net unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$363.9
371.0
The following table sets forth the effect of the Company’s external reinsurance on its income statements for
the years ended December 31, 2011, 2010 and 2009, prior to the reinsurance transaction with State Auto Mutual
under the Pooling Arrangement, as discussed in Note 6a:
($ millions)
Written premiums:
Year ended December 31
2011
2010
2009
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$814.4
8.7
(26.9)
852.8
3.4
(27.3)
830.3
4.9
(26.7)
Net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
$796.2
828.9
808.5
Earned premiums:
Direct
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$812.1
18.2
(26.7)
842.1
3.5
(26.8)
802.8
5.0
(26.5)
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
$803.6
818.8
781.3
Losses and loss expenses incurred:
Direct
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$716.2
12.6
(25.8)
589.2
2.4
(6.1)
587.0
2.7
(10.7)
Net losses and loss expenses incurred . . . . . . . . . . . . .
$703.0
585.5
579.0
108
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
6. Transactions with Affiliates
a. Reinsurance
The insurance subsidiaries of State Auto Financial participate in a quota share reinsurance pooling
arrangement (“the Pooling Arrangement”) with 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”), Beacon National Insurance Company (“Beacon National”), Patrons Mutual
Insurance Company of Connecticut (“Patrons Mutual”) and Litchfield Mutual Fire Insurance Company
(“Litchfield”). State Auto P&C, Milbank, Farmers and SA Ohio are referred to as the “STFC Pooled
Companies,” and State Auto Mutual, SA Wisconsin, SA Florida, Meridian Citizens Mutual, Meridian Security,
Beacon National, Patrons Mutual and Litchfield are referred to as the “Mutual Pooled Companies.” The STFC
Pooled Companies, the Mutual Pooled Companies, including the Rockhill Insurers (defined below), and Beacon
Lloyds Insurance Company (“Beacon Lloyds”), a subsidiary of State Auto Mutual, are collectively referred to as
the “State Auto Group.”
As of January 1, 2011, the Pooling Arrangement was amended to add Rockhill Insurance Company
(“Rockhill”), Plaza Insurance Company (“Plaza”), American Compensation Insurance Company (“American
Compensation”) and Bloomington Compensation Insurance Company (“Bloomington Compensation”) to the
pool. Rockhill, Plaza, American Compensation and Bloomington Compensation are referred to as the “Rockhill
Insurers.” In conjunction with this amendment, the STFC Pooled Companies received $149.8 million ($69.1
million in cash and $80.7 million in investment securities) from the Rockhill Insurers for net insurance liabilities
transferred on January 1, 2011. The following table sets forth the impact on the Company’s balance sheet at
January 1, 2011, relating to this amendment:
($ millions)
(Decrease)/Increase
Losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$124.1
34.1
(0.1)
8.3
Net cash and investment securities received . . . . . . . . . . . . . . . . . . . . .
$149.8
109
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
On December 31, 2011,
the Pooling Arrangement was amended to reduce the overall participation
percentage of the STFC Pooled Companies from 80% to 65% and to include the pooling of applicable balance
sheet accounts such as applicable accumulated other comprehensive income related to employee benefit plans. In
conjunction with this amendment, the STFC Pooled Companies will pay $261.4 million in cash to the Mutual
Pooled Companies in the first quarter 2012 for the net liabilities transferred on December 31, 2011. The
following table sets forth the impact on the Company’s balance sheet at December 31, 2011, relating to this
amendment:
($ millions)
(Decrease)/Increase
Losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(203.4)
(106.8)
(52.3)
22.1
59.1
(27.3)
7.4
Net cash to be paid (Due to affiliate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(261.4)
As of January 1, 2010, the Pooling Arrangement was amended to add SA National to the pool and to include
voluntary assumed reinsurance from third parties unaffiliated with the pool participants that was assumed on or
after January 1, 2009. In conjunction with this amendment, the STFC Pooled Companies received $3.7 million in
cash for net insurance assets transferred on January 1, 2010. The following table sets forth the impact on the
Company’s balance sheet at January 1, 2010, relating to this amendment:
($ millions)
(Decrease)/Increase
Losses and loss expenses payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(4.0)
(1.4)
(0.6)
(0.2)
(9.5)
$ 3.7
In general, under the Pooling Arrangement, the STFC Pooled Companies and the Mutual Pooled Companies
other than State Auto Mutual cede to State Auto Mutual all of their insurance business and assume from State
Auto Mutual an amount equal to their respective participation percentages in the Pooling Arrangement. All
premiums, losses and loss expenses and underwriting expenses are allocated among the participants on the basis
of each Company’s participation percentage in the Pooling Arrangement. The Pooling Arrangement provides
indemnification against loss or liability relating to insurance risk and has been accounted for as reinsurance.
The Pooling Arrangement does not relieve each individual pooled subsidiary of its primary liability as the
originating insurer; consequently, there is a concentration of credit risk arising from business ceded to State Auto
110
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
Mutual. As the Pooling Arrangement provides for the right of offset, the Company has reported losses and loss
expenses payable and prepaid reinsurance premiums to State Auto Mutual as assets only in situations when net
amounts ceded to State Auto Mutual exceed net amounts assumed. All parties that participate in the Pooling
Arrangement have an A.M. Best rating of A (Excellent).
The following table sets forth the reinsurance transactions on the Company’s balance sheets for the Pooling
Arrangement between the STFC Pooled Companies and State Auto Mutual at December 31, 2011 and 2010:
($ millions)
Losses and loss expenses payable:
December 31
2011
2010
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(504.8)
881.6
(498.4)
874.2
Net assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 376.8
375.8
Unearned premiums:
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(363.9)
462.3
(371.0)
605.6
Net assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 98.4
234.6
The following table sets forth the reinsurance transactions on the Company’s income statements for the
Pooling Arrangement between the STFC Pooled Companies and State Auto Mutual for the years ended
December 31, 2011, 2010 and 2009:
($ millions)
Written premiums:
Year ended December 31
2011
2010
2009
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (796.2)
1,284.6
(828.9)
1,323.5
(770.8)
1,172.7
Earned premiums:
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (803.6)
1,428.8
(818.8)
1,257.2
(742.6)
1,137.8
Losses and loss expenses incurred:
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (701.0)
1,177.7
(579.1)
883.2
(545.0)
809.2
Intercompany Balances
Pursuant to the Pooling Arrangement, State Auto Mutual receives all premiums and pays all losses and
expenses associated with the insurance business produced by the pool participants and then settles the
intercompany balances generated by these transactions with the participating companies on a quarterly basis
within 45 days following each quarter end. No interest is paid on this balance. When settling the intercompany
balances, State Auto Mutual provides the pool participants with full credit for the premiums written and net
losses paid during the quarter and retains all receivable amounts from insureds and agents and reinsurance
111
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
recoverable on paid losses from unaffiliated reinsurers. Any receivable amounts that are ultimately deemed to be
uncollectible are charged-off by State Auto Mutual and allocated to the pool members on the basis of pool
participation. As a result, the Company has an off-balance sheet credit risk related to the balances due to State
Auto Mutual from insurers, agents and reinsurers, which are offset by the unearned premium from the respective
policies. The Company’s share of the premium balances due to State Auto Mutual from agents and insureds at
December 31, 2011 and 2010 is approximately $268.5 million and $330.7 million, respectively.
b. Notes Payable
In May 2003, State Auto Financial formed a Delaware business trust (the “Capital Trust”) to issue $15.0
million of mandatorily redeemable preferred capital securities to a third party and $0.5 million of common
securities to State Auto Financial (the capital and common securities are collectively referred to as the “Trust
Securities”). The Capital Trust loaned $15.5 million, the proceeds from the issuance of its Trust Securities, to
State Auto Financial in the form of a Floating Rate Junior Subordinated Debt Securities due in 2033 (the
“Subordinated Debentures”). The Subordinated Debentures and interest accrued thereon are the Capital Trust’s
only assets. Interest on the Trust Securities are payable quarterly at a rate equal to the three-month LIBOR rate
plus 4.20% adjusted quarterly (total 4.73% at December 31, 2011). Because the interest rate and interest payment
dates on the Subordinated Debentures are the same as the interest rate and interest payment dates on the Trust
Securities, payments from the Subordinated Debentures finance the distributions paid on the Trust Securities.
State Auto Financial has the right to redeem the Subordinated Debentures, in whole or in part, on or after
May 2008. State Auto Financial has unconditionally and irrevocably guaranteed payment of any required
distributions on the capital securities, the redemption price when the capital securities are to be redeemed, and
any amounts due if the Capital Trust is liquidated or terminated. State Auto Financial’s equity interest in the
Capital Trust is included in other invested assets. In accordance with the Consolidation Topic of the FASB ASC,
State Auto Financial determined that the business trust is a variable interest entity for which it is not the primary
beneficiary and therefore, does not consolidate the Capital Trust with the Company. See Note 7.
c. Notes Receivable
In May 2009, the Company entered into two separate credit agreements with State Auto Mutual pursuant to
which it loaned State Auto Mutual a total of $70.0 million. Interest is payable semi-annually at a fixed annual
interest rate of 7.00%, with the principal payable in May 2019. There is no prepayment penalty, and no collateral
was given as security for the payment of this loan.
Under these agreements, State Auto Financial earned interest of $4.9 million, $4.9 million and $3.1 million
for the years ended December 31, 2011, 2010 and 2009, respectively. Interest income is included in net
investment income on the consolidated statements of income.
The Company estimates the fair value of the notes receivable from affiliate using market quotations for U.S.
treasury securities with similar maturity dates and applies an appropriate credit spread. The following table sets
forth the notes receivable at December 31, 2011 and 2010:
($ millions, except interest rates)
2011
Carrying
value
Fair
value
Interest
rate
Carrying
value
2010
Fair
value
Interest
rate
Notes receivable from affiliate . . . . . . . . . . . . . . . . . . . . . . .
$70.0
$77.5
7.00% $70.0
$71.1
7.00%
112
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
d. Management Services
Stateco provides State Auto Mutual and its affiliates investment management services. Investment
management income is recognized quarterly based on a percentage of the average fair value of investable assets
and the equity portfolio performance of each company managed. Revenue related to these services amounted to
$1.9 million, $1.6 million and $1.6 million in 2011, 2010 and 2009, respectively, and is included in other income
(affiliates) on the consolidated statements of income.
7. Notes Payable and Credit Facility
In 2003, State Auto Financial issued $100.0 million of unsecured Senior Notes due November 2013. The
Senior Notes bear interest at a fixed rate of 6.25% per annum, which is payable each May 15 and November 15.
The Senior Notes are general unsecured obligations ranking senior to all existing and future subordinated
indebtedness and equal with all existing and future senior indebtedness. The Senior Notes are not guaranteed by
any of State Auto Financial’s subsidiaries and thereby are effectively subordinated to all subsidiaries’ existing
and future indebtedness. State Auto Financial incurred $1.5 million in issuance costs related to the Senior Notes,
which is recorded in other assets on the consolidated balance sheets and is being amortized into interest expense
($0.1 million each for 2011, 2010 and 2009) as the underlying interest expense is recognized on the Senior Notes.
State Auto Financial has a $100.0 million unsecured revolving credit facility with a syndicate of lenders
which matures in September 2016 (the “Credit Facility”). During the term of the Credit Facility, State Auto
Financial has the right to increase the total facility to a maximum amount of $150.0 million, provided that no
event of default has occurred and is continuing. The Credit Facility is available for general corporate purposes
and provides for interest-only payments during its term, with principal and interest due in full at maturity.
Interest is based on LIBOR or a base rate plus a calculated margin amount. The Credit Facility includes certain
covenants, including financial covenants that require the Company to maintain a minimum net worth and not
exceed a certain debt to capitalization ratio. As of December 31, 2011, the Company had not made any
borrowings and was in compliance with all covenants related to the Credit Facility. State Auto Financial incurred
$0.5 million in issuance costs related to the Credit Facility, which is recorded in other assets on the consolidated
balance sheets and is being amortized into expense ($0.1 million each for 2011, 2010 and 2009) over the term of
the Credit Facility.
The fair value of the Senior Notes is based on the quoted market price at December 31, 2011 and 2010,
respectively. The carrying amount of the Subordinated Debentures (see Note 6b) in the consolidated balance
sheets approximates its fair value as the interest rate adjusts quarterly. The following table sets forth the notes
payable at December 31, 2011 and 2010:
($ millions, except interest rates)
2011
Fair
value
Carrying
value
Interest
rate
Carrying
value
2010
Fair
value
Interest
rate
Senior Notes due 2013: issued $100.0, November 2003
with fixed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$100.9
$100.3
6.25% $101.3
$106.4
6.25%
Affiliate Subordinated Debentures due 2033: issued
$15.5, May 2003 with variable interest (see
Note 6b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.5
15.5
4.73
15.5
15.5
4.50
Total notes payable . . . . . . . . . . . . . . . . . . . . . . . . . .
$116.4
$115.8
$116.8
$121.9
113
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
8. Federal Income Taxes
The following table sets forth the reconciliation between actual federal income tax expense (benefit) and the
amount computed at the indicated statutory rate for the years ended December 31, 2011, 2010 and 2009:
($ millions)
2011
2010
2009
Amount at statutory rate . . . . . . . . . . . . . . . . . . . . .
Tax-exempt interest and dividends received
$(38.3)
%
35
$ 8.6
%
35
$ (4.5)
%
35
deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10.8)
10
(13.1)
(54)
(16.9)
133
Patient Protection and Affordable Care Act,
Medicare Part D exemption repeal . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . .
Federal income tax expense (benefit) and
—
(4.6)
91.2
—
4
(83)
4.5
—
—
19
—
—
—
(1.1)
(0.5)
—
8
4
effective rate . . . . . . . . . . . . . . . . . . . . . . . .
$ 37.5
(34)
$ —
—
$(23.0)
180
The following table sets forth the tax effects of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010:
December 31,
2011
December 31,
2010
($ millions)
Deferred tax assets:
Unearned premiums not currently deductible . . . . . . . . . .
Losses and loss expenses payable discounting . . . . . . . . . .
Postretirement and pension benefits . . . . . . . . . . . . . . . . . .
Realized loss on other-than-temporary impairment . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Deferral of policy acquisition costs . . . . . . . . . . . . . . . . . .
Net unrealized holding gains on investments . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . .
Total net deferred tax assets before valuation
allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32.4
25.0
39.4
11.4
14.9
56.0
0.7
6.3
186.1
41.3
53.1
94.4
91.7
91.2
Net deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . . .
$
0.5
42.6
25.2
63.1
11.0
16.9
4.0
7.7
6.7
177.2
52.5
38.4
90.9
86.3
—
86.3
Deferred income tax assets and liabilities represent the tax effect of the differences between the financial
statement carrying value of existing assets and liabilities and their respective tax bases. The Company
114
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
periodically evaluates its deferred tax assets, which requires significant judgment, to determine if they are
realizable based upon weighing all available evidence, both positive and negative, including loss carryback
potential, past operating results, existence of cumulative losses in the most recent years, projected performance of
the business, future taxable income, including the ability to generate capital gains, and prudent and feasible tax
planning strategies. In making such judgments, significant weight is given to evidence that can be objectively
verified. If, based on available information, it is more likely than not that the deferred income tax asset will not
be realized, then a valuation allowance must be established with a corresponding charge to net income and/or
other comprehensive income (loss).
The magnitude of the catastrophe losses from unprecedented storms experienced industry wide, which by
far exceeded the Company’s projections, resulted in a loss before federal income taxes for the year ended
December 31, 2011. The Company considered both positive and negative evidence and concluded a valuation
allowance should be established. A valuation allowance of $91.2 million was held at December 31, 2011, with a
corresponding charge to total tax expense for the year ended December 31, 2011. The $0.5 million of deferred
income tax asset remaining after recognition of the valuation allowance represents a deferred tax asset on the
gross unrealized fixed maturity losses where management determined this portion of the asset to be realizable
due to management’s assertion that it has both the ability and intent to hold these securities through recovery or
maturity.
In future periods the Company will re-assess its judgments and assumptions regarding the realization of its
net deferred tax assets, but until such time the positive evidence exceeds the negative evidence the Company will
maintain a valuation allowance against its net deferred tax assets.
At December 31, 2011 and 2010, the Company had a deferred tax asset related to its net operating loss
carryforwards of $52.0 million and $4.0 million, respectively, which, if not used, will expire in 2031 and 2030,
respectively.
At December 31, 2011, the Company carried no balance for uncertain tax positions. The Company had no
accrual for the payment of interest and penalties at December 31, 2011 or 2010.
State Auto Financial and its subsidiaries file a consolidated U.S. federal income tax return. State Auto
Financial and its subsidiaries also file in various state jurisdictions. The Company is no longer subject to U.S.
federal or state and local income tax examinations by tax authorities for years before 2008. However, the
Company is currently under audit by the Internal Revenue Service for the 2009 and 2008 tax years, as required
by the Congressional Joint Committee on Taxation due to refunds in excess of the $2.0 million threshold. The
audit is anticipated to continue through 2012, and will include a limited scope examination for all tax years
impacted by the net operating loss carrybacks, including tax years 2005 through 2009.
9. Pension and Postretirement Benefit Plans
The Company, through the employees of State Auto P&C, provides management and operation services
under management agreements for all insurance and non-insurance affiliates. The annual periodic costs related to
the Company’s benefit plans are allocated to affiliated companies based on allocations pursuant to intercompany
management agreements including the Pooling Arrangement for insurance subsidiaries and affiliates party to this
agreement.
The Company provides a defined benefit pension plan for its eligible employees. Substantially all Company
employees hired prior to January 1, 2010 become eligible to participate the year after becoming 20 years of age
115
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
and vest with 5 years of credited service or attained age 65. The Company’s policy is to fund pension costs in
accordance with the requirements of the Employee Retirement Income Security Act of 1974. Benefits are
determined by applying factors specified in the plan to a participant’s defined average annual compensation.
The Company also provides a postretirement benefit plan including certain health care and life insurance
benefits for its eligible retired employees. On November 4, 2011, the postretirement benefit plan was amended to
change eligibility requirements for participation of employees and certain retirees, resulting in a $93.8 million
negative plan amendment. In addition, a curtailment gain resulted and the Company’s portion recognized was
$14.9 million.
The defined benefit pension and postretirement benefit plans are referred to herein as “the benefit plans.”
The following table sets forth information regarding the pension and postretirement benefit plans’ change in
benefit obligation, plan assets and funded status at December 31, 2011 and 2010:
($ millions)
Pension
Postretirement
2011
2010
2011
2010
Change in benefit obligation:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of pooling change, December 31, 2011 . . . . . . . . . . . . . . . . . . . .
250.0
$ 282.8
—
—
10.5
15.2
52.5
(16.0)
(115.4) —
$119.4
(2.4) —
—
10.8
14.9
24.8
(15.3)
95.4
—
(93.8) —
4.6
5.6
16.9
(3.1)
5.2
5.7
7.4
(2.3)
(14.5) —
The Company’s portion of benefit obligation at end of year . . . . . .
$ 229.6
282.8
$ 27.1
119.4
Change in plan assets available for plan benefits:
Fair value of plan assets available for plan benefits at beginning of year . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of pooling change, December 31, 2011 . . . . . . . . . . . . . . . . . . . .
$
$ 219.6
15.0
8.6
(16.0)
(79.5) —
2.7
197.9
—
13.0
0.1
24.0
(15.3) —
2.6
—
0.1
—
(1.0) —
The Company’s portion of fair value of plan assets at end of
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 147.7
219.6
$
1.8
Supplemental executive retirement plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5.6)
(7.0) —
2.7
—
Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (87.5)
(70.2) $ (25.3)
(116.7)
Accumulated benefit obligation—end of year . . . . . . . . . . . . . . . . . . . . . . . . .
$ 207.1
258.3
No assets are expected to be returned during the fiscal year ending December 31, 2012.
116
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following table sets forth the Company’s share of the amounts included in accumulated other
comprehensive income (loss) that have not been recognized in net periodic cost at December 31, 2011 and 2010:
($ millions)
Transition asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service benefit
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31
2011
$ —
(80.9)
136.2
2010
(0.3)
(18.2)
144.8
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 55.3
126.3
The following table sets forth the Company’s share of amortization expected to be recognized for the year
ending December 31, 2012:
($ millions)
Prior service benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
$(5.2)
7.9
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.7
The following table sets forth information regarding the Company’s share of pension and postretirement
benefit plans’ components of net periodic cost for the years ended December 31, 2011, 2010 and 2009:
($ millions)
Pension
Postretirement
2011
2010
2009
2011
2010
2009
Components of net periodic cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost (benefit) . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8.5
12.3
(14.6)
0.3
7.0
8.7
12.0
(13.9)
0.3
7.7
8.2
11.7
(14.7)
0.4
5.6
$ 4.1
5.1
(0.2)
(2.1)
0.3
3.7
5.0
(0.2)
(1.4)
0.1
4.1
5.8
(0.2)
(1.5)
0.2
Net periodic cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.5
14.8
11.2
7.2
7.2
8.4
Curtailment loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
0.2 — (1.6)
(1.6)
Net periodic cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13.5
14.8
11.4
$ 7.2
5.6
6.8
117
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following table sets forth the Company’s share of the benefit payments, which reflect expected future
service, expected to be paid:
($ millions)
Pension
Postretirement
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 – 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7.6
8.0
8.5
8.8
9.3
56.4
$2.2
2.2
2.2
2.1
2.1
9.2
The postretirement plan’s gross benefit payments for 2011 were $2.8 million, including the prescription
drug benefits. The postretirement plan’s subsidy related to Medicare Prescription Drug Improvement and
Modernization Act of 2003 was $0.4 million for 2011 and estimates future annual subsidies to be approximately
$0.4 million.
The following table sets forth the weighted average assumptions used to determine the benefit plans’
obligations at December 31, 2011 and 2010:
Pension
Postretirement
2011
2010
2011
2010
Benefit obligations weighted-average assumptions:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rates of increase in compensation levels . . . . . . . . . . . . . . . . . . . . . . . .
4.40% 5.50% 4.40% 5.50%
4.00
4.00 —
—
The following table sets forth the weighted average assumptions used to determine the benefit plans’ net
periodic cost for the years ended December 31, 2011, 2010 and 2009:
Pension
Postretirement
2011
2010
2009
2011
2010
2009
Weighted-average assumptions:
Discount rate . . . . . . . . . . . . . . . . . . . . . . .
5.50%
6.00%/
5.75%(2)
Expected long-term rate of return on
assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.00
8.00
Rates of increase in compensation
6.00%/
6.25%(3)
9.00/
8.00(3)
5.50%/
4.75%(1) 6.00%
8.00
8.00
6.00%/
6.25%(3)
9.00/
8.00(3)
levels . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.00
4.00
4.00
—
—
—
(1) Due to the curtailment resulting from the postretirement benefit plan amendment, the expense was remeasured at November 1, 2011,
using discount rate of 4.75%.
(2) Due to the curtailment resulting from the employee one-time pension benefit election, the expense was remeasured at May 31, 2010,
using discount rate of 5.75%.
(3) Due to the curtailment resulting from the restructuring, the expense was remeasured at June 30, 2009, using discount rate of 6.25% and
expected long-term rate of return on assets of 8.00%.
The benefit plans’ obligations are long-term in nature and consequently the investment strategies have a
long-term time horizon. In establishing the long-term rate of return assumption on plan assets, management,
118
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
along with its pension consulting actuary, reviews the historical performance of the plan assets and the stability
in the mix of the investment portfolio. The expected inflation rate and expected real rates of return of applicable
asset classes are then determined to assist in setting appropriate assumptions.
The following table sets forth the assumed health care cost
trend rates used for the years ended
December 31, 2011, 2010 and 2009:
Assumed health care cost trend rates:
Health care cost trend rate assumed for the next year . . . . . . . . . . . . . . . . . .
Rate to which the cost trend rate is assumed to decline (the ultimate trend
rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year that the rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . . . .
Postretirement
2011
2010
2009
10.00% 10.00% 10.00%
5.00% 5.00% 5.00%
2016
2014
2015
The assumed health care cost trend rates have a significant effect on the amounts reported for the
postretirement plan. The following table sets forth the effects of a one percentage point change in assumed health
care cost trend rates for the year ended December 31, 2012:
($ millions)
Postretirement
Increase
(Decrease)
One percentage point change:
Effect on total service and interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on accumulated postretirement benefit obligation . . . . . . . . . . . . . . . . . . . .
$0.2
3.5
$(0.1)
(3.1)
The benefit plans’ investment policy objective is to preserve the investment principal while generating
income and appreciation in fair value to meet the benefit plans’ obligations. The benefit plans’ investment
strategy and risk tolerance is balanced between meeting cash obligation requirements and a long-term relatively
high risk tolerance. Since the nature and timing of the benefit plans’ liabilities and cash requirements are
predictable, the liquidity requirements are somewhat moderate. One of the goals of diversifying the benefit plans’
portfolio among different asset classes
risk in one asset
class. Management has investment policy guidelines with respect to limiting the ownership in any single debt or
equity issuer, and the international private equity investments are composed of numerous securities to reduce our
exposure to a single issuer. The following table sets forth the asset allocation targets, as a percentage of total fair
value, which are used as a guide by management when allocating funds as they become available.
the elimination of concentration of
is
Asset Category:
Fixed maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. large-cap equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. small-cap equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Emerging market equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset
allocation
target
(0 to 100%)
36%
33
14
12
5
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
119
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
See Note 3 for the valuation methods used by the Company for each type of financial instrument the plans
hold that are carried at fair value. There were no transfers between level categorizations during the years ended
December 31, 2011 and 2010.
The following tables set forth the Company’s share of pension plan’s available-for-sale securities within the
fair value hierarchy at December 31, 2011 and 2010:
($ millions)
At December 31, 2011:
Fixed maturities:
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
Total
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
U.S. treasury securities and obligations of U.S. government
agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies mortgage-backed securities . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25.2 —
10.9 —
17.8 —
53.9 —
Equity securities:
Large-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pension plan investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51.5
20.7
51.5
20.7
72.2
72.2
15.9 —
3.8
3.8
$145.8
76.0
25.2
10.9
17.8
53.9
—
—
—
15.9
—
69.8
—
—
—
—
—
—
—
—
—
—
($ millions)
At December 31, 2010:
Fixed maturities:
U.S. treasury securities and obligations of U.S. government
agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies mortgage-backed securities . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
Large-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-cap securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pension plan investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
—
—
—
—
86.4
32.0
118.4
—
2.2
120.6
Total
$ 29.1
12.8
29.9
71.8
86.4
32.0
118.4
25.5
2.2
$217.9
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
29.1
12.8
29.9
71.8
—
—
—
25.5
—
97.3
—
—
—
—
—
—
—
—
—
—
—
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following tables set forth the Company’s share of the postretirement plan’s available-for-sale securities
within the fair value hierarchy at December 31, 2011 and 2010:
($ millions)
At December 31, 2011:
Fixed maturities:
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
Total
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
U.S. treasury securities and obligations of U.S. government
agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.4 —
0.2 —
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.6 —
0.2
0.2
Total postretirement plan investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.8
0.2
1.4
0.2
1.6
—
1.6
—
—
—
—
—
($ millions)
At December 31, 2010:
Fixed maturities:
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
Total
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
U.S. treasury securities and obligations of U.S. government
agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.2 —
0.3 —
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.5 —
0.2
0.2
Total postretirement plan investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.7
0.2
2.2
0.3
2.5
—
2.5
—
—
—
—
—
The actuarially prepared funding amount to the pension plan ranges from the minimum amount the
Company would be required to contribute to the maximum amount that would be deductible for tax purposes.
Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the
maximum amount would be subject to an excise tax and may not be deductible for tax purposes. The Company
share of expected contributions during 2012 is approximately $13.0 million.
The Company maintains a defined contribution plan that covers substantially all employees of the Company.
The Company matches the first 1% of contributions of participants’ salary at the rate of one dollar for each dollar
contributed. Participant contributions of 2% to 6% are matched at a rate of 50 cents for each dollar contributed.
In addition, the Company contributes a percentage of the employee’s annual income for those employees hired
121
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
on or after January 1, 2010, and for those employees hired prior to January 1, 2010 who chose to freeze their
existing accrued pension benefit effective June 30, 2010. The Company’s share of the expense under the plan
totaled $4.8 million, $3.3 million and $3.3 million for 2011, 2010 and 2009, respectively.
10. Stockholders’ Equity
a. Treasury Shares
On August 17, 2007, State Auto Financial’s Board of Directors authorized a plan to repurchase, from time
to time, up to 4.0 million of its common shares, or approximately 10% of State Auto Financial’s outstanding
shares (the “Repurchase Plan”). This program ended on December 31, 2009. Under the Repurchase Plan, State
Auto Financial repurchased shares from State Auto Mutual in amounts that were proportional to the respective
current ownership percentages of State Auto Mutual, which was approximately 64%, and other shareholders.
State Auto Financial did not repurchase any shares in 2009 and had total share repurchase activity in 2008 of
approximately 1.2 million common shares. For the lifetime of the Repurchase Plan, approximately 2.0 million
common shares were purchased at an average repurchase price of $27.26 per share for a total cost of $55.3
million.
b. Dividend Restrictions and Statutory Financial Information
State Auto P&C, Milbank, Farmers and SA Ohio are subject to regulations and restrictions under which
payment of dividends from statutory earned surplus can be made to State Auto Financial during the year without
prior approval of regulatory authorities. Pursuant to these rules, approximately $62.5 million is available for
payment to State Auto Financial from its insurance subsidiaries in 2012 without prior approval. State Auto
Financial received dividends from its insurance subsidiaries in the amount of $56.4 million and $11.5 million in
2010 and 2009, respectively.
The following tables set forth reconciliations of statutory capital and surplus and net income, as determined
using SAP, to the amounts included in the accompanying consolidated financial statements:
($ millions)
2011
2010
Statutory capital and surplus of insurance subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net liabilities of non-insurance parent and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$622.3
(74.2)
783.0
(54.1)
Increases (decreases):
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement and pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed maturities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
548.1
728.9
118.1
4.6
(33.4)
117.0
3.9
150.2
(30.3)
(37.6)
37.3
3.3
Stockholders’ equity per accompanying consolidated financial statements . . . . . . . . . . . . . . . . . .
$758.3
851.8
122
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
($ millions)
Year ended December 31
2011
2010
2009
Statutory net (loss) income of insurance subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) of non-insurance parent and affiliates . . . . . . . . . . . . . . . . . . . . . . . . .
$ (64.6)
1.9
(Decreases) increases:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement and pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
(62.7)
(32.1)
(2.5)
(48.4)
(2.9)
1.8
16.9
2.3
19.2
9.2
(0.5)
8.7
22.9
(18.4)
4.7
(3.0)
(0.9)
5.0
(12.0)
12.5
(3.5)
(0.5)
Net (loss) income per accompanying consolidated financial statements . . . . . . . . . . . . . .
$(146.8)
24.5
10.2
11. Preferred Stock
State Auto Financial has two authorized classes of preferred stock. For both classes, upon issuance, the
Board of Directors has authority to fix and determine the significant features of the shares issued, including,
among other things, the dividend rate, redemption price, redemption rights, conversion features and liquidation
price payable in the event of any liquidation, dissolution, or winding up of the affairs of State Auto Financial.
The Class A preferred stock is not entitled to voting rights until, for any period, dividends are in arrears in
the amount of six or more quarterly dividends.
12. Share-Based Compensation
The Company maintains share-based compensation plans for key employees and outside, or non-employee,
directors. The share-based compensation plan for key employees is the State Auto Financial Corporation 2009
Equity Compensation Plan (the “Equity Plan”). This plan replaced the previous equity plan which expired on
July 1, 2010. The stock-based compensation plan for outside directors is the Outside Directors Restricted Share
Unit Plan (the “RSU Plan”).
The Company’s share-based compensation plans authorize the granting of various equity-based incentives
including stock options, restricted stock and restricted share units to employees and non-employee directors and
agents. The expense for these equity-based incentives is based on their fair value at date of grant and amortized
over their vesting period. The fair value of each stock option is estimated on the date of grant using the Black-
Scholes closed-form pricing model. The pricing model requires assumptions such as the expected life of the
option and expected volatility of the Company’s stock over the expected life of the option, which significantly
impacts the assumed fair value. The Company uses historical data to determine these assumptions and if these
assumptions change significantly for future grants, share-based compensation expense will fluctuate in future
periods.
Equity Plan
The Equity Plan provides for the award of qualified and nonqualified stock options, restricted shares,
performance shares, performance units and other stock-based awards. The Company has reserved 2.0 million
123
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
common shares under the Equity Plan. As of December 31, 2011, a total of 0.9 million common shares are available
for issuance under the Equity Plan. The Equity Plan provides that (i) no more than 33% of the common shares
authorized for issuance under the Equity Plan may be granted in the form of awards other than stock options, (ii) the
maximum number of common shares subject to awards of stock options, restricted shares and performance shares
that may be granted in any calendar year is equal to 1.5% of the total number of common shares of the Company
outstanding as of December 31 of the prior year, and (iii) the maximum number of common shares subject to
awards of stock options, restricted shares and performance shares that may be granted in any calendar year to any
one individual is 250,000 shares. The Equity Plan automatically terminates on May 8, 2019.
The Equity Plan provides that qualified stock options may be granted at an option price not less than the fair
market value of the common shares at the date of grant and that nonqualified stock options may be granted at any
price determined by the Compensation Committee of the Board of Directors. Options granted generally vest over
a three-year period, with one-third of the options vesting on each anniversary of the grant date, and must be
exercised no later than ten years from the date of grant. Stock options granted under the Equity Plan for 2011,
2010 and 2009 were 0.6 million, 0.6 million and 0.4 million, respectively.
The Equity Plan provides for the granting of restricted shares subject to a vesting schedule based on the
employee’s continued employment (“Restriction Period”), for which vesting is generally on the third anniversary
after the date of grant. The Company recognizes compensation expense based on the number of restricted shares
granted at the then grant date fair value over the Restriction Period.
The following table sets forth the status of the Company’s non-vested and vested restricted shares and
changes for the years ended December 31, 2011, 2010 and 2009:
Outstanding, beginning of year . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
2009
Weighted
Average
Grant
Date Fair
Value
Weighted
Average
Grant
Date Fair
Value
Shares
Weighted
Average
Grant
Date Fair
Value
Shares
$18.78
17.03
32,000
17,180
— (32,000)
$29.98
18.78
29.98
42,500
—
(10,500)
$30.46
—
31.94
Shares
17,180
16,707
—
Outstanding, end of year . . . . . . . . . . . . . . . . . . . . .
33,887
$17.92
17,180
$18.78
32,000
$29.98
As of December 31, 2011, there was $0.3 million of total unrecognized compensation cost related to
non-vested restricted share compensation arrangements. The remaining cost is expected to be recognized over a
period of 2.25 years.
Employee Stock Purchase Plan
The Company also has a broad-based employee stock purchase plan under which employees of the
Company may choose at two different specified time intervals each year to have up to 6% of their annual base
earnings withheld to purchase the Company’s common shares. The purchase price of the common shares is 85%
of the lower of its beginning-of-interval or end-of-interval market price. The Company has reserved 3.4 million
common shares under this plan. As of December 31, 2011, a total of 2.9 million common shares have been
purchased under this plan. This plan remains in effect until terminated by the Board of Directors.
124
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
Outside Directors Plan
The RSU Plan is an unfunded deferred compensation plan which currently provides each outside director
with an award of 1,400 restricted share units (the “RSU award”) following each annual meeting of shareholders.
The amount of the award may change from year to year, based on the provision described below. The RSU
awards are fully vested upon grant. RSU awards are not common shares of the Company and, as such, no
participant has any rights as a holder of common shares under the RSU Plan. RSU awards represent the right to
receive an amount, payable in cash or common shares of the Company, as previously elected by the outside
director, equal to the value of a specified number of common shares of the Company at the end of the restricted
period. Such election may be changed within the constraints set forth in the RSU Plan. The restricted period for
the RSU awards begins on the date of grant and expires on the date the outside director retires from or otherwise
terminates service as a director of the Company. During the restricted period, outside directors are credited with
dividends, equivalent in value to those declared and paid on the Company’s common shares, on all RSU awards
granted to them. At the end of the restricted period, outside directors receive distributions of their RSU awards
either (i) in a single lump sum payment, or (ii) in annual installment payments over a five- or ten-year period, as
previously elected by the outside director. The administrative committee for the RSU Plan (currently the
Company’s Compensation Committee) retains the right to increase the annual number of RSU awards granted to
each outside director to as many as 5,000 or to decrease such annual number to not less than 500, without seeking
shareholder approval, if such increase or decrease is deemed appropriate by the administrative committee to
maintain director compensation at appropriate levels. The RSU Plan automatically terminates on May 31, 2015.
The Company accounts for the RSU Plan as a liability plan. There were 23,928 RSUs, 24,268 RSUs, and 14,800
RSUs granted in 2011, 2010 and 2009, respectively.
During 2011 and 2010, common shares valued at approximately $30,000 and $39,000, respectively, were
distributed by the Company under the RSU Plan.
Stock Options
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes closed-
form pricing model. The following tables present the weighted-average assumptions used in the option pricing
model for options granted to employees and non-employees (independent insurance agencies) during 2011, 2010
and 2009. The expected life of the options for employees represents the period of time the options are expected to
be outstanding and is based on historical trends. For non-employees the expected life of the option approximates
the remaining contractual term of the option. The expected stock price volatility is based on the historical
volatility of the Company’s stock for a period approximating the expected life and the expected dividend yield is
based on the Company’s most recent period’s dividend payout. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant and has a term approximating the expected life of the option.
The fair value of share-based awards granted to employees was estimated at the date of grant using the
Black-Scholes option-pricing model. The following table sets forth the weighted average fair values and related
assumptions for options granted for the years ended December 31, 2011, 2010 and 2009:
2011
2010
2009
Fair value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125
4.56
$4.69
5.40
3.51% 3.28% 3.84%
2.5% 2.5% 2.0%
34.9% 36.8% 42.6%
6.3
6.1
6.0
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following table sets forth the Company’s total stock option activity and related information for these
plans for the years ended December 31, 2011, 2010 and 2009:
(millions, except per share amounts)
2011
2010
2009
Options
3.4
Outstanding, beginning of year . . . . . . . . . . . . . . . . . .
0.6
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.2)
Outstanding, end of year . . . . . . . . . . . . . . . . . . . . . . .
3.8
Weighted-
Average
Exercise
Price
$23.53
16.98
16.40
18.94
$22.79
Weighted-
Average
Exercise
Price
Options
$24.02
18.74
14.54
24.73 —
2.8
0.4
(0.1)
Options
3.1
0.6
(0.2)
(0.1)
3.4
$23.53
3.1
Weighted-
Average
Exercise
Price
$24.84
14.65
13.68
25.38
$24.02
Intrinsic value for stock options is defined as the difference between the current market value and the grant
price. For the years ended December 31, 2011, 2010 and 2009, the total intrinsic value of stock options exercised
was $0.1 million, $1.4 million and $0.6 million, respectively. The tax benefit for tax deductions from share-based
awards totaled $0.3 million and $0.2 million for the years ended December 31, 2010 and 2009, respectively.
The following table sets forth information pertaining to the total options outstanding and exercisable at
December 31, 2011:
(Options in millions)
Range of Exercise Prices:
$10.01 – $20.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.01 – $30.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater than $30.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise
Price
Number
Number
2.0
1.1
0.7
3.8
6.2
4.8
3.3
5.3
$17.20
27.16
32.11
$22.80
0.9
1.1
0.7
2.7
Weighted-
Average
Exercise
Price
$17.03
27.26
32.11
$24.92
Aggregate intrinsic value for total options outstanding at December 31, 2011 was $1.9 million.
Compensation expense recognized during 2011, 2010 and 2009 was $3.2 million, $3.7 million and $3.7
million, respectively. Share-based compensation is recognized as a component of loss and loss adjustment
expense and acquisition and operating expense in a manner consistent with other employee compensation. As of
December 31, 2011, there was $3.4 million of total unrecognized compensation cost related to option-based
compensation arrangements granted under the plans. The remaining cost is expected to be recognized over a
period of three years.
126
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
13. Net (Loss) Earnings Per Common Share
The following table sets forth the compilation of basic and diluted net (loss) earnings per common share for
the years ended December 31, 2011, 2010 and 2009:
(millions, except per share amounts)
2011
2010
2009
Numerator:
Net (loss) earnings for basic net earnings per common
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive share-based awards . . . . . . . . . . . . . . . . . . .
$(146.8)
—
24.5
10.2
0.2 —
Adjusted net (loss) earnings for dilutive net (loss)
earnings per common share . . . . . . . . . . . . . . . . . . . .
$(146.8)
24.7
10.2
Denominator:
Weighted average shares for basic net (loss) earnings per
common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive share-based awards . . . . . . . . . . . . . . . . . . .
Adjusted weighted average shares for diluted net (loss)
earnings per common share . . . . . . . . . . . . . . . . . . . .
40.1
0.1
40.2
Basic net (loss) earnings per common share . . . . . . . . . . . . . . . . . .
Diluted net (loss) earnings per common share . . . . . . . . . . . . . . . .
$ (3.65)
$ (3.65)
40.0
0.1
40.1
0.61
0.62
39.7
0.1
39.8
0.26
0.25
The following table sets forth the options to purchase shares of common stock that were not included in the
computation of diluted earnings (loss) per share because the exercise price of the options was greater than the
average market price or their inclusion would have been antidilutive for the years ended December 31, 2011,
2010 and 2009:
(in millions)
2011
2010
2009
Number of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.3
2.7
2.1
14. Reportable Segments
Effective January 1, 2011, the Company had four reportable segments: personal
insurance, business
insurance, specialty insurance (the “insurance segments”) and investment operations. The 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 personal insurance segment provides primarily personal automobile and
homeowners to the personal insurance market. The business insurance segment provides primarily commercial
automobile, commercial multi-peril, fire & allied and general liability insurance covering small-to-medium sized
commercial exposures in the business insurance market. The specialty insurance segment provides commercial
coverages, including workers’ compensation, that require specialized product underwriting, claims handling or
risk management services through a distribution channel of retail agents and wholesale brokers, which may
include program administrators and other specialty sources. The investment operations segment, managed by
Stateco, provides investment services.
127
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
Due to internal changes which occurred in 2010, that included realigning the internal organization to be
more strategic in the personal, business and specialty insurance markets, along with changes to the Pooling
Arrangement as of January, 1, 2011 (see Note 6), the Company changed its reportable insurance segments from
personal and business insurance to the three insurance segments described above. No changes were made to the
investment operations segment. Prior reporting periods have been restated to conform to the new insurance
segment presentation.
The Company evaluates the performance of its insurance segments using industry financial measurements
based on SAP, which include loss and loss adjustment expense ratios, underwriting expense ratios, combined
ratios, statutory underwriting gain (loss), net premiums earned and net written premiums. One of the most
significant differences between SAP and GAAP is that SAP requires all underwriting expenses to be expensed
immediately and not deferred and amortized over the same period the premium is earned. The investment
operations segment is evaluated based on investment returns of assets managed by Stateco.
Asset information by segment is not reported for the insurance segments because the Company does not
produce such information internally.
128
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following table sets forth financial information regarding the Company’s reportable segments for the
years ended December 31, 2011, 2010 and 2009:
($ millions)
Revenues from external sources:
Insurance segments
2011
2010
2009
Personal insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 800.6
379.0
249.2
798.5
383.5
75.2
732.8
398.2
45.5
Total insurance segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,428.8
1,257.2
1,176.5
Investment operations segment
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized capital gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85.4
38.1
Total investment operations segment
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
123.5
80.8
11.0
91.8
82.1
(5.2)
76.9
Total revenue from reportable segments . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues from external sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,552.3
1.4
1,553.7
10.5
1,349.0
6.1
1,355.1
9.8
1,253.4
3.5
1,256.9
9.6
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,564.2
1,364.9
1,266.5
Reconciling items:
Eliminate intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10.5)
(9.8)
(9.6)
Total consolidated revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,553.7
1,355.1
1,256.9
Segment loss before federal income tax:
Insurance segments:
Personal insurance SAP underwriting loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business insurance SAP underwriting loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty insurance SAP underwriting loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (67.4)
(70.9)
(46.6)
Total insurance segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(184.9)
Investment operations segment:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized capital gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment operations segment
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other segments income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciling items:
GAAP adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense on corporate debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85.4
38.1
123.5
(0.5)
(37.9)
(7.1)
(2.4)
(9.3)
(24.0)
(28.5)
(61.8)
80.8
11.0
91.8
0.3
—
(7.1)
1.3
Total consolidated (loss) income before federal income taxes . . . . . . . . .
$ (109.3)
24.5
(59.5)
(2.2)
(6.2)
(67.9)
82.1
(5.2)
76.9
(1.1)
(11.5)
(7.6)
(1.6)
(12.8)
129
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
The following table sets forth financial information regarding the Company’s reportable segments at
December 31, 2011 and 2010:
($ millions)
Segment assets:
December 31
2011
2010
Investment operations segment . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,585.9
$2,395.4
Total segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,585.9
2,395.4
Reconciling items:
Corporate assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
204.9
326.6
Total consolidated assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,790.8
$2,722.0
Assets attributed to the investment operations segment include the total investments and cash and cash
equivalent categories from the balance sheet. All other assets are corporate assets and are not assigned to a
segment.
The following table sets forth revenues from external sources for reportable segments for the years ended
December 31, 2011, 2010 and 2009:
($ millions)
Earned premiums:
Personal insurance:
2011
2010
2009
Personal auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 492.6
272.7
35.3
Total personal insurance earned premiums . . . . . . . . . . . .
800.6
Business insurance:
Commercial auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial multi-peril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fire & allied lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other & product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial
Total business insurance earned premiums . . . . . . . . . . . .
Specialty insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94.0
104.1
93.8
65.4
21.7
379.0
249.2
508.1
257.3
33.1
798.5
98.6
95.6
97.7
69.0
22.6
383.5
75.2
471.9
230.0
30.9
732.8
106.2
95.2
97.6
74.8
24.4
398.2
45.5
Total earned premiums . . . . . . . . . . . . . . . . . . . . . . . .
1,428.8
1,257.2
1,176.5
Investment operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized capital gains (losses) . . . . . . . . . . . . . . . . . . . . . . . .
Total investment operations . . . . . . . . . . . . . . . . . . . . . . . .
85.4
38.1
123.5
80.8
11.0
91.8
82.1
(5.2)
76.9
Total revenues from reportable segments . . . . . . . . . .
$1,552.3
1,349.0
1,253.4
130
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
15. Quarterly Financial Data (unaudited)
The following tables set forth quarterly financial data for 2011 and 2010:
($ millions, except per share amounts)
2011
For three months ended
March 31
June 30
September 30 December 31
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before federal income taxes . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) per common share:
$380.2
15.4
12.7
384.4
(137.6)
(201.4)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.32
$ 0.32
(5.01)
(5.01)
388.0
(52.0)
(58.7)
(1.46)
(1.46)
401.1
64.9
100.6
2.50
2.49
($ millions, except per share amounts)
2010
For three months ended
March 31
June 30
September 30 December 31
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before federal income taxes . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) per common share:
$326.4
20.6
12.9
331.1
(30.0)
(26.2)
340.7
(0.2)
0.2
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.32
$ 0.32
(0.66)
(0.66)
0.01
—
356.9
34.1
37.6
0.94
0.94
16. Contingencies
The following describes significant pending legal proceedings, other than ordinary routine litigation
incidental to our business, to which State Auto Financial or any of its subsidiaries is a party or to which any of
our property is subject:
In December 2010, a putative class action lawsuit (Kelly vs. State Automobile Mutual Insurance
Company, et al.) was filed against State Auto Financial, State Auto P&C and State Auto Mutual in state
court in Ohio. In this lawsuit, plaintiffs alleged that the defendants have engaged, and continue to engage, in
deceptive practices by failing to disclose to plaintiffs the availability,
through one or more related
companies, of insurance policies providing for identical coverage and service as those policies purchased by
plaintiffs but at a lower premium amount. This suit was voluntarily dismissed by the plaintiffs without
prejudice on December 15, 2011, but they have retained the right to refile their case within one year. If this
case is refiled, the Company will deny any and all liability to plaintiffs or the alleged class, and will
vigorously defend the suit as it believes that its practices with respect to pricing, quoting and selling
insurance policies are in compliance with all applicable laws.
Other—In addition to the litigation described above, the Company is involved in numerous lawsuits arising
in the ordinary course of our business operations arising out of or otherwise related to its insurance policies.
Certain of
these lawsuits allege extra-contractual damages. These lawsuits are in various stages of
development. The Company will generally contest these matters vigorously but may pursue settlement if
131
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements, Continued
appropriate. The Company considers all such litigation in establishing its loss and loss adjustment expense
reserves. Based on currently available information, the Company does not believe it is reasonably possible that
any such lawsuit or related lawsuits will be material to its results of operations or have a material adverse effect
on its consolidated financial or cash flow positions.
Additionally, from time to time the Company may be involved in lawsuits arising in the ordinary course of
business but not arising out of or otherwise related to its insurance policies. Based on currently available
information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits will
be material to its results of operations or have a material adverse effect on its consolidated financial or cash flow
position.
In accordance with the Contingencies Topic of the FASB ASC, the Company accrues for a litigation-related
liability when it is probable that such a liability has been incurred and the amount can be reasonably estimated.
Based on currently available information known to the Company, the Company believes that its reserves for
litigation-related liabilities are reasonable. Given the inherent uncertainty surrounding the ultimate resolution of
these legal proceedings, an adverse outcome could have a material impact to the Company’s results of operations
in a future period, though in the opinion of the Company’s management, none would likely have a material
adverse effect on its consolidated financial or cash flow position.
Additionally, the Company may be impacted by adverse regulatory actions and adverse court decisions
where insurance coverages are expanded beyond the scope originally contemplated in its insurance policies. The
Company believes that the effects, if any, of such regulatory actions and published court decisions are not likely
to have a material adverse effect on its financial or its cash flow position.
132
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management’s Annual Report on Internal Control Over Financial Reporting
Our management’s annual report on internal control over financial reporting required by Item 308(a) of
Regulation S-K follows. The attestation report of our independent registered public accounting firm required by
Item 308(b) of Regulation S-K is found under the caption “Report of the Independent Registered Public
Accounting Firm on Internal Control over Financial Reporting” in Item 8 of this Form 10-K.
The following report is provided by our management on the Company’s internal control over financial
reporting (as defined in Rule 13a-15(f) of the Exchange Act):
1. Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company.
2. Our management has used the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) framework to evaluate the effectiveness of our internal control over financial reporting. Our
management believes that the COSO framework is a suitable framework for its evaluation of our
internal control over financial reporting because it is free from bias, permits reasonably qualitative and
quantitative measurements of our internal controls, is sufficiently complete so that those relevant
factors that would alter a conclusion about the effectiveness of our internal controls are not omitted and
is relevant to an evaluation of internal control over financial reporting.
3. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can only provide reasonable assurance with respect to
financial reporting.
4. Our management has assessed the effectiveness of our internal control over financial reporting as of
December 31, 2011, and has concluded that such internal control over financial reporting was effective.
5.
Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated
financial statements included in this Form 10-K, has issued their attestation on the Company’s internal
control over financial reporting, which is included herein.
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s
periodic filings with the Securities and Exchange Commission.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other information
None.
133
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our directors required by Items 401(a) and (d)-(f) of Regulation S-K will be found
under the caption “Proposal One: Election of Directors” in our 2012 Proxy Statement, which information is
incorporated herein by reference. Information regarding our executive officers required by Items 401(b) and
(d)-(f) of Regulation S-K is found under the caption “Executive Officers of the Registrant” at the end of Item 1 of
our Form 10-K, which information is also incorporated by reference into this Item 10.
a
We have
separately-designated standing Audit Committee
established in accordance with
Section 3(a)(58)(A) of the Exchange Act. As of March 12, 2012, the members of our Audit Committee were
Eileen A. Mallesch, Alexander B. Trevor, David R. Meuse, Thomas E. Markert and Paul S. Williams.
Ms. Mallesch is Chairperson of our Audit Committee. Our Board of Directors has determined that Ms. Mallesch
is an “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K, and
“independent,” as that term is defined in Rule 10A-3 of the Exchange Act.
Information regarding the filing of reports of ownership under Section 16(a) of the Exchange Act by our
officers and directors and persons owning more than 10% of a registered class of our equity securities required
by Item 405 of Regulation S-K will be found under the caption “Section 16(a) Beneficial Ownership Reporting
Compliance” in our 2012 Proxy Statement, which information is incorporated herein by reference.
Information concerning the procedures by which shareholders may recommend nominees to our Board of
Directors will be found under the caption “Corporate Governance—Nomination of Directors” in our 2012 Proxy
Statement. There has been no material change to the nomination procedures previously disclosed in the proxy
statement for our 2012 annual meeting of shareholders.
Our Board of Directors has adopted a code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer, controller, and persons performing similar functions. This code of
ethics has been posted on our website at www.StateAuto.com under “Investor Relations” then “Corporate
Governance.” Any amendment (other than any technical, administrative or other non-substantive amendment) to,
or waiver from, a provision of this code will be posted on our website described above within four business days
following its occurrence.
Item 11. Executive Compensation
Our 2012 Proxy Statement will contain information regarding the following matters: information regarding
executive compensation required by Item 402 of Regulation S-K will be found under the captions “Board of
Directors and Board Committees—Compensation of Outside Directors and Outside Director Compensation
Table” and “Compensation Discussion and Analysis”; information required by Item 407(e)(4) of Regulation S-K
will be found under the caption “Compensation Committee Interlocks and Insider Participation”; information
required by Item 407(e)(5) of Regulation S-K will be found under the caption “Compensation Committee
Report.” This information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information regarding security ownership of certain beneficial owners and management required by
Item 403 of Regulation S-K will be found under the caption “Proposal One: Election of Directors” and “Principal
Holders of Voting Securities” in our 2012 Proxy Statement, which information is incorporated herein by
reference.
Information regarding equity compensation plan information required by Item 201(d) of Regulation S-K
will be found under the caption “Equity Compensation Plan Information” in our 2012 Proxy Statement, which
information is incorporated herein by reference.
134
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions required by Item 404 of Regulation S-K
will be found under the caption “Related Party Transactions” in our 2012 Proxy Statement, which information is
incorporated herein by reference.
Information regarding the independence of our directors required by Item 407(a) of Regulation S-K will be
found under the caption “Corporate Governance—Director Independence” in our 2012 Proxy Statement, which is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services required by Item 9(e) of Schedule 14A will be
found under the caption “Independent Registered Public Accounting Firm” in our 2012 Proxy Statement, which
information is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) LISTING OF FINANCIAL STATEMENTS
PART IV
The following consolidated financial statements of the Company are filed as part of this Form 10-K and are
included in Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Income for each of the three years in the period ended December 31, 2011
Consolidated Statements of Comprehensive Income for each of the three years in the period ended
December 31, 2011
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended
December 31, 2011
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2011
Notes to Consolidated Financial Statements
(a)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Company for the years 2011, 2010 and 2009 are included
in Item 14(d) following the signatures and should be read in conjunction with our consolidated financial
statements contained in our Form 10-K.
Schedule
Number
I.
II.
III.
IV.
V.
Summary of Investments—Other Than Investments in Related Parties
Schedule
Condensed Financial Information of Registrant
Supplementary Insurance Information
Reinsurance
Valuation and Qualifying Accounts
All other schedules and footnotes are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes thereto.
135
(a)(3) LISTING OF EXHIBITS
Exhibit
No.
3.01
3.02
3.03
3.04
3.05
10.01
10.02*
10.03*
10.04*
10.05*
10.06*
10.07*
10.08*
10.09*
10.10*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
State Auto Financial Corporation’s Amended
and Restated Articles of Incorporation
1933 Act Registration Statement No. 33-40643
on Form S-1 (see Exhibit 3(a) therein)
Auto
State
Amendment
Articles of Incorporation
Financial
Corporation’s
to the Amended and Restated
1933 Act Registration Statement No. 33-89400
on Form S-8 (see Exhibit 4(b) therein)
State Auto Financial Corporation Certificate
of Amendment to the Amended and Restated
Articles of Incorporation as of June 2, 1998
Form 10-K Annual Report for the year ended
December 31, 1998 (see Exhibit 3(A)(3) therein)
State Auto Financial Corporation’s Amended
and Restated Code of Regulations
1933 Act Registration Statement No. 33-40643
on Form S-1 (see Exhibit 3(b) therein)
to State Auto Financial
First Amendment
Corporation’s Amended and Restated Code of
Regulations as of May 7, 2010
the period
Form 10-Q Quarterly Report
ended September 30, 2010 (see Exhibit 3.05
therein)
for
Agreement
Guaranty
State
Automobile Mutual Insurance Company and
State Auto Property and Casualty Insurance
Company dated as of May 16, 1991
between
1933 Act Registration Statement No. 33-40643
on Form S-1 (see Exhibit 10 (d) therein)
1991 Stock Option Plan of State Auto
Financial Corporation
1933 Act Registration Statement No. 33-40643
on Form S-1 (see Exhibit 10 (h) therein)
Amendment Number 1 to the 1991 Stock
Option Plan
of State Auto Financial
Corporation
Amendment Number 2 to the 1991 Stock
Option Plan
of State Auto Financial
Corporation
1933 Act Registration Statement No. 33-89400
on Form S-8 (see Exhibit 4 (a) therein)
Form 10-K Annual Report for the year ended
December 31, 1996 (see Exhibit 10(DD) therein)
Amendment Number 3 to 1991 Stock Option
Plan (effective January 1, 2001) of State Auto
Financial Corporation
the period
Form 10-Q Quarterly Report
ended September 30, 2003 (see Exhibit 10.01
therein)
for
Amendment Number 4 to 1991 Stock Option
Plan (effective March 7, 2008) of State Auto
Financial Corporation
Form 8-K Current Report filed on March 13,
2008 (see Exhibit 10.1 therein)
1991 Directors’ Stock Option Plan of State
Auto Financial Corporation
1933 Act Registration Statement No. 33-40643
on Form S-1 (see Exhibit 10 (i) therein)
Amendment Number 1 to the 1991 Directors’
Stock Option Plan of State Auto Financial
Corporation
Form 10-K Annual Report for the year ended
December 31, 1996 (see Exhibit 10(EE) therein)
Second Amendment to 1991 Directors’ Stock
Option Plan
of State Auto Financial
Corporation
the period
Form 10-Q Quarterly Report
ended September 30, 2001 (see Exhibit 10(JJ)
therein)
for
to the 1991 Directors’
Third Amendment
Stock Option Plan (effective March 7, 2008)
of State Auto Financial Corporation
Form 8-K Current Report filed on March 13,
2008 (see Exhibit 10.2 therein)
136
Exhibit
No.
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18
10.19
10.20
10.21
10.22
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
2000 Directors Stock Option Plan of State
Auto Financial Corporation
Definitive Proxy Statement on Form DEF 14A,
File No. 000-19289, for Annual Meeting of
Shareholders held on May 26, 2000 (see
Appendix B therein)
First Amendment
Option Plan
Corporation
to 2000 Directors Stock
of State Auto Financial
Form 10-Q Quarterly Report
the period
ended March 31, 2001 (see Exhibit 10(HH)
therein)
for
Second Amendment to 2000 Directors Stock
Option Plan
of State Auto Financial
Corporation
Form 10-Q Quarterly Report
the period
ended September 30, 2001 (see Exhibit 10(KK)
therein)
for
Form 10-K Annual Report for the year ended
December 31, 2001 (see Exhibit 10(EE) therein)
Form 10-K Annual Report
for year ended
December 31, 2002 (see Exhibit 10(UU) therein)
Form 10-Q Quarterly Report
ended June 30, 2005 (see Exhibit 10.66 therein)
the period
for
Form 8-K Current Report filed on March 13,
2008 (see Exhibit 10.3 therein)
Form 10-K Annual Report for the year ended
December 31, 1992 (see Exhibit 10 (N) therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.17 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.18 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.19 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.20 therein)
Third Amendment to 2000 Directors Stock
Option Plan
of State Auto Financial
Corporation
Fourth Amendment to 2000 Directors Stock
Option Plan
of State Auto Financial
Corporation
Fifth Amendment
Option Plan
Corporation
to 2000 Directors Stock
of State Auto Financial
Sixth Amendment to the 2000 Directors Stock
Option Plan (effective March 7, 2008) of
State Auto Financial Corporation
Investment Management Agreement between
Inc. and State
Stateco Financial Services,
Automobile Mutual
Insurance Company,
effective April 1, 1993
Investment Management Agreement between
Stateco Financial Services, Inc. and Meridian
Security Insurance Company, effective June
1, 2001
Investment Management Agreement between
Stateco Financial Services,
Inc. and State
Auto Florida Insurance Company effective
April 1, 2002
Investment Management Agreement between
Stateco Financial Services, Inc. and Midwest
Security
effective
Insurance Company
January 1, 1997
Investment Management Agreement between
Stateco Financial Services, Inc. and Meridian
Citizens Mutual Insurance Company effective
June 1, 2001
137
Exhibit
No.
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 10-Q Quarterly Report
the period
ended March 31, 2007 (see Exhibit 10.63
therein)
for
Form 10-K Annual Report for the year ended
December 31, 2007 (see Exhibit 10.22 therein)
Form 10-K Annual Report for the year ended
December 31, 2007 (see Exhibit 10.23 therein)
Form 10-K Annual Report
December 31, 2010 (see Exhibit 10.26 therein)
for year ended
Form 10-K Annual Report
December 31, 2010 (see Exhibit 10.27 therein)
for year ended
Form 10-K Annual Report
December 31, 2010 (see Exhibit 10.28) therein)
for year ended
Form 10-K Annual Report
for year ended
December 31, 2002 (see Exhibit 10(OO) therein)
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.29 therein)
Investment Management Agreement dated
March 29, 2007, between Stateco Financial
Services, Inc. and Beacon National Insurance
Company,
Insurance
Company, Petrolia Insurance Company and
Beacon Lloyds Insurance Company
Preferred
First
and
dated
Restated
Investment
Amended
Management Agreement
of
as
December 31, 2007, among Stateco Financial
Services, Inc. and Patrons Mutual Insurance
Company
of Connecticut, Patrons Fire
Insurance Company of Rhode Island, and
Provision State Insurance Company
and
Restated
Investment
Amended
as
of
Management Agreement
December
Stateco
2007,
31,
Financial Services, Inc. and Litchfield Mutual
Fire Insurance Company
dated
between
Investment Management Agreement between
Stateco Financial Services, Inc. and Plaza
Insurance Company effective October 1, 2010
Investment Management Agreement between
Stateco Financial Services, Inc. and Rockhill
Insurance Company effective October 1, 2010
Investment Management Agreement between
Stateco Financial Services, Inc. and American
and
Compensation
Bloomington
Insurance
Company effective October 1, 2010
Insurance Company
Compensation
Cost Sharing Agreement among State Auto
Property and Casualty Insurance Company,
State
Insurance
Company, and State Auto Florida Insurance
Company effective January 1, 2003
Automobile Mutual
Renewal of Cost Sharing Agreement among
State Auto Property & Casualty Insurance
Company,
Automobile Mutual
Insurance Company and BroadStreet Capital
Partners, Inc. effective March 31, 2008
State
138
Exhibit
No.
10.31
10.32
10.33
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.45 therein)
Form 10-Q Quarterly Report
the period
ended March 31, 2005 (see Exhibit10.56 therein)
for
Security
Insurance Company
Midwest
and
amended
Management Agreement
restated as of January 1, 2000 by and among
State
Insurance
Company, State Auto Property and Casualty
Insurance Company and Midwest Security
Insurance Company
State Auto
Insurance Company of Wisconsin)
Automobile Mutual
(nka
Property
Management
and Operations Agreement,
Amended and Restated as of January 1, 2005
by and among State Automobile Mutual
Insurance Company, State Auto Financial
Corporation,
and
State Auto
Casualty Insurance Company, State Auto
National
Insurance Company, Milbank
Insurance Company, State Auto Insurance
Company
Security
of Ohio, Meridian
Insurance Company, Meridian Citizens
Company, Meridian
Mutual
Inc., Farmers Casualty
Insurance Group,
Insurance Company,
Financial
Services, Inc., Strategic Insurance Software,
Inc., and 518 Property Management and
Leasing, LLC
Insurance
Stateco
Form 10-Q Quarterly Report
ended June 30, 2007 (see Exhibit 66.67 therein)
the period
for
Property
First Amendment, made as of April 1, 2007,
to Management and Operations Agreement
Amended and Restated as of January 1, 2005,
by and among State Automobile Mutual
Insurance Company, State Auto Financial
and
State Auto
Corporation,
Casualty Insurance Company, State Auto
National
Insurance Company, Milbank
Insurance Company, State Auto Insurance
Company
Security
of Ohio, Meridian
Insurance Company, Meridian Citizens
Company, Meridian
Mutual
Inc., Farmers Casualty
Insurance Group,
Insurance Company,
Financial
Services, Inc., Strategic Insurance Software,
Inc., 518 Property Management and Leasing,
LLC, State Auto Florida Insurance Company,
Beacon National Insurance Company, Beacon
Insurance
Inc., Beacon Lloyds
Lloyds,
Company,
Insurance
Company, and Petrolia Insurance Company
Insurance
Preferred
Stateco
First
139
Exhibit
No.
10.34
10.35
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 8-K Current Report filed on January 27,
2009 (see Exhibit 10.1 therein)
Form 10-K Annual Report
December 31, 2010 (see Exhibit 10.36 therein)
for year ended
Second Amendment dated as of December 31,
to the Management and Operations
2008,
Agreement, Amended and Restated as of
January 1, 2005, among State Auto Financial
Corporation,
State Automobile Mutual
Insurance Company, State Auto Property &
Casualty Insurance Company, State Auto
National
Insurance Company, Milbank
Insurance Company, State Auto Insurance
Company
Security
of Ohio, Meridian
Insurance Company, Meridian Citizens
Company, Meridian
Mutual
Inc., Farmers Casualty
Insurance Group,
Insurance Company,
Financial
Services, Inc., Strategic Insurance Software,
Inc., 518 Property Management and Leasing,
LLC, State Auto Florida Insurance Company,
Beacon National Insurance Company, Beacon
Insurance
Inc., Beacon Lloyds
Lloyds,
Company,
Insurance
Patrons Mutual
Company of Connecticut, Litchfield Mutual
Fire Insurance Company, and Provision State
Insurance Company
Insurance
Stateco
as
effective
Financial
Amendment,
Third
of
December 31, 2010, to the Management and
Operations Agreement, Amended
and
Restated as of January 1, 2005, among State
Corporation,
Auto
State
Automobile Mutual
Insurance Company,
State Auto Property & Casualty Insurance
Company, Milbank Insurance Company, State
Auto Insurance Company of Ohio, Meridian
Insurance Company, Meridian
Security
Company,
Citizens Mutual
Inc., Farmers
Meridian Insurance Group,
Casualty
Stateco
Financial Services, Inc., Strategic Insurance
Software, Inc., 518 Property Management and
Leasing, LLC, State Auto Florida Insurance
Insurance
Company,
Beacon National
Company, Beacon Lloyds,
Inc., Beacon
Lloyds Insurance Company, Patrons Mutual
and
Insurance Company of Connecticut
Litchfield Mutual Fire Insurance Company
Company,
Insurance
Insurance
140
Exhibit
No.
10.36
10.37
10.38
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 10-Q Quarterly Report
the period
ended September 30, 2009 (see Exhibit 10.01
therein)
for
Consulting Services Agreement dated as of
November 1, 2009, by and between State
Automobile Mutual
Insurance Company,
State Auto Property & Casualty Insurance
Company, Meridian
Insurance
Citizens Mutual
Company, Meridian
Farmers Casualty
Insurance Company,
Insurance Company, Milbank
Insurance
Company, and RTW, Inc.
Security
Form 8-K Current Report filed on November 25,
2009 (see Exhibit 10.1 therein)
Form 8-K Current Report filed on February 16,
2010 (see Exhibit 10.3 therein)
Company,
Agreement
Underwriting Management
effective as of November 20, 2009, by and
between Rockhill Insurance Company, Plaza
Insurance Company, American Compensation
Bloomington
Insurance
Compensation Insurance Company, State
Automobile Mutual
Insurance Company,
State Auto Property & Casualty Insurance
Insurance
Company, Meridian
Company, Milbank
Insurance Company,
Farmers Casualty Insurance Company, and
Risk Evaluation and Design, LLC
Security
Insurance
Property & Casualty
and Operations Agreement,
Management
effective as of January 1, 2010, entered into
as of February 10, 2010, by and among State
Auto
Insurance
Automobile Mutual
State
Company,
Insurance
Insurance Company, Rockhill
Company,
Company,
Plaza
American Compensation Insurance Company,
Insurance
Bloomington
Company, Rockhill Holding Company,
National
Coverage
Environmental
Corporation of
the South, LLC, National
Environmental Coverage Corporation, RTW,
Insurance Services, LLC,
Inc., Rockhill
Rockhill Underwriting Management, LLC
and Risk Evaluation and Design, LLC
Compensation
141
Exhibit
No.
10.39
10.40
10.41
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 8-K Current Report filed on January 7,
2011 (see Exhibit 10.2 therein)
Form 10-K Annual Report for the year ended
December 31, 2007 (see Exhibit 10.38 therein)
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.44 therein)
as
effective
Insurance
Automobile Mutual
Amended and Restated Management and
of
Operations Agreement,
January 1, 2011, by and among State Auto
Property & Casualty Insurance Company,
State
Insurance
Insurance Company,
Company, Rockhill
American
Plaza
Company,
Compensation
Bloomington
Insurance
Company, Rockhill Holding Company,
Coverage
Environmental
National
Corporation of
the South, LLC, National
Environmental Coverage Corporation, RTW,
Inc., Rockhill Insurance Services, LLC and
Rockhill Underwriting Management, LLC.
Insurance
Compensation
Company,
Reinsurance Pooling Agreement Amended
and Restated as of January 1, 2008 by and
among State Automobile Mutual Insurance
Company, State Auto Property and Casualty
Insurance Company, Milbank
Insurance
Company, State Auto Insurance Company of
Wisconsin,
Insurance
Farmers Casualty
Company, State Auto Insurance Company of
Ohio, State Auto Florida Insurance Company,
Insurance Company,
Meridian
Security
Meridian
Insurance
Citizens Mutual
Insurance
Patrons Mutual
Company,
Company of Connecticut, Litchfield Mutual
Fire Insurance Company and Beacon National
Insurance Company
First Amendment effective as of July 1, 2008
to Reinsurance Pooling Agreement Amended
and Restated as of January 1, 2008 by and
among State Automobile Mutual Insurance
Company, State Auto Property & Casualty
Insurance Company, Milbank
Insurance
Company, State Auto Insurance Company of
Wisconsin,
Insurance
Farmers Casualty
Company, State Auto Insurance Company of
Ohio, State Auto Florida Insurance Company,
Insurance Company,
Meridian
Security
Meridian
Insurance
Citizens Mutual
Insurance
Patrons Mutual
Company,
Company of Connecticut, Litchfield Mutual
Fire Insurance Company and Beacon National
Insurance Company
142
Exhibit
No.
10.42
10.43
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 8-K Current Report filed on February 16,
2010 (see Exhibit 10.1 therein)
Form 10-K Annual Report
December 31, 2010 (see Exhibit 10.49 therein)
for year ended
Reinsurance Pooling Agreement, Amended
and Restated effective as of January 1, 2010,
entered into as of February 10, 2010, by and
among State Automobile Mutual Insurance
Company, State Auto Property & Casualty
Insurance
Insurance Company, Milbank
Company, State Auto Insurance Company of
Wisconsin,
Insurance
Farmers Casualty
Company, State Auto Insurance Company of
Insurance
Ohio,
State Auto National
Insurance
Company, State Auto Florida
Company, Meridian
Insurance
Security
Citizens Mutual
Company, Meridian
Patrons Mutual
Company,
Insurance
Connecticut,
of
Company
Insurance
Litchfield Mutual Fire Insurance Company,
and Beacon National Insurance Company
First Amendment, effective December 31,
2010,
to Reinsurance Pooling Agreement
Amended and Restated as of January 1, 2010,
by and among State Automobile Mutual
Insurance Company, State Auto Property &
Insurance Company, Milbank
Casualty
Insurance Company, State Auto Insurance
Company of Wisconsin, Farmers Casualty
Insurance Company, State Auto Insurance
Company of Ohio, State Auto Florida
Insurance Company, Meridian
Security
Insurance Company, Meridian Citizens
Mutual Insurance Company, Patrons Mutual
Connecticut,
Insurance
Litchfield Mutual Fire Insurance Company,
and Beacon National Insurance Company
Company
of
143
Exhibit
No.
10.44
10.45
10.46
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 8-K Current Report filed on January 7,
2011 (see Exhibit 10.1 therein)
Included herein
Automobile Mutual
Reinsurance Pooling Agreement Amended
and Restated as of January 1, 2011, entered
into as of January 3, 2011, by and among
State
Insurance
Company, State Auto Property & Casualty
Insurance
Insurance Company, Milbank
Company, State Auto Insurance Company of
Wisconsin,
Insurance
Farmers Casualty
Company, State Auto Insurance Company of
Ohio, State Auto Florida Insurance Company,
Security
Insurance Company,
Meridian
Insurance
Citizens Mutual
Meridian
Company,
Insurance
Patrons Mutual
Company of Connecticut, Litchfield Mutual
Fire Insurance Company, Beacon National
Insurance
Insurance Company, Rockhill
Company,
Company,
Plaza
American Compensation Insurance Company
and Bloomington Compensation Insurance
Company
Insurance
First Amendment, effective December 31,
2011,
to Reinsurance Pooling Agreement
Amended and Restated as of January 1, 2011
by and among State Automobile Mutual
Insurance Company, State Auto Property &
Casualty
Insurance Company, Milbank
Insurance Company, State Auto Insurance
Company of Wisconsin, Farmers Casualty
Insurance Company, State Auto Insurance
Company of Ohio, State Auto Florida
Security
Insurance Company, Meridian
Insurance Company, Meridian Citizens
Mutual Insurance Company, Patrons Mutual
Insurance
Connecticut,
Litchfield Mutual Fire Insurance Company,
Beacon National
Company,
Rockhill Insurance Company, Plaza Insurance
Company, American Compensation Insurance
Company and Bloomington Compensation
Insurance Company
Company
Insurance
of
Included herein
Homeowners Quota
Share Reinsurance
Contract between State Automobile Mutual
Insurance Company (on behalf of itself and
insurance subsidiaries and affiliates now
under its ownership, control or management,
including insurance subsidiaries of State Auto
Financial Corporation) and a syndicate of
reinsurers effective December 31, 2011 at
11:59 p.m.
144
Exhibit
No.
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 8-K Current Report filed on February 16,
2010 (see Exhibit 10.2 therein)
Form 10-Q Quarterly Report
ended June 30, 2003 (see 10(XX) therein)
for
the period
Form 10-Q Quarterly Report
ended June 30, 2003 (see 10(YY) therein)
for
the period
Securities Act Registration
on
Form S-4 (File No. 333-111507) (see Exhibit
4.01 therein)
Statement
Securities Act Registration
on
Form S-4 (File No. 333-111507) (see Exhibit
4.02 therein)
Statement
Form 8-K Current Report filed on May 26, 2009
(see Exhibit 10.1 therein)
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.1 therein)
Form 8-K Current Report filed on September 30,
2011 (see Exhibit 10.1 therein)
Included herein
Commutation
and Release Agreement,
effective as of January 1, 2010, entered into
as of February 10, 2010, between State
Automobile Mutual Insurance Company and
State Auto National Insurance Company
Amended and Restated Declaration of Trust
of STFC Capital Trust I, dated as of May 22,
2003
Indenture dated as of May 22, 2003, for
Junior Subordinated Debt
Floating Rate
Securities Due 2033
Indenture dated as of November 13, 2003,
among State Auto Financial Corporation, as
Issuer, and Fifth Third Bank, as Trustee,
regarding 6 1⁄4% Senior Note due 2013
Form of 6 1⁄4% Senior Note due 2013
(Exchange Note)
Credit Agreement dated as of May 19, 2009,
between State Automobile Mutual Insurance
and Milbank
borrower,
as
Company,
Insurance Company, as lender
Credit Agreement dated as of May 8, 2009,
between State Automobile Mutual Insurance
Company, as borrower, and State Auto
Property & Casualty Insurance Company, as
lender
Auto
among
Credit Agreement dated as of September 29,
2011,
Financial
State
Corporation, as borrower, a syndicate of
financial
institutions, as the lenders party
thereto, KeyBank National Association, as
Administrative Agent, Lead Arranger, Sole
Book Runner and Swingline Lender, and
JPMorgan Chase Bank, N.A. and PNC
as Co-
BANK, National Association,
Documentation Agents.
as
dated
Employment Agreement,
of
December 20, 2011, commencing as of
January 1, 2012, among State Auto Financial
Corporation, State Auto Property & Casualty
Insurance Company,
State Automobile
Mutual Insurance Company and Robert P.
Restrepo, Jr.
145
Exhibit
No.
10.56*
10.57*
10.58*
10.59*
10.60*
10.61*
10.62*
10.63*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
effective
Employment Agreement
as of
March 1, 2009, among State Auto Financial
Corporation, State Auto Property & Casualty
Insurance Company,
State Automobile
Mutual Insurance Company and Robert P.
Restrepo, Jr.
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.53 therein)
Executive Agreement dated as of December
among State Auto Financial
20, 2011,
State Automobile Mutual
Corporation,
P.
Insurance
Restrepo, Jr.
Company
Robert
and
Employment Agreement dated as of October
among State Auto Financial
4,
2007,
and
Corporation,
Casualty
State
Automobile Mutual Insurance Company and
Mark A. Blackburn
State Auto
Company,
Insurance
Property
2007,
Amendment effective January 1, 2009 to
Employment Agreement dated as of October
4,
among State Auto Financial
Corporation, State Auto Property & Casualty
State Automobile
Insurance Company,
Mutual
Insurance Company and Mark A.
Blackburn
Amended and Restated Executive Agreement
dated as of October 4, 2007, among State
Auto
State
Automobile Mutual Insurance Company and
Mark A. Blackburn
Corporation,
Financial
as
(dated
Employment Agreement
of
November 17, 2008), including Amendment
to Employment Agreement
(dated as of
November
among Rockhill
2010),
30,
Holding Company, State Automobile Mutual
Insurance Company and Jessica E. Buss
Executive Change of Control Agreement
dated as of October 28, 2011, among State
Auto Financial Corporation, State Auto
Property & Casualty Insurance Company,
State Automobile Mutual Insurance Company
and Steven E. English
Executive Change of Control Agreement
dated as of October 28, 2011, among State
Auto Financial Corporation, State Auto
Property & Casualty Insurance Company,
State Automobile Mutual Insurance Company
and Clyde H. Fitch, Jr
146
Included herein
Form 10-Q Quarterly Report
the period
ended September 30, 2007 (see Exhibit 10.69
therein)
for
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.56 therein)
Form 10-Q Quarterly Report
the period
ended September 30, 2007 (see Exhibit 10.70
therein)
for
Included herein
Form 10-Q Quarterly Report
the period
ended September 30, 2011 (see Exhibit 10.1
therein)
for
Form 10-Q Quarterly Report
the period
ended September 30, 2011 (see Exhibit 10.2
therein)
for
Exhibit
No.
10.64*
10.65*
10.66*
10.67*
10.68*
10.69*
10.70*
10.71*
10.72*
10.73*
10.74*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Executive Change of Control Agreement
dated as of October 28, 2011, among State
Auto Financial Corporation, State Auto
Property & Casualty Insurance Company,
State Automobile Mutual Insurance Company
and James A. Yano
Executive Change of Control Agreement
dated as of October 28, 2011, among State
Auto Financial Corporation, State Auto
Property & Casualty Insurance Company,
State Automobile Mutual Insurance Company
and Jessica E. Buss
Form of Indemnification Agreement between
State Auto Financial Corporation and each of
its directors
Indemnification Agreement dated as of
November 14, 2008, between State Auto
Financial Corporation
P.
Restrepo, Jr.
and Robert
Officer Indemnification Agreement dated as
of May 8, 2009, between State Auto Financial
Corporation and Steven E. English
Indemnification Agreement dated as of
State
2008,
November
Automobile Mutual Insurance Company and
Mark A. Blackburn
between
14,
Officer Indemnification Agreement dated as
of May 8, 2009, between State Auto Financial
Corporation and Clyde H. Fitch, Jr.
Officer Indemnification Agreement dated as
of May 8, 2009, between State Auto Financial
Corporation and James A. Yano
Amended and Restated Equity Incentive
Compensation Plan of State Auto Financial
Corporation
Amendment Number 1 to the Amended and
Restated Equity Incentive Compensation Plan
of
Financial Corporation
(amendment effective August 15, 2008)
State Auto
Restricted Share Award Agreement under the
Amended and Restated Equity Incentive
Compensation Plan dated as of March 2, 2006
between State Auto Financial Corporation
and Robert P. Restrepo, Jr.
147
Form 10-Q Quarterly Report
the period
ended September 30, 2011 (see Exhibit 10.3
therein)
for
Included herein
Form 8-K Current Report filed on November 20,
2008 (see Exhibit 99.1 therein)
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.2 therein)
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.3 therein)
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.4 therein)
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.5 therein)
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.6 therein)
Form 10-Q Quarterly Report
ended June 30, 2005 (see Exhibit 10.60 therein)
the period
for
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.63 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.49 therein)
Exhibit
No.
10.75*
10.76*
10.77*
10.78*
10.79*
10.80*
10.81*
10.82*
10.83*
10.84*
10.85*
10.86*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
under
Restricted Stock Agreement
the
Amended and Restated Equity Incentive
Compensation Plan dated as of October 4,
2007,
Financial
Corporation and Mark A. Blackburn
State Auto
between
under
the
Restricted Stock Agreement
Amended and Restated Equity Incentive
Compensation Plan dated as of November 5,
2007,
Financial
Corporation and Clyde H. Fitch
State Auto
between
Form of Non-Qualified
Stock Option
Agreement under the Amended and Restated
Equity Incentive Compensation Plan of State
Auto Financial Corporation
Non-Qualified Stock Option Agreement
under
the Amended and Restated Equity
Incentive Compensation Plan of State Auto
Financial Corporation dated March 2, 2006
between State Auto Financial Corporation
and Robert P. Restrepo, Jr.
Form of Incentive Stock Option Agreement
under
the Amended and Restated Equity
Incentive Compensation Plan of State Auto
Financial Corporation
Form 10-Q Quarterly Report
the period
ended September 30, 2007 (see Exhibit 10.71
therein)
for
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.66 therein)
Form 10-Q Quarterly Report
ended June 30, 2005 (see Exhibit 10.62 therein)
the period
for
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.51 therein)
Form 10-Q Quarterly Report
ended June 30, 2005 (see Exhibit 10.63 therein)
the period
for
2009 Equity Incentive Compensation Plan of
State Auto Financial Corporation
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.7 therein)
Amendment No. 1 to the 2009 Equity
Incentive Compensation Plan of State Auto
Financial Corporation
Restricted Stock Agreement under the 2009
Equity Incentive Compensation Plan dated as
of March 4, 2010 between State Auto Financial
Corporation and Robert P. Restrepo, Jr.
Restricted Stock Agreement under the 2009
Equity Incentive Compensation Plan dated
March 3, 2011, between State Auto Financial
Corporation and Robert P. Restrepo, Jr.
Outside Directors Restricted Share Unit Plan
of State Auto Financial Corporation
to the Outside Directors
First Amendment
Restricted Share Unit Plan of State Auto
Financial Corporation
Second Amendment to the Outside Directors
Restricted Share Unit Plan of State Auto
Financial Corporation
148
Form 10-Q Quarterly Report
ended June 30, 2011 (see Exhibit 10.01 therein)
the period
for
Form 10-Q Quarterly Report
the period
ended March 31, 2010 (see Exhibit 10.01
therein)
for
Form 10-Q Quarterly Report
the period
ended March 31, 2011 (see Exhibit 10.01
therein)
for
Form 10-Q Quarterly Report
ended June 30, 2005 (see Exhibit 10.61 therein)
the period
for
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.54 therein)
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.72 therein)
Exhibit
No.
10.87*
10.88*
10.89*
10.90*
10.91*
10.92*
10.93*
10.94*
10.95*
10.96*
10.97*
10.98*
10.99*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Third Amendment to the Outside Directors
Restricted Share Unit Plan of State Auto
Financial Corporation
Fourth Amendment to the Outside Directors
Restricted Share Unit Plan of State Auto
Financial Corporation effective November 1,
2010
Form of Restricted Share Unit Agreement for
the Outside Directors Restricted Share Unit
Plan of State Auto Financial Corporation
Form of Designation of Beneficiary for the
Outside Directors Restricted Share Unit Plan
of State Auto Financial Corporation
Supplemental Retirement Plan for Executive
of
Employees
Insurance
Companies
(Restatement) effective as of
January 1, 1994
State Auto
Amendment No. 1, effective as of January 1,
2008, to Supplemental Retirement Plan for
Executive Employees of State Auto Insurance
Companies
Amendment No. 2 effective as of January 1,
2009 to the Supplemental Retirement Plan for
Executive Employees of State Auto Insurance
Companies
Supplemental Retirement Plan for Executive
Employees
Insurance
Companies effective as of May 1, 2010
State Auto
of
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.73 therein)
Form 10-K Annual Report
December 31, 2010 (see Exhibit 10.89 therein)
for year ended
Form 10-Q Quarterly Report
ended June 30, 2005 (see Exhibit 10.64 therein)
the period
for
Form 10-Q Quarterly Report
ended June 30, 2005 (see Exhibit 10.65 therein)
the period
for
Form 10-K Annual Report for the year ended
December 31, 1997 (see Exhibit 10(HH) therein)
Form 10-Q Quarterly Report
ended June 30, 2008 (see Exhibit 10.01 therein)
the period
for
Form 10-Q Quarterly Report
the period
ended September 30, 2008 (see Exhibit 10.01
therein)
for
Form 10-Q Quarterly Report
ended June 30, 2010 (see Exhibit 10.01 therein)
the period
for
First Amendment
the Supplemental
to
Retirement Plan for Executive Employees of
State Auto Insurance Companies (amendment
effective December 1, 2010)
Form 10-K Annual Report
December 31, 2010 (see Exhibit 10.96 therein)
for year ended
Auto
State
Corporation
Supplemental Executive Retirement Plan,
effective January 1, 2007
Financial
First Amendment to the State Auto Financial
Corporation
Executive
Supplemental
Retirement Plan effective December 1, 2010
Form 10-Q Quarterly Report
the period
ended September 30, 2007 (see Exhibit 10.72
therein)
for
Form 10-K Annual Report
December 31, 2010 (see Exhibit 10.98 therein)
for year ended
Form of Designation of Distribution Election
the State Auto Financial Corporation
for
Supplemental Executive Retirement Plan
Form 10-Q Quarterly Report
the period
ended September 30, 2007 (see Exhibit 10.73
therein)
for
Restated
State Auto Insurance Companies Amended
Deferred
and
Compensation Plan (amended and restated as
of March 1, 2001)
Directors
149
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.58 therein)
Exhibit
No.
10.100*
10.101*
10.102*
10.103*
10.104*
10.105*
10.106*
10.107*
10.108*
10.109*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.59 therein)
Form 10-Q Quarterly Report
the period
ended September 30, 2008 (see Exhibit 10.02
therein)
for
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.84 therein)
Act
1933
Statement
No. 333-170564 on Form S-8 (see Exhibit 4(j)
therein)
Registration
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.60 therein)
First Amendment to the State Auto Insurance
Companies Amended and Restated Directors
Deferred Compensation Plan (amendment
effective as of December 1, 2005)
Second Amendment
to the State Auto
Insurance Companies Amended and Restated
Directors Deferred Compensation
Plan
(amendment effective as of January 1, 2009)
Third Amendment to the State Auto Insurance
Companies Amended and Restated Directors
Deferred Compensation Plan (amendment
effective as of January 1, 2009)
Fourth Amendment
to the State Auto
Insurance Companies Amended and Restated
Directors Deferred Compensation
Plan
effective November 1, 2010
Agreement of Assignment and Assumption
dated as of March 1, 2001, among State Auto
Financial Corporation, State Automobile
Mutual
Insurance Company, State Auto
Property and Casualty Insurance Company,
and Midwest Security Insurance Company
(nka State Auto Insurance Company of
Wisconsin)
State Auto
Insurance Companies Amended and Restated
Directors Deferred Compensation Plan
regarding
the
Form of State Auto Insurance Companies
Directors Deferred Compensation Agreement
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.61 therein)
State Auto Property & Casualty Insurance
Company Amended and Restated Incentive
Deferred Compensation Plan effective as of
March 1, 2010
Act
1933
Statement
No. 333-165366 on Form S-8 (see Exhibit 4(e)
therein)
Registration
Casualty
First Amendment to the State Auto Property
&
Company
Amended and Restated Incentive Deferred
Compensation Plan (amendment effective
July 1, 2010)
Insurance
Form 10-Q Quarterly Report
ended June 30, 2010 (see Exhibit 10.02 therein)
the period
for
Second Amendment
to the State Auto
Property & Casualty Insurance Company
Amended and Restated Incentive Deferred
Compensation Plan (amendment effective
November 1, 2010)
1933 Act Registration Statement No. 333-170568
on Form S-8 (see Exhibit 4(h) therein)
Third Amendment to the State Auto Property
& Casualty Insurance Company Amended
Deferred
and
Compensation Plan (amendment effective
January 1, 2011)
Incentive
Restated
Included herein
150
Exhibit
No.
10.110*
10.111*
10.112*
10.113*
10.114*
10.115
21.01
23.01
24.01
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
State Auto Financial Corporation Leadership
Bonus Plan
Form 10-Q Quarterly Report
ended June 30, 2007 (see Exhibit 10.64 therein)
the period
for
First Amendment to the State Auto Financial
Corporation
Plan
Leadership
(amendment effective as of January 1, 2009)
Bonus
Form 10-Q Quarterly Report
the period
ended September 30, 2008 (see Exhibit 10.04
therein)
for
Form 10-Q Quarterly Report
ended June 30, 2007 (see Exhibit 10.65 therein)
the period
for
Form 8-K Current Report filed on March 13,
2008 (see Exhibit 10.5 therein)
Form 10-Q Quarterly Report
the period
ended September 30, 2008 (see Exhibit 10.05
therein)
for
Form 8-K Current Report filed on November 25,
2009 (see Exhibit 10.1 therein)
State Auto Financial Corporation Long-Term
Incentive Plan
First Amendment to the State Auto Financial
Plan
Corporation
(amendment effective as of January 1, 2008)
Long-Term Incentive
Second Amendment
to the State Auto
Financial Corporation Long-Term Incentive
Plan (amendment effective as of January 1,
2009)
Company,
Underwriting Management
Agreement
effective as of November 20, 2009, by and
between Rockhill Insurance Company, Plaza
Insurance Company, American Compensation
Insurance
Bloomington
Compensation Insurance Company, State
Automobile Mutual
Insurance Company,
State Auto Property & Casualty Insurance
Company, Meridian
Insurance
Insurance Company,
Company, Milbank
Farmers Casualty Insurance Company, and
Risk Evaluation and Design, LLC
Security
List of Subsidiaries of State Auto Financial
Corporation
Included herein
Consent of
Accounting Firm
Independent Registered Public
Included herein
Powers of Attorney—Robert P. Restrepo, Jr.,
David J. D’Antoni, David R. Meuse, S. Elaine
Roberts, Alexander B. Trevor and Paul S.
Williams
Form 10-K Annual Report for the year ended
December 31, 2007 (see Exhibit 24.01 therein)
24.02
Powers of Attorney—Robert E. Baker and
Thomas E. Markert
24.03
Power of Attorney—Eileen A. Mallesch
the period
Form 10-Q Quarterly Report
ended March 31, 2008 (see Exhibit 24.01
therein)
for
Form 10-K Annual Report
December 31, 2010 (see Exhibit 24.03 therein)
for year ended
31.01
31.02
CEO certification required by Section 302 of
Sarbanes-Oxley Act of 2002
Included herein
CFO certification required by Section 302 of
Sarbanes-Oxley Act of 2002
Included herein
151
Exhibit
No.
32.01
32.02
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
CEO certification required by Section 906 of
Sarbanes-Oxley Act of 2002
Included herein
CFO certification required by Section 906 of
Sarbanes-Oxley Act of 2002
Included herein
101.INS** XBRL Instance Document
Included herein
101.SCH** XBRL
Taxonomy
Extension
Schema
Included herein
Document
101.CAL** XBRL Taxonomy Extension Calculation
Included herein
Linkbase Document
101.DEF** XBRL
Taxonomy Definition
Linkbase
Included herein
Document
101.LAB** XBRL Taxonomy Extension Label Linkbase
Included herein
Document
101.PRE** XBRL Taxonomy Extension Presentation
Included herein
Linkbase Document
Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit.
*
** The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other
document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or
document.
(b) EXHIBITS
The exhibits included with this Form 10-K, as indicated in Item 15(a)(3), have been separately filed.
(c) FINANCIAL STATEMENT SCHEDULES
Our financial statement schedules included with this Form 10-K, as indicated in Item 15(a)(2), follow the
signatures to this Form 10-K.
152
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 12, 2012
STATE AUTO FINANCIAL CORPORATION
/s/ ROBERT P. RESTREPO, JR.
Robert P. Restrepo, Jr.
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ ROBERT P. RESTREPO, JR.
Robert P. Restrepo, Jr.
/s/ STEVEN E. ENGLISH
Steven E. English
Chairman, President and Chief
Executive Officer
(principal executive officer)
Vice President and Chief Financial
Officer
(principal financial officer)
/s/ CYNTHIA A. POWELL
Cynthia A. Powell
Vice President and Treasurer
(principal accounting officer)
DAVID J. D’ANTONI*
David J. D’Antoni
ROBERT E. BAKER*
Robert E. Baker
THOMAS E. MARKERT*
Thomas E. Markert
DAVID R. MEUSE*
David R. Meuse
S. ELAINE ROBERTS*
S. Elaine Roberts
EILEEN A. MALLESCH*
Eileen A. Mallesch
ALEXANDER B. TREVOR*
Alexander B. Trevor
PAUL S. WILLIAMS*
Paul S. Williams
Director
Director
Director
Director
Director
Director
Director
Director
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
*
Steven E. English by signing his name hereto, does sign this document on behalf of the person indicated
above pursuant to a Power of Attorney duly executed by such person.
/s/ STEVEN E. ENGLISH
Attorney in Fact
March 12, 2012
Steven E. English
153
Consent of Independent Registered Public Accounting Firm
We consent
to the incorporation by reference in the following Registration Statements and related
Prospectuses of State Auto Financial Corporation of our reports dated March 12, 2012, with respect to the
consolidated financial statements and schedules of State Auto Financial Corporation and subsidiaries and the
effectiveness of internal control over financial reporting of State Auto Financial Corporation and subsidiaries,
included in this Annual Report (Form 10-K) for the year ended December 31, 2011.
EXHIBIT 23.01
Form
S-8
S-8
S-8
S-8
S-8
S-8
S-3
S-3
S-4
S-8
S-8
S-8
S-8
Registration
Number
33-44667
33-89400
1991 Stock Option Plan
Description
33-44666
1991 Directors’ Stock Option Plan
1991 Employee Stock Purchase and Dividend Reinvestment Plan
33-41423
333-05755
333-147333
333-56336
State Auto Insurance Companies Capital Accumulation Plan
333-43882
2000 Directors’ Stock Option Plan
333-43880
2000 Stock Option Plan
333-41849 Monthly Stock Purchase Plan for Independent Agents
333-90529
333-111507
1998 State Auto Agents’ Stock Option Plan
6 1⁄4% Senior Notes due 2013
333-127172
2005 Outside Directors Restricted Share Unit Plan
333-165364 State Auto Financial Corporation 2009 Equity Incentive Compensation Plan
333-165366 State Auto Property & Casualty Insurance Company Amended and Restated
333-170568
Incentive Deferred Compensation Plan
333-170564 State Auto Insurance Companies Amended and Restated Directors Deferred
Compensation Plan
/s/ Ernst & Young LLP
Columbus, Ohio
March 12, 2012
154
CERTIFICATION
I, Robert P. Restrepo, Jr., certify that:
1.
I have reviewed this Form 10-K of State Auto Financial Corporation;
EXHIBIT 31.01
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
to provide reasonable assurance
financial reporting to be designed under our supervision,
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 12, 2012
/s/ Robert P. Restrepo, Jr.
Robert P. Restrepo, Jr.,
Chief Executive Officer
(Principal Executive Officer)
155
CERTIFICATION
I, Steven E. English, certify that:
1.
I have reviewed this Form 10-K of State Auto Financial Corporation;
EXHIBIT 31.02
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
to provide reasonable assurance
financial reporting to be designed under our supervision,
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 12, 2012
/s/ Steven E. English
Steven E. English,
Chief Financial Officer
(Principal Financial Officer)
156
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.01
In connection with the Annual Report of State Auto Financial Corporation (the “Company”) on Form 10-K
for the period ended December 31, 2011, as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, Robert P. Restrepo, Jr., Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
/s/ Robert P. Restrepo, Jr.
Robert P. Restrepo, Jr.
Chief Executive Officer
March 12, 2012
A signed original of this written statement required by Section 906 has been provided to State Auto Financial
Corporation and will be retained by State Auto Financial Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
157
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.02
In connection with the Annual Report of State Auto Financial Corporation (the “Company”) on Form 10-K
for the period ended December 31, 2011, as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, Steven E. English, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
/s/ Steven E. English
Steven E. English
Chief Financial Officer
March 12, 2012
A signed original of this written statement required by Section 906 has been provided to State Auto Financial
Corporation and will be retained by State Auto Financial Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
158
State Auto Financial Corporation (STFC)
is a super-regional insurance holding company
headquartered in Columbus, Ohio. STFC is affiliated
with State Automobile Mutual Insurance Company
(State Auto Mutual), which owns approximately
63% of STFC. STFC, State Auto Mutual and their
insurance subsidiaries and affiliates (State Auto)
market their insurance products through
independent insurance agencies and brokers
throughout the United States. State Auto’s principal
lines include personal and commercial auto,
homeowners, commercial multi-peril, fire and
general liability insurance.
With a commitment to responsible cost-based
pricing, conservative investments and sound
underwriting practices, STFC has achieved solid
long-term financial performance since becoming a
public company in 1991. State Auto Financial
Corporation is traded on the Nasdaq Global Market
System under the symbol STFC.
Financial Highlights
Earned premiums
Net investment income
Net realized investment gain (loss)
Other income
Total revenue
Net (loss) income
Basic (loss) earnings per share
Diluted (loss) earnings per share
Dividends paid per share
Book value per share
Total assets
Stockholders’ equity
Return on equity
Combined ratio
($ in millions, except per share amounts)
2011
2010
2009
2008
2007
$ 1,428.8
85.4
37.0
2.5
$ 1,533.7
$ (146.8)
(3.65)
$
(3.65)
$
0.60
$
$ 18.81
$ 2,790.8
$ 758.3
1,257.2
80.8
14.9
2.2
1,355.1
24.5
0.61
0.62
0.60
21.23
2,722.0
851.8
(18.2)%
2.9%
116.3
104.6
1,176.5
82.1
(5.2)
3.5
1,256.9
10.2
0.26
0.25
0.60
21.33
1,126.0
87.4
(36.4)
4.9
1,181.9
(31.1)
(0.78)
(0.78)
0.60
19.23
1,011.6
84.7
12.1
5.0
1,113.4
119.1
2.90
2.86
0.50
23.10
2,564.5
849.4
1.3%
105.8
2,443.6
761.0
2,337.9
935.5
(3.7)%
109.8
13.5%
92.8
Cover photos clockwise, from top left: State Auto founder Bob Pein; Susan Hill of Benton-Luttrell-Brown Company, an independent
insurance agency representing State Auto in Van Alstyne, Texas; State Auto Claim Representative Morgan Howard; State Auto’s current
Corporate Headquarters at 518 E. Broad St. in Columbus, Ohio; Catastrophe Claim Representative Kevin McBride with a claimant
following the May 22, 2011, tornado in Joplin, Mo.; the 1932 Christmas display at State Auto’s “Christmas Corner,” now an 80-year
downtown Columbus tradition.
Corporate Information
ANNUAL MEETING
10 a.m. Friday, May 4, 2012 at Corporate Headquarters
SHAREHOLDER INQUIRIES
Larry Adeleye
Assistant Vice President, Treasury and Finance Director
State Auto Financial Corporation
518 E. Broad St.
Columbus, Ohio 43215
Phone (614) 917-5108
FAX (614) 887-1074
Larry.Adeleye@StateAuto.com
INDEPENDENT AUDITORS
Ernst & Young LLP
Huntington Center
41 S. High St., Ste. 1100
Columbus, Ohio 43215
LEGAL COUNSEL
Baker & Hostetler LLP
65 E. State St., Ste. 2100
Columbus, Ohio 43215
SEC FILINGS
This report and other filings with the Securities and
Exchange Commission are available free of charge
on the Company’s website at StateAuto.com.
TRANSFER AGENT/REGISTRAR
Computershare
P.O. Box 43078
Providence, R.I. 02940
Phone (800) 622-6757
www-us.computershare.com/investor/2/contact/index#SCUSSTFC
STOCK TRADING
Common shares are traded in the Nasdaq Global Select
National Market System under the symbol STFC. As of
March 2, 2012, there were 1,285 shareholders of the
Company’s common shares.
MARKET PRICE RANGE,COMMON STOCK
Initial Public Offering – June 28, 1991, $2.25
The high and low sale prices for each quarterly period
for the past two years as reported by Nasdaq and cash
dividends paid per share are:
2011
First Qtr.
Second Qtr.
Third Qtr.
Fourth Qtr.
2010
First Qtr.
Second Qtr.
Third Qtr.
Fourth Qtr.
High
$18.35
18.28
18.00
14.06
High
$19.06
20.38
16.30
17.89
Low
$14.90
15.16
11.83
10.09
Low
$15.11
15.42
13.40
15.06
Dividend
$0.15
0.15
0.15
0.15
Dividend
$0.15
0.15
0.15
0.15
CORPORATE HEADQUARTERS
State Auto Financial Corporation
518 E. Broad St.
Columbus, Ohio 43215
StateAuto.com
(614) 464-5000
FORWARD-LOOkINg STATEMENTS
This Annual Report contains forward-looking statements
within the meaning of the Private Securities Litigation
Reform Act of 1995. Please see “Important Information
Regarding Forward-Looking Statements” preceding
Part I of the Company’s Annual Report on Form 10-K
for the fiscal year ended Dec. 31, 2011, which is
included with this Annual Report.
90 Years of Service
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Frustrated by insurance rates that were unreasonably high and claims settlements that were routinely
handled with disregard, Robert Pein was determined to create a new kind of insurance company
dedicated to serving the needs of the community – not the needs of the insurance executives.
In 1921, State Automobile Mutual Insurance Company was founded. With three employees and a rented
room in downtown Columbus, Ohio, Pein set forth to tackle the inequities in the insurance industry. From
the very beginning, State Auto advocated the independent agency system as the best approach to serving
the needs of its policyholders. To this day, as hometown neighbors, local independent agents continue to
provide efficient, professional and more personalized service than that of their competitors. Just as Robert
Pein had always dreamed.
State Auto Financial Corporation
Meridian Security Insurance Company
State Auto Property & Casualty Insurance Company
Meridian Citizens Mutual Insurance Company
Milbank Insurance Company
Beacon National Insurance Company
Farmers Casualty Insurance Company
Beacon Lloyds Insurance Company
State Auto Insurance Company of Ohio
Patrons Mutual Insurance Company of Connecticut
Stateco Financial Services Inc.
Litchfield Mutual Fire Insurance Company
518 Property Management & Leasing LLC
Rockhill Insurance Company
State Automobile Mutual Insurance Company
Plaza Insurance Company
State Auto Insurance Company of Wisconsin
American Compensation Insurance Company
State Auto Florida Insurance Company
Bloomington Compensation Insurance Company
STATE AUTO FINANCIAL CORPORATION
518 E. BROAD ST.
COLUMBUS, OHIO 43215
STATEAUTO.COM
State Auto Financial Corporation
2011 Annual Report