STATE AUTO FINANCIAL CORPORATION
2019 ANNUAL REPORT
LETTER TO SHAREHOLDERS
“...we’ve never lost sight of where we
were going, and that focus and persistence
has transformed State Auto and positioned
us for long-term success.”
Dear Shareholders,
Personal Lines
2019 was a challenging but ultimately
successful year. Our journey to create a
modernized and healthy carrier took a ma-
jor step forward. We entered 2020 a much
stronger company than in many years.
Like any journey, ours has not been per-
fectly smooth. Rather, it’s been a long and
winding road. However, through all the
challenges of the journey, we’ve never
lost sight of where we were going, and
that focus and persistence has trans-
formed State Auto and positioned us for
long-term success.
Of course, we must take accountabil-
ity for the 2019 results. We failed to
make an underwriting profit, and that
is unacceptable. Our personal lines
business was the primary cause of our
miss. After a strong 2018, our progress in
2019 was slowed by a few key product
and technology gaps that had to be
closed, mainly impacting our auto line.
In addition, we experienced an elevated
level of weather losses that significantly
impacted our property lines of business.
As I noted, early in the year we uncovered
a handful of technology issues, as well as
some weaknesses in our personal auto
product we thought we’d addressed. The
work to correct these issues put us be-
hind and caused us to fail to achieve our
goal of profitable growth for our largest
line of business.
In personal auto, we had no growth for
the year and our statutory combined
ratio was 103.0%. We identified the
weaknesses in our pricing model and
began a series of adjustments to correct.
Those fixes continued throughout the
year and will be completed when we
launch an updated model in the first and
second quarters of 2020.
We also experienced execution issues
while upgrading our platform architec-
ture. We worked through the transition
and are now in a much more robust
position. We were clearly challenged
in the auto line with both product and
technology issues, but I’m proud our
team rallied together, fixed the areas of
concern, and by the end of the year, our
technology and personal auto products
were ready for 2020.
In our business, weather is a reality and
we do our best to prepare for it through
underwriting, risk management and
pricing. Unfortunately, there are some
years in which Mother Nature is especial-
ly unkind and preparation isn’t enough.
2019 was one of those years, and the
result was a homeowners statutory
combined ratio of 106.8%. Regardless
of the severe weather, we own the poor
result and are committed to returning our
homeowners business to an underwriting
profit in 2020.
The good news in personal lines was our
homeowners business growth of nearly
20%. This is a terrific result demonstrating
the combination of our digital technol-
ogy and new product design has been
embraced by our agency force. We have
good momentum in this line and I believe
our growth trajectory will continue.
As we enter 2020, we’re clear on the ad-
justments needed in personal lines in order
to return to growth and profitability.
2
Commercial Lines
Our goal is to grow and be profitable in
each of our lines of business, and com-
mercial lines delivered on that goal with
an extremely strong year.
Overall, commercial achieved a profit,
coming in at a statutory combined ratio
of 97.0% for the year. This is a result of
our teams across underwriting, claims,
sales, and pricing working together. The
profitability was achieved along with
strong growth of 12.0%. As I stated, we
want each individual line to win, so it’s
important to note the consistency across
commercial lines. Of our six commercial
product lines, four were profitable and all
but workers’ compensation grew.
We spent the last two years rebuilding
our commercial teams and products,
and our 2019 results are a clear indicator
that those efforts were successful. More
importantly, we believed a few years ago
when this journey began that commercial
lines had great potential for State Auto.
2019 was a major step forward toward
realizing that potential.
As we enter 2020, commercial lines are
well positioned to continue delivering
outstanding results.
Technology
While we uncovered some fundamental
technology pieces that needed to be
fixed, we continued to move the com-
pany forward. Our system stability and
security are both strong. We‘ll be able to
add volume to this platform with great
efficiency.
In early 2020, we’ll launch farm and ranch
and middle market commercial on our
digital-only platform, State Auto Connect.
The only product left to add to our digital
“Our State Auto associates have
demonstrated the creativity, passion and
persistence needed to win.”
platform will be workers’ compensation.
In just four years, we’ve delivered six
products, a blistering pace, and are now
near the end of the modernization of
State Auto. This is extremely significant.
It gives us continuity, efficiency, and
effectiveness.
of gaining the full benefit of that invest-
ment and effort.
As we enter 2020, our technology plat-
form has never been stronger.
Agent Partners
I’m very proud of our technology team.
We talked in 2015 about the fact that we
have to spend and upgrade technology
to truly win going forward, especially in
an industry that will be greatly affected
by change and innovation. The journey to
date has been hard, but we’re on the cusp
We also finished 2019 with a clearer view
and understanding of our agent partners:
their needs, their commitment to us, and
how we can win together. We’ve taken
our agent partners on this turnaround
journey for the last four years and it hasn’t
been perfect. However, we’ve emerged
as a stronger company with an obvious
spot on their “shelf” of companies. We
provide them an innovative partner with
competitive products and work with
them to anticipate and prepare for the
change that is coming. Likewise, we’ve
been clear about what we need and ex-
pect from a true partner: quality business,
high integrity and open communication in
both directions.
As we enter 2020 our agency partner-
ships have never been more mutually
beneficial.
4
“As we enter 2020, our talent and
culture are strong.”
Our People
We’ve emphasized from day one that
the key to our success is culture. It is our
number one priority. As we get the culture
right, as our associates embrace it, as we
all live it, we will win.
In 2019, we continued to make progress
toward a deep and meaningful culture
based on trust and respect. One that
encourages candor, radical transparency,
innovation and fun. Our culture empow-
ers associates and allows them to develop
personally and professionally. As a result,
our talent has gotten better and we’ve
become an employer sought out by elite
candidates. At the end of the day, these
factors will drive our success.
the key pieces in place to deliver on our
goal of profitable growth.
As we enter 2020, our talent and culture
are strong.
Best,
We are responsible for a year where our
results did not meet our expectations.
The journey we’ve taken isn’t smooth,
and our industry is complex and presents
challenges along the way. Success is
based on how one reacts to adversity
along the way. Our State Auto associates
have embraced our journey and reacted
to challenges with the creativity, passion
and persistence needed to win. That’s
why I’m confident we enter 2020 with all
Mike LaRocco
President, Chairman of the Board
& Chief Executive Officer
6
BOARD OF DIRECTORS
Michael E. LaRocco
President and
Chief Executive Officer
Chairman of the Board,
Investment and Finance Committee
Kym M. Hubbard
Retired Global Head of
Investments, Chief Investment
Officer and Treasurer,
Ernst & Young, LLC
Audit Committee, Compensation
Committee, Independent Committee,
Investment and Finance Committee
(Chair)
Setareh Pouraghabagher
Member of the faculty and
Executive Partner, California
Polytechnic State University
Audit Committee (Chair), Indepedent
Committee (Chair), Nominating and
Governance Committee, Risk Committee
SENIOR OFFICERS
Mike LaRocco
President, Chairman of the Board
and Chief Executive Officer
Steve English
Senior Vice President,
Chief Financial Officer
Melissa Centers
Senior Vice President,
Secretary and General Counsel
Jason Berkey
Senior Vice President,
Data & Analytics
Kim Garland
Senior Vice President,
Personal & Commercial Lines, State Auto Labs
Élise Spriggs
Senior Vice President,
Associate and External Relations
Paul Stachura
Senior Vice President,
Chief Claims and Risk Engineering Officer
Greg Tacchetti
Senior Vice President,
Chief Information and Strategy Officer
Robert Baker
Executive Vice President of
DHR International Inc.
Compensation Committee (Chair),
Nominating and Governance
Committee, Risk Committee
Michael J. Fiorile
Retired President and
Chief Executive Officer of
The Dispatch Printing Company
Nominating and Governance
Committee (Chair), Risk Committee
Eileen A. Mallesch
Retired Senior Vice President
and CFO, Nationwide Property and
Casualty Inurance Company
Audit Committee, Compensation Committee ,
Independent Committee
David R. Meuse
Senior Advisor, Stonehenge Partners
Lead Director, Audit Committee,
Independent Committee, Investment
and Finance Committee
S. Elaine Roberts
Retired President and Chief
Executive Officer, Columbus
Regional Airport Authority
Compensation Committee,
Independent Committee, Nominating
and Governance Committee
Investment , Risk Committee (Chair)
8
Environmental,
Social &
Governance
Report
“State Auto believes that to build a
sustainable future, we must deliver
profitable, long-term growth in an ethical
and responsible manner...”
We believe in delivering profitable,
long-term growth in an ethical and
responsible manner by protecting and
enhancing the safety and well-being of
our associates, communities and the
environment. Our 2019 Environmental,
Social and Governance (ESG) Report
highlights the steps we’re taking to do
just that, and is tangible evidence of our
commitment to transparency.
10
Workforce as of June 30, 2019
54.8% female
Fully subsidized rideshare program and
public transit passes for associates.
24/7 no-cost on-site fitness center
“We can’t become the very best
without new ideas, fresh perspectives and
various backgrounds among our ranks.”
403,325 lbs.
paper recycled
The 13 members of STFC’s board
of directors include 6 women and
3 African Americans.
4 of 6
STFC board committees
chaired by women
“State Auto Women in Technology”
group formed
CO2 Emissions Reduced by
168,000 lbs.
To view the entire report go to
www.stateauto.com/esg
12
Financial Highlights
®
Earned premiums
Net investment income
Net investment gain (loss)
Other income
Total revenue
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Dividends paid per share
Book value per share
Total assets
Stockholders’ equity
Return on equity
GAAP Combined ratio
$
$
$
$
$
$
$
$
$
$
$
$
2019
1,253.0
80.4
74.2
2.4
1,410.0
87.4
2.01
1.96
0.40
22.01
2,985.4
959.9
9.8%
102.7
2018
1,238.0
84.9
(49.7)
2.6
1,275.8
12.8
0.30
0.29
0.40
18.91
2,895.9
818.5
1.5%
100.6
($ in millions, except per share amounts)
2017
1,276.1
78.8
65.1
2.3
2016
1,291.1
74.7
36.5
2.3
2015
1,275.9
71.7
24.3
2.1
1,422.3
1,404.6
1,374.0
(17.8)
(0.42)
(0.42)
0.40
19.68
3,019.1
835.0
(2.1)%
107.7
19.2
0.46
0.46
0.40
20.34
2,973.4
850.5
2.3%
106.3
52.3
1.27
1.26
0.40
20.40
2,841.1
843.2
6.3%
101.5
Investment Portfolio
Net Premium Written
(In Billions)
MBS -
18.9%
Corporate Bonds -
17.7%
Equities -
14.9%
Agency Bonds -
14.0%
Tax Exempt Bonds -
13.8%
Treasury Bonds -
13.3%
Notes Receivable -
2.6%
Other Invested Assets -
2.6%
Taxable Muni Bonds -
2.2%
2019
2018
2017
2016
2015
$1.3
$1.2
$1.3
$1.3
$1.3
$0.0
$0.3
$0.6
$0.9
$1.2
$1.5
Book Value (Per Share)
Dividend Paid (Per Share)
2019
2018
2017
2016
2015
$22.01
$18.91
$19.68
$20.34
$20.40
2019
2018
2017
2016
2015
$0.40
$0.40
$0.40
$0.40
$0.40
$0
$5
$10
$15
$20
$25
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
$0.35
$0.40
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019 or
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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
(Address of principal executive offices)
Columbus Ohio
43215-3976
(Zip Code)
Registrant’s telephone number, including area code:
(614) 464-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common shares, without par value
STFC
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ¨ No ý
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 ý
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 ý 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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. (Check one):
Large accelerated filer
Non-accelerated filer
¨
o
Accelerated filer
Smaller reporting company
Emerging growth company
ý
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
As of June 30, 2019, 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
$617,915,534.
On February 21, 2020, the Registrant had 43,654,704 Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement relating to the annual meeting of shareholders to be held May 8, 2020 (the
“2020 Proxy Statement”), which will be filed within 120 days of December 31, 2019, 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, 2019
Form 10-K
Item
Description
Part I
1
Business
1A
1B
2
3
4
5
6
7
7A
8
9
9A
9B
10
11
12
13
14
15
Part II
Part III
Part IV
Executive Officers of the Registrant
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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
Qualitative and Quantitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
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
Page
9
15
16
27
27
28
28
29
31
31
63
63
64
106
106
106
107
107
107
107
108
109
120
3
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical facts, included in this Annual Report on Form 10-K of State Auto
Financial Corporation (“State Auto Financial” or “STFC”) for the fiscal year ended December 31, 2019 (this “Form 10-K”), 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.
4
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
State Auto Mutual
Refers to STFC and its consolidated subsidiaries, namely State Auto
Property & Casualty Insurance Company (“State Auto P&C”), Milbank
Insurance Company (“Milbank”), State Auto Insurance Company of Ohio
(“SA Ohio”), and Stateco Financial Services, Inc. (“Stateco”).
Refers to State Automobile Mutual Insurance Company, which owns
approximately 59.5% of STFC’s outstanding common shares.
STFC Pooled Companies
Refers to State Auto P&C, Milbank, and SA Ohio.
Mutual Pooled Companies
Refers to State Auto Mutual, and certain subsidiaries and affiliates of State
Auto Mutual, namely, State Auto Insurance Company of Wisconsin (“SA
Wisconsin”), Meridian Security Insurance Company (“Meridian Security”),
Patrons Mutual Insurance Company of Connecticut (“Patrons Mutual”),
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.
Rockhill Insurers
Refers to RIC, Plaza, American Compensation and Bloomington
Compensation.
State Auto Group
Refers to the Pooled Companies
5
Glossary of Selected Insurance and Accounting Terms
Accident year
Accounting standards codification or ASC
Admitted insurer
American Institute of Certified Public
Accountants or AICPA
Allocated loss adjustment expenses or ALAE
Book value per share
Catastrophe loss
Combined ratio
Debt to capital ratio
Deferred acquisition costs or DAC
Direct written premiums
The calendar year in which loss events occur, regardless of when the
losses are actually reported, booked or paid.
The Codification is the single source of authoritative nongovernmental
GAAP developed by the Financial Accounting Standards Board
(“FASB”).
An insurer licensed to transact insurance business within a state and
subject to comprehensive policy rate, form and market conduct
regulation by that state’s insurance regulatory authority.
The AICPA represents the certified public accounting profession
nationally regarding rule-making and standard-setting, and serves as an
advocate before legislative bodies, public interest groups and other
professional organizations. The AICPA also monitors and enforces
compliance with the profession’s technical and ethical standards.
The costs that can be related to a specific claim, which may include
attorney fees, external claims adjusters and investigation costs, among
others.
Total common stockholders’ equity divided by the number of common
shares outstanding.
Loss and ALAE from catastrophes, where catastrophes are defined as a
severe loss caused by various natural events, including hurricanes,
hailstorms, tornadoes, windstorms, earthquakes, 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 $25.0 million or more in industry
insured property losses and affects a significant number of property and
casualty policyholders and insurers.
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.
The ratio of notes payable to the sum of total stockholders’ equity and
notes payable.
Expenses that vary with, and are primarily related to, the production of
new and renewal insurance business, and are deferred and amortized to
achieve a matching of revenues and expenses when reported in financial
statements prepared in accordance with GAAP.
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
movements.
Earned premiums or premiums earned
Excess and surplus lines insurance
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.
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.
6
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.
Financial Accounting Standards Board or
FASB
Generally accepted accounting principles or
GAAP
In the United States, a non-governmental body the SEC has charged with
establishing and maintaining generally accepted standards for
professional accountants.
Accounting practices used in the United States of America determined by
the FASB and American Institute of Certified Public Accountants
(“AICPA”).
Incurred but not reported reserves or IBNR
Loss adjustment expenses or LAE
Loss and LAE ratio or loss ratio
Loss reserves
Managing general underwriter or MGU
National Association of Insurance
Commissioners or NAIC
Net premiums written to surplus ratio or
leverage ratio
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.
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.
For both SAP and GAAP, it is the ratio of incurred losses and LAE to
earned premiums.
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.
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.
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.
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
Retail agent or retail agency
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 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.
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.
7
Risk-based capital or RBC
Standard insurance
Statutory accounting practices or SAP
Statutory surplus
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.
Insurance which is typically written by admitted insurers. Our personal
and commercial insurance segments are comprised of standard insurance.
The practices and procedures prescribed or permitted by state insurance
regulatory authorities in the United States for recording transactions and
preparing financial statements.
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
Wholesale broker
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.
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.
8
Item 1. Business
PART I
State Auto Financial is an Ohio domiciled property and casualty insurance holding company incorporated in 1990. We are
engaged in writing personal and business insurance. State Auto Financial’s principal subsidiaries are State Auto P&C, Milbank
and SA Ohio, each of which is a property and casualty insurance company, and Stateco, which provides investment
management services to affiliated insurance companies.
State Auto Mutual is an Ohio domiciled mutual property and casualty insurance company organized in 1921. It owns
approximately 59.5% of State Auto Financial’s outstanding common shares. State Auto Mutual’s other subsidiaries and
affiliates include SA Wisconsin, Meridian Security, Patrons Mutual and the Rockhill Insurers, each of which is a property and
casualty insurance company. 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.
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.
As previously reported, we have exited our specialty business and we stopped writing this business on a net basis in 2018;
as a result, the specialty insurance segment is no longer a reportable segment and is disclosed as "specialty run-off."
Our Pooled Companies are rated A- (Excellent) by the A.M. Best Company (“A.M. Best”).
FINANCIAL INFORMATION ABOUT SEGMENTS
Our reportable insurance segments are personal
insurance (collectively the “insurance
segments”). These insurance segments are business units managed separately from each other due to the differences in the types
of customers they serve, products they provide or services they offer. Our 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 16 to our consolidated financial statements included in
Item 8 of this Form 10-K.
insurance and commercial
The products within each reportable insurance segment are as follows:
• Personal Insurance Segment- personal auto, homeowners and other personal
• Commercial Insurance Segment - commercial auto, small commercial package, middle market commercial,
workers’ compensation, farm and ranch and other commercial
PERSONAL AND COMMERCIAL INSURANCE
Products offered in our personal and commercial 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, 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, homeowners, and other personal (examples of products included in other personal are
dwelling fire, personal inland marine and personal umbrella).
Commercial Insurance
In our commercial insurance segment, we write standard insurance covering small to medium sized commercial
exposures. We offer a broad range of coverages including commercial auto, small commercial package, middle market
commercial, farm & ranch, workers’ compensation and other commercial (examples of products included in other commercial
are commercial inland marine, small commercial package umbrella and middle market commercial umbrella).
9
Marketing
We market our personal and commercial insurance products through approximately 3,200 retail agencies. We view our
retail agents as our primary customers, because they are in a position to either recommend 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 their home states; training
opportunities; and incentives related to profit and growth.
We actively help our agencies develop the professional sales skills of their staff. Our training programs include both
product and sales training conducted in our corporate headquarters. Further, some of our training programs include disciplined
follow-up and coaching for an extended time. In addition, from time to time we provide targeted training sessions 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 incentives.
INVESTMENT OPERATIONS
The primary objectives of our investment strategy are to maintain adequate liquidity and capital
to meet our
responsibilities to policyholders; grow surplus long term to support the growth of our company; provide a consistent level of
income; and manage investment risk. Our investment portfolio is managed separately from that of State Auto Mutual and its
subsidiaries and affiliates, and investment results are not shared through the Pooling Arrangement, as described below. Stateco
performs investment management services for both us and State Auto Mutual and all subsidiaries and affiliates. Investment
policies and guidelines are 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—Results
of Operations—Investment Operations Segment.”
CLAIMS
Our claims and risk engineering (“CARE”) division supports our insurance segments through emphasis on timely
investigation of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate case reserves for
claims, sharing of relevant information, 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 and focused on yielding 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. In areas where there is not a sufficient volume of
claims to warrant staff adjusters, we supplement our field staff with outside adjusters and appraisers who work under our
direction.
Claim settlement authority levels are established for each adjuster, supervisor and manager based on their level of
expertise. 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 claim adjusting costs by settling as many claims as possible through our claims staff and, when appropriate,
by settling disputes regarding automobile physical damage, bodily injury and property insurance claims through arbitration or
mediation.
In addition to our internal claims adjusters, we utilize third party claims administrators (“TPAs”) to investigate, process
and settle certain specialty run-off claims on our behalf. As with our internal claims adjusters, claim settlement authority is
established for adjusters, supervisors and managers within each TPA. Claims handling and reporting guidelines are established
and provided to each TPA. Members of our internal claims staff perform periodic reviews of individual claim files produced by
each TPA for compliance with such established claims handling and reporting guidelines.
We have in-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 to defend our insureds, when appropriate.
10
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 a specified portion of
premiums, losses and expenses based on each of the Pooled Companies’ respective pooling percentages. The balance of the
pooled premiums, losses and expenses are retained by State Auto Mutual.
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,
2019:
State
Texas
Ohio
Kentucky
Michigan
South Carolina
Arkansas
Minnesota
Tennessee
Mississippi
Maryland
Illinois
Indiana
Missouri
North Carolina
Pennsylvania
All others (1)
Total
% of Total
13.2 %
7.7
6.2
5.4
4.2
4.0
4.0
4.0
3.8
3.7
3.6
3.6
3.5
3.4
3.3
26.4
100.0 %
(1) No other single state accounted for 3.0% or more of the total direct
written premiums written in 2019.
MANAGEMENT AGREEMENT
Through various management and cost sharing agreements, State Auto P&C provides 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, renewed for an additional
ten-year period on January 1, 2015. If the 2005 Management Agreement was terminated for any reason, we would have to
relocate our facilities to continue our operations. See “Properties” included in Item 2 of this Form 10-K.
REINSURANCE
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. 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.”
See “Regulation” in this Item 1 for a discussion of the Terrorism Acts.
LOSS RESERVES
We maintain reserves for the eventual payment of losses and LAE for both reported claims and unreported claims. Loss
reserves are management’s best estimate at a given point in time of what we expect to pay to settle all claims incurred as of the
11
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 our estimate of ultimate payments required to settle claims varies from the loss reserves currently recorded.
Loss reserves for reported claims are initially established on either a case-by-case or formula basis depending on the type
and circumstances of the claim. The case-by-case reserve amounts are determined based on our case 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 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 single method for determining the
exact 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—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, 2019, 2018 and 2017:
($ millions)
Beginning of Year:
Year Ended December 31
2018
2017
2019
Loss and loss expenses payable
Less: Reinsurance recoverable on losses and loss expenses payable
Net losses and loss expenses payable(1)
Provision for losses and loss expenses occurring:
$ 1,146.8
5.5
1,141.3
$ 1,255.6
3.1
1,252.5
$ 1,181.6
3.6
1,178.0
Current year
Prior years(2)
Total
Loss and loss expense payments for claims occurring during:
Current year
Prior years
Total
End of Year:
913.5
(68.7)
844.8
530.4
402.8
933.2
876.6
(80.2)
796.4
456.5
451.1
907.6
964.9
(46.6)
918.3
445.2
398.6
843.8
Net losses and loss expenses payable
Add: Reinsurance recoverable on losses and loss expenses payable
Losses and loss expenses payable(3)
1,052.9
13.6
$ 1,066.5
1,141.3
5.5
$ 1,146.8
1,252.5
3.1
$ 1,255.6
(1)
Includes net amounts assumed from affiliates of $593.6 million, $711.4 million, and $630.9 million at beginning of year 2019, 2018, and
2017, respectively.
(2) This line item shows changes 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.”
(3)
Includes net amounts assumed from affiliates of $500.8 million, $593.6 million, and $711.4 million at end of year 2019, 2018, and 2017,
respectively.
COMPETITION
The property and casualty insurance industry is highly competitive. We compete with numerous insurance companies,
with varying sizes and financial resources, in the personal and commercial insurance markets based on the following factors:
price; product offerings and innovation; underwriting criteria; quality of service to insureds; relationships with our retail agents
and wholesale brokers; prompt and fair claims handling and settlement; financial stability; and technology. 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 shareholders. Additionally, these laws require that all transactions within our holding company system affecting any
insurance subsidiary within the State Auto Group are 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.
The Risk Management and Own Risk Solvency Assessment Model Act (“ORSA”), adopted by the NAIC in 2012,
requires insurers to incorporate a comprehensive enterprise risk management framework within company operations. Overall,
ORSA is an internal assessment of the risks associated with an insurer’s business and the sufficiency of capital resources to
support those risks. Each insurer’s ORSA process will be unique, reflecting its business, strategy and approach to enterprise risk
management. In 2019, the State Auto Group filed its ORSA Summary Report, supported by internal risk management materials,
with the Ohio Department of Insurance, our lead state regulator.
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, $91.3 million is available in 2020 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 $10.0 million, $10.0 million and $15.0 million in 2019, 2018 and 2017, respectively, from its insurance
subsidiaries. Additional information regarding dividend restrictions can be found in this Item 7 and in Note 12 to our
consolidated financial statements included in Item 8 of this Form 10-K.
Rates and Related Regulation. Except as discussed below, we are not aware of the adoption of any material adverse
legislation or regulation in any state in which we conducted business during 2019 which would materially impact our business.
Many states in which we operate have passed or are considering legislation restricting or banning the use of credit scoring
in the rating and risk selection process. Some states are also becoming active in questioning the use of catastrophe modeling in
the pricing and underwriting areas. Regulation risk is realized when states do not approve or limit the amount of rate a company
can charge which may result in writing underpriced business. See “Risk Factors - Regulations” in Item 1A of this Form 10-K.
13
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, 2019, 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 was extended in 2005, 2007 and again in 2019. The 2019 reauthorization of
the Terrorism Risk Insurance Act provides an extension through 2027. Under these Terrorism Acts, commercial property and
casualty insurers like State Auto Group, in exchange for making terrorism coverage available, may be entitled to be reimbursed
by the Federal Government for a portion of their aggregate losses. As required by the Terrorism Acts, we offer policyholders in
specific lines of commercial insurance the option to elect Terrorism coverage. In order for a loss to be covered under the
Terrorism Act, the loss must meet the aggregate industry loss minimum and must be the result of an act of terrorism as certified
by the Secretary of the Treasury. Policyholders may choose to reject terrorism coverage (terrorism coverage is mandatory for
workers compensation). If the policyholder rejects coverage for certified acts of terrorism, we will only cover 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. Our current commercial property reinsurance excludes
certified acts of foreign terrorism and loss due to nuclear, biological or chemical agents. Insurers participating in the Terrorism
Acts are required to provide information regarding insurance coverage for terrorism losses, including; (i) lines of business with
exposure to such losses; (ii) premiums earned on such coverage; (iii) geographical location of exposures; (iv) pricing of such
coverage; (v) the take-up rate for such coverage; and (vi) the amount of private reinsurance for acts of terrorism purchased. See
Risk Factors- Terrorism" in Item 1A of this From 10-K.
The Federal Insurance Office (“FIO”) was established in 2010 by the enactment of the Dodd-Frank Act. The FIO is a
separate office within the United States Department of Treasury. The primary objective of the FIO 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 FIO 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 FIO has no authority as a regulator or supervisor of
insurance companies.
EMPLOYEES
As of February 21, 2020, we had 1,978 employees. Our employees are not covered by any collective bargaining
agreement. We consider the relationship with our employees to be good.
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.
14
Information about our Executive Officers
Name of Executive Officer and
Position(s) with Company
Michael E. LaRocco,
Chairman, President and Chief
Executive Officer
(1)
Age
63
Steven E. English,
Senior Vice President, Chief
Financial Officer
Jason E. Berkey,
Senior Vice President, Data and
Analytics
Melissa A. Centers,
Senior Vice President, Secretary and
General Counsel
Kim B. Garland,
Senior Vice President, Personal &
Commercial Lines and State Auto
Labs
Elise D. Spriggs,
Senior Vice President, Associate and
External Relations
Paul M. Stachura,
Senior Vice President, Chief CARE
Officer
Gregory A. Tacchetti,
Senior Vice President, Chief
Information and Strategy Officer
Scott A. Jones,
Vice President, Chief Investment
Officer
Matthew S. Mrozek,
Vice President, Chief Actuarial Officer
Matthew R. Pollak,
Vice President, Chief Accounting
Officer and Treasurer
(1) Age as of February 27, 2020.
59
45
48
54
49
62
51
55
51
54
Principal Occupation(s)
During the Past Five Years
President and Chief Executive Officer of STFC and State
Auto Mutual, 5/15 to present; Chairman of the Board of
STFC, 1/16 to present; chief executive officer of Business
Insurance Direct LLC, 10/11 to 4/15; chief executive officer
of AssureStart Insurance Agency LLC, 1/13 to 7/14; chief
executive officer of Fireman’s Fund Insurance Company,
3/08 to 7/11.
Senior Vice President of STFC and State Auto Mutual, 8/13
to present; Vice President of STFC and State Auto Mutual,
5/06 to 7/13; Chief Financial Officer of STFC and State Auto
Mutual, 12/06 to present.
Senior Vice President of Data and Analytics of STFC and
State Auto Mutual, 1/20 to present; Vice President of
Personal Lines of STFC and State Auto Mutual, 9/17 to 1/20;
Vice President of STFC and State Auto Mutual, 10/15 to
9/17; vice president of American Insurance Group (“AIG”),
1/04 to 7/15.
Senior Vice President, Secretary and General Counsel of
STFC, 11/15 to present; General Counsel and Secretary of
State Auto Mutual, 11/15 to present; Assistant Secretary of
STFC and State Auto Mutual, 11/12 to 11/15; Associate
General Counsel of STFC and State Auto Mutual, 3/12 to
11/15; Assistant General Counsel of STFC and State Auto
Mutual, 6/10 to 3/12.
Senior Vice President of Personal & Commercial Lines of
STFC and State Auto Mutual, and State Auto Labs, 1/20 to
present, Senior Vice President of Commercial Lines of STFC
and State Auto Mutual, 9/17 to 1/20; Senior Vice President of
Standard Lines of STFC and State Auto Mutual, 8/15 to
9/17; chief product officer of AIG consumer division, 1/13 to
12/14; chief underwriting officer of AIG’s global consumer
insurance division, 12/12 to 1/13; president and chief
executive officer of United Guaranty Corporation (“UGC”),
an affiliate of AIG, 2/12 to 12/12; chief operating officer of
UGC, 6/09 to 12/12.
Senior Vice President, Associate and External Relations of
STFC and State Auto Mutual, 10/17 to present; Senior Vice
President, External and Government Affairs of STFC and
State Auto Mutual, 3/16 to present; vice president and
director of government relations, 7/11 to 6/15. Attorney,
Carpenter, Lipps & Leland LLP, 06/15 to 03/16.
Senior Vice President and Chief CARE Officer of STFC and
State Auto Mutual, 9/15 to present; chief claims officer, of
QBE Holdings, Inc., 5/13 to 9/15; chief claims and risk
services officer of Fireman’s Fund Insurance Company, 5/05
to 4/13.
Senior Vice President and Chief Information and Strategy
Officer of STFC and State Auto Mutual, 8/15 to present; chief
executive officer of AssureStart Insurance Agency LLC, 7/14
to 12/14; chief operating officer of AssureStart Insurance
Agency LLC, 10/11 to 6/14; senior vice president and chief
administrative officer of Fireman’s Fund Insurance Company,
2008 to 10/11.
Vice President and Chief 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.
Vice President and Chief Actuarial Officer of STFC and State
Auto Mutual, 3/09 to present.
Vice President, Chief Accounting Officer and Treasurer of
STFC and State Auto Mutual, 4/13 to present; vice president,
corporate finance and accounting of American Safety
Insurance Holdings, Ltd. 2/10 to 4/13.
An Executive Officer
of the Company Since
2015
(2)
2006
2017
2015
2015
2016
2015
2015
2012
2015
2013
(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.
15
Item 1A. Risk Factors
Statements contained in this Form 10-K may be “forward-looking” within the meaning of 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 below develop into actual events, then such
events could have a material adverse effect on our business, reputation, liquidity, capital resources, financial position or results
of operations. In that case, the market price of our stock could decline materially.
The risk factors might affect, alter, or change actions we take in developing or executing our strategies, including, but not
limited to capital management. We employ a number of risk management approaches to reduce our exposure to risk, all of
which have inherent limitations. The failure of our risk management actions could have material adverse effects on our
business, reputation, liquidity, capital resources, financial position or results of operations.
The following list of risk factors is not exhaustive and others may exist or develop. This information should be carefully
considered together with the other information included in this report and in other reports and materials we file with the SEC, as
well as news releases and other information we publicly disseminate from time to time.
GENERAL RISK FACTORS
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, or changes in the report lag, between the
occurrence of an insured event and the time a claim is actually reported to us. We refine loss reserve estimates as part of 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 and adversely affect our liquidity and financial position.
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, wildfires and man-made events, 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.
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
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variety of our property and casualty lines, most of our catastrophe claims in the past have related to homeowners, allied lines,
commercial property 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.
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 or refusing to enforce policy provisions such as hurricane deductibles. 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, such reinsurance may prove inadequate if a major catastrophic loss exceeds the reinsurance limit, or we incur 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. While we use 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 a
potential 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 auto or other lines of business could be negatively affected.
A severe catastrophic event, pandemic or terrorist attack somewhere in the world may not result in material insurance
losses to us. However, our investment portfolio, reinsurers or the general economy could be negatively affected, resulting in a
material adverse effect on our business, liquidity, capital resources, financial position or results of operations.
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.
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 timely 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 accuracy;
the development, selection and application of appropriate rating formula or other pricing methodologies;
our ability to use credit scoring, education and occupation, and other data methodologies in pricing and
underwriting;
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 company underwriting guidelines;
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our ability to innovate with new product and/or 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 accurately predict consumer behavior, such as policyholder retention;
our ability to properly classify our new and renewal business;
unanticipated court decisions, legislation or regulatory action;
unanticipated changes or execution problems in our claim settlement practices, including our ability to recognize
and respond to fraudulent or inflated claims;
changing driving patterns for auto exposures including distracted driving; changing weather patterns (including
those which may be related to climate change) for property exposures;
technological
autonomous cars;
innovations in automobiles, such as accident avoidance systems and advances leading to
changes in the medical sector of the economy; including healthcare reform cost shifting and other factors;
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, wildfires, 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 underprice risks, which would negatively affect our margins, or we could overprice risks, which could reduce our
competitiveness. In either event, our operating results, financial condition and cash flows could be materially adversely
affected.
VENDOR MANAGEMENT
Loss of key vendor relationships or failure of a vendor to perform as anticipated or to protect personal information of
our customers, claimants or employees could negatively affect our operations.
We rely on services and products provided by various vendors. In the event that one or more of our vendors becomes
unable to continue to provide products or services as anticipated, we may suffer operational impairment and financial loss. If
one or more of our vendors fail to protect personal information of our customers, claimants or employees, we may incur
operational impairments, or could be exposed to litigation, compliance costs or reputation damage. See Privacy section for
further information.
CYBERSECURITY THREATS
Our highly automated and networked organization is subject to cyberterrorism and a variety of other cybersecurity
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
adverse 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 from multiple sources and could interrupt, damage or otherwise
adversely affect the operation of these critical systems. Threats to data security have risen in recent years due to new
technologies, the use of the internet and telecommunications to conduct financial transactions and the increased sophistication
and resources of hackers, activists and other external parties.
In addition, to access our online services, our customers may use devices or software that are beyond our control
environment and which may provide additional avenues for attackers to gain access to confidential information. Although we
have information security procedures and controls in place, our technologies, systems, networks, and customers' devices and
software may become the target of cyber-attacks or information security breaches that could result in the unauthorized release,
gathering, monitoring, misuse, loss, change, or destruction of our or our customers' confidential, proprietary and other
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information (including personal identifying information of individuals), or otherwise disrupt our or our customers' or other third
parties' business operations.
We and others in our industry are regularly the subject of attempts by attackers to gain unauthorized access to our
networks, systems, and data, or to obtain, change, or destroy confidential data (including personal identifying information of
individuals) through a variety of means, including computer viruses, malware, and phishing. In the future, these attacks may
result in unauthorized individuals obtaining access to our confidential information or that of our customers, or otherwise
accessing, damaging, or disrupting our systems or infrastructure.
We are continuously developing and enhancing our controls, processes, and practices designed to protect our systems,
computers, software, data, and networks from attack, damage, or unauthorized access. This continued development and
enhancement will require us to expend additional resources, including the investigation and remediation of any information
security vulnerabilities that may be detected. Despite our ongoing investments in security resources, talent, and business
practices, we are unable to assure that these security measures will be effective. Additionally, as part of our technology strategy,
we utilize U.S., off-shore and cloud vendors. Controls employed by these vendors may prove inadequate.
The risk committee of the Board of Directors oversees the Company’s cybersecurity risk mitigation strategy. On a
quarterly basis, a written report is prepared and presented to the risk committee which provides an overview of the Company’s
cybersecurity program, including management’s assessment of the program’s maturity utilizing a standardized framework and
investments we have made in the program and how we expect them to enhance the maturity of the program. The presentation
also includes a discussion of major cybersecurity events in the news.
If our systems and infrastructure were to be breached, damaged, or disrupted, or if we were to experience a loss of our
confidential information or that of our customers, we could be subject to serious negative consequences, including disruption of
our operations, damage to our reputation, a loss of trust in us on the part of our customers, vendors or other counterparties,
client attrition, reimbursement or other costs, increased compliance costs, litigation exposure and legal liability and regulatory
fines or penalties. Any of these could materially and adversely affect our results of operations, our financial condition, and/or
our share price. We maintain cyber liability insurance coverage to offset certain potential losses, subject to policy limits, such
as liability to others, costs of related crisis management, data extortion, applicable forensics and certain regulatory defense
costs, fines and penalties.
PRIVACY
Privacy protection requirements for consumers are expanding from simply protecting personal information to a more
consumer-driven model that allows individuals in some respects to control a company's ongoing storage and use of their
personal information. Our failure to comply with such privacy laws could have an adverse effect on our business.
We continue to see increased regulation of data privacy and security, including the adoption of more stringent subject
matter specific state laws, and federal laws regulating the collection and use of data, as well as security and data breach
obligations. Privacy protection requirements for consumers are expanding from simply protecting personal information to a
more consumer-driven model that allows individuals in some respects to control a company's ongoing storage and use of their
personal information. This expansion places an increased burden on us to be able to respond to a consumer’s request to know or
request to permanently anonymize their data, and failure to comply could result in fines, penalties, or litigation which could
have an adverse effect on our business.
The regulatory framework for privacy issues is evolving in the U.S. and worldwide, and various government and
consumer agencies and public advocacy groups have called for new regulation and changes in industry practices. It is possible
that new laws and regulations will be adopted at the state or federal level, or both, or existing laws and regulations may be
interpreted in new ways that would affect our business. Complying with any new regulatory requirements could force us to
incur substantial costs or require us to change our business practices in a manner that could negatively impact the way we
conduct business.
BUSINESS CONTINUITY
Our business depends on the uninterrupted operation of our facilities, systems and business functions, including our
information technology, telecommunications and other business systems. Our business 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, power outages, a major failure of the Internet, 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
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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 that is designed to continue our core business operations in the event that
normal business operations cannot be performed due to a catastrophic event. While we continue to test and assess our business
continuity plan to meet the needs of our core business operations and address multiple business interruption events, there is no
assurance that we will be able to perform our core business operations upon the occurrence of such an event, which may result
in a material adverse effect on our reputation, financial position and results of operations.
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. There can be no assurance
that our use of reinsurance effectively meets our strategic business objectives. Reinsurance may not be adequate to protect us
against losses and may not be available to us in the future at commercially reasonable rates. The availability, policy conditions
and cost of reinsurance are subject to prevailing market conditions and loss experience, 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. 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.
CYCLICAL NATURE OF THE INDUSTRY
The property and casualty insurance industry is cyclical, which may cause fluctuations in our operating results.
The property and casualty insurance industry 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 cyclical nature 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 expected returns. Accordingly, our commercial 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. Policyholder reaction to price competition may result in the
movement of business and volatility of premium revenues.
The personal lines products are influenced by a collection of loss cost trends. Driving patterns including behavioral
changes like distracted driving, along with 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. We
may be unable to increase premiums at the same pace as coverage costs increase. Accordingly, profit margins initially decline
prior to periods of increasing loss costs.
ECONOMIC CONDITIONS
Economic conditions may adversely affect our business.
A challenging national and global economy may adversely impact our business and results of operations. While the
volatility of the economic climate makes it difficult for us to predict the overall impact of economic conditions on our business
and results of operations, our business may be impacted in a variety of ways.
Economic conditions affect consumer behavior. For example, a decrease in gas prices may result in consumers driving
more miles, leading to a possible increase in auto claim frequency. Negative economic conditions may cause consumers and
the demand for insurance products. For example, declining
businesses to decrease their spending, which may impact
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. High levels of
unemployment have a tendency to cause 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 under
insured motorist claims may rise. Vacated homes and business properties pose increased insurance industry risk.
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Volatility and weakness in the financial and capital markets may negatively impact the value of our investment portfolio.
Economic strains on states and municipalities could result in downgrades or defaults of certain municipal obligations.
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
can negatively affect our
retention. Reductions in new business start-ups may negatively affect the number of future potential business insurance
customers.
current business
among our
customers
insurance
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.
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.
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 shareholders and other investors, and relates to authorization for lines of
transactions with affiliates,
business, capital and surplus requirements,
dividend limitations (see “Regulation-Dividends” in 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
examining laws and regulations, generally focusing on modifications to holding company regulations, interpreting existing laws
and developing new laws.
limitations, underwriting limitations,
investment
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 us to possible assessments, some of which could be material to our results of operations. The potential
availability of recoupments or premium rate increases, if applicable, may not offset such assessments in the financial statements
nor do so in the same fiscal periods.
From time to time, some of the states in which we operate consider 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
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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.
We cannot predict with certainty the effect any enacted, proposed or future state or federal regulation 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, including financial and regulatory reporting, 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. Tax legislative
initiatives by these governmental bodies, including actions by departments of insurance, taxing authorities and other state and
local agencies, to change the current tax structure or to increase taxes, assessments and other revenue-generating fees may
increase the cost of doing business in those jurisdictions.
From time to time, various legislative initiatives are enacted or proposed that could materially impact our financial
statements or tax positions. There can be no assurance that our effective tax rate or tax positions will not be adversely affected
by enacted or proposed tax 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.
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.
An emerging risk faced by the property and casualty industry is commonly referred to as the opioid crisis. Numerous
lawsuits have been filed on behalf of states, counties and municipalities alleging a variety of claims and generally seek
compensatory damages caused by the opioid crisis. In general, defendants named in these lawsuits have been major
pharmaceutical companies, wholesale distributors, retail pharmacies and doctors. Since these lawsuits are at early stages, we
are unable to predict the outcome of these lawsuits or their impact to our financial results.
Court decisions have had, and are expected to continue to have, significant impact on the property and casualty insurance
industry. These 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.
We have seen instances of political pressure exerted to force or persuade insurers to provide extra-contractual coverage,
such as foregoing the use of deductibles.
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There is also a growing trend of plaintiffs targeting property and casualty insurers, including us, in putative 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. Other
environmental concerns could also create or affect potential liability exposures.
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. 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 the risk of insured losses on future
acts of terrorism that are certified by the U.S. Secretary of the Treasury. We are required to participate in the Terrorism Acts as
a result of our commercial insurance business. In addition, under the Terrorism Acts, terrorism coverage is mandatory for all
primary workers’ compensation policies. Insureds with non-workers’ compensation commercial policies, however, have the
option to accept or decline our terrorism coverage. In 2019, over 90% of our commercial lines non-workers’ compensation
policyholders purchased terrorism coverage. Although the Terrorism Acts mitigate our exposure to a large-scale terrorist attack,
our deductible is substantial and losses could have a material adverse effect on our results of operations, financial condition and
liquidity.
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 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.
Furthermore, our reinsurers could experience significant losses as a result of terrorist attacks, potentially jeopardizing
their ability to pay losses ceded to them and reducing the availability of reinsurance. Our current commercial property
reinsurance excludes certified acts of foreign terrorism and loss due to nuclear, biological or chemical agents.
INVESTMENTS
The performance of our investment portfolios is subject
to various investment risks, such as market, credit,
concentration, liquidity, and interest rate risks. Such risks could result in material adverse effects to our results of
operations, cash flows and financial position.
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. Low interest rate environments put
downward pressure on investment income. 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.
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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 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.
EMPLOYEES
Our ability to attract, develop and retain talented employees, managers and executives, and to maintain appropriate
staffing levels, is critical to our success, as is our ability to effectively plan for the succession and transition of key executives
and subject matter experts.
Our success depends on our ability to attract, train, develop and retain talented, ethical, diverse employees, including
executives and other key managers in a specialized industry. The 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. Effective
succession planning is important to assure the timely, competent replacement of retiring or transitioning senior executives and
other departing management talent and subject matter experts.
Our success also depends on our ability to maintain and improve the effectiveness of our staff. Our ability to do so may
be impaired as a result of a variety of internal and external factors which affect employees and the employment marketplace, as
well as our ability to recognize and respond to changing trends and other circumstances that affect our employees. 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
business) in one or more business units or locations. In either event, our financial results could be materially adversely affected.
Changes in U.S. immigration policies and laws could impact our ability to hire and retain foreign national employees
working under visas, which could adversely affect our operations.
We have many foreign national employees who work for us under visas issued by the U.S. government. These foreign
national employees are highly skilled with expertise in technology and other areas needed for the operation of our business.
Recent changes to U.S. immigration policies and laws have placed more restrictions on the issuance and extension of work
visas. These restrictions could make it more difficult for us to hire and retain these highly skilled employees, which could
adversely affect our operations.
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. Some of our competitors have well-established national reputations and brands supported by extensive media
advertising. Some of our competitors have substantially greater financial, technical and operating resources and market share
than us. We may not be able to effectively compete, which could adversely affect our sales and profitability. We believe that
competition in our lines of business is based primarily on price, service, commission structure, product features, technology, use
24
of telematics, financial strength ratings, producer relationships, reputation and name or brand recognition. Market developments
such as usage-based auto insurance or new entrants into the insurance marketplace could potentially result in reduced market
share or adverse selection. Several automobile manufacturers have announced plans to begin marketing autonomous vehicles in
the coming years. Some manufacturers have indicated that liability coverage may be included as part of the purchase price of
the vehicle. Over time, as the sale of autonomous vehicles becomes more common, sales of our commercial and private
passenger auto liability products may be impacted. The growth in mobile communications and the prominence of social media
as a source of information for consumers are recent examples of significant developments in the marketplace which may
adversely affect our competitive position. Social media, for example, could be potentially utilized in a manner which negatively
affects our reputation with current or prospective policyholders and agents.
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 to market
and sell our products. 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.
New digital carriers have entered the insurance marketplace over the past few years. These carriers typically market
personal lines automobile or homeowners products direct to the consumer and do not utilize the independent agency system. As
these carriers grow, their new customers will either be first time buyers of insurance products or customers leaving other
carriers. Insuretech companies have also benefited from the evolving marketplace. Insurance companies, including State Auto,
have been investing in these companies. Investing companies seek a business partner that will allow them to take advantage of
new technology that can help a carrier either attract quality business or improve underwriting results, with an ultimate goal of
improved financial performance. The growth of both the digital carriers and insuretech companies could impact the potential
growth of other carriers.
The increased transparency that arises from information available from the use of tools, such as comparative rater
software, could work to our disadvantage. The competitive environment for certain lines of business, such as personal auto
insurance, puts pressure on achieving sustainable profit margins. 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.
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, FASB, 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.
RISKS RELATING TO STATE AUTO FINANCIAL CORPORATION
CREDIT AND FINANCIAL STRENGTH RATINGS
A downgrade in our financial strength ratings may negatively affect our business and reputation 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 rating 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. The State Auto Group’s current financial strength rating from
A.M. Best is A- (Excellent) with a stable outlook.
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 State Auto Group’s current credit rating
from A.M. Best is bbb- with a stable outlook.
25
Depending on future results and developments, we may not be able to maintain our current ratings.
DIVIDENDS
There can be no assurance that we will continue to pay cash dividends consistent with current or 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 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 STFC’s liquidity, including STFC’s 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.
If we are unable to effectively execute our top initiatives and projects, we may not meet organizational objectives due
to cost overruns, missed project milestones, defects and/or failing to deliver the desired business value.
An ongoing challenge during system development and enhancement is the effective and efficient utilization of our current
technology in view 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.
System implementations are complex processes requiring extensive planning and coordination among multiple
stakeholder groups. During 2019, we completed the rollout of our “State Auto Connect” digital quote and issue platform in
states where we write private passenger auto and homeowners business. During 2019, we completed the launch of our new
business owners’, commercial auto and small commercial umbrella products. The farm and ranch product has been added to the
State Auto Connect platform and will be rolled out to agents in 2020. We intend to launch State Auto Connect for middle
market commercial in 2020, and workers’ compensation in 2021. These new technology platforms are intended to provide us
with quicker speed to market, improve ease of doing business for our policyholders and agents, lower our costs for maintenance
and product introductions, and provide greater operational efficiency. However, even with our best planning and efforts and the
involvement of third party expertise, there can be no assurance that the expected benefits will be realized upon implementation
or that the transition will be completed within the planned time frame or budget. Such risks are also present in other key
initiatives and projects planned for 2020 and beyond.
If we experience difficulties with outsourcing or other third party relationships, our ability to conduct business might
be negatively impacted.
From time to time we may outsource certain business, information technology or administrative functions or otherwise
rely on third parties for the performance of such functions for efficiency and cost saving purposes. If we fail to develop and
implement our sourcing strategies or our third party providers fail to perform as expected, we may experience operational
difficulties, increased costs, and a loss of business that may have a negative impact on our results of operations or financial
condition.
DISTRIBUTION SYSTEM
Our retail agents, who are part of the independent agency distribution channel, are our sole distribution method for
our personal and commercial insurance products. Our exclusive use of such distribution 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 other means, such as the internet, rather than through agents.
26
We market our insurance products exclusively through independent, non-exclusive insurance agents, 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
independent agency system as our distribution channel. However, we recognize that although the number of distribution
locations has expanded and the size of many agencies has grown, the number of individual 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 may become more difficult to expand the number of independent agencies representing us. If we are
unsuccessful in maintaining and increasing our agency representation, 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. When price competition is intense, our
premium production may be negatively impacted 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 partnering with agents to market and sell our products. We have expanded our retail agents to include network
agents, which are traditional retail agents that have affiliated with a group, and corporate-owned agents, which are
geographically diverse retail locations with common ownership. 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, we may not be successful and 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 to purchase our insurance
products or make changes to their policies. We have expanded our distribution channel to include platform agents. These agents
are accessed by clients via the Internet and do not have retail locations. Nevertheless, our distribution system may place us at a
disadvantage with consumers who prefer to purchase insurance products only online.
Additionally, in any given period we may drive a significant portion of our business from a limited number of agents and
the loss of any of these relationships could have a significant impact on our ability to market our products and services.
Likewise,
in certain jurisdictions, when the insured remits payments to the agent in full, our premiums are considered to have
been paid in full, notwithstanding that we may or may not have actually received the premiums from the agent. Consequently,
we assume a degree of risk associated with certain agents with whom we transact business.
The insurance marketplace is evolving and independent insurance agency distribution systems are growing rapidly.
Our success depends on our ability and our independent agents’ ability to react to these changes.
As the insurance industry changes and the growth of the independent insurance agency distribution system evolves, our
ability to adapt to these changes with our agents is critical. An influx of agencies are joining larger independent network
agencies. Our dependence on network agencies and the percentage of the book of business they write with us can be positively
or negatively affected by the collective business decisions those network agencies make.
CONTROL BY OUR PARENT COMPANY
State Auto Mutual owns a significant interest in us and may exercise its control in a manner detrimental to the
interests of other STFC shareholders.
As of December 31, 2019, State Auto Mutual owned approximately 59.5% 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 shareholders 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 shareholders.
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. State Auto Mutual also owns and leases other office facilities in numerous locations
throughout the State Auto Group’s geographical areas of operation.
27
Item 3. Legal Proceedings
We are involved in lawsuits in the ordinary course of our business arising out of or otherwise related to our insurance
policies. Additionally, from time to time we may be involved in lawsuits, including class actions, in the ordinary course of
business but not arising out of or otherwise related to our insurance policies. These lawsuits are in various stages of
development. We generally will contest these matters vigorously but may pursue settlement if appropriate. 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 position or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
28
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 February 21, 2020,
there were 1,010 shareholders 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:
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(1) Adjusted for stock splits.
High
Low
Dividend
$
$
$
$
34.99
35.04
36.45
34.75
High
30.40
34.31
32.96
35.05
$
30.33
32.11
28.46
28.10
0.10
0.10
0.10
0.10
Low
Dividend
$
25.92
27.59
28.57
28.75
0.10
0.10
0.10
0.10
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 information regarding regulatory restrictions on the
payment of dividends to State Auto Financial by its insurance subsidiaries.
29
Performance Graph
The line graph below compares the total return on $100.00 invested on December 31, 2014, 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.
STFC
Nasdaq Index
Nasdaq Ins. Index
2014
2015
2016
2017
2018
2019
100.00
100.00
100.00
92.66
105.73
106.45
120.66
113.66
123.10
131.05
145.76
127.02
153.20
140.10
116.21
139.60
189.45
147.24
30
Comparison of Cumulative Total ReturnSTFCNasdaq IndexNasdaq Ins. Index20142015201620172018201975100125150175200 Item 6. Selected Consolidated Financial Data
(dollars and shares in millions, except per share data)
Year ended December 31
2019
2018
2017
2016
2015
Statement of Income Data — GAAP Basis:
Earned premiums
Net investment income
Total revenues
Net income (loss)
Earned premium growth (decline)
Return on average invested assets(1)
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
Per Common Share Data — GAAP Basis:
Basic EPS
Diluted EPS
Cash dividends per share
Book value per share
Common Share Price:
High
Low
Close at December 31
Close price to book value per share
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
(1)
Invested assets include investments and cash equivalents
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,253.0
80.4
1,410.0
87.4
1.2 %
3.0 %
2,669.3
2,985.4
122.0
959.9
43.6
9.8 %
11.3 %
2.01
1.96
0.40
22.01
36.45
28.10
31.02
1.41
67.4 %
35.3 %
102.7 %
67.6 %
34.7 %
102.3 %
1.4
1,238.0
84.9
1,275.8
12.8
(3.0)%
3.2 %
2,598.9
2,895.9
122.0
818.5
43.3
1.5 %
13.0 %
0.30
0.29
0.40
18.91
35.05
25.92
34.04
1.80
64.3
36.3
100.6
64.5
36.7
101.2
1,276.1
78.8
1,422.3
(17.8)
(1.2)%
3.1 %
2,689.7
3,019.1
122.1
835.0
42.4
(2.1)%
12.8 %
(0.42)
(0.42)
0.40
19.68
30.85
22.11
29.12
1.48
72.0
35.7
107.7
72.1
35.1
107.2
1,291.1
74.7
1,404.6
19.2
1.2 %
3.1 %
2,612.6
2,973.4
122.1
850.5
41.8
2.3 %
12.6 %
0.46
0.46
0.40
20.34
27.42
17.84
26.81
1.32
73.0
33.3
106.3
73.1
33.5
106.6
1,275.9
71.7
1,374.0
52.3
19.4 %
3.1 %
2,471.7
2,841.1
100.5
843.2
41.3
6.3 %
10.6 %
1.27
1.26
0.40
20.40
27.37
20.01
20.59
1.01
67.8
33.7
101.5
68.4
33.8
102.2
1.4
1.5
1.5
1.6
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. For information regarding our
financial results for the fiscal year ended December 31, 2017, please see the discussion included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2018.
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 and SA Ohio, each of which is a property and
casualty insurance company, and Stateco, which provides investment management services to affiliated insurance companies.
31
Our reportable insurance segments are personal insurance and commercial insurance. These insurance segments are
managed separately from each other due to the differences in the types of customers they serve, products they provide or
services they offer. Investment operations is also a reportable segment. As previously reported, we have exited our specialty
business, which has resulted in the elimination of our specialty insurance segment. As a result, effective January 1, 2019, the
specialty insurance business is no longer a reportable segment as it no longer is material to our results and is disclosed as
"specialty run-off." See “Personal and Commercial 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 under 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 2019 is set forth in this Item 7 and in Note 16 to our consolidated
financial statements included in Item 8 of this Form 10-K.
EXECUTIVE SUMMARY
In 2019, although we did not meet our goal of profitable growth, we made considerable progress toward positioning our
company to be able to produce more consistent profitable results. Our personal and commercial lines' 101.2% SAP combined
ratio and 10.2% net written premium growth fell short of our expectations, but were accompanied by efforts throughout our
company to become more effective and efficient.
Insurance Operations
Our personal lines business did not meet our expectations for profit or growth in 2019. Personal lines were impacted by
technology and pricing issues in our personal auto and homeowners' products, that should be addressed with the introduction of
an updated pricing model in 2020. We also experienced execution challenges during upgrades of our platform architecture. We
have addressed those issues, as well. In commercial lines, we delivered profit and strong growth. This was the result of two
years of rebuilding our commercial lines teams and products. We are well positioned to continue delivering outstanding results
in this part of our business.
Claims
Our Claims and Risk Engineering (CARE) organization is focused on providing an exceptional customer experience for
those who rely on us during some of their greatest times of need. Our CARE team is continually exploring new ways to
streamline and improve the claim process through the use of technology, while keeping in mind that people ultimately make the
difference. We are committed to improving all aspects of the claim experience for our customers.
Technology
In 2019, we completed the multi-year rollout of our digital quote and issue platform for personal lines, small commercial
and commercial auto, which continued to drive significant growth. The flexibility of this platform allows us to offer new
products and rates and incorporates advanced data analytics, giving us the ability to more efficiently match rate to risk.
Throughout 2019, our efforts were focused on delivering a stable technology experience for our agents and policyholders, while
working toward a 2020 launch of farm and ranch and middle market commercial on the new platform, followed by workers'
compensation in 2021.
Culture
Our culture is central to our progress to date, and will remain critical to our future success. We encourage openness,
candor, transparency, creativity and challenge. Our associates are expected to act like owners by participating, asking questions,
challenging assumptions and proposing solutions. We believe the culture that we have created enables us to move quickly and
effectively, with agents and customers at the forefront. It also includes a shared commitment to the communities in which we
live and work, which has been at the heart of our company since our founding. Our success will be measured not only in our
business performance, but in the difference we make in our communities.
Moving forward
We remain focused on operational excellence, which means getting better at everything we do, every day. At the same
time, we are committed to more effective execution of the many efforts underway to further strengthen our company. We strive
to continually improve our digital technology platform, while adjusting to the needs of our agency partners, customers and the
broader marketplace. As a result of the rebuilding of our company, we are well positioned to take advantage of the growing
disruption in the P&C industry and deliver sustained, consistent profitable growth.
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,
32
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.
The following table sets forth the participants and their participation percentages in the Pooling Arrangement. There were
no changes to the participants or to their participation percentages during 2019.
STFC Pooled Companies:
State Auto P&C
Milbank
SA Ohio
Total STFC Pooled Companies
State Auto Mutual Pooled Companies:
State Auto Mutual
SA Wisconsin
Meridian Security
Patrons Mutual
RIC
Plaza
American Compensation
Bloomington Compensation
Total State Auto Mutual Pooled Companies
51.0 %
14.0
—
65.0
34.5
—
—
0.5
—
—
—
—
35.0 %
We anticipate that the STFC Pooled Companies will maintain a 65% participation percentage 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.
33
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, 2019 and 2018:
($ millions, except per share data)
2019
2018
GAAP Basis:
Total revenues
Income before federal income taxes
Net income
Stockholders’ equity
Book value per share
Return on average equity
Debt to capital ratio
Cat loss and ALAE ratio
Non-cat loss and LAE ratio
Loss and LAE ratio
Expense ratio
Combined ratio
Premiums written growth
Investment yield
SAP Basis:
Cat loss and ALAE ratio
Non-cat loss and ALAE ratio
ULAE ratio
Loss and LAE ratio
Expense ratio
Combined ratio
Net premiums written to surplus
$
$
$
$
$
$
$
$
$
$
1,410.0
107.0
87.4
959.9
22.01
9.8 %
11.3 %
8.0 %
59.4 %
67.4 %
35.3 %
102.7 %
8.9 %
3.0 %
8.0 %
53.5 %
6.1 %
67.6 %
34.7 %
102.3 %
1.4
1,275.8
12.9
12.8
818.5
18.91
1.5 %
13.0 %
5.8 %
58.5 %
64.3 %
36.3 %
100.6 %
(4.7)%
3.2 %
5.8 %
52.7 %
6.0 %
64.5 %
36.7 %
101.2 %
1.4
The following highlights significant factors that impacted our 2019 net income of $87.4 million:
•
•
•
•
Net investment gain was $74.2 million, which included $73.8 million of unrealized gains from equity securities
and other invested assets. Net investment income was $80.4 million, which included $62.3 million of income from
the fixed maturities portfolio.
Earned premiums were $1,253.0 million, which reflected new business growth in homeowners, commercial auto,
middle market commercial, and other personal as well as increased rates in personal auto.
The SAP catastrophe loss and ALAE ratio was 8.0%, or $100.5 million. 2019 was impacted by (i) severe wind
and hail storms, approximately half of which occurred in Texas, and (ii) adverse development of prior accident
year catastrophe losses in the specialty run-off business relating to Hurricanes Irma and Harvey.
The SAP non-cat loss and ALAE ratio was 53.5%, or $669.7 million. Non-catastrophe losses and ALAE included
5.8 points of favorable development relating to prior years, or $72.4 million, primarily from the commercial
insurance segment which contributed $58.8 million. The current accident year non-cat loss and ALAE was
primarily impacted by non-cat weather losses and large losses, including fires.
The following highlights significant factors that impacted our 2018 net income of $12.8 million:
•
Net investment loss of $49.7 million, which was impacted by $57.4 million of unrealized losses from equity
securities and other invested assets due to the adoption of ASU 2016-01 effective January 1, 2018 which requires
changes in fair value for equity securities and other invested assets still held to be reported through net income.
34
•
•
•
Earned premiums were $1,238.0 million and reflected new business growth in the personal insurance segment and
the exit of the specialty business.
The catastrophe loss and ALAE ratio was 5.8%, or $71.7 million. 2018 was impacted by wind and hail storms.
The SAP non-cat loss and ALAE ratio was 52.7%, or $653.0 million. Non-catastrophe losses and ALAE included
6.2 points of favorable development relating to prior years, or $76.6 million. The personal and commercial
insurance segments contributed 7.0 points, or $79.7 million, due primarily to lower than anticipated severity
emerging from multiple accident years with the majority of favorable development from the 2016 and 2017
accident years.
Insurance Segments
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. The unearned portion of written premiums, called unearned premiums, is
reflected on our balance sheet as a liability and represents our obligation to provide coverage for the unexpired term of the
policies.
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 the “Critical Accounting Policies—Deferred
Acquisition Costs” section included in this Item 7.
The accounting for pension benefits also contributes to the difference between our GAAP loss and expense ratios and our
SAP loss and expense ratios. For a discussion of our pension and postretirement benefit obligations, see the “Critical
Accounting Policies – Pension and Postretirement Benefit Obligations” 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.
35
Summary of Key Indicators of Insurance Segment Results
The following table sets forth certain key performance indicators for our insurance segments for the years ended
December 31, 2019 and 2018:
($ in millions)
2019
Net written premiums
Net earned premiums
Losses and LAE incurred:
Cat loss and ALAE
Non-cat loss and ALAE:
Prior accident years non-cat loss and ALAE
Current accident year non-cat loss and ALAE
Total non-cat loss and ALAE
Total Loss and ALAE
ULAE
Total Loss and LAE
Underwriting expenses
Net underwriting loss
Cat loss and ALAE ratio
Non-cat loss and ALAE ratio:
Prior accident years non-cat loss and ALAE ratio
Current accident year non-cat loss and ALAE ratio
Total non-cat loss and ALAE ratio
Total Loss and ALAE ratio
ULAE ratio
Total Loss and LAE ratio
Expense ratio
Combined ratio
(1)N/M = Not Meaningful
Personal &
Commercial
Specialty run-off
Total
1,318.8
$
1,247.9
(0.7) $
5.1
1,318.1
1,253.0
89.9
(71.3)
736.9
665.6
755.5
78.3
833.8
454.0
10.6
(1.1)
5.2
4.1
14.7
(2.0)
12.7
3.1
(39.9) $
7.2 %
(10.7) $
N/M(1)
(5.7)%
59.0 %
53.3 %
60.5 %
6.3 %
66.8 %
34.4 %
101.2 %
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
100.5
(72.4)
742.1
669.7
770.2
76.3
846.5
457.1
(50.6)
8.0 %
(5.8)%
59.3 %
53.5 %
61.5 %
6.1 %
67.6 %
34.7 %
102.3 %
$
$
36
($ in millions)
2018
Net written premiums
Net earned premiums
Losses and LAE incurred:
Cat loss and ALAE
Non-cat loss and ALAE:
Prior accident years non-cat loss and ALAE
Current accident year non-cat loss and ALAE
Total non-cat loss and ALAE
Total Loss and ALAE
ULAE
Total Loss and LAE
Underwriting expenses
Net underwriting (loss) gain
Cat loss and ALAE ratio
Non-cat loss and ALAE ratio:
Prior accident years non-cat loss and ALAE ratio
Current accident year non-cat loss and ALAE ratio
Total non-cat loss and ALAE ratio
Total Loss and ALAE ratio
ULAE ratio
Total Loss and LAE ratio
Expense ratio
Combined ratio
Personal &
Commercial
Specialty run-off
Total
1,196.3
$
1,138.2
$
14.0
99.8
1,210.3
1,238.0
70.3
(79.7)
659.0
579.3
649.6
67.9
717.5
425.8
1.4
3.1
70.6
73.7
75.1
5.5
80.6
18.8
(5.1) $
6.2 %
0.4
$
1.4 %
(7.0)%
57.9 %
50.9 %
57.1 %
5.9 %
63.0 %
35.6 %
98.6 %
3.1 %
70.8 %
73.9 %
75.3 %
5.5 %
80.8 %
133.7 %
214.5 %
71.7
(76.6)
729.6
653.0
724.7
73.4
798.1
444.6
(4.7)
5.8 %
(6.2)%
58.9 %
52.7 %
58.5 %
6.0 %
64.5 %
36.7 %
101.2 %
$
$
37
792.4
759.2
71.1
(12.5)
443.6
431.1
502.2
51.2
553.4
245.6
(39.8)
9.4 %
(1.7)%
58.5 %
56.8 %
66.2 %
6.7 %
72.9 %
31.0 %
103.9 %
Personal Insurance Segment
The following tables set forth certain key performance indicators by major product line of business for our personal
insurance segment for the years ended December 31, 2019 and 2018:
Table 1
($ in millions)
2019
Net written premiums
Net earned premiums
Losses and LAE incurred:
Cat loss and ALAE
Non-cat loss and ALAE:
Prior accident years non-cat loss and ALAE
Current accident year non-cat loss and ALAE
Total non-cat loss and ALAE
Total Loss and ALAE
ULAE
Total Loss and LAE
Underwriting expenses
Net underwriting (loss) gain
Cat loss and ALAE ratio
Non-cat loss and ALAE ratio:
Personal Auto Homeowners Other Personal
Total
$
424.5
$
326.0
$
428.3
295.9
$
41.9
35.0
6.0
(10.7)
284.8
274.1
280.1
30.1
310.2
129.9
60.1
0.3
142.7
143.0
203.1
19.9
223.0
102.5
5.0
(2.1)
16.1
14.0
19.0
1.2
20.2
13.2
$
(11.8) $
(29.6) $
1.6
$
1.4 %
20.3 %
14.1 %
Prior accident years non-cat loss and ALAE ratio
Current accident year non-cat loss and ALAE ratio
Total non-cat loss and ALAE ratio
Total Loss and ALAE ratio
ULAE ratio
Total Loss and LAE ratio
Expense ratio
Combined ratio
(2.5)%
66.5 %
64.0 %
65.4 %
7.0 %
72.4 %
30.6 %
0.1 %
48.2 %
48.3 %
68.6 %
6.8 %
75.4 %
31.4 %
103.0 %
106.8 %
(5.9)%
45.9 %
40.0 %
54.1 %
3.4 %
57.5 %
31.6 %
89.1 %
38
Table 2
($ in millions)
2018
Net written premiums
Net earned premiums
Losses and LAE incurred:
Cat loss and ALAE
Non-cat loss and ALAE:
Prior accident years non-cat loss and ALAE
Current accident year non-cat loss and ALAE
Total non-cat loss and ALAE
Total Loss and ALAE
ULAE
Total Loss and LAE
Underwriting expenses
Net underwriting gain (loss)
Cat loss and ALAE ratio
Non-cat loss and ALAE ratio:
Prior accident years non-cat loss and ALAE ratio
Current accident year non-cat loss and ALAE ratio
Total non-cat loss and ALAE ratio
Total Loss and ALAE ratio
ULAE ratio
Total Loss and LAE ratio
Expense ratio
Combined ratio
Personal Auto Homeowners Other Personal
Total
$
424.8
$
273.1
$
402.0
248.8
$
28.6
23.1
4.9
(24.4)
265.8
241.4
246.3
24.9
271.2
126.1
41.3
(7.3)
106.6
99.3
140.6
16.1
156.7
91.6
2.5
(1.1)
12.2
11.1
13.6
0.8
14.4
10.6
$
4.7
$
0.5
$
(1.9) $
726.5
673.9
48.7
(32.8)
384.6
351.8
400.5
41.8
442.3
228.3
3.3
1.2 %
16.6 %
11.0 %
7.2 %
(6.1)%
66.1 %
60.0 %
61.2 %
6.2 %
67.4 %
29.7 %
97.1 %
(2.9)%
42.9 %
40.0 %
56.6 %
6.4 %
63.0 %
33.6 %
96.6 %
(4.9)%
52.8 %
47.9 %
58.9 %
3.3 %
62.2 %
36.9 %
99.1 %
(4.9)%
57.1 %
52.2 %
59.4 %
6.2 %
65.6 %
31.4 %
97.0 %
All new business is now issued through State Auto Connect, a fully digital quote and issue platform that incorporates
advanced data analytics and updated pricing models. The flexibility of this platform allows us to offer new products and
coverages. This platform enables our agents to submit, quote, bind, issue and bill policies through a completely digital and
integrated platform. We started the rollout of State Auto Connect in five states in 2016 and launched the final state in January
2019.
The personal insurance segment's net written premiums for the year ended December 31, 2019 increased 9.1% compared
to 2018 (Tables 1 - 2), primarily driven by new business growth and increased rates in homeowners and other personal. The
new business growth resulted in higher levels of policies in force for homeowners during 2019 compared to 2018. Partially
offsetting the 2019 net written premium growth was a decrease in personal auto net written premiums primarily driven by a
decline in new business and retention when compared to 2018.
The personal insurance segment's SAP catastrophe loss ratio for the year ended December 31, 2019 was 9.4%, compared
to 7.2% in 2018 (Tables 1 - 2). During 2019, catastrophe losses, primarily wind and hail storms, were more severe when
compared to the same 2018 period, with most of the catastrophe losses impacting homeowners. While the number of
catastrophe events in 2019 was flat when compared to 2018, the 2019 events were more severe with over half of the reported
losses occurring in Texas. During 2018, catastrophe losses were primarily related to wind and hail storms with approximately
one-third of the losses occurring in Texas and Colorado.
The personal insurance segment's SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2019 was
56.8% compared to 52.2% in 2018. (Tables 1 - 2).
39
The personal auto SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2019 increased 4.0 points
when compared to the same 2018 period (Tables 1 - 2). Favorable development of prior accident year losses improved the 2019
loss ratio by 2.5 points compared to 6.1 points in 2018. The 3.6 points of less favorable development in 2019 was across
multiple coverages including bodily injury and uninsured and under-insured motorist coverages as well as adverse development
of property damage claims, primarily from the 2018 and 2017 accident years. The 2018 prior accident year favorable
development was primarily attributable to lower than anticipated severity for bodily injury claims from the 2016 and 2017
accident years.
The homeowners SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2019 increased 8.3 points
when compared to the same 2018 period (Tables 1 - 2). The current accident year loss ratio increased 5.3 points when compared
to 2018, primarily attributable to an elevated level of non-cat weather losses. The 2019 prior accident year losses were
minimally impacted by development compared to favorable development of 2.9 points in 2018. The 2018 prior accident year
favorable development was primarily attributable to favorable emergence on liability claims from multiple accident years.
Commercial Insurance Segment
The following tables set forth certain key performance indicators by major product line of business for our commercial
insurance segment for the years ended December 31, 2019 and 2018:
Table 3
($ in millions)
2019
Net written premiums
Net earned premiums
Losses and LAE incurred:
Cat loss and ALAE
Non-cat loss and ALAE
Commercial
Auto
Small
Commercial
Package
Middle
Market
Commercial
Workers'
Comp
Farm &
Ranch
Other
Commercial
Total
$
$
109.5
91.4
$
122.4
119.2
$
149.2
134.3
$
76.7
78.2
$
50.0
48.5
$
18.6
17.1
526.4
488.7
0.3
7.9
8.2
—
2.4
—
18.8
Prior accident years non-cat
loss and ALAE
Current accident year non-cat
loss and ALAE
Total non-cat loss and ALAE
Total Loss and ALAE
ULAE
Total Loss and LAE
Underwriting expenses
Net underwriting (loss) gain
$
(4.7)
(15.2)
(11.8)
(20.9)
(3.0)
(3.2)
(58.8)
57.9
53.2
53.5
5.7
59.2
43.9
(11.7) $
64.0
48.8
56.7
5.7
62.4
47.2
9.6
$
83.5
71.7
79.9
6.3
86.2
59.8
(11.7) $
54.4
33.5
33.5
6.9
40.4
27.2
10.6
$
23.2
20.2
22.6
1.8
24.4
22.7
1.4
$
10.3
7.1
7.1
0.7
7.8
7.6
1.7
$
293.3
234.5
253.3
27.1
280.4
208.4
(0.1)
3.9 %
Cat loss and ALAE ratio
0.4 %
6.6 %
6.1 %
— %
4.9 %
— %
Non-cat loss and ALAE ratio
Prior accident years non-cat
loss and ALAE ratio
Current accident year non-cat
loss and ALAE ratio
Total non-cat loss and ALAE
ratio
Total Loss and ALAE ratio
ULAE ratio
Total Loss and LAE ratio
Expense ratio
Combined ratio
(5.1)%
(12.8)%
(8.8)%
(26.8)%
(6.0)%
(18.8)%
(12.0)%
63.3 %
53.8 %
62.2 %
69.7 %
47.8 %
60.1 %
60.0 %
58.2 %
58.6 %
6.2 %
64.8 %
40.1 %
41.0 %
47.6 %
4.8 %
52.4 %
38.6 %
53.4 %
59.5 %
4.7 %
64.2 %
40.1 %
104.9 %
91.0 % 104.3 %
42.9 %
42.9 %
8.8 %
51.7 %
35.5 %
87.2 %
41.8 %
46.7 %
3.7 %
50.4 %
45.4 %
95.8 %
41.3 %
41.3 %
4.1 %
45.4 %
40.9 %
86.3 %
48.0 %
51.9 %
5.5 %
57.4 %
39.6 %
97.0 %
40
Table 4
($ in millions)
2018
Net written premiums
Net earned premiums
Losses and LAE incurred:
Cat loss and ALAE
Non-cat loss and ALAE
Prior accident years non-cat
loss and ALAE
Current accident year non-cat
loss and ALAE
Total non-cat loss and ALAE
Total Loss and ALAE
ULAE
Total Loss and LAE
Underwriting expenses
Net underwriting (loss) gain
$
Commercial
Auto
Small
Commercial
Package
Middle
Market
Commercial
Workers'
Comp
Farm &
Ranch
Other
Commercial
Total
$
$
77.1
75.1
$
119.2
120.9
$
121.3
116.8
$
89.0
90.7
$
46.8
45.0
$
16.4
15.8
469.8
464.3
0.2
10.7
7.2
—
3.3
0.2
21.6
(8.4)
(9.6)
(8.0)
(13.3)
(2.7)
(4.9)
(46.9)
47.3
38.9
39.1
4.2
43.3
35.8
(4.0) $
68.8
59.2
69.9
6.2
76.1
53.6
(8.8) $
71.5
63.5
70.7
5.6
76.3
49.5
(9.0) $
56.5
43.2
43.2
7.2
50.4
29.1
11.2
$
22.1
19.4
22.7
1.8
24.5
21.3
(0.8) $
8.2
3.3
3.5
1.1
4.6
8.2
3.0
$
274.4
227.5
249.1
26.1
275.2
197.5
(8.4)
4.6 %
Cat loss and ALAE ratio
0.3 %
8.8 %
6.1 %
— %
7.3 %
1.4 %
Non-cat loss and ALAE ratio
Prior accident years non-cat
loss and ALAE ratio
Current accident year non-cat
loss and ALAE ratio
Total non-cat loss and ALAE
ratio
Total Loss and ALAE ratio
ULAE ratio
Total Loss and LAE ratio
Expense ratio
Combined ratio
(11.2)%
(7.9)%
(6.8)%
(14.7)%
(6.0)%
(31.0)%
(10.1)%
63.0 %
56.9 %
61.2 %
62.3 %
49.2 %
52.3 %
59.1 %
51.8 %
52.1 %
5.6 %
57.7 %
46.5 %
49.0 %
57.8 %
5.1 %
62.9 %
44.9 %
54.4 %
60.5 %
4.8 %
65.3 %
40.8 %
104.2 %
107.8 %
106.1 %
47.6 %
47.6 %
7.9 %
55.5 %
32.7 %
88.2 %
43.2 %
50.5 %
3.9 %
54.4 %
45.6 %
100.0 %
21.3 %
22.7 %
6.8 %
29.5 %
50.0 %
79.5 %
49.0 %
53.6 %
5.6 %
59.2 %
42.0 %
101.2 %
In October 2017, we launched State Auto Connect for new business in one state for our commercial auto and small
commercial package products. Similar to the State Auto Connect platform for our personal insurance products, the State Auto
Connect commercial lines platform is completely digital and incorporates data analytics and more sophisticated pricing models
compared to our legacy underwriting systems. This platform enables our agents to submit, quote, bind, issue and bill policies
through a completely digital and integrated platform. During 2018, we completed the rollout of State Auto Connect for
commercial auto, and in January 2019 we finished the rollout of State Auto Connect for small commercial package. We
anticipate launching our farm and ranch product in State Auto Connect during the first quarter of 2020, our middle market
commercial product during the second half of 2020 followed by workers' compensation in 2021.
The commercial insurance segment's net written premiums for the year ended December 31, 2019 increased 12.0%
compared to 2018 (Tables 3 - 4), primarily driven by new business growth in commercial auto and middle market commercial.
The 2019 increases were partially offset by a decrease in net written premiums in workers’ compensation due to lower retention
as a result of the continued intense competition in this market.
The commercial insurance segment's SAP catastrophe loss and ALAE ratio for the year ended December 31, 2019 was
3.9% compared to 4.6% in 2018 (Tables 3 - 4). Catastrophe events impacting the commercial insurance segment for 2019 were
less severe when compared to 2018.
The commercial insurance segment's SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2019
was 48.0% compared to 49.0% in 2018. (Tables 3 - 4).
The commercial auto SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2019 increased 6.4
points when compared to 2018 (Tables 3 - 4). The non-catastrophe loss and ALAE ratio for 2019 was impacted by less
41
favorable development of prior accident year losses of 5.1 points compared to favorable development of 11.2 points in 2018.
The 2019 favorable development was primarily from the 2017 and 2018 accident years. The 2018 favorable development was
primarily attributable to lower than anticipated bodily injury severity from the 2016 and 2017 accident years.
The small commercial package SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2019
improved 8.0 points compared to 2018 (Tables 3 - 4) primarily driven by greater favorable development of prior accident year
losses attributable to lower than expected bodily injury severity from multiple accident years. In addition, 2019 was impacted
by a lower level of current accident year property losses when compared to the same 2018 period, which was impacted by more
weather-related claims and large fire losses.
The middle market commercial SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2019
improved 1.0 point compared to 2018 (Tables 3 - 4). The 2019 improvement was primarily driven by greater favorable
development of prior accident year losses due to lower than expected bodily injury claim severity from multiple accident years.
Partially offsetting the 2019 improvement in the non-catastrophe loss and ALAE ratio when compared to 2018 were large fire
losses in the current accident year, including a single large loss that added 2.0 points to the loss ratio.
The workers' compensation SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2019 improved
4.7 points when compared to the same 2018 period. The 2019 loss ratio was impacted by greater favorable development of
prior accident year losses when compared to the same 2018 period, primarily due to lower than anticipated severity from
multiple accident years. Partially offsetting the 2019 improvement was a higher current accident year loss ratio when compared
to 2018, which reflected (i) elevated claim frequency and severity, and (ii) a single large loss that added 3.5 points to the loss
ratio.
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 the 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, 2019 and 2018:
($ millions)
%
GAAP Loss
and LAE Ratio
2018
%
GAAP Loss
and LAE Ratio
2019
Provision for losses and loss expenses occurring:
Current year
Prior years
Total losses and loss expenses
$
$
913.5
(68.7)
844.8
72.9 % $
(5.5)%
67.4 % $
876.6
(80.2)
796.4
70.8 %
(6.5)%
64.3 %
42
The following table sets forth a tabular presentation of the development of the ultimate liability of prior accident years by
line of business for the years ended December 31, 2019 and 2018:
($ millions)
Non-cat loss and ALAE:
Personal Insurance Segment:
Personal Auto
Homeowners
Other Personal
Total Personal Insurance Segment
Commercial Insurance Segment:
Commercial Auto
Small Commercial Package
Middle Market Commercial
Workers' Compensation
Farm & Ranch
Other Commercial
Total Commercial Insurance Segment
Specialty run-off
Total non-cat loss and ALAE
Cat loss and ALAE:
Personal Insurance Segment
Commercial Insurance Segment
Specialty run-off
Total cat loss and ALAE
ULAE
Total
2019
2018
(Redundancy)/Deficiency
$
(10.7) $
0.3
(2.1)
(12.5)
(4.7)
(15.2)
(11.8)
(20.9)
(3.0)
(3.2)
(58.8)
(1.1)
(72.4)
(4.2)
(0.8)
10.7
5.7
(2.0)
$
(68.7) $
(24.4)
(7.3)
(1.1)
(32.8)
(8.4)
(9.6)
(8.0)
(13.3)
(2.7)
(4.9)
(46.9)
3.1
(76.6)
0.3
2.7
0.5
3.5
(7.1)
(80.2)
For further information, see the discussion below and the "Personal Insurance Segment" and "Commercial Insurance
Segment" sections of “Results of Operations – Insurance Segments” included in this Item 7.
The following table sets forth a tabular presentation of the development of the ultimate liability by accident year for the
year ended December 31, 2019:
($ millions)
Accident Year
2009 and prior
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
2019
(Redundancy)/Deficiency
(2.6)
$
(1.9)
(1.6)
(2.0)
(3.5)
(4.6)
(10.8)
(5.9)
(11.9)
(23.9)
(68.7)
$
While emergence by accident year includes normal fluctuations due to the uncertainty associated with loss reserve
development and claim settlement, the more notable items contributing to 2019 development were as follows:
43
•
•
•
•
The commercial insurance segment non-catastrophe loss and ALAE reserves contributed $58.8 million of
favorable development, driven by workers’ compensation, small commercial package, and middle market
commercial which contributed $20.9 million, $15.2 million, and $11.8 million, respectively. Favorable
development in these lines was driven by lower than anticipated severity emerging from multiple accident
years.
The personal insurance segment non-catastrophe loss and ALAE reserves contributed $12.5 million of the
favorable development, driven by personal auto which contributed $10.7 million of favorable development,
primarily due to lower than anticipated bodily injury severity.
ULAE was $2.0 million lower than anticipated in the reserves at December 31, 2018.
Catastrophe reserves in specialty run-off contributed $10.7 million of adverse development primarily from
Hurricanes Irma and Harvey. Partially offsetting the adverse development in specialty run-off was $5.0
million of favorable development in the personal and commercial insurance segments.
The following table sets forth a tabular presentation of the development of the ultimate liability by accident year for the
year ended December 31, 2018:
($ millions)
Accident Year
2008 and prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
2018
(Redundancy)/Deficiency
2.9
$
(1.7)
(0.7)
(2.0)
(3.4)
(10.8)
(7.1)
(8.1)
(12.8)
(36.5)
(80.2)
$
While emergence by accident year includes normal fluctuations due to the uncertainty associated with loss reserve
development and claim settlement, the more notable items contributing to 2018 development were as follows:
•
•
•
•
•
The commercial insurance segment non-catastrophe loss and ALAE reserves contributed $46.9 million of
favorable development, driven by workers’ compensation, small commercial package, commercial auto, and
middle market commercial, which contributed $13.3 million, $9.6 million, $8.4 million and $8.0 million,
respectively. Favorable development in these lines was driven by lower than anticipated severity emerging
from multiple accident years.
The personal insurance segment non-catastrophe loss and ALAE reserves contributed $32.8 million of the
favorable development, driven by personal auto and homeowners which contributed $24.4 million and $7.3
million, respectively, of favorable development, primarily due to lower than anticipated bodily injury severity
from the prior two accident years.
ULAE was $7.1 million lower than anticipated in the reserves at December 31, 2017.
The specialty run-off non-catastrophe loss and ALAE reserves accounted for $3.1 million of adverse
development, which was driven by E&S casualty and programs with adverse development of $2.7 million and
$1.2 million, respectively. E&S casualty adverse development was primarily due to higher ultimate loss
estimates for healthcare and umbrella product lines, with the development being spread across accident years
2014 through 2017. For programs, adverse development was due primarily to higher ultimate loss estimates
for certain programs with auto liability and contractors liability exposure. Slightly offsetting the adverse
development was $0.8 million of favorable development in E&S property.
Catastrophe reserves contributed $3.5 million of adverse development.
44
The following table sets forth loss and loss expenses payable by major line of business at 2019 and 2018:
($ millions)
Personal Insurance Segment:
Personal auto
Homeowners
Other Personal
Total Personal Insurance Segment
Commercial Insurance Segment:
Commercial Auto
Small Commercial Package
Middle Market Commercial
Workers’ Compensation
Farm & Ranch
Other Commercial
Total Commercial Insurance Segment
Specialty run-off:
E&S Property
E&S Casualty
Programs
Total Specialty run-off
Total losses and loss expenses payable net of reinsurance
recoverable on losses and loss expenses payable
$
2019
2018
$
Change
$
162.9
69.2
15.1
247.2
76.7
110.5
152.8
187.8
13.3
30.9
572.0
27.8
145.9
60.0
233.7
$
173.2
53.2
14.1
240.5
78.9
120.0
147.2
195.4
12.9
27.5
581.9
33.1
186.8
99.0
318.9
(10.3)
16.0
1.0
6.7
(2.2)
(9.5)
5.6
(7.6)
0.4
3.4
(9.9)
(5.3)
(40.9)
(39.0)
(85.2)
$
1,052.9
$
1,141.3
$
(88.4)
The loss and loss expenses payable at December 31, 2019 decreased $88.4 million from the loss and loss expenses
payable at December 31, 2018, primarily due to the run-off of specialty 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, 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 would be impacted,
perhaps significantly, in the future if the ultimate payments required to settle claims vary from the liability currently recorded.
For a discussion of our reserving methodologies, see “Critical Accounting Policies – Losses and Loss Expenses Payable”
included in this Item 7.
Acquisition and Operating Expenses
Our GAAP acquisition and operating expenses were $442.0 million in 2019 compared to $449.8 million in 2018.
Acquisition and operating expenses for 2019 decreased when compared to 2018 primarily due to a decrease in variable
incentive compensation and amortization of deferred acquisition costs, partially offset by increases in report ordering costs and
EDP software cost amortization.
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, U.S. large-cap equities, U.S. small-cap
equity funds, international equity funds, master limited partnership ("MLP") funds and exchange traded funds ("ETF"). In
addition, Stateco uses an outside investment manager who invests in international funds. The Investment and Finance
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 to increase our capital position, maintain 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.
45
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 purchases of bonds that are rated below investment grade by a recognized rating service. Our fixed
maturity portfolio is composed of high quality, investment grade issues, comprised mostly of debt issues rated A, or higher. We
obtain investment ratings from nationally recognized ratings agencies. If there is a split rating, we assign the lowest rating
obtained.
Our internally managed equity portfolio invests in U.S. large-cap companies across many different industries, selected
based upon their potential for appreciation. This diversification across companies and industries reduces volatility in the value
of the large-cap equity portfolio. Our investment policy guidelines limit the purchase of a specific stock to no more than 5.0%
of the market value of the stock at the time of purchase, and no individual company’s equity holding should exceed 5.0% of the
total equity portfolio. In addition, we also invest in dividend-paying exchange traded funds and mutual funds which add to the
diversification of the portfolio by allowing us to invest in a large number of companies via one security.
Our externally managed equity portfolio invests in international funds. External 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 when compared to how we manage our large-cap equity holdings.
At December 31, 2019, our investments in fixed maturities, equity securities and certain other invested assets were carried
at fair value. The unrealized holding gains or losses of our available-for-sale fixed maturities, net of applicable deferred taxes,
are included as a separate component of stockholders’ equity as accumulated other comprehensive income and as such are not
included in the determination of net income.
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2016-01 which, among other things,
requires unrealized gains and losses for equity securities and other invested assets previously identified as available-for-sale to
be recognized in net income. Previously, the unrealized gains and losses for these securities were recognized in other
comprehensive income. Accordingly, changes in the fair value of equity securities and other invested assets are reported in "net
investment gain (loss)" in the condensed consolidated statements of income for the years ended December 31, 2019 and 2018,
respectively.
46
Composition of Investment Portfolio
The following table sets forth the composition of our investment portfolio at carrying value at December 31, 2019 and
2018:
($ 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:
Large-cap securities
Mutual and exchange traded funds
Total equity securities
Other invested assets:
International instruments
Other invested assets
Total other invested assets
Other invested assets, at cost
Total portfolio
2019
% of
Total
2018
% of
Total
$
78.0
2.8 % $
59.8
2.2 %
1,992.3
135.6
2,127.9
70.0
104.4
290.8
395.2
72.5 % 2,017.1
5.0 %
142.4
77.5 % 2,159.5
2.5 %
70.0
3.8 %
10.6 %
14.4 %
77.2
237.8
315.0
56.4
13.3
69.7
6.5
$ 2,747.3
2.1 %
0.5 %
2.6 %
0.2 %
38.5
10.3
48.8
5.6
100.0 % $ 2,658.7
75.9 %
5.4 %
81.3 %
2.6 %
2.9 %
8.9 %
11.8 %
1.5 %
0.4 %
1.9 %
0.2 %
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 $70.0 million from us on an unsecured basis. In May 2019, the Company refinanced the two
credit agreements at an interest rate of 4.05%, with principal payable in May 2029.
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual
maturity at December 31, 2019:
($ 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
Total
Amortized
Cost
Fair
Value
$
107.9
$
565.4
158.1
602.6
108.8
575.0
166.2
625.4
646.0
2,080.0
$
652.5
2,127.9
$
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, 2019, our equity portfolio consisted of approximately 38 different large-cap stocks and 17 mutual and
exchange traded funds. The largest single fund holding was 18.7% of the equity portfolio based on fair value and the top ten
positions accounted for 68.6% of the equity portfolio. At December 31, 2018, our equity portfolio consisted of approximately
42 different large-cap stocks and 16 mutual and exchange traded funds. The largest single fund holding was 22.2% of the equity
portfolio based on fair value and the top ten positions accounted for 72.6% of the equity portfolio.
47
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 4.17 and 4.23 as of December 31, 2019 and 2018,
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, 2019:
($ millions)
Fixed maturities:
-200 bps
Change
-100 bps
Change
Fair Value
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 mortgage-backed
securities
$
$
664.3
459.5
501.1
687.3
$
618.5
442.0
486.1
670.1
$
578.2
425.4
471.8
652.5
$
540.7
409.1
457.6
639.3
506.3
390.8
443.7
611.9
Balance as of December 31, 2019
$
2,312.2
$
2,216.7
$
2,127.9
$
2,046.7
$
1,952.7
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 88.9% of the bonds we
own are rated A or better. We do not intend to change our investment policy or 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. We categorize our fixed
maturities as available-for-sale in order to provide us greater flexibility in managing our portfolio. We do not maintain a trading
portfolio.
There are no mortgage backed securities in our fixed maturity portfolio which may be labeled sub-prime mortgage backed
securities. We invest only in mortgage backed securities issued by a federal agency or that are U.S. Government guaranteed.
Specifically, at December 31, 2019, approximately $652.5 million, or 30.7%, of our fixed maturity available-for-sale
investment portfolio was in either GNMA pools, which are guaranteed by the full faith and credit of the U.S. Government, or
FNMA or Freddie Mac pools.
The following table sets forth the credit ratings of our municipal securities based on ratings by nationally recognized
rating agencies at December 31, 2019:
($ millions)
Rating
AAA
AA*
A
BBB
Total
$
Total fair
value
31.8
308.5
75.6
9.5
%
7.5
72.5
17.8
2.2
$
425.4
100.0
* Our AA rating category includes securities that have been either pre-funded or
escrowed to maturity.
48
We believe our Muni Portfolio is well diversified by issuer and state. We have 4.9% invested in securities which have
been either pre-refunded or escrowed to maturity bonds. No single issuer comprises more than 5.0% of our Muni Portfolio. For
the bonds that are not in the pre-refunded category, no more than 15% is concentrated in any one state. We believe our Muni
Portfolio is invested within the strongest sectors of the municipal bond market. Revenue bonds represent 61.3% of our Muni
Portfolio and state and local government general obligation bonds make up 22.7% of our Muni Portfolio. 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.
At December 31, 2019, our large-cap equity portfolio had a weighted beta of 1.02 using the S&P 500 Index as the
benchmark. At December 31, 2019, our mutual and exchange traded funds portfolio had a weighted beta of 1.00 using the S&P
500 Index and the CRSP US Small Cap Index as benchmarks. Beta estimates the degree the portfolio’s price will fluctuate
based on a given movement in the market index. The following tables set forth what changes might occur in the value of the
large-cap equity portfolio and the mutual fund and ETF portfolio given a change in the respective index at December 31, 2019:
Large-cap equity portfolio:
Fair value ($ millions)
Change in S&P 500 Index
Value as % of original value
Mutual fund and ETF portfolio:
Fair value ($ millions)
Change in Index
Value as % of original value
$
$
125.7
+20%
120 %
$
115.0
+10%
110 %
$
104.4
—
100 %
$
93.7
-10%
90 %
83.1
-20%
80 %
$
348.9
$
319.9
$
290.8
$
261.7
$
232.6
+20%
120 %
+10%
110 %
—
100 %
-10%
90 %
-20%
80 %
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 U.S. 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, 2019, we had one international fund, which was included in other invested assets. The international fund
had a beta of 0.71 using the MSCI EAFE Index as a benchmark. The following table sets forth what changes might occur in the
value of Funds 1 given a change in the MSCI EAFE Index at December 31, 2019:
International fund:
Fair value ($ millions)
Change in MSCI EAFE Index
Value as % of original value
$
$
64.4
+20%
114 %
$
60.4
+10%
107 %
$
56.4
—
100 %
$
52.4
-10%
93%
48.4
-20%
86%
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 value may differ significantly from what is shown in the table above.
49
Investment Operations Revenue
The following table sets forth the components of net investment income for the years ended December 31, 2019 and
2018:
($ millions)
Gross investment income:
Fixed maturities
Equity securities
Other
Total gross investment income
Less: Investment expenses
Net investment income
Average invested assets (at cost)
Annualized investment yield
Annualized investment yield, after tax
Net investment income, after tax
Effective tax rate
Year Ended December 31
2019
2018
62.3
13.2
5.5
81.0
0.6
80.4
2,635.4
3.0 %
2.5 %
65.7
18.2 %
$
$
$
$
65.3
13.4
7.2
85.9
1.0
84.9
2,691.1
3.2 %
2.6 %
69.3
18.3 %
$
$
$
$
Our investment operations revenue for the year ended December 31, 2019 decreased when compared to the same 2018
period due to (i) lower yields on bonds purchased and bonds owned in the portfolio, (ii) decreased income from our TIPS
bonds, driven by the change in the CPI Index, and (iii) a slightly smaller bond portfolio.
The following table sets forth realized gains (losses) and the proceeds received on sale for our investment portfolio for the
years ended December 31, 2019 and 2018:
($ millions)
2019
2018
Realized gains
(losses)
Proceeds received
on sale
Realized gains
(losses)
Proceeds received
on sale
Realized gains:
Fixed maturities
Equity securities
Total realized gains
Realized losses:
Equity securities:
Sales
Other invested assets
Total realized losses
Net realized gains on investments
$
$
$
$
$
3.5
2.4
5.9
$
$
(4.2) $
—
(4.2) $
$
1.7
308.8
25.2
334.0
20.2
1.3
21.5
355.5
$
$
$
$
$
2.0
6.6
8.6
$
$
(0.9) $
—
(0.9) $
$
7.7
98.0
88.5
186.5
9.3
1.2
10.5
197.0
We did not recognize any impairments on our fixed maturity portfolio during 2019 or 2018. 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. Future increases or decreases in fair value, if not other-than-
temporary, are included in accumulated other comprehensive income (loss). See “Critical Accounting Policies – Investments”
included in this Item 7 for OTTI impairment indicators.
50
Gross Unrealized Investment Gains and Losses
Based upon our review of our investment portfolio at December 31, 2019, 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, 2019:
($ millions, except number of positions)
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of
U.S. government agencies
Obligations of states and political
subdivisions
Corporate securities
U.S. government agencies mortgage-
backed securities
Cost or
amortized
cost
Gross
unrealized
holding
gains
Number of
gain
positions
Gross
unrealized
holding
losses
Number of
loss
positions
Fair
value
$
569.2
$
12.3
36
$
(3.3)
28
$
578.2
404.3
460.5
646.0
21.1
11.7
11.1
56.2
86
58
57
237
$
—
(0.4)
(4.6)
(8.3)
—
7
47
82
425.4
471.8
652.5
$ 2,127.9
Total available-for-sale fixed maturities
$ 2,080.0
$
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 at December 31, 2019 and 2018, and the change in unrealized holding gains,
net of deferred tax, for the year ended December 31, 2019:
($ millions)
Available-for-sale investments
Unrealized holding gains (losses):
Fixed maturities
Net deferred federal income tax
Unrealized gains (losses), net of tax
Fair Value Measurements
2019
2018
$ Change
$
$
47.9
(10.1)
37.8
$
$
(28.7) $
6.0
(22.7) $
76.7
(16.1)
60.6
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, 2019.
Other Items
Income Taxes
For the year ended December 31, 2019, the federal income tax expense was $19.6 million compared to $0.1 million for
2018. Our effective tax rate for 2019 was 18.3% compared with 0.5% in 2018. The change in our effective tax rate in 2019
when compared to 2018 was primarily due to unrealized gains in 2019 versus unrealized losses in 2018 in relation to the tax
exempt income that remained comparable.
See “Critical Accounting Policies — Income Taxes” included in this Item 7. See Note 9, “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, 2019 and 2018.
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 income security investments. The
51
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, as
discussed below, the STFC Pooled Companies do not have the day-to-day liquidity concerns normally associated with an
insurance company due to their participation in, and the terms of, the Pooling Arrangement. In addition, State Auto P&C’s
$100.0 million open line of credit with the Federal Home Loan Bank of Cincinnati (the “FHLB”) is available for general
corporate purposes, which includes funding for any of our liquidity needs. See “Liquidity and Capital Resources – Borrowing
Arrangements" included in this Item 7.
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 60 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 of the Pooling Arrangement, 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. This action was
not necessary in 2019 or 2018.
We maintain a portion of our investment portfolio in relatively short-term and highly liquid investments to ensure the
immediate availability of funds to pay claims and expenses. At December 31, 2019 and 2018, we had $78.0 million and $59.8
million, respectively,
in cash and cash equivalents, and $2,592.8 million and $2,523.3 million, respectively, of total
investments. Our available-for-sale fixed maturities included $9.3 million and $8.9 million, respectively, of securities on
deposit with insurance regulators, as required by law, at December 31, 2019 and 2018. In addition, substantially all of our fixed
maturity and equity securities are traded on public markets. For a further discussion regarding investments, see “Results of
Operations – Investments Operations Segment” included in this Item 7.
Net cash used in operating activities was $43.9 million and $13.4 million in 2019 and 2018, respectively. Net cash from
operations will vary from period to period if there are significant changes in underwriting results, primarily the level of
premiums written or loss and loss expenses paid, and in cash flows from investment income.
Net cash provided by investing activities was $74.1 million in 2019, compared to net cash used by investing activities of
$16.0 million in 2018. The change from 2019 compared to 2018 was primarily driven by increases in the proceeds from the
sales and maturities of fixed maturities partially offset by an increase in the purchases of fixed maturities.
Net cash used in financing activities was $12.0 million and $2.3 million in 2019 and 2018, respectively. The change was
primarily driven by a decrease in stock option exercises in 2019 when compared to 2018.
Borrowing Arrangements
FHLB Line of Credit
State Auto P&C has an Open Line of Credit Commitment (the "OLC") with the FHLB that provides State Auto P&C with
a $100.0 million one-year open line of credit available for general corporate purposes. The OLC matures in April 2020, and our
52
current intention is to renew the OLC for another year. Draws under the OLC are to be funded at a daily variable rate advance
with a term of no more than 180 days with interest payable monthly. All advances under the OLC are to be fully secured by a
pledge of specific investment securities of State Auto P&C. As of December 31, 2019, no advances had been made under the
OLC.
FHLB Loans
State Auto P&C has outstanding two term loans with the FHLB in the principal amounts of $21.5 million and $85.0
million, respectively (the “2016 FHLB Loan” and "2018 FHLB Loan", respectively). The 2016 FHLB Loan matures in
September 2021 and may be prepaid without penalty. The 2016 FHLB Loan provides for interest-only payments during its
term, with principal due in full at maturity. The interest rate is fixed over the term of the loan at 1.73%. The 2018 FHLB Loan
matures in May 2033 and provides for interest-only payments during its term, with principal due in full at maturity. The interest
rate is fixed over the term of the loan at 3.96%. Prepayment of the 2018 FHLB Loan would require a prepayment fee.
The 2016 and 2018 FHLB Loans are fully secured by a pledge of specific investment securities of State Auto P&C.
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 (liquidation amount of $0.5 million), State
Auto Financial has issued to the Capital Trust $15.5 million aggregate principal amount of unsecured Floating Rate Junior
Subordinated Debt Securities due 2033 (the “Subordinated Debentures”). The sole assets of the Capital Trust are the
Subordinated Debentures and any interest accrued thereon. Interest on the Capital Trust’s capital and common securities is
payable quarterly at a rate equal to the three-month LIBOR rate plus 4.20%, adjusted quarterly. The applicable interest rates for
December 31, 2019 and 2018 were 6.11% and 6.94%, respectively.
Notes Payable Summary
The following table sets forth our notes payable at December 31, 2019:
($ millions)
Subordinated Debentures due 2033: issued $15.5 million, May 2003 with variable
interest adjusting quarterly
FHLB loan due 2033: issued $85.0 million, May 2018 with fixed interest
FHLB loan due 2021: issued $21.5 million , September 2016 with fixed interest
Total notes payable
Carrying
Value
Fair
Value
Interest
Rate
$
$
$
15.2
85.3
21.5
15.2
97.8
21.5
122.0
$
134.5
6.11 %
3.96 %
1.73 %
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 “Liquidity and Capital Resources – Credit and Financial Strength Ratings”
included in this Item 7. Based upon the notes payable carrying value at December 31, 2019, we had $15.2 million notes payable
with variable interest and $85.3 million and $21.5 million of notes payable with interest fixed at 3.96% and 1.73%,
respectively, which equated to approximately 12.5% variable interest debt and 87.5% 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 “Liquidity and
Capital Resources –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.
To minimize the risk of reinsurer default, the State Auto Group cedes only to third-party reinsurers who are rated A- or
better by A.M. Best or Standard & Poor’s and also utilizes both domestic and international markets to diversify its credit risk.
We utilize reinsurance to limit our loss exposure and contribute to our liquidity and capital resources.
53
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. 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 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.
Adverse Development Cover
The State Auto Group has an adverse development reinsurance agreement implemented at the end of 2014, that provides
for $40.0 million of coverage for adverse claims development in excess of carried reserves as of November 30, 2014 for the
terminated restaurant program business previously underwritten by a MGU-subsidiary of State Auto Mutual.
Property Catastrophe Treaty
Members of the State Auto Group maintain a property catastrophe excess of loss reinsurance agreement, covering
property catastrophe related events affecting at least two risks. This property catastrophe reinsurance agreement renewed as of
July 1, 2019. Under this reinsurance agreement, we retain the first $75.0 million of catastrophe loss, each occurrence, with a
5.0% co-participation on the next $125.0 million of covered loss, each occurrence. The reinsurers are responsible for 95.0% of
the catastrophe losses excess of $75.0 million up to $200.0 million, each occurrence. The State Auto Group is responsible for
catastrophe losses above $200.0 million. There is also an automatic restatement of the limit, for 125% of the deposit premium.
Property Per Risk Treaty
As of July 1, 2019, the State Auto Group renewed the property per risk excess of loss reinsurance agreement. This
reinsurance agreement provides individual property risk coverage for the State Auto Group for losses exceeding $4.0 million.
The reinsurers are responsible for 100.0% of the loss excess of the $4.0 million retention for property business up to $20.0
million of covered loss.
Casualty and Workers' Compensation Treaties
As of July 1, 2019, the State Auto Group renewed the casualty excess of loss reinsurance agreement. Under this
reinsurance agreement,
involve workers'
the State Auto Group is responsible for the first $3.0 million of losses that
compensation, auto liability, other liability and umbrella liability policies. This reinsurance agreement provides coverage up to
$10.0 million, except for commercial umbrella policies which are covered for limits up to $15.0 million.
Also, certain unusual claim situations involving extra contractual obligations, excess of policy limits, LAE coverage and
multiple policy or coverage loss occurrences arising from bodily injury liability, property damage, uninsured motorist and
personal injury protection are covered by a Clash reinsurance agreement that provides for $20.0 million of coverage in excess
of $10.0 million retention for each loss occurrence. This Clash reinsurance coverage sits above the $7.0 million excess of $3.0
million arrangement.
In addition, each company in the State Auto Group is party to a workers’ compensation catastrophe insurance agreement
that provides additional reinsurance coverage for workers’ compensation losses involving multiple workers. Subject to $10.0
million of retention, reinsurers are responsible for 100.0% of the excess over $10.0 million up to $30.0 million of covered loss.
For loss amounts over $30.0 million, the casualty excess of loss reinsurance agreement provides $20.0 million coverage in
excess of $30.0 million. Workers’ compensation catastrophe 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 $10.0 million to
covered loss under these agreements.
Oil & Gas Quota Share
Effective March 1, 2018, the State Auto Group entered into a quota share agreement ("Oil & Gas Quota Share") covering
its gas & propane distribution book of business. The Oil & Gas Quota Share expired February 28, 2019 on a run-off basis.
54
Contractual Obligations
The following table sets forth our significant contractual obligations at December 31, 2019:
($ millions)
Direct loss and ALAE reserves(1)
Notes payable(2):
FHLB loan due 2021: issued $21.5 million, September
2016 with fixed interest
FHLB loan due 2033; issued $85.0 million, May 2018 with
fixed interest
Subordinated Debentures due 2033: issued $15.5, May
2003 with variable interest(3) adjusting quarterly
Total notes payable
Interest payable (2):
FHLB loan due 2021: issued $21.5 million, September
2016 with fixed interest
FHLB loan due 2033; issued $85.0 million, May 2018 with
fixed interest
Subordinated Debentures due 2033: issued $15.5, May
2003 with variable interest(3) adjusting quarterly
Total interest payable
Postretirement benefits
Pension funding(4)
Total
Total
$ 1,052.9
Due
1 year
or less
Due
1-3
years
Due
3-5
years
Due
after 5
years
$
463.1
$
370.1
$
117.1
$
102.6
21.5
85.0
15.5
122.0
0.8
48.8
—
—
—
—
0.4
3.4
21.5
—
—
21.5
0.4
6.7
—
—
—
—
—
6.7
13.7
63.3
18.0
66.1
$ 1,322.3
$
0.9
4.7
2.1
6.3
476.2
$
1.9
9.0
3.9
13.7
418.2
$
1.9
8.6
3.6
14.0
143.3
$
—
85.0
15.5
100.5
—
32.0
9.0
41.0
8.4
32.1
284.6
(1)
(2)
(3)
(4)
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. Under the current Pooling Arrangement, STFC
will recover 35% of these payments. For a 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, 2018, 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.
Interest on the subordinated debentures was calculated using an interest rate equal to the three-month LIBOR rate at December 31, 2019 of 1.9138%
plus 4.20%, or 6.1138%.
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 10, “Pension and Postretirement Benefits Plans” to our consolidated financial statements included in Item 8 of this Form
10-K for a tabular presentation of expected benefit payments from the State Auto Group’s defined benefit pension plan.
The cost of leases and other purchase obligations of State Auto Mutual are allocated to us through the Pooling
Arrangement.
Regulatory Considerations
At December 31, 2019 and 2018, 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.
55
The following table sets forth the statutory leverage ratios for our insurance subsidiaries at December 31, 2019 and 2018:
Statutory Leverage Ratios
2019
2018
State Auto P&C
Milbank
Weighted Average
1.5
1.5
1.5
1.4
1.7
1.4
State Auto P&C, Milbank and SA Ohio are subject to regulations and restrictions under which payment of dividends from
statutory surplus can be made to State Auto Financial during the year without prior approval of regulatory authorities. Under the
insurance regulations of Iowa and Ohio (the states of domicile), the maximum amount of dividends that we may pay out of
earned surplus to shareholders within a twelve month period without prior approval of the Department is limited to the greater
of 10% of the most recent year-end policyholders’ surplus or net income for the twelve month period ending the 31st day of
December of the previous year-end. Pursuant to these rules, $91.3 million is available for payment to State Auto Financial from
its insurance subsidiaries in 2020 without prior approval. State Auto Financial received dividends from its insurance
subsidiaries in the amount of $10.0 million and $10.0 million in 2019 and 2018.
Our insurance subsidiaries are subject to risk-based capital (“RBC”) requirements that have been adopted by individual
states. These requirements subject insurers having statutory capital less than that required by the RBC calculation to varying
degrees of regulatory action, depending on the level of capital inadequacy. The RBC formulas specify various weighting factors
to be applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of total adjusted capital to authorized control level RBC. Generally no remedial action is required by an
insurance company if its adjusted statutory surplus exceeds 200% of the authorized level RBC. At December 31, 2019, the ratio
of total adjusted statutory capital to authorized control level of State Auto Financial’s insurance subsidiaries ranged from 482%
to 21,472%.
Credit and Financial Strength Ratings
As of June 20, 2019, the State Auto Group’s financial strength rating from A.M. Best was A- (Excellent) with a stable
outlook and its credit rating from A.M. Best was bbb- with a stable outlook.
The financial strength rating is for the State Auto Group and expresses 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.
We believe that these ratings provide a meaningful way for policyholders, agents, creditors, shareholders 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.
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.
Our management considers how its overall strategy and decisions may influence the rating agencies’ evaluation of our
credit strength and capital position, which may in turn directly impact the credit and financial strength ratings assigned by those
agencies. In its decision-making process with respect to significant transactions, such as reinsurance, financing and investing
activities, and acquisitions, management takes into consideration the potential impact these decisions will have on our earnings
volatility and capital position.
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, has been 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, historically medical care costs have
risen at a higher rate than general inflation over the last few years. Costs for building materials typically rise significantly
following widespread natural catastrophes, such as what the industry experienced in areas affected by Superstorm Sandy in
2012. 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
56
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.
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.
Investments
Our fixed maturity 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.
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2016-01 that, among other things
requires unrealized gains and losses for equity securities and other invested assets previously identified as available-for-sale to
be recognized in net income. Previously, the unrealized gains and losses for these securities were recognized in other
comprehensive income. Accordingly, changes in the fair value of equity securities and other invested assets are reported in "net
investment gain (loss)" in the condensed consolidated statements of income for the year ended December 31, 2019 and 2018.
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 fixed maturity investments for OTTI: (i) the financial condition of the issuer including
receipt of scheduled principal and interest cash flows; (ii) our intent to sell; and (iii) 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 (loss) income. Future
increases or decreases in fair value, if not other-than-temporary, are included in other comprehensive (loss) income.
Deferred Acquisition Costs
Acquisition costs, consisting of net commissions (including ceding commissions), premium taxes and certain
underwriting expenses related to the successful acquisition or renewal of property and casualty business, are deferred and
amortized over the same period in which the related premiums are earned. Ceding commissions relating to reinsurance
agreements reimburse us for both deferrable and non-deferrable acquisition costs. To the extent these ceding commissions
exceed the deferrable amount of acquisition costs, the excess is reported as a deferred liability and is included in other liabilities
in our consolidated balance sheet. Excess ceding commissions are amortized in proportion to net revenue recognized on the
underlying policies resulting in excess ceding commissions being recognized as a reduction of acquisition and operating
expenses.
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. Anticipated investment income is considered in
determining whether a premium deficiency exists.
Losses and Loss Expenses Payable
Our loss reserves reflect all unpaid amounts for claims that have been reported, as well as for claims that have not yet
been reported. 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 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 type
of risk, 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
57
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
adjustment expenses incurred, and subtract all amounts already paid or held as case or formula reserves. Note that reference to
losses below implicitly includes allocated loss adjustment expenses.
including claims, actuarial and accounting. This assessment requires considerable judgment
The determination of ultimate losses and loss expenses integrates information and analysis provided by several disciplines
within our Company,
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 information,
inflation, 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.
Our internal actuarial staff conducts quarterly reviews of 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, 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 ultimate losses, and thus 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 most common 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 ultimate losses, and thus indicated IBNR reserves. This method uses paid loss experience as well as
the outstanding amounts (formula and case reserves) for claims that have been reported and are still open. With this method, a
pattern of reported losses is estimated to project ultimate incurred values for each accident year. An important assumption
underlying 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 can distort the 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 outstanding amounts,
so only paid losses are utilized. With this method, a payment pattern is estimated to project ultimate settlement values for each
accident year, with an important 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 extent that the reporting pattern influences the payment pattern)
is relevant to the results of this method. This method’s advantage is that 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 (i) the paid
method does not use all of the available information, (ii) in some cases the liability payment patterns require the application of
very large development factors to relatively small payments in less mature accident years, and (iii) changes in the claims
settlement rate will distort the projections.
Claim Counts and Severities Method: The Counts and Severities Method calculations are very similar to the development
methods described above. 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 estimate.
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
actuaries. For example, premium-based methods may be used in developing ultimate loss estimates, including the Expected
Loss Ratio and Bornhuetter-Ferguson methods described below.
58
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 to rely upon 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
or other sources.
Incurred Bornhuetter-Ferguson Method: The Incurred 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 to-date as the
weight on the Incurred Loss Development Method. This method is particularly useful where there is a low volume of data in the
more recent accident periods or where the experience is volatile. In general, this method produces estimates that are similar to
the Incurred Loss Development Method.
Paid Bornhuetter-Ferguson Method: The Paid Bornhuetter-Ferguson Method is a weighted average of the Expected
Loss Ratio Method and the Paid Loss Development Method, using the percentage of losses paid to-date as the weight on the
Paid Loss Development Method. In less mature accident periods in which payment activity is relatively low, this method
produces estimates that are similar to the Expected Loss Ratio 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 historical 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,
historical 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, open claim severity, and prior period development. For example, if more than one method provides a reasonable
projection, the actuary may select a weighted 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. Reserves consider the expected variation to establish an appropriate position within a range. At December 31,
2019, loss and loss expenses payable were $1,052.9 million, within an estimated range of $927.7 million to $1,094.4 million.
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,
$1,094.4 million, the reserve increase of $41.5 million corresponds to an after-tax decrease of $32.7 million in net income,
assuming a tax rate of 21%. Likewise, should ultimate losses decline to a level corresponding to the low point of the range,
$927.7 million, the $125.2 million reserve decrease would add $98.9 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 certain loss reserve estimation methods for casualty lines is that the loss cost trends
underlying historical data 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, 2019, workers’ compensation loss and
ALAE reserve balance 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 5% 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 5% increase in the loss cost trend would have on our
results of operations over the lifetime of the underlying claims in workers’ compensation is an increase of $111.3 million on
reserves, or a $88.0 million reduction to net income, assuming a tax rate of 21%. Inflation changes have much more impact on
the longer tail commercial lines like workers’ compensation, and much less impact on the shorter tail personal lines.
In addition to establishing loss reserves, as described above, we establish reserves for ULAE. Historical patterns of paid
ULAE relative to paid loss are analyzed along with historical claim counts including claims opened, claims closed, and claims
remaining open. The product of this analysis is an estimate of the relationship, or ratio, between ULAE and loss underlying the
current loss reserves. This ratio is applied to the current outstanding loss reserves to estimate the required ULAE reserve.
Consequently, this component of the loss expense reserve has a proportional relationship to the overall claim inventory and held
loss reserves. The method assumes that the underlying claims process and mix of business do not change materially from period
to period.
59
The following table sets forth a reconciliation of MBE of our direct loss and LAE reserve to our net losses and loss
expenses payable at December 31, 2019 and 2018. The STFC Pooled Companies net additional share of transactions assumed
from State Auto Mutual through the Pooling Arrangement for the years ended December 31, 2019 and 2018, respectively, has
been reflected in the table below as assumed by STFC Pooled Companies.
($ millions)
Direct loss and ALAE reserve:
STFC Pooled Companies
Assumed by STFC Pooled Companies
Total direct loss and ALAE reserve
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
2019
2018
$
534.3
537.8
1,072.1
$
523.1
633.0
1,156.1
29.0
28.2
57.2
(23.2)
(3.2)
(26.4)
(13.6)
6.4
(42.8)
28.7
30.7
59.4
(20.9)
(3.9)
(24.8)
(5.5)
22.3
(66.2)
Total losses and loss expenses payable, net of reinsurance recoverable on losses and
loss expenses payable of $13.6 million and $5.5 million in 2019 and 2018, respectively $ 1,052.9
$ 1,141.3
The following tables set forth the net losses and loss expenses payable by major line of business at December 31, 2019
and 2018:
($ millions)
December 31, 2019
Personal Insurance Segment:
Personal Auto
Homeowners
Other personal
Total Personal Insurance Segment
Commercial Insurance Segment:
Commercial Auto
Small Commercial Package
Middle Market Commercial
Workers’ Compensation
Farm & Ranch
Other Commercial
Total Commercial Insurance Segment
Specialty run-off:
E&S Property
E&S Casualty
Programs
Total Specialty run-off
Total losses and loss expenses payable net of reinsurance
recoverable on losses and loss expenses payable
Ending
Loss &
ALAE
Case &
Formula
Ending
Loss &
ALAE
IBNR
Ending
ULAE
Bulk
Total
Reserves
$
$
112.1
36.7
5.4
154.2
46.3
41.1
62.4
67.6
8.4
2.5
228.3
14.9
44.4
34.8
94.1
$
43.7
28.1
9.0
80.8
27.6
64.1
76.5
106.6
4.4
28.4
307.6
12.2
94.7
23.0
129.9
$
7.1
4.4
0.7
12.2
2.8
5.3
13.9
13.6
0.5
—
36.1
0.7
6.8
2.2
9.7
162.9
69.2
15.1
247.2
76.7
110.5
152.8
187.8
13.3
30.9
572.0
27.8
145.9
60.0
233.7
$
476.6
$
518.3
$
58.0
$
1,052.9
60
($ millions)
December 31, 2018
Personal Insurance Segment:
Personal Auto
Homeowners
Other personal
Total Personal Insurance Segment
Commercial Insurance Segment:
Commercial Auto
Small Commercial Package
Middle Market Commercial
Workers’ Compensation
Farm & Ranch
Other Commercial
Total Commercial Insurance Segment
Specialty run-off:
E&S Property
E&S Casualty
Programs
Total Specialty run-off
Total losses and loss expenses payable net of reinsurance
recoverable on losses and loss expenses payable
Ending
Loss &
ALAE
Case &
Formula
Ending
Loss &
ALAE
IBNR
Ending
ULAE
Bulk
Total
Reserves
$
$
125.9
32.6
5.3
163.8
47.4
48.8
63.0
66.9
8.1
1.2
235.4
20.1
50.6
50.2
120.9
$
40.2
17.3
8.2
65.7
29.0
65.7
70.2
115.2
4.2
26.2
310.5
12.3
127.0
45.9
185.2
$
7.1
3.3
0.6
11.0
2.5
5.5
14.0
13.3
0.6
0.1
36.0
0.7
9.2
2.9
12.8
173.2
53.2
14.1
240.5
78.9
120.0
147.2
195.4
12.9
27.5
581.9
33.1
186.8
99.0
318.9
$
520.1
$
561.4
$
59.8
$
1,141.3
See discussion in “Results of Operations—Loss and LAE Development” 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. 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.
At December 31, 2019, asbestos reserves were $2.2 million and environmental reserves were $20.8 million, for a total
reserve of $23.0 million, or 2.2% of net losses and loss expenses payable. Relative to December 31, 2018, asbestos and
environmental reserves increased $1.0 million and $4.1 million, respectively.
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”). We record
the funded status of these plans on our balance sheet while the annual net periodic costs 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. We receive reimbursement of 35% of the annual net periodic costs from the
Mutual Pooled Companies in accordance with the terms of the Pooling Arrangement.
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.
For the December 31, 2019 and 2018 valuations, the Adjusted RP-2014 mortality table was used as a baseline for the
mortality assumption and to project future mortality rates. Incorporated into the table are rates projected generationally using
61
Scale MP-2017 to reflect mortality improvement (Scale MP-2016 was used at the beginning of the year). The January 1, 2019
and 2018 actuarial reports of the benefit plans included these revised mortality assumptions.
To calculate the State Auto Group’s December 31, 2019 benefit obligation for each of the benefit plans, we used a
discount rate of 3.10% 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, all else being equal, results in a
higher present value benefit obligation. To calculate our benefit obligation at December 31, 2019 and net periodic benefit cost
for the year ended December 31, 2020, a discount rate of 3.10% and an expected long-term rate of return on plan assets of
6.50% 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.
As a result of revised mortality assumptions and the change in the discount rate, the benefit plan’s liability decreased $3.6
million for the year ended December 31, 2019 and increased $5.0 million for the year ended December 31, 2018.
The following table sets forth an illustration of variability with respect to the discount rate on the December 31, 2019
benefit obligation and expected net periodic benefit cost for the year ending December 31, 2020, along with the variability of
the expected return on plan assets to the expected net periodic benefit cost for the year ending December 31, 2020. Holding all
other assumptions constant, sensitivity to changes in any one of our key assumptions are as follows:
($ millions)
Benefit obligation
Net periodic benefit cost (benefit)
Net periodic benefit cost
$
$
$
Pension
Discount rate
Postretirement
Discount rate
2.85%
3.10%
3.35%
2.85%
3.10%
3.35%
493.6
6.8
478.2
5.8
459.2
4.9
$
$
25.6
(4.8)
25.0
(4.8)
24.5
(4.8)
Expected return on plan assets
6.25%
6.50%
6.75%
6.5
5.8
5.1
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 compensation levels only, provides information about the obligation
an employer would have if the plan were discontinued at the measurement date. At December 31, 2019, our ABO and PBO
were $453.8 million and $478.2 million, respectively. At December 31, 2019, our defined benefit pension plan’s fair value of
the assets was $442.1 million, which resulted in an underfunded status within our balance sheet of $36.1 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 $10.0 million in
2020.
The unfunded status on the pension plan and supplemental executive retirement plan decreased from $57.5 million at
December 31, 2018, to $47.9 million at December 31, 2019. Primarily influencing the change from year to year are actuarial
gains and losses arising from factors that include (i) changes in the discount rate, (ii) expected to actual demographic changes,
such as retirement age, mortality, turnover, rate of compensation changes, and (iii) changes in returns on our plan assets.
See Note 10, “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.
Income Taxes
For 2019, we recognized federal income tax benefit of $19.6 million compared to a federal income tax expense of $0.1
million for 2018.
Deferred income tax assets and liabilities represent the tax effect of the differences between the financial statement
carrying value of existing assets and liabilities and their respective tax bases. In accordance with the FASB’s ASC 740, Income
Taxes (ASC 740), we periodically evaluate our deferred tax assets, which requires significant judgment, to determine if they are
realizable based upon weighing all available evidence, both positive and negative, including our historical and anticipated
future taxable income. In making such judgments, significant weight is given to evidence that can be objectively verified.
The net operating loss carryforwards do not begin to expire until 2032 and will not fully expire until 2038. Management
anticipates generating future taxable income that will allow for the realization of all of our net operating loss carryforwards
before expiration.
62
The following table sets forth the components of our federal income tax expense (benefit) for the years ended December
31, 2019 and 2018:
($ millions)
Income before federal income taxes
Current tax benefit
Deferred tax expense
Total federal income tax expense
Net income
2019
2018
$
$
107.0
(0.4)
20.0
19.6
87.4
$
$
12.9
(1.1)
1.2
0.1
12.8
See Note 9, “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.
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.”
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:
63
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of State Auto Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of State Auto Financial Corporation and subsidiaries (the
Company) as of December 31, 2019 and 2018, 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, 2019, and the related notes and
financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 27, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1994
Grandview Heights, Ohio
February 27, 2020
64
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
To the Stockholders and the Board of Directors of State Auto Financial Corporation
Opinion on Internal Control over Financial Reporting
We have audited State Auto Financial Corporation and subsidiaries’ internal control over financial reporting as of December
31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission “(2013 framework),” (the COSO criteria). In our opinion, State Auto Financial
Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, 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, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our
report dated February 27, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Grandview Heights, Ohio
February 27, 2020
65
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
Consolidated Balance Sheets
($ and shares in millions, except per share amounts)
Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $2,080.0 and $2,188.2,
respectively)
Equity securities
Other invested assets
$
Other invested assets, at cost
Notes receivable from affiliate
Total investments
Cash and cash equivalents
Accrued investment income and other assets
Deferred policy acquisition costs (affiliated net assumed $20.2 and $19.9, respectively)
Reinsurance recoverable on losses and loss expenses payable
Prepaid reinsurance premiums
Due from affiliate
Current federal income taxes
Net deferred federal income taxes
Property and equipment, at cost (net of accumulated depreciation of $5.9 and $7.5,
respectively)
Total assets
Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliated net assumed $500.8 and $593.6,
respectively)
Unearned premiums (affiliated net assumed $116.7 and $112.4, respectively)
Notes payable (affiliates $15.2 and $15.2, respectively)
Pension and postretirement benefits
Due to affiliate
Other liabilities (affiliated net assumed $19.5 and $17.7, respectively)
Total liabilities
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; 50.4 and 50.0 shares
issued, respectively, at stated value of $2.50 per share
Treasury stock, 6.9 and 6.8 shares, respectively, at cost
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
$
$
$
December 31
2019
2018
$
2,127.9
395.2
69.7
6.5
70.0
2,669.3
78.0
31.7
111.1
13.6
7.5
21.5
6.3
42.2
2,159.5
315.0
48.8
5.6
70.0
2,598.9
59.8
32.4
101.9
5.5
6.6
—
5.9
77.8
4.2
7.1
2,985.4
$
2,895.9
1,066.5
649.2
122.0
72.9
—
114.9
2,025.5
—
—
125.9
(117.5)
206.7
(37.9)
782.7
959.9
2,985.4
$
$
1,146.8
584.2
122.0
83.0
22.4
119.0
2,077.4
—
—
125.0
(117.0)
194.2
(96.4)
712.7
818.5
2,895.9
66
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
Consolidated Statements of Income
($ millions, except per share amounts)
Year ended December 31
2018
2017
2019
Earned premiums (affiliated net assumed $220.3, $318.3, and $459.0, respectively)
Net investment income (affiliates $3.6, $4.9, and $4.9, respectively)
Net investment gain (loss):
$
1,253.0
80.4
$
1,238.0
84.9
$
1,276.1
78.8
Total other-than-temporary impairment losses
Other investment gain (loss)
Total net investment gain (loss)
Other income from affiliates
Total revenues
Losses and loss expenses (affiliated net assumed $169.3, $180.5, and $379.4,
respectively)
Acquisition and operating expenses (affiliated net assumed $69.1, $108.7, and
$160.7, respectively)
Interest expense (affiliates $1.1, $1.0, and $0.8, respectively)
Other expenses
Total expenses
Income before federal income taxes
Federal income tax expense
Current
Deferred
Total federal income tax expense
Net income (loss)
Earnings (loss) per common share:
Basic
Diluted
Dividends paid per common share
See accompanying notes to consolidated financial statements.
—
74.2
74.2
2.4
1,410.0
—
(49.7)
(49.7)
2.6
1,275.8
(3.5)
68.6
65.1
2.3
1,422.3
844.8
796.4
918.3
442.0
4.9
11.3
1,303.0
107.0
449.8
5.7
11.0
1,262.9
12.9
455.2
5.9
7.9
1,387.3
35.0
(0.4)
20.0
19.6
87.4
2.01
1.96
0.40
$
$
$
$
(1.1)
1.2
0.1
12.8
0.30
0.29
0.40
$
$
$
$
0.4
52.4
52.8
(17.8)
(0.42)
(0.42)
0.40
$
$
$
$
67
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
Consolidated Statements of Comprehensive Income (Loss)
($ millions)
Net income (loss)
Other comprehensive income (loss), net of tax:
Net change in unrealized holding gain (loss) on available-for-sale
investments:
Unrealized holding gains (losses) arising during year
Reclassification adjustments for gains realized in net income
Income tax (expense) benefit
Total change in net unrealized holding gain (loss) on available-for-
sale investments
Net unrecognized benefit plan obligations:
Net actuarial loss arising during period
Reclassification adjustments for amortization to statements of income:
Negative prior service cost
Net actuarial gain
Income tax benefit (expense)
Total net unrecognized benefit plan obligations
Other comprehensive income (loss)
Comprehensive income (loss)
See accompanying notes to consolidated financial statements.
Year ended December 31
2018
2017
2019
$
87.4
$
12.8
$
(17.8)
80.2
(3.5)
(16.1)
60.6
(5.9)
(6.3)
9.6
0.5
(2.1)
58.5
(46.4)
(2.0)
10.1
(38.3)
(4.3)
(6.3)
13.2
(0.6)
2.0
(36.3)
69.0
(65.1)
(0.7)
3.2
(1.5)
(6.3)
12.5
(1.7)
3.0
6.2
$
145.9
$
(23.5) $
(11.6)
68
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
Consolidated Statements of Stockholders’ Equity
Year ended December 31
2018
2017
2019
50.0
0.4
50.4
(6.8)
(0.1)
(6.9)
49.2
0.8
50.0
(6.8)
—
(6.8)
48.6
0.6
49.2
(6.8)
—
(6.8)
125.0
0.9
125.9
$
$
123.0
2.0
125.0
$
$
121.6
1.4
123.0
(117.0) $
(0.5)
(117.5) $
(116.8) $
(0.2)
(117.0) $
(116.5)
(0.3)
(116.8)
194.2
5.1
7.4
206.7
$
$
171.8
13.3
9.1
194.2
(96.4) $
3.8
$
$
$
—
60.6
(2.1)
(37.9) $
(63.9)
(38.3)
2.0
(96.4) $
159.9
8.8
3.1
171.8
(2.4)
—
3.2
3.0
3.8
712.7
$
653.2
$
687.9
—
87.4
(17.4)
782.7
959.9
$
$
63.9
12.8
(17.2)
712.7
818.5
$
$
—
(17.8)
(16.9)
653.2
835.0
$
$
$
$
$
$
$
$
$
$
$
(in millions)
Common shares:
Balance at beginning of year
Issuance of shares
Balance at end of year
Treasury shares:
Balance at beginning of year
Issuance of shares
Balance at end of year
Common stock:
Balance at beginning of year
Issuance of shares
Balance at end of year
Treasury stock:
Balance at beginning of year
Shares acquired on stock award exercises and vested restricted shares
Balance at end of year
Additional paid-in capital:
Balance at beginning of year
Issuance of common stock
Stock awards granted
Balance at end of year
Accumulated other comprehensive (loss) income:
Balance at beginning of year
Cumulative effect of change in accounting for equity securities and other invested assets and
reclassification of stranded tax effects as of January 1, 2018
Change in unrealized holding gain (loss) on investments, net of tax
Change in unrecognized benefit plan obligations, net of tax
Balance at end of year
Retained earnings:
Balance at beginning of year
Cumulative effect of change in accounting for equity securities and other invested assets and
reclassification of stranded tax effects as of January 1, 2018
Net income (loss)
Dividends declared (affiliates $10.4, $10.4 and $10.4, respectively)
Balance at end of year
Total stockholders’ equity at end of year
See accompanying notes to consolidated financial statements.
69
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
Consolidated Statements of Cash Flows
($ millions)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization, net
Share-based compensation
Net investment (gain) loss
Changes in operating assets and liabilities:
Deferred policy acquisition benefits
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
Deferred tax expense on share-based awards
Federal income taxes
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale
Purchases of equity securities
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
Sales of other invested assets
Net disposals of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Payments to acquire treasury stock
Payments of dividends (affiliates $10.4, $10.4 and $10.4, respectively)
Payment of prepayment fee
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 $1.1, $1.0, and $0.8, respectively)
Federal income tax refund
See accompanying notes to consolidated financial statements.
70
Year ended December 31
2018
2017
2019
$
87.4
$
12.8
$
(17.8)
9.4
6.1
(74.2)
(9.2)
0.7
(14.5)
(9.0)
(44.9)
(80.3)
65.0
(0.9)
20.5
(43.9) $
(592.6) $
(63.4)
(13.3)
386.3
308.8
45.4
1.3
1.6
74.1
$
$
5.9
(0.5)
(17.4)
—
(12.0) $
18.2
59.8
78.0
$
8.9
11.1
49.7
8.4
3.9
(16.9)
(2.6)
47.6
(108.8)
(27.6)
0.9
(0.8)
(13.4) $
(349.6) $
(91.4)
(1.8)
229.8
98.0
97.8
1.2
—
(16.0) $
$
15.4
(0.2)
(17.1)
(0.4)
(2.3) $
(31.7)
91.5
59.8
$
4.8
$
— $
5.7
$
— $
12.5
4.2
(65.1)
11.5
3.5
(14.8)
0.2
11.3
74.0
(6.0)
—
54.4
67.9
(505.4)
(185.9)
(1.4)
233.6
184.8
252.7
1.1
—
(20.5)
10.2
(0.3)
(16.9)
—
(7.0)
40.4
51.1
91.5
5.7
(1.6)
$
$
$
$
$
$
$
$
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
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
•
•
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 only members are State Auto P&C and Stateco.
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
intercompany balances and transactions have been eliminated in consolidation.
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 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.
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 and SA Ohio that are prescribed or permitted by the Departments.
The Company’s insurance subsidiaries, domiciled in Ohio and Iowa, are required to prepare statutory basis financial
statements in accordance with the accounting practices prescribed or permitted by the insurance departments of the states of
domicile. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state
laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. The
Ohio and Iowa Departments of Insurance require insurers domiciled in their respective states to prepare statutory financial
statements in accordance with National Association of Insurance Commissioners’ (“NAIC”) statutory accounting practices.
Permitted statutory accounting practices are those practices that differ either from state-prescribed statutory accounting
practices or NAIC statutory accounting practices. The Company’s insurance subsidiaries do not apply any statutory accounting
practices that would be considered a prescribed statutory accounting practice that differs from NAIC statutory accounting
practices.
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
71
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
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 realization 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 assets will not be realized, then a valuation allowance must
be established with a corresponding charge to net income and/or other comprehensive loss. These estimates by their nature are
subject to uncertainties for various reasons.
d. Investments
Investments in fixed maturities 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 and, as such, are not included in the determination of net income. Realized gains
and losses on the sales of investments are computed using the first-in, first-out method.
The Company views gross unrealized losses on fixed maturities as being temporary since it is its assessment that these
securities will recover in the near term, allowing the Company to realize the anticipated long-term economic value. 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 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. 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 security 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
if not other-than-temporary, are included in other
comprehensive income. Future increases or decreases in fair value,
comprehensive income.
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 net commissions (including ceding commissions), premium taxes and certain underwriting
expenses related to the successful acquisition or renewal of property and casualty business, are deferred and amortized over the
same period in which the related premiums are earned. Ceding commissions relating to reinsurance agreements reimburse us
for both deferrable and non-deferrable acquisition costs. Excess ceding commissions are amortized in proportion to net revenue
recognized on the underlying policies resulting in excess ceding commissions being recognized as a reduction of acquisition
and operating expenses.
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. Anticipated investment income is considered in
determining whether a premium deficiency exists.
72
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following table sets forth net deferred acquisition costs for the years ended December 31, 2019, 2018 and 2017:
($ millions)
Balance, beginning of year
Acquisition costs deferred
Acquisition costs amortized to expense
Balance, end of year
2019
2018
2017
$
$
101.9
225.7
(216.5)
111.1
$
$
110.3
211.5
(220.0)
101.9
$
$
121.8
230.8
(242.3)
110.3
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.
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. 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 $26.4 million and $24.8 million at December 31, 2019 and
2018, 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 pro rata over the policy period. Unearned premiums represent the portion of
premiums written relative to the unexpired terms of coverage.
As a result of the Pooling Arrangement, the Company has 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. When settling the intercompany balances, State Auto Mutual provides the STFC Pooled Companies 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 recoverable on paid losses from unaffiliated reinsurers. Any 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. Based on historical data, this credit risk exposure is not considered to be material to our financial position
or results of operations.
73
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
j. Comprehensive Income
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 and unrecognized benefit plan obligations, adjusted
for deferred federal income taxes.
k. New Accounting Standards
Adoption of Recent Accounting Pronouncements
Leases
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" that amended previous guidance on lease
accounting. The new guidance requires the recognition of lease assets and lease liabilities by lessees for those leases classified
as operating leases under previous GAAP. The guidance became effective beginning January 1, 2019 and it did not have a
material impact on the Company’s results of operations, consolidated financial position or cash flows, as the Company is not a
party to any material leases as a lessee or lessor as defined by the guidance. The Company elected the practical expedients
contained in ASC 842-10-65-1(f) and therefore did not reassess the lease classification of its existing leases.
Pending Adoption of Recent Accounting Pronouncements
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses ( Topic 326)" that amended previous
guidance on the impairment of financial instruments by adding an impairment model that requires an entity to recognize
expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce
complexity of credit impairment models and result in a more timely recognition of expected credit losses. The measurement of
credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are
limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized as an
allowance rather than impairing as they are incurred. The effective date of ASU 2016-13 is for interim and annual reporting
periods beginning after December 15, 2019. The Company will adopt the guidance when it becomes effective for the Company
on January 1, 2020.
The Company will adopt ASC 326 using the modified retrospective method for all financial assets measured at amortized
cost and off-balance-sheet credit exposures, which include reinsurance recoverables and premiums receivables. The
measurement of expected credit losses is based on relevant information about past events, including historical experience,
current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company
will record a net decrease to retained earnings as of January 1, 2020 for the cumulative effect of adopting ASC 326, which will
not have a material impact on the Company's results of operations, consolidated financial position, or cash flows.
The Company will adopt ASC 326 using the prospective transition approach for available-for-sale debt securities. As a
result, the amortized cost basis remains the same before and after the effective date of ASC 326 and no adjustment will be made
upon adoption.
Disclosure Framework —Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13 which changes the fair value measurement disclosure requirements of
ASC 820 by adding, eliminating and modifying disclosures. The effective date of ASU 2018-13 is for interim and annual
reporting periods beginning after December 15, 2019. The ASU has not yet been adopted; however, it is not expected to have a
material impact on the Company's results of operations, consolidated financial position, or cash flows.
Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14 which changes the defined benefit pension and other postretirement plan
disclosure requirements of ASC 715 by adding, eliminating and modifying disclosures. The effective date of ASU 2018-14 is
for annual reporting periods ending after December 15, 2020. The ASU has not yet been adopted; however, it is not expected to
have a material impact on the Company's results of operations, consolidated financial position, or cash flows.
74
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
2. Investments
The following tables set forth the cost or amortized cost and fair value of investments by lot at December 31, 2019 and
2018:
($ millions)
December 31, 2019
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies
Obligations of states and political subdivisions
Corporate securities
U.S. government agencies mortgage-backed securities
Total available-for-sale fixed maturities
($ millions)
December 31, 2018
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies
Obligations of states and political subdivisions
Corporate securities
U.S. government agencies mortgage-backed securities
Cost or
amortized
cost
Gross
unrealized
holding
gains
Gross
unrealized
holding
losses
Fair
value
$
$
$
$
$
$
$
569.2
404.3
460.5
646.0
$ 2,080.0
Cost or
amortized
cost
$
438.4
408.2
551.7
789.9
12.3
21.1
11.7
11.1
56.2
Gross
unrealized
holding
gains
3.2
7.3
0.6
3.3
578.2
(3.3) $
425.4
—
471.8
(0.4)
(4.6)
652.5
(8.3) $ 2,127.9
Gross
unrealized
holding
losses
Fair
value
(9.2) $
(0.9)
(11.7)
(21.3)
432.4
414.6
540.6
771.9
Total available-for-sale fixed maturities
$ 2,188.2
$
14.4
$
(43.1) $ 2,159.5
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, 2019 and 2018:
($ millions, except # of positions)
Less than 12 months
12 months or more
Total
December 31, 2019
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
Fair
value
Unrealized
losses
Number
of
positions
Fair
value
Unrealized
losses
Number
of
positions
Fair
value
Unrealized
losses
Number
of
positions
$136.0
—
126.6
$262.6
$
$
(2.5)
—
(1.5)
(4.0)
17
—
15
32
$157.6
40.8
137.9
$336.3
$
$
(0.8)
(0.4)
(3.1)
(4.3)
11
7
32
50
$ 293.6
40.8
264.5
$ 598.9
$
$
(3.3)
(0.4)
(4.6)
(8.3)
28
7
47
82
($ millions, except # of positions)
Less than 12 months
12 months or more
Total
December 31, 2018
Fixed maturities:
U.S. treasury securities and
obligations of U.S.
government agencies
Obligations of states and
political subdivisions
Corporate securities
U.S. government agencies mortgage-
backed securities
Total fixed maturities
Fair
value
Unrealized
losses
Number
of
positions
Fair
value
Unrealized
losses
Number
of
positions
Fair
value
Unrealized
losses
Number
of
positions
$ 83.1
$
(1.8)
7
$259.6
$
(7.4)
35
$ 342.7
$
(9.2)
63.6
244.0
169.5
$ 560.2
$
(0.5)
(3.0)
(2.8)
(8.1)
7
31
18
63
39.6
189.5
(0.4)
(8.7)
8
30
103.2
433.5
(0.9)
(11.7)
385.5
$874.2
(18.5)
$ (35.0)
70
143
555.0
(21.3)
$1,434.4 $ (43.1)
42
15
61
88
206
75
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The Company reviewed its investments at December 31, 2019 and 2018 and determined that no additional other-than-
temporary impairment existed in the gross unrealized holding losses. The following table sets forth the realized losses related to
other-than-temporary impairments on the Company’s investment portfolio recognized for the year ended December 31, 2017:
($ millions)
Equity securities:
Large-cap securities
Small-cap securities
Total other-than-temporary impairments
2017
$
$
(1.5)
(2.0)
(3.5)
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual
maturity at December 31, 2019:
($ 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 mortgage-backed securities
Total
Amortized
cost
Fair
value
$
$
107.9
565.4
158.1
602.6
646.0
2,080.0
$
$
108.8
575.0
166.2
625.4
652.5
2,127.9
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.
At December 31, 2019, State Auto P&C had fixed maturity securities, with a carrying value of approximately $106.5
million, that were pledged as collateral for the FHLB Loan (as defined in Note 8). In accordance with the terms of the FHLB
Loan, State Auto P&C retains all rights regarding these securities, which are included in the “U.S. government agencies
mortgage-backed securities” classification of the Company’s fixed maturity securities portfolio.
At December 31, 2019, State Auto P&C had fixed maturities with fair values of approximately $27.3 million pledged as
collateral for the performance obligations under its reinsurance agreement with Home State County Mutual Insurance Company
("Home State") as defined in Note 6. In accordance with the terms of the trust agreement, State Auto P&C retains all rights
regarding these securities, which are included in the “U.S. treasury securities and obligations of U.S. government agencies”
classification of the Company’s fixed maturity securities portfolio.
Fixed maturities with fair values of approximately $9.3 million and $8.9 million were on deposit with insurance
regulators as required by law at December 31, 2019 and 2018, respectively.
The following table sets forth the components of net investment income for the years ended December 31, 2019, 2018
and 2017:
($ millions)
Fixed maturities
Equity securities
Cash and cash equivalents, and other
Investment income
Investment expenses
Net investment income
2019
2018
2017
$
$
62.3
13.2
5.5
81.0
0.6
80.4
$
$
65.3
13.4
7.2
85.9
1.0
84.9
$
$
63.2
10.5
6.3
80.0
1.2
78.8
The Company’s current investment strategy does not rely on the use of derivative financial instruments.
Proceeds on sales of investments in 2019, 2018 and 2017 were $355.5 million, $197.0 million and $438.6 million,
respectively.
76
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following table sets forth the realized and unrealized holding gains (losses) on the Company’s investment portfolio
for the years ended December 31, 2019, 2018 and 2017:
($ millions)
Investment gain (loss), net:
Fixed maturities:
Realized gains on sales of securities
Net gain on fixed maturities
Equity securities:
Realized (losses) gains on sales of securities, net
Unrealized gain (loss) on securities still held, net
Net gain (loss) on equity securities
Other invested assets:
Realized gains on sales of securities
Unrealized gain (loss) on securities still held, net
Net gain (loss) on other invested assets
Other net realized loss
Net gain (loss) on investments
Change in net unrealized holding gains (losses), net of tax
Fixed maturities
Equity securities
Other invested assets
Deferred federal income tax (liability) benefit
Change in net unrealized holding gains (losses), net of tax
2019
2018
2017
$
$
$
$
$
3.5
3.5
$
2.0
2.0
(1.8)
63.9
62.1
—
9.9
9.9
(1.3)
5.7
(49.7)
(44.0)
—
(7.7)
(7.7)
—
2.8
2.8
62.1
—
62.1
0.2
—
0.2
—
74.2
$
(49.7) $
65.1
76.7
$
(48.4) $
—
—
(16.1)
—
—
10.1
60.6
$
(38.3) $
6.3
(13.0)
10.6
(0.7)
3.2
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).
The Company utilizes a nationally recognized pricing service to estimate the majority of its investment portfolio’s fair
value. The Company obtains one price per security. The Company’s processes and control procedures are designed to ensure
the price is accurately recorded on an unadjusted basis. Through discussions with the pricing service, the Company obtains 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, the Company compares the valuations received
to other fair value pricing from other independent pricing sources. At December 31, 2019 and 2018, the Company did not adjust
any of the prices received from the pricing service.
Transfers between levels may occur due to changes in the availability of market observable inputs. Transfers in and out of
levels are reported as having occurred at the beginning of the quarter in which the transfer occurred. There were no transfers
between levels during the years ended December 31, 2019 and 2018.
77
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following sections describe the valuation methods used by the Company for each type of financial instrument carried
at fair value.
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 include, but are not limited to, market prices
from recently completed transactions and transactions of 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, samples 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 or 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, and U.S.
government agencies 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.
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 is one international fund (“the fund”) that invests in equity securities of foreign issuers
and is managed by third party investment managers. The fund had a fair value of $56.4 million and $38.5 million at December
31, 2019 and 2018, respectively, which was determined using the fund’s net asset value. The Company employs procedures to
assess the reasonableness of the fair value of the fund including obtaining and reviewing the fund’s audited financial
statements. There is no unfunded commitment related to the fund. The Company may not sell its investment in the fund;
however, the Company may redeem all or a portion of its investment in the fund at net asset value per share with the
appropriate prior written notice. In accordance with Accounting Standard Codification 820-10, this investment is measured at
fair value using the net asset value per share practical expedient and has not been classified in the fair value hierarchy. Fair
values presented here are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the
consolidated balance sheets.
The remainder of the Company’s other invested assets consist of holdings in publicly-traded mutual funds. The Company
believes that its prices for these publicly-traded mutual funds, based on an observable market price for an identical asset in an
active market, reflect their fair values and consequently these securities have been disclosed in Level 1.
78
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following tables set forth the Company’s investments within the fair value hierarchy at December 31, 2019 and 2018:
($ millions)
December 31, 2019
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S.
government agencies
Obligations of states and political subdivisions
Corporate securities
U.S. government agencies mortgage-backed securities
Total available-for-sale fixed maturities
Equity securities:
Large-cap securities
Mutual and exchange traded funds
Total equity securities
Other invested assets
Total investments
($ millions)
December 31, 2018
Fixed maturities:
U.S. treasury securities and obligations of U.S.
government agencies
Obligations of states and political subdivisions
Corporate securities
U.S. government agencies mortgage-backed securities
Total fixed maturities
Equity securities:
Large-cap securities
Mutual and exchange traded funds
Total equity securities
Other invested assets
Total investments
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
— $
—
—
—
—
104.4
290.8
395.2
13.3
408.5
$
578.2
425.4
471.8
652.5
2,127.9
—
—
—
—
2,127.9
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
— $
—
—
—
—
77.2
237.8
315.0
10.3
325.3
$
432.4
414.6
540.6
771.9
2,159.5
—
—
—
—
2,159.5
Total
578.2
425.4
471.8
652.5
2,127.9
104.4
290.8
395.2
13.3
2,536.4
Total
432.4
414.6
540.6
771.9
2,159.5
77.2
237.8
315.0
10.3
2,484.8
$
$
$
$
$
$
$
$
79
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
Financial Instruments Disclosed, But Not Carried, At Fair Value
Other Invested Assets
Included in other invested assets are common stock of the Federal Home Loan Bank of Cincinnati (the “FHLB”), and the
Trust Securities (as defined in Note 7b). The Trust Securities and FHLB common stock are carried at cost, which approximates
fair value. The fair value of the FHLB common stock at December 31, 2019 was $6.0 million and the fair value of the Trust
Securities were $0.5 million. Both investments have been placed in Level 3 of the fair value hierarchy.
Notes Receivable from Affiliates
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 $70.0 million at an interest rate of 7.00%. In May 2019, the Company refinanced the two
credit agreements with State Auto Mutual at an interest rate of 4.05%, with principal payable in May 2029. The Company
estimates the fair value of the notes receivable from affiliates using market quotations for U.S. treasury securities with similar
maturity dates and applies an appropriate credit spread. This has been placed in Level 2 of the fair value hierarchy.
($ millions, except interest rates)
December 31, 2019
Fair
value
Carrying
value
Interest
rate
December 31, 2018
Fair
value
Carrying
value
Notes receivable from affiliate, May 2009 $
Notes receivable from affiliate, May 2019 $
— $
$
70.0
—
74.6
— % $
4.05 % $
70.0
$
— $
71.1
—
Interest
rate
7.00 %
— %
Notes Payable
Included in notes payable are the FHLB Loans (as defined in Note 8) and Subordinated Debentures. The Company
estimates the fair value of the FHLB Loans by discounting cash flows using a borrowing rate currently available to the
Company for a loan with similar terms. The FHLB Loans have been placed in Level 3 of the fair value hierarchy. The carrying
amount of the Subordinated Debentures approximates its fair value as the interest rate adjusts quarterly and has been disclosed
in Level 3.
($ millions, except interest rates)
December 31, 2019
Fair
Value
Carrying
value
Interest
rate
Carrying
value
December 31, 2018
Fair
value
Interest
rate
FHLB Loan due 2021:, issued $21.5,
September 2016 with fixed interest
FHLB Loan due 2033: issued $85.0,
May 2018 with fixed interest
Affiliate Subordinated Debentures due
2033: issued $15.5, May 2003 with
variable interest
Total notes payable
$
21.5
$
21.5
1.73 % $
21.5
$
20.9
1.73 %
85.3
97.8
3.96 %
85.3
89.0
3.96 %
15.2
122.0
$
15.2
134.5
$
6.11 %
15.2
122.0
$
15.2
125.1
$
6.94 %
80
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
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:
($ millions)
Losses and loss expenses payable, at beginning of year
Less: reinsurance recoverable on losses and loss expenses payable
Net balance at beginning of year
2019
2018
2017
$
$
1,146.8
5.5
1,141.3
$
1,255.6
3.1
1,252.5
1,181.6
3.6
1,178.0
Incurred related to:
Current year
Prior years
Total incurred
Paid related to:
Current year
Prior years
Total paid
Net balance at end of year
Plus: reinsurance recoverable on losses and loss expenses payable
Losses and loss expenses payable (affiliated net assumed $500.8, $593.6, and
$711.4 respectively)
913.5
(68.7)
844.8
530.4
402.8
933.2
1,052.9
13.6
876.6
(80.2)
796.4
456.5
451.1
907.6
1,141.3
5.5
964.9
(46.6)
918.3
445.2
398.6
843.8
1,252.5
3.1
$
1,066.5
$
1,146.8
$
1,255.6
The Company recorded favorable development related to prior years’ loss and loss expense reserves in 2019 of $68.7
million. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves was due to $71.3 million of
favorable development in the personal and commercial insurance segments. In the personal insurance segment, personal auto
contributed $10.7 million of favorable development, primarily from the 2018 and 2017 accident years. In the commercial
insurance segment, workers' compensation, small commercial package, and middle market commercial contributed $20.9
million, $15.2 million, and $11.8 million, respectively, of favorable development from multiple accident years. The favorable
development from prior years' non-catastrophe loss and ALAE reserves was partially offset by $5.7 million of adverse
development in catastrophe reserves driven by $10.7 million of adverse development from specialty run-off, primarily from the
2017 accident year.
The Company recorded favorable development related to prior years’ loss and loss expense reserves in 2018 of $80.2
million. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves was due to $79.7 million of
favorable development in the personal and commercial insurance segments. In the personal insurance segment, personal auto
contributed $24.4 million of favorable development primarily driven by lower than anticipated severity emerging from accident
years 2016 and 2017, and homeowners contributed favorable development of $7.3 million, spread across several accident years.
In the commercial insurance segment, workers' compensation, small commercial package, commercial auto, and middle market
commercial contributed $13.3 million, $9.6 million, $8.4 million, and $8.0 million, respectively, of favorable development.
Slightly offsetting the favorable development was adverse development in the specialty insurance segment of $3.1 million,
primarily driven by E&S casualty and programs with adverse development of $2.7 million and $1.2 million, respectively. The
E&S casualty adverse development for prior accident years was due primarily to development within our healthcare and
umbrella books of business. The programs adverse development for prior accident years was driven by increased ultimate loss
estimates for commercial auto liability and contractors liability coverages. Favorable development of prior years' unallocated
loss adjustment expenses was $7.1 million of the 2018 development.
The Company recorded favorable development related to prior years’ loss and loss expense reserves in 2017 of $46.6
million. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves was primarily driven by $44.0
million of favorable development in the commercial insurance segment. Favorable development in these lines was driven by
lower than anticipated severity emerging from multiple accident years. The personal insurance segment non-catastrophe loss
and ALAE reserves accounted for $1.6 million of the favorable development in 2017. Personal auto contributed $4.4 million of
favorable development primarily driven by lower than anticipated severity emerging from accident years 2015 and 2016.
Slightly offsetting the favorable development was adverse development in homeowners and other personal of $1.5 million and
$1.3 million, respectively. Homeowners adverse development was primarily from accident year 2016. Adverse development in
other personal was driven by higher than anticipated severity emerging from accident years 2015 and 2016. The specialty
insurance segment non-catastrophe loss and ALAE reserves accounted for $4.2 million of adverse development, primarily
driven by E&S property with adverse development of $3.0 million. E&S property adverse development was driven by higher
than anticipated severity for liability coverages on business in run-off.
81
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
5. Short-Duration Insurance Contracts
The following tables set forth:
•
•
•
•
undiscounted, incurred and paid claims and allocated claim adjustment expenses by accident year, on a net basis
after reinsurance;
the sum of IBNR claims liabilities + expected development on reported claims ("IBNR+") included within the
incurred claims development tables, for each accident year, for the most recent reporting period;
cumulative claim frequency information for each accident year; and
average annual percentage payout of incurred claims by age, net of reinsurance.
The above information is provided for each of the Company’s reportable insurance segments and specialty run-off and
then is further disaggregated between short and long-tail where "tail" refers to the time period between the occurrence of a loss
and the ultimate settlement of the claims. See Note 16 for discussion of the Company’s reportable segments.
The personal insurance segment generally consists of only short-tail business, whereas the commercial insurance segment
and specialty run-off have both short and long-tail business. The Company determined that these disaggregated groupings have
more homogeneous risk characteristics with similar development patterns and are generally subject to similar trends.
Short-Tail Business: For short-tail business, claims are typically settled within five years, and the most common actuarial
estimates are based on development method projections of incurred losses, paid losses, claim counts and claim severities. Each
of these methods is described in the "Losses and Loss Expenses Payable" section of "Critical Accounting Policies" included in
Item 7 of this Form 10-K. Separate projections are made for catastrophes that are in the very early stages of development based
on specific information known through the reporting date.
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 and Bornhuetter-Ferguson methods as described in the "Losses and Loss Expenses Payable" section of "Critical
Accounting Policies" included in Item 7 of this Form 10-K.
Cumulative Claim Frequency: Cumulative claim frequency is defined as the cumulative number of reported claims
("reported claims"). Reported claims include claims that do not result in a liability (e.g. those below a deductible). Reported
claims disclosed in the tables below are for the State Auto Group and have not been pooled (see Note 7a for additional
information regarding the Pooling Arrangement).
Personal Insurance Segment - Short-Tail
The change in incurred losses and loss adjustment expenses for prior accident years was due to lower than expected
emergence of all personal insurance products. The emergence was primarily attributable to lower severity for bodily injury
claims from the 2017 and 2018 accident years.
($ in millions except number of claims)
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2019
Accident
Year
2015
2016
2017
2018
2019
For the Years Ended December 31,
2015*
2016*
2017*
2018*
2019
IBNR+
$
339.0
$
345.5
$
341.0
$
339.0
$
337.2
$
368.5
370.0
372.4
361.4
355.0
418.5
360.8
351.9
411.4
497.5
Total $
1,958.8
0.7
1.4
2.3
11.9
65.8
Reported
Claims (1)
153,017
151,554
151,458
154,173
153,602
* Supplementary information and unaudited
(1) Personal insurance segment - short-tail is an aggregation of the homeowners and personal auto product lines. Homeowners
reported claims are counted by claimant and personal auto claims are counted by coverage.
82
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
($ in millions)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident Year
2015*
2016*
2017*
2018*
2019
For the Years Ended December 31,
$
216.5
$
290.8
$
231.9
2015
2016
2017
2018
2019
318.0
$
330.7
$
316.2
236.8
342.6
315.8
276.4
334.1
352.1
335.7
375.1
343.7
Total $
1,740.7
All outstanding liabilities before 2015, net of reinsurance $
Losses and allocated loss adjustment expenses payable, net of reinsurance $
2.5
220.6
* Supplementary information and unaudited
Commercial Insurance Segment - Short-Tail
The change in incurred losses and loss adjustment expenses for prior accident years was primarily driven by lower than
expected emergence for the small commercial package and middle market commercial products. The emergence in these
products was driven by lower than expected bodily injury claim severity from multiple accident years.
($ in millions except number of claims)
Accident
Year
2015
2016
2017
2018
2019
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2019
For the Years Ended December 31,
2015*
2016*
2017*
2018*
2019
IBNR+
Reported
Claims(1)
$
239.4 $
239.9 $
232.5 $
227.3 $
222.5 $
237.0
227.6
236.8
225.2
225.5
228.4
220.6
215.9
216.4
248.2
Total $
1,123.6
10.6
11.8
20.7
42.3
85.3
37,819
34,801
31,948
30,603
29,491
* Supplementary information and unaudited
(1) Commercial insurance segment - short-tail is an aggregation of the commercial auto, small commercial package, middle
market commercial and farm & ranch product lines. Commercial auto reported claims are counted by coverage and small
commercial package, middle market commercial and farm & ranch reported claims are counted by claimant.
83
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
($ in millions)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident Year
2015*
2016*
2017*
2018*
2019
2015
2016
2017
2018
2019
$
101.5
$
148.3
$
169.6
$
192.9
$
99.2
147.3
104.9
176.7
153.9
98.7
Total $
All outstanding liabilities before 2015, net of reinsurance $
Losses and allocated loss adjustment expenses payable, net of reinsurance $
204.5
196.1
175.5
144.6
108.4
829.1
36.3
330.8
* Supplementary information and unaudited
Commercial Insurance Segment - Long-Tail
The change in incurred losses and loss adjustment expenses for prior accident years was due to lower than expected
emergence in the workers’ compensation product, primarily driven by lower than expected severity.
($ in millions except number of claims)
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2019
For the Years Ended December 31,
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
IBNR+
$ 38.8
$ 41.3
$ 41.6
$ 40.4
$ 40.3
$ 40.4
$ 40.8
$ 40.2
$ 39.8
$ 39.6
$
44.6
47.4
49.7
45.5
45.8
48.7
44.8
43.7
45.4
51.6
44.8
44.1
44.1
50.0
59.7
44.9
43.9
43.4
47.1
59.4
62.6
43.9
42.9
42.9
45.7
56.5
60.6
59.0
42.9
41.7
41.5
45.3
53.7
57.2
56.4
56.4
42.3
40.5
40.5
43.4
51.3
53.9
53.7
53.6
54.4
Total $473.2
1.8
2.5
2.7
4.8
7.6
9.6
14.8
15.3
18.2
27.6
Reported
Claims(1)
5,260
12,228
12,761
11,317
11,570
11,158
12,443
12,558
12,470
11,379
* Supplementary information and unaudited
(1) Commercial insurance segment-long-tail consists of the workers' compensation product. Workers' compensation reported claims
are counted by a combination of claimant and coverage.
84
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
($ in millions)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
$
9.0
$
$
21.6
12.4
$
28.0
25.4
12.6
$
31.4
31.9
23.5
12.3
$
33.2
35.0
29.8
23.3
12.4
$
34.6
36.9
32.7
29.0
24.4
13.9
$
35.4
37.7
34.7
32.3
30.0
28.2
12.6
$
35.8
38.1
35.8
33.7
32.8
35.7
26.8
13.2
$
36.4
38.6
36.4
34.2
34.1
38.3
32.3
27.0
13.2
36.6
38.9
36.6
34.4
34.6
39.5
35.6
32.8
26.4
14.7
$ 330.1
All outstanding liabilities before 2010, net of reinsurance $
31.1
Losses and allocated loss adjustment expenses payable, net of reinsurance $ 174.2
* Supplementary information and unaudited
Specialty run-off - Short-Tail
($ in millions except number of claims)
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2019
For the Years Ended December 31,
Accident
Year
2015
2016
2017
2018
2019
2015*
2016*
2017*
2018*
2019
IBNR+
$
75.5
$
$
85.4
99.3
87.8
99.5
134.2
$
90.3
$
90.4
$
102.7
129.7
18.5
105.7
138.3
20.5
1.0
Total $
355.9
2.9
9.8
17.4
4.6
0.1
Reported
Claims(1)
8,151
7,440
9,162
2,065
46
* Supplementary information and unaudited
(1) Specialty run-off-short-tail is an aggregation of the E&S Property and programs product lines. E&S Property and programs
reported claims are counted by claimant.
85
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
($ in millions)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident Year
2015*
2016*
2017*
2018*
2019
$
24.0
$
$
48.3
25.2
$
62.8
50.2
39.0
2015
2016
2017
2018
2019
$
76.7
69.9
77.5
6.3
Total $
All outstanding liabilities before 2015, net of reinsurance $
Losses and allocated loss adjustment expenses payable, net of reinsurance $
83.2
87.4
101.2
10.7
0.5
283.0
12.0
84.9
* Supplementary information and unaudited
Specialty run-off - Long-Tail
($ in millions except number of claims)
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2019
For the Years Ended December 31,
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
IBNR+
Reported
Claims(1)
$ 11.2
$ 10.9
$
9.9
$
9.7
$
9.8
$
9.9
$ 10.3
$ 10.1
$ 10.0
$
11.9
10.7
16.7
10.7
16.7
20.1
10.2
15.4
18.9
23.3
10.1
17.6
17.9
25.2
38.6
10.9
17.4
16.5
27.1
44.9
60.8
10.5
16.5
15.9
28.3
44.8
62.9
71.6
9.7
16.0
15.3
29.5
45.7
64.8
73.1
53.0
$
$
$
9.4
9.5
16.1
15.0
30.0
45.0
64.3
70.5
53.3
4.1
0.8
0.8
0.7
1.2
2.8
5.5
16.7
33.9
31.3
4.1
1,382
1,104
1,027
1341
1,695
2,410
5,062
6,379
4,054
1,499
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
* Supplementary information and unaudited
(1) Specialty run-off-long-tail consists of the E&S Casualty product line. E&S Casualty reported claims are counted by claimant.
Total $317.2
86
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
($ in millions)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
$
0.8
$
$
2.2
0.9
$
5.2
3.0
0.9
$
6.5
5.2
4.0
1.1
$
7.7
6.6
7.3
3.7
1.2
$
7.6
7.1
10.3
6.7
7.2
2.7
$
8.1
7.9
12.5
9.0
12.5
10.9
6.0
$
8.2
8.1
14.0
10.5
16.7
20.6
15.7
5.5
$
8.3
8.4
14.1
12.0
21.5
29.1
31.5
16.4
2.7
8.4
8.6
14.7
13.3
24.2
34.7
39.7
25.2
12.7
0.1
All outstanding liabilities before 2010, net of reinsurance $
3.5
Losses and allocated loss adjustment expenses payable, net of reinsurance $ 139.1
Total
$ 181.6
* Supplementary information and unaudited
The following table sets forth the reconciliation of the claims development tables to the balance sheet losses and loss
expenses payable, with separate disclosure of unallocated loss adjustment expenses, net of reinsurance ("ULAE") and
reinsurance recoverable on losses and loss expenses payable, for the years ended December 31:
($ in millions)
2019
2018
2017
Net losses and allocated loss adjustment expenses payable:
Personal Insurance Segment
Short-tail
Other personal
Commercial Insurance Segment
Short-tail
Long-tail
Other commercial
Specialty run-off
Short-tail
Long-tail
Net losses and loss expenses payable
ULAE
Reinsurance recoverable on losses and loss expenses payable
$
220.6
$
216.0
$
14.4
13.5
229.4
13.2
360.2
180.8
26.4
210.6
167.9
336.4
182.1
27.4
128.5
177.6
1,081.5
1,188.5
59.8
5.5
64.0
3.1
330.8
174.2
30.9
84.9
139.1
994.9
58.0
13.6
Total losses and loss expenses payable
$
1,066.5
$
1,146.8
$
1,255.6
87
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following table sets forth the historical average annual payout of incurred losses and allocated loss adjustment
expenses (claims duration) for short-duration contracts, based on the disaggregated information in the paid loss development
tables, net of reinsurance:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
Segment
1*
2*
3*
4*
5*
6*
7*
8*
9*
10*
Personal Insurance:
Short-tail
66.4 % 23.0 % 7.0 % 3.2 % 1.0 %
N/A
N/A
N/A
N/A
N/A
Commercial Insurance:
Short-tail
Long-tail
Specialty run-off:
Short-tail
Long-tail
45.7 % 21.7 % 11.0 % 9.6 % 5.2 %
N/A
N/A
N/A
N/A
N/A
26.9 % 27.7 % 13.7 % 7.0 % 3.8 % 2.1 % 1.2 % 0.9 % 1.2 %
0.4 %
33.5 % 25.0 % 17.3 % 16.0 % 7.2 %
N/A
N/A
N/A
N/A
N/A
6.5 % 18.0 % 21.6 % 15.3 % 11.7 % 7.0 % 4.0 % 2.8 % 1.6 %
0.8 %
* Supplementary information and unaudited
6. 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 7a 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.
Effective June 1, 2017, State Auto P&C entered into a quota share agreement with Home State to assume 100% of the
business issued under this agreement, defined as Texas Private Passenger Automobile. Home State receives a variable fee
(capped at 2%) in consideration for this arrangement.
The following table sets forth the effect of the Company’s external reinsurance on its balance sheets at December 31,
2019 and 2018, prior to the reinsurance transaction with State Auto Mutual under the Pooling Arrangement, as discussed in
Note 7a:
($ millions)
Losses and loss expenses payable:
Direct
Assumed
Ceded
Net losses and loss expenses payable
Unearned premiums:
Direct
Assumed
Ceded
Net unearned premiums
2019
2018
$
$
$
$
540.1
25.6
(13.6)
552.1
495.8
36.7
(7.5)
525.0
$
$
$
$
530.9
22.3
(5.5)
547.7
436.2
35.5
(6.6)
465.1
88
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following table sets forth the effect of the Company’s external reinsurance on its income statements for the years
ended December 31, 2019, 2018 and 2017, prior to the reinsurance transaction with State Auto Mutual under the Pooling
Arrangement, as discussed in Note 7a:
($ millions)
Written premiums:
Direct
Assumed
Ceded
Net written premiums
Earned premiums:
Direct
Assumed
Ceded
Net earned premiums
Losses and loss expenses incurred:
Direct
Assumed
Ceded
Net losses and loss expenses incurred
2019
2018
2017
$
$
$
$
$
$
1,036.9
82.5
(26.3)
1,093.1
976.8
81.3
(25.4)
1,032.7
631.4
59.6
(15.6)
675.4
$
$
$
$
$
$
915.1
75.1
(22.7)
967.5
881.3
61.0
(22.6)
919.7
572.5
48.4
(4.9)
616.0
$
$
$
$
$
$
835.6
31.1
(22.9)
843.8
828.7
11.0
(22.6)
817.1
530.9
10.4
(2.5)
538.8
7. Transactions with Affiliates
a. Reinsurance
The insurance subsidiaries of State Auto Financial, including State Auto P&C, Milbank and SA Ohio (collectively
referred to as the “STFC Pooled Companies”) 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,
Meridian Security Insurance Company, Patrons Mutual Insurance Company of Connecticut, Rockhill Insurance Company,
Plaza Insurance Company, American Compensation Insurance Company and Bloomington Compensation Insurance Company,
(collectively referred to as the “Mutual Pooled Companies”). RIC, Plaza, American Compensation and Bloomington
Compensation are referred to as the “Rockhill Insurers.” The STFC Pooled Companies, the Mutual Pooled Companies and the
Rockhill Insurers are collectively referred to as the “State Auto Group.”
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 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).
89
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
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, 2019 and 2018:
($ millions)
Assets
Deferred policy acquisition costs:
Ceded
Assumed
Net assumed
Liabilities
Losses and loss expenses payable:
Ceded
Assumed
Net assumed
Unearned premiums:
Ceded
Assumed
Net assumed
Other liabilities:
Ceded
Assumed
Net assumed
2019
2018
(90.9) $
111.1
20.2
$
(82.0)
101.9
19.9
(552.1) $
1,052.9
500.8
$
(547.7)
1,141.3
593.6
(525.0) $
641.7
116.7
$
(17.2) $
36.7
19.5
$
(465.2)
577.6
112.4
(24.6)
42.3
17.7
$
$
$
$
$
$
$
$
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, 2019, 2018 and
2017:
($ millions)
Written premiums:
Ceded
Assumed
Net assumed
Earned premiums:
Ceded
Assumed
Net assumed
Losses and loss expenses incurred:
Ceded
Assumed
Net assumed
Acquisition and operating expenses:
Ceded
Assumed
Net assumed
2019
2018
2017
(1,093.1) $
1,318.1
225.0
$
(967.5) $
1,210.3
242.8
$
(1,032.7) $
1,253.0
220.3
$
(919.7) $
1,238.0
318.3
$
(677.2) $
846.5
169.3
$
(370.0)
439.1
69.1
$
(617.6) $
798.1
180.5
$
(341.1)
449.8
108.7
$
(843.8)
1,270.3
426.5
(817.1)
1,276.1
459.0
(540.4)
919.8
379.4
(299.2)
459.9
160.7
$
$
$
$
$
$
$
90
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
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 60 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 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, 2019 and 2018 is
approximately $371.0 million and $347.8 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 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 is payable quarterly at a rate equal to the three-month
LIBOR rate plus 4.20% adjusted quarterly (total 6.11% at December 31, 2019). 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
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 810, 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.
to redeem the Subordinated Debentures,
c. Notes Receivable
In May 2009, the Company entered into two separate credit agreements with State Automobile Mutual Insurance
Company pursuant to which it loaned State Auto Mutual a total of $70.0 million at an interest rate of 7.00%. In May 2019, the
Company refinanced the two credit agreements with State Auto Mutual at an interest rate of 4.05%, with principal payable in
May 2029. There is no prepayment penalty, and no collateral was given as security for the payment for these loans.
Pursuant to these agreements, the Company earned interest of $3.6 million for the year ended December 31, 2019 and
$4.9 million for the years ended December 31, 2018 and 2017, respectively. See Note 3 for the notes receivable fair value
discussion.
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 $2.1 million, $2.0 million and $2.0 million in 2019,
2018 and 2017, respectively, and is included in other income (affiliates) on the consolidated statements of income.
91
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
8. Notes Payable and Open Line of Credit
FHLB Loans
State Auto Financial’s subsidiary, State Auto P&C, is a member of the Federal Home Loan Bank of Cincinnati (the
“FHLB”). On May 17, 2018, State Auto P&C refinanced its $85.0 million loan (the "2013 FHLB loan") for a period of fifteen
years at a fixed rate of 3.96%. The new loan (the "2018 FHLB loan") provides for interest-only payments during its term, with
principal due in full at maturity. Prepayment of the 2018 FHLB Loan would require a prepayment fee. State Auto P&C incurred
a $0.4 million prepayment fee which is included in interest expense in the condensed consolidated statements of income for the
year ended December 31, 2018. State Auto P&C has a term loan with the FHLB in the principal amount of $21.5 million (the
“2016 FHLB Loan”). The 2016 FHLB Loan is a five-year term loan and may be prepaid after three years with no prepayment
penalty. The 2016 FHLB Loan provides for interest-only payments during its term, with principal due in full at maturity. The
interest rate is fixed over the term of the loan at 1.73%.
The 2016 and 2018 FHLB Loans are fully secured by a pledge of specific investment securities of State Auto P&C.
FHLB Line of Credit
State Auto P&C has an Open Line of Credit Commitment (the "OLC") with the FHLB that provides State Auto P&C with
a $100.0 million one-year open line of credit available for general corporate purposes. The OLC matures in April 2020. Draws
under the OLC are to be funded at a daily variable rate advance with a term of no more than 180 days with interest payable
monthly. All advances under the OLC are to be fully secured by a pledge of specific investment securities of State Auto P&C.
As of December 31, 2019, no advances had been made under the OLC.
9. Federal Income Taxes
The following table sets forth the reconciliation between actual federal income tax expense and the amount computed at
the indicated statutory rate for the years ended December 31, 2019, 2018 and 2017:
($ millions)
Amount at statutory rate
Tax-exempt interest and dividends received deduction
Other, net
Federal income tax expense
Impact of TCJA at enactment
$
22.5
(2.3)
(0.6)
19.6
—
21.0 % $
(2.1)
(0.6)
18.3 %
—
Federal income tax expense
$
19.6
18.3 % $
2.7
(2.3)
(0.3)
0.1
—
0.1
21.0 % $
(17.7)
(2.8)
0.5 %
—
0.5 % $
12.3
(5.7)
2.7
9.3
43.5
52.8
35.0 %
(16.3)
7.7
26.4 %
124.1 %
150.5 %
2019
2018
2017
On December 22, 2017, the United States enacted the TCJA which, among other changes, reduced the U.S. federal tax
rate from 35.0% to 21.0% beginning on January 1, 2018. The estimated effects of enactment of TCJA were reflected in the net
deferred tax asset that was reported on the Company's balance sheet at December 31, 2017. Total income tax expense for 2017
included a provisional net charge of $43.5 million to reflect the change in tax laws and tax rates included in TCJA at the date of
enactment, resulting primarily from revaluing the Company's deferred tax assets and liabilities.
In computing taxable income, property and casualty insurers are required to discount their unpaid loss reserves. TCJA
changed the prescribed interest rates to rates based on corporate bond yield curves, required the use of IRS-prescribed claims
payment patterns and extended the applicable time periods for the claims payment patterns. These changes were effective for
tax years beginning after 2017 and were subject to a transition rule that spreads the additional tax payment from the amount
determined by applying these changes over the subsequent eight years beginning in 2018. The pre-tax provisional change in
discounted loss reserves attributable to the TCJA changes to loss reserve discounting was determined to be $50.9 million at
December 31, 2017. As a result of changes to the IRS Code, deferred tax assets were increased by that amount, with an
offsetting deferred tax liability. The deferred tax liability will be amortized over a period of eight years beginning in 2018. This
item is a taxable temporary difference and has no direct impact on total tax expense for 2017 and future years.
92
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
During 2018, the Internal Revenue Service (IRS) released proposed regulations addressing the mechanics of the reserve
discounting. Under those regulations and a related Revenue Procedure 2019-06 ("Rev. Proc. 2019-06"), the interest rate term
was not to exceed seventeen and one-half years. The provisional amount was based on twenty years. After discounting the
January 1, 2018 reserves using the Rev. Proc. 2019-06 published factors, the impact was $47.5 million on a pretax basis down
from the initial estimate of $50.9 million for a tax-effected change of $0.7 million in the impact of the transitional amount.
During 2019, the IRS released Rev. Proc. 2019-31 with final discount factors, which were used in the 2018 tax return filed
in 2019. After discounting the January 1, 2018 reserves using these final factors, the impact was $42.7 million on a pretax basis
down from the revised estimate of $47.5 million for a tax-effected change of $1.0 million in the impact of the transitional
amount.
The following table sets forth the tax effects of temporary differences that give rise to significant portions of deferred tax
assets and deferred tax liabilities at December 31, 2019 and 2018:
($ millions)
Deferred tax assets:
Unearned premiums not currently deductible
Losses and loss expenses payable discounting
Postretirement and pension benefits
Investments
Other liabilities
Net operating loss carryforward
Tax credit carryforward
Other
Total deferred tax assets
Deferred tax liabilities:
Deferral of policy acquisition costs
Investments
Total deferred tax liabilities
Net deferred federal income taxes
2019
2018
$
$
27.0
10.6
20.0
—
13.4
12.1
2.5
1.1
86.7
23.3
21.2
44.5
42.2
$
$
24.3
11.2
21.4
8.9
14.8
15.1
2.7
0.8
99.2
21.4
—
21.4
77.8
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 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.
At December 31, 2019, the tax benefit of the net operating loss (“NOL”) carryforward was $12.1 million. The NOL
carryforwards do not begin to expire until 2032 and will not fully expire until 2038.
At December 31, 2019, the Company carried no balance for uncertain tax positions. The Company had no accrual for the
payment of interest and penalties at December 31, 2019 or 2018.
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 2016. The Company has no current U.S. federal or state and local income
tax examinations on-going at this time.
10. 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 Company provides eligible employees and retirees
pension and postretirement benefits and records the funded status of these plans on its balance sheet while the annual net
periodic costs 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.
93
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The Company provides a defined benefit pension plan for eligible employees hired prior to January 1, 2010 at which time
the plan was closed to new participants. All Company employees participating in the plan are vested. 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 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, 2019 and 2018:
($ millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Benefit obligation at end of year
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
Fair value of plan assets at end of year
Supplemental executive retirement plan
Funded status at end of year
Accumulated benefit obligation end of year
Pension
Postretirement
2019
2018
2019
2018
$
$
$
$
$
428.1
5.8
17.2
60.4
(33.3)
478.2
381.6
10.0
83.8
(33.3)
442.1
(11.8)
(47.9) $
$
$
468.0
7.7
16.0
(43.6)
(20.0)
428.1
407.7
15.0
(21.1)
(20.0)
381.6
(11.0)
(57.5) $
$
453.8
$
406.5
$
25.5
—
1.0
1.0
(2.5)
25.0
—
—
—
—
— $
—
(25.0) $
28.3
—
0.9
(1.3)
(2.4)
25.5
—
—
—
—
—
—
(25.5)
No assets are expected to be returned during the fiscal year ending December 31, 2019.
The following table sets forth the amounts included in accumulated other comprehensive income (loss) that has not been
recognized in net periodic cost at December 31, 2019 and 2018:
($ millions)
Prior service benefit
Net actuarial loss
Total
2019
2018
$
$
(43.4) $
157.1
113.7
$
(49.7)
160.8
111.1
The following table sets forth the Company’s share of amortization expected to be recognized as a component of net
periodic cost for the year ending December 31, 2020:
($ millions)
Prior service benefit
Net actuarial loss
Total
2020
(5.5)
9.4
3.9
$
$
94
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
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, 2019, 2018 and 2017:
($ millions)
Components of net periodic cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service benefit
Net actuarial loss
Net periodic cost (benefit)
2019
Pension
2018
2017
2019
Postretirement
2018
2017
$
$
3.8
11.5
(17.8)
—
6.0
3.5
$
$
5.1
10.7
(18.0)
—
8.2
6.0
$
$
5.7
11.4
(16.7)
—
7.8
8.2
$
$
— $
0.7
—
(5.5)
0.2
(4.6) $
— $
0.6
—
(5.5)
0.3
(4.6) $
—
0.8
—
(5.5)
0.2
(4.5)
The following table sets forth the benefit payments, which reflect expected future service, expected to be paid:
($ millions)
2020
2021
2022
2023
2024
2025-2029
$
Pension
18.2
18.8
19.6
20.7
21.6
123.1
Postretirement
2.1
$
2.0
1.9
1.8
1.8
8.4
The postretirement plan’s gross benefit payments for 2019 were $2.5 million, including the prescription drug benefits.
The postretirement plan’s subsidy related to Medicare Prescription Drug Improvement and Modernization Act of 2003
estimates future annual subsidies to be approximately $0.3 million.
The following table sets forth the weighted average assumptions used to determine the benefit plans’ obligations at
December 31, 2019 and 2018:
Benefit obligations weighted-average assumptions:
Discount rate
Rates of increase in compensation levels
Pension
Postretirement
2019
2018
2019
2018
3.10 %
3.25
4.12 %
3.25
3.10 %
—
4.12 %
—
The following table sets forth the weighted average assumptions used to determine the benefit plans’ net periodic cost for
the years ended December 31, 2019, 2018 and 2017:
2019
Pension
2018
2017
2019
Postretirement
2018
2017
Weighted-average assumptions:
Discount rate
Expected long-term rate of return on assets
Rates of increase in compensation levels
4.12 % 3.50 % 4.00 % 4.12 % 3.50 % 4.00 %
6.75
3.25
—
—
7.00
3.25
7.00
3.50
—
—
—
—
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, 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.
95
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following table sets forth the assumed health care cost trend rates used for the years ended December 31, 2019, 2018
and 2017:
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
2019
Postretirement
2018
2017
5.50 %
4.00 %
2075
5.50 %
3.80 %
2075
6.00 %
3.80 %
2075
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, 2019:
($ millions)
Postretirement
Increase
(Decrease)
One percentage point change:
Effect on total service and interest cost
Effect on accumulated postretirement benefit obligation
$
$
0.1
2.2
(0.1)
(2.0)
The pension plan’s investment policy objective is to preserve the investment principal while generating income and
appreciation in fair value to meet the pension plan’s obligations. The pension plan’s investment strategy and risk tolerance is
balanced between meeting cash obligation requirements and a long-term relatively high risk tolerance takes into account the
predictable cash requirements, nature of the plan’s liabilities and the plan’s long term time horizon. 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 is the elimination of concentration of risk in
one asset class. Management also has investment policy guidelines with respect to limiting the ownership in any single debt or
equity issuer. The international fund investments are also 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.
Asset Category:
Fixed maturity
U.S. large-cap equity
U.S. small-cap equity
International equity
Emerging market equity
Total
Asset
allocation
target
(0 to 100%)
61.0 %
19.8
8.3
7.6
3.3
100.0 %
Effective January 1, 2014, the Investment Committee approved a change to a liability driven investment (LDI) for the
pension plan assets. The primary goal of the LDI strategy is to shift the asset allocation to more closely align with the plan
liability, thereby reducing the volatility of the funded status. The implementation of the LDI strategy occurred over time and the
actual asset allocation at any point in time is dependent upon the funded status and the level of interest rates. This glide path
helps to balance interest rate risk, curve steepness risk, and credit spread risk, as incremental changes are made to the allocation
over time. This allocation strategy reduces exposure to equity holdings and increases exposure to long duration fixed maturity
holdings. This change resulted in lower volatility for the plan assets. By moving more of the plan’s assets to long duration fixed
income, the duration of the assets increased to more closely match the duration of the plan’s liabilities.
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, 2019 and
2018.
Included in the pension plan’s investments are two international funds (“the funds”) that invests in equity securities of
foreign issuers and are managed by third party investment managers. The funds had a fair value of $38.2 million and
$32.7 million at December 31, 2019 and 2018, respectively, which was determined using the funds' net asset value. In
96
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
accordance with ASC 820-10, since these investments are measured at fair value using the net asset value per share practical
expedient they have not been classified in the table below.
The following tables set forth the plan’s investments within the fair value hierarchy at December 31, 2019 and 2018:
($ millions)
December 31, 2019
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
Mutual and exchange traded funds
Total equity securities
Total pension plan investments
($ millions)
December 31, 2018
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
Mutual and exchange traded funds
Total equity securities
Total pension plan investments
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Total
$
$
$
$
98.6
153.1
4.0
255.7
91.9
49.7
141.6
397.3
Total
90.6
121.4
5.2
217.2
82.3
43.4
125.7
342.9
$
$
$
$
— $
—
—
—
91.9
49.7
141.6
141.6
$
98.6
153.1
4.0
255.7
—
—
—
255.7
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
— $
—
—
—
82.3
43.4
125.7
125.7
$
90.6
121.4
5.2
217.2
—
—
—
217.2
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 expects to contribute up to $10.0 million to the pension plan during
2020.
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 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 $6.4 million, $5.6 million and $6.4 million for 2019, 2018 and
2017, respectively.
97
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
11. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
The following tables set forth the changes in the Company’s accumulated other comprehensive income (loss) component
("AOCI(L)"), net of tax, for the years ended December 31, 2019, 2018 and 2017:
($ millions)
Unrealized Gains
and Losses on
Available-for-
Sale Securities
Benefit Plan
Items
Total
Beginning balance at January 1, 2019
Other comprehensive income (loss)
Amounts reclassified from AOCI (a)
Net current period other comprehensive income (loss)
Ending balance at December 31, 2019
Beginning balance at January 1, 2018
Cumulative effect of change in accounting for equity
securities and other invested assets and reclassification of
stranded tax effects as of January 1, 2018
Other comprehensive loss before reclassifications
Amounts reclassified from AOCI (a)
Net current period other comprehensive (loss) income
Ending balance at December 31, 2018
Beginning balance at January 1, 2017
Other comprehensive income (loss) before
Amounts reclassified from AOCI (a)
Net current period other comprehensive income
Ending balance at December 31, 2017
(a) See separate table below for details about these reclassifications
$
$
$
$
$
$
(20.2) $
63.4
(2.8)
60.6
40.4
$
(76.2) $
(5.9)
3.8
(2.1)
(78.3) $
(96.4)
57.5
1.0
58.5
(37.9)
66.0
$
(62.2) $
3.8
(47.9)
(36.7)
(1.6)
(38.3)
(20.2) $
62.8
45.5
(42.3)
3.2
66.0
$
$
(16.0)
(4.3)
6.3
2.0
(76.2) $
(65.2) $
(1.5)
4.5
3.0
(62.2) $
(63.9)
(41.0)
4.7
(36.3)
(96.4)
(2.4)
44.0
(37.8)
6.2
3.8
The following tables set forth the reclassifications out of accumulated other comprehensive income (loss), by component,
to the Company’s consolidated statement of income for the years ended December 31, 2019, 2018 and 2017:
($ millions)
Details about Accumulated Other
Comprehensive (Loss) Income Components
December 31
2018
2019
2017
Affected line item in the Condensed
Consolidated Statements of Income
Unrealized gains on available for sale securities $ 3.5
3.5
(0.7)
2.8
$ 2.0
2.0
(0.4)
1.6
$ 65.1 Realized gain on sale of securities
65.1 Total before tax
(22.8) Tax expense
42.3 Net of tax
Amortization of benefit plan items:
Negative prior service costs
Net loss
6.3
(9.6)
(3.3)
(0.5)
(3.8)
6.3
(13.2)
(6.9)
0.6
(6.3)
(b)
(b)
6.3
(12.5)
(6.2) Total before tax
1.7 Tax benefit
(4.5) Net of tax
Total reclassifications for the period
$ (1.0) $ (4.7) $ 37.8
(b)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see pension
and postretirement benefit plans footnote for additional details).
98
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
12. Stockholders’ Equity
a. Dividend Restrictions and Statutory Financial Information
State Auto P&C, Milbank and SA Ohio are subject to regulations and restrictions under which payment of dividends from
statutory surplus can be made to State Auto Financial during the year without prior approval of regulatory authorities. Under the
insurance regulations of Iowa and Ohio (the states of domicile), the maximum amount of dividends that the Company may pay
out of earned surplus to shareholders within a twelve month period without prior approval of the Department is limited to the
greater of 10% of the most recent year-end policyholders’ surplus or net income for the twelve month period ending the 31st
day of December of the previous year-end. Pursuant to these rules, approximately $91.3 million is available for payment to
State Auto Financial from its insurance subsidiaries in 2020 without prior approval. State Auto Financial received dividends
from its insurance subsidiaries in the amount of $10.0 million, $10.0 million and $15.0 million in 2019, 2018 and 2017,
respectively.
The Company’s insurance subsidiaries are subject to risk-based capital (“RBC”) requirements that have been adopted by
individual states. These requirements subject insurers having statutory capital less than that required by the RBC calculation to
varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC formulas specify various
weighting factors to be applied to financial balances or various levels of activity based on the perceived degree of risk.
Regulatory compliance is determined by a ratio of total adjusted capital to authorized control level RBC. Generally no remedial
action is required by an insurance company if its adjusted statutory surplus exceeds 200% of the authorized level RBC. As of
December 31, 2019, each of the Company’s insurance subsidiaries maintained adjusted statutory surplus in excess of 400% of
the authorized control level RBC.
The Company's statutory capital and surplus was $913.3 million and $871.9 million at December 31, 2019 and 2018,
respectively. The Company's net income, as determined using SAP, was $31.1 million, $65.1 million, and $43.5 million for the
years ended December 31, 2019, 2018, and 2017, respectively.
13. 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.
14. Share-Based Compensation
The Company maintains share-based compensation plans for key employees and outside, or non-employee, directors.
Effective May 4, 2017, the share-based compensation plan for key employees is the State Auto Financial Corporation 2017
Long-Term Incentive Plan (the “2017 LTIP”). The 2017 LTIP replaced the State Auto Financial Corporation 2009 Equity
Compensation Plan (the “2009 Equity Plan”). 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
performance stock awards, performance unit awards, restricted stock, and other stock based awards to employees and non-
employee directors. The expense for these equity-based incentives is based on their fair value at the date of grant and amortized
over their vesting period.
The Company has reserved 2.4 million common shares under the 2017 LTIP. As of December 31, 2019, a total of 1.8
million common shares are available for issuance under the 2017 LTIP. The 2017 LTIP provides that (i) the maximum value
of performance stock awards or performance unit awards settled in cash that may be granted in any calendar year is equal to the
excess of the number of awards multiplied by the fair market value of the company’s common shares on the applicable payment
or settlement date of the award multiplied by 5 and (ii) the maximum number of common shares subject to awards of
performance stock and performance units that may be granted in any calendar year to any one individual is 250,000 shares. The
2017 LTIP automatically terminates on May 4, 2027.
Restricted Stock and Performance Unit Awards
Service-based restricted stock awards granted to employees are 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
99
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
Company recognizes compensation expense based on the number of restricted shares granted at the then grant date fair value
over the Restriction Period. The Company recognizes forfeitures as they occur.
Awards with both service and performance conditions granted to employees are subject to (i) the Restriction Period, and
(ii) the achievement of predetermined performance goals within specified time periods. All performance-based awards include a
specified number of units that will vest. The number of performance based awards that are ultimately earned for each grant is
dependent upon meeting specified target and performance goals that range from 0% to 500% of the target number of
performance units awarded based on the extent to which the Company achieves the performance goals for the performance
measures as set forth in a performance matrix established by the Compensation Committee.
Generally, service-based and performance-based equity awards are expensed pro-rata over their respective vesting periods
based on the market value of the awards at the time of grant. Performance-based equity awards that contain variable vesting
criteria are expensed based on management’s expectation of the percentage of the award that will ultimately be earned. These
estimates can change periodically throughout the measurement period.
The following table sets forth the Company’s total activity and related information for performance unit award activity
for the years ended December 31, 2019, 2018 and 2017:
2019
2018
2017
Weighted
Average
Grant
Date Fair
Value
27.47
33.67
27.65
29.59
29.37
Shares
356,400
$
130,680
(12,500)
(14,391)
460,189
$
Weighted
Average
Grant
Date Fair
Value
27.20
27.65
—
27.37
27.47
Shares
147,869
$
214,449
—
(15,918)
356,400
$
Weighted
Average
Grant
Date Fair
Value
—
27.20
—
27.20
27.20
Shares
— $
171,617
—
(23,748)
147,869
$
Outstanding, beginning of year
Granted
Vested
Forfeited
Outstanding, end of year
As of December 31, 2019, there was $5.9 million of total unrecognized compensation cost related to performance unit
awards. The remaining cost is expected to be recognized over a period of 1.01 years.
The following table sets forth the Company’s total activity and related information for service-based restricted stock
award activity for the years ended December 31, 2019, 2018 and 2017:
2019
2018
2017
Weighted
Average
Grant
Date Fair
Value
Shares
Shares
Outstanding, beginning of year
126,946
$
26.21
71,578
$
Granted
Vested
Forfeited
Outstanding, end of year
—
(58,801)
(211)
67,934
$
—
24.57
21.54
27.65
97,049
(37,644)
(4,037)
126,946
$
Weighted
Average
Grant
Date Fair
Value
22.44
27.65
22.88
24.82
26.21
Weighted
Average
Grant
Date Fair
Value
22.04
27.20
21.39
23.45
22.44
Shares
107,297
$
6,229
(26,271)
(15,677)
71,578
$
As of December 31, 2019, there was $0.7 million of total unrecognized compensation cost related to service-based
restricted stock awards. The remaining cost is expected to be recognized over a period of 0.81 years.
Stock Options
In accordance with the terms of the 2009 Equity Plan, options previously granted were all vested as of December 31,
2019 and must be exercised no later than ten years from the date of grant. If not exercised, outstanding options will expire in
2026.
The fair value of each stock option was 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 used historical data to
determine these assumptions
100
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The expected life of the options for employees represented 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 following table sets forth the Company’s stock option activity and related information for the years ended December
31, 2019, 2018 and 2017:
(millions, except per share amounts)
2019
2018
2017
Outstanding, beginning of year
Exercised
Canceled
Outstanding, end of year
Weighted-
Average
Exercise
Price
Options
Weighted-
Average
Exercise
Price
Options
Options
Weighted-
Average
Exercise
Price
1.0
$
(0.2)
—
0.8
$
18.50
16.45
17.07
19.18
1.7
$
(0.7)
—
1.0
$
19.22
20.08
25.17
18.50
2.5
$
(0.4)
(0.4)
1.7
$
20.63
19.38
28.96
19.22
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, 2019, 2018 and 2017, the total intrinsic value of stock options exercised was $4.5 million,
$7.2 million and $3.0 million, respectively.
The following table sets forth information pertaining to the total options outstanding and exercisable at December 31,
2019:
(Options in millions)
Options Outstanding
Options Exercisable
Range of Exercise Prices:
$10.01 – $20.00
$20.01 – $30.00
Total
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise
Price
Number
Weighted-
Average
Exercise
Price
Number
0.4
0.4
0.8
2.2 $
4.9
3.5 $
16.67
22.0
19.18
0.4
0.4
0.8
$
$
16.67
21.97
19.18
Aggregate intrinsic value for total options outstanding and exercisable at December 31, 2019 was $9.0 million,
respectively.
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 4.0 million common shares under this plan. As of December 31, 2019, a
total of 3.6 million common shares have been purchased under this plan. This plan remains in effect until terminated by the
Board of Directors.
101
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
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 six months after the date of
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 cash or common share distributions of their RSU awards
either (i) in a single lump sum payment, or (ii) in annual installment payments over a 5- or 10-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 10,000 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, 2026. The Company accounts for the RSU Plan as a liability plan. There were 18,837
RSUs, 23,080 RSUs, and 26,323 RSUs granted in 2019, 2018 and 2017, respectively.
During 2019 and 2018, common shares valued at approximately $1,217,996 and $110,256, respectively, were distributed
by the Company under the RSU Plan.
Share-based compensation expense recognized during 2019, 2018 and 2017 was $6.1 million, $11.1 million and $4.2
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, 2019, there
was $6.6 million of total unrecognized compensation cost related to compensation arrangements granted under the plans. The
remaining cost is expected to be recognized over a period of 0.98 years.
15. Net Earnings (Loss) Per Common Share
The following table sets forth the compilation of basic and diluted net earnings (loss) per common share for the years
ended December 31, 2019, 2018 and 2017:
(millions, except per share amounts)
Numerator:
Net earnings (loss) for basic net earnings per common share
Effect of dilutive share-based awards
Adjusted net earnings (loss) for dilutive net earnings (loss) per
common share
Denominator:
Weighted average shares for basic net earnings (loss) per common share
Effect of dilutive share-based awards
Adjusted weighted average shares for diluted net earnings (loss) per
common share
Basic net earnings (loss) per common share
Diluted net earnings (loss) per common share
2019
2018
2017
$
$
$
$
$
87.4
(1.1)
$
12.8
—
(17.8)
—
86.3
$
12.8
$
(17.8)
43.4
0.6
44.0
2.01
1.96
$
$
42.8
0.6
43.4
0.30
0.29
$
$
42.1
—
42.1
(0.42)
(0.42)
102
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following table sets forth the options to purchase shares of common stock and the restricted share units (“RSU
award”) provided to each outside director of the Company, that were not included in the computation of diluted earnings per
common share because the exercise price of the options, or awards, was greater than the average market price or their inclusion
would have been antidilutive for the years ended December 31, 2018 and 2017:
(millions)
Total number of antidilutive options and awards
2018
2017
0.1
0.5
16. Reportable Segments
The Company changed its reportable segments from four to three effective January 1, 2019. The exit from the specialty
insurance business resulted in the elimination of specialty insurance as a reportable segment. Specialty results, labeled as
"specialty run-off," are included in the tables below to enable reconciliation to total underwriting results.
The three remaining reportable segments are: personal insurance, commercial insurance, and investment operations. The
reportable insurance segments are business units managed separately because of the differences in the type of customers they
serve, the products they provide or services they offer.
The personal insurance segment primarily provides personal automobile and homeowners to the personal insurance
market. The commercial insurance segment primarily provides commercial automobile, commercial multi-peril, fire & allied,
general liability, workers’ compensation insurance covering small-to-medium sized commercial exposures in the commercial
insurance market. In addition, the commercial insurance segment provides farm & ranch insurance.
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, managed by Stateco, provides investment services and is evaluated based on
investment returns of assets. Asset information by segment is not reported for the insurance segments because the Company
does not produce such information internally.
The Company’s reportable insurance segments, and the products within each, are as follows:
• Personal Insurance Segment- personal auto, homeowners, and other personal
• Commercial Insurance Segment - commercial auto, small commercial package, middle market commercial,
workers’ compensation, farm & ranch, and other commercial
103
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
The following table sets forth financial information regarding the Company’s reportable segments for the years ended
December 31, 2019, 2018 and 2017:
($ millions)
Revenues from external sources:
Insurance operations
Personal insurance
Commercial insurance
Specialty run-off
Total insurance operations
Investment operations segment
Net investment income
Net investment gain (loss)
Total investment operations
All other
Total revenues from external sources
Intersegment revenues
Total revenues
Reconciling items:
Eliminate intersegment revenues
Total consolidated revenue
Segment (loss) income before federal income taxes:
Insurance operations SAP underwriting (loss) gain
Personal insurance
Commercial insurance
Specialty run-off
Total insurance operations
Investment operations segment:
Net investment income
Net investment gain (loss)
Total investment operations
All other
Reconciling items:
GAAP adjustments
Interest expense on corporate debt
Corporate expenses
Total reconciling items
Total consolidated income before federal income taxes
$
$
$
$
$
2019
2018
2017
$
759.2
488.7
5.1
1,253.0
80.4
74.2
154.6
2.4
1,410.0
6.5
1,416.5
673.9
464.3
99.8
1,238.0
84.9
(49.7)
35.2
2.6
1,275.8
6.5
1,282.3
(6.5)
1,410.0
$
(6.5)
1,275.8
$
$
$
(39.8) $
(0.1)
(10.7)
(50.6)
80.4
74.2
154.6
0.3
14.7
(4.9)
(7.1)
2.7
107.0
$
$
3.3
(8.4)
0.4
(4.7)
84.9
(49.7)
35.2
0.4
(3.7)
(5.7)
(8.6)
(18.0) $
$
12.9
580.6
455.7
239.8
1,276.1
78.8
65.1
143.9
2.3
1,422.3
6.0
1,428.3
(6.0)
1,422.3
(23.0)
(10.6)
(56.0)
(89.6)
78.8
65.1
143.9
0.6
(9.9)
(5.9)
(4.1)
(19.9)
35.0
The following table sets forth financial information regarding the Company’s reportable segments at December 31, 2019
and 2018:
($ millions)
Segment assets:
2019
2018
Investment operations segment
Total segment assets
$
2,747.3
$
2,747.3
2,658.7
2,658.7
Reconciling items:
Corporate assets
238.1
237.2
Total consolidated assets
$
2,985.4
$
2,895.9
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.
104
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
17. Quarterly Financial Data (unaudited)
The following tables set forth quarterly financial data for 2019 and 2018:
($ millions, except per share amounts)
Total revenues
Income (loss) before federal income taxes
Net income (loss)
Income (loss) per common share:
Basic
Diluted
Total revenues
(Loss) income before federal income taxes
Net (loss) income
(Loss) earnings per common share:
Basic
Diluted
18. Contingencies
$
$
$
$
$
$
March 31
367.6
61.6
49.4
1.14
1.12
March 31
323.7
(3.3)
(2.1)
$
$
$
$
2019
For three months ended
June 30
September 30
334.5
$
12.7
11.5
December 31
367.8
$
40.3
32.7
340.1
(7.6)
(6.2)
(0.14) $
(0.14) $
0.26
0.25
$
$
0.75
0.72
2018
For three months ended
June 30
September 30
346.0
$
41.0
33.4
341.7
7.7
6.0
(0.05) $
(0.05) $
0.14
0.14
$
$
0.78
0.76
December 31
264.4
(32.5)
(24.5)
(0.57)
(0.57)
$
$
$
In accordance with the Contingencies Topic of the Financial Accounting Standards Board’s Accounting Standards
Codification, 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. The Company reviews all litigation on an ongoing basis when making accrual and
disclosure decisions. For certain legal proceedings, the Company cannot reasonably estimate losses or a range of loss, if any,
particularly for proceedings that are in their early stages of development or where the plaintiffs seek indeterminate
damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of
important factual questions, may need to be determined before probability can be established or before a loss or range of loss
can be reasonably estimated. If the loss contingency in question is not both probable and reasonably estimable, the Company
does not establish an accrual and the matter will continue to be monitored for any developments that would make the loss
contingency both probable and reasonably estimable. Based on currently available information known to the Company, it
believes that its reserves for litigation-related liabilities are reasonable. However, in the event that a legal proceeding results in a
substantial judgment against, or settlement by, the Company, there can be no assurance that any resulting liability or financial
commitment would not have a material adverse effect on the financial condition, results of operations or cash flows of the
consolidated financial statements of the Company.
The Company is involved in lawsuits in the ordinary course of its business arising out of or otherwise related to its
insurance policies. Additionally, from time to time the Company may be involved in lawsuits, including class actions, in the
ordinary course of business but not arising out of or otherwise related to its insurance policies. These lawsuits are in various
if
stages of development. The Company generally will contest
appropriate. 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 position or cash flows.
these matters vigorously but may pursue settlement
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
results of operations or have a material adverse effect on its consolidated financial position or cash flows.
105
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Information concerning the change in our independent registered public accounting firm from Ernst & Young LLP to
PricewaterhouseCoopers LLP for 2020 was previously reported on a Form 8-K filed with the SEC on September 3, 2019, which
information will be supplemented pursuant to a Form 8-K/A to be filed with the SEC at the conclusion of the Ernst & Young
LLP engagement.
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) 2013
framework to evaluate the effectiveness of our internal control over financial reporting. Our management believes
that the COSO 2013 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,
2019, 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 report 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
Not applicable.
106
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 the 2020 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 this Form 10-K, which information is also
incorporated by reference into this Item 10.
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act. As of February 27, 2020, the members of our Audit Committee were Eileen A. Mallesch, Kym M. Hubbard,
David R. Meuse and Setareh Pouraghabagher. Ms. Pouraghabagher is Chairperson of our Audit Committee. Our Board of
Directors has determined that Ms. Mallesch and Ms. Pouraghabagher are both 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 “Ownership of Equity Securities of the Company—Section 16(a) Beneficial Ownership
Reporting Compliance” in the 2020 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 and Board of Directors—Nomination of Directors” in the 2020 Proxy
Statement. There has been no material change to the nomination procedures previously disclosed in the proxy statement for our
2020 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
The 2020 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 “Corporate Governance and Board of
Directors—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 Matters—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 Matters—Compensation Committee Report of the
Fiscal Year Ended December 31, 2019” 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 “Ownership of Equity Securities of the Company” in the 2020 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 and Burn Rate” in the 2020 Proxy Statement, which information is
incorporated herein by reference.
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 the 2020 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 and Board of Directors—Directors—Director Independence” in the 2020 Proxy Statement,
which is incorporated herein by reference.
107
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 “Audit Committee Matters—Independent Registered Public Accounting Firm - Audit and Other Services Fees” in
our 2020 Proxy Statement, which information is incorporated herein by reference.
108
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, 2019 and 2018
Consolidated Statements of Income for each of the three years in the period ended December 31, 2019
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2019
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2019
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2019
Notes to Consolidated Financial Statements
(a)(2)
LISTING OF FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Company for the years 2019, 2018 and 2017 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.
(a)(3) LISTING OF EXHIBITS
Exhibit
No.
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
3.01
3.02
3.03
3.04
3.05
3.06
State Auto Financial Corporation’s Amended and
Restated Articles of Incorporation
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 3.01 therein)
State Auto Financial Corporation’s Amendment to
the Amended and Restated Articles of Incorporation
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
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 3.04 therein)
First Amendment to State Auto Financial
Corporation’s Amended and Restated Code of
Regulations
Second Amendment to State Auto Financial
Corporation’s Amended and Restated Code of
Regulations
Form 10-Q Quarterly Report for the period ended
September 30, 2010 (see Exhibit 3.05 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2016 (see Exhibit 3.01 therein)
4.01
Description of Securities
Included herein
109
Exhibit
No.
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
10.09
10.10
10.11
10.12
10.13
10.14
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Investment Management Agreement between
Stateco Financial Services, Inc. and State
Automobile Mutual Insurance Company, effective
April 1, 1993
First Amendment to the Investment Management
Agreement between Stateco Financial Services, Inc.
and State Automobile Mutual Insurance Company,
effective January 1, 2013
Amended and Restated Exhibit A to the Investment
Management Agreement between Stateco Financial
Services, Inc. and State Automobile Mutual
Insurance Company, effective January 1, 2013
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, 2012 (see Exhibit 10.09 therein)
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 10.10 therein)
Investment Management Agreement between
Stateco Financial Services, Inc. and Meridian
Security Insurance Company, effective June 1, 2001
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.17 therein)
Amended and Restated Exhibit A to the Investment
Management Agreement between Stateco Financial
Services, Inc. and Meridian Security Insurance
Company, effective January 1, 2013
Investment Management Agreement between
Stateco Financial Services, Inc. and Midwest
Security Insurance Company effective January 1,
1997
Amended and Restated Exhibit A to the Investment
Management Agreement between Stateco Financial
Services, Inc. and Midwest Security Insurance
Company, effective January 1, 2013
Investment Management Agreement between
Stateco Financial Services, Inc. and Meridian
Citizens Mutual Insurance Company effective June
1, 2001
Amended and Restated Exhibit A to the Investment
Management Agreement between Stateco Financial
Services, Inc. and Meridian Citizens Mutual
Insurance Company, effective January 1, 2013
Amended and Restated Investment Management
Agreement dated as of 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
Investment Management Agreement between
Stateco Financial Services, Inc. and Plaza Insurance
Company effective October 1, 2010
Amended and Restated Exhibit A to the Investment
Management Agreement between Stateco Financial
Services, Inc. and Plaza Insurance Company,
effective January 1, 2013
Investment Management Agreement between
Stateco Financial Services, Inc. and Rockhill
Insurance Company effective October 1, 2010
Amended and Restated Exhibit A to the Investment
Management Agreement between Stateco Financial
Services, Inc. and Rockhill Insurance Company,
effective January 1, 2013
110
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 10.12 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, 2012 (see Exhibit 10.15 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.20 therein)
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 10.17 therein)
Form 10-K Annual Report for the year ended
December 31, 2007 (see Exhibit 10.22 therein)
Form 10-K Annual Report for year ended
December 31, 2010 (see Exhibit 10.26 therein)
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 10.22 therein)
Form 10-K Annual Report for year ended
December 31, 2010 (see Exhibit 10.27 therein)
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 10.24 therein)
Exhibit
No.
10.15
10.16
10.17
10.18
10.19
10.20
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 10-K Annual Report for year ended
December 31, 2010 (see Exhibit 10.28) therein)
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 10.26 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.45 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2015 (see Exhibit 10.01 therein)
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.26 therein)
Form 10-Q Quarterly Report for the period ended
March 31, 2018 (see Exhibit 10.01 therein)
Investment Management Agreement between
Stateco Financial Services, Inc. and American
Compensation Insurance Company and
Bloomington Compensation Insurance Company
effective October 1, 2010
Amended and Restated Exhibit A to the Investment
Management Agreement between Stateco Financial
Services, Inc. and American Compensation
Insurance Company and Bloomington
Compensation Insurance Company, effective
January 1, 2013
Midwest Security Insurance Company Management
Agreement amended and restated as of January 1,
2000 by and among State Automobile Mutual
Insurance Company, State Auto Property and
Casualty Insurance Company and Midwest Security
Insurance Company (nka State Auto Insurance
Company of Wisconsin)
Management and Operations Agreement, Amended
and Restated as of January 1, 2015 by and among
State Automobile Mutual Insurance Company, State
Auto Financial Corporation, State Auto Property
and Casualty Insurance Company,
State Auto Insurance Company of Ohio, Milbank
Insurance Company, Meridian Security Insurance
Company, Patrons Mutual Insurance Company,
Stateco Financial Services, Inc., 518 Property
Management and Leasing, LLC, State Auto
Holdings, Inc., Facilitators, Inc., CDC Holding,
Inc., Partners General Insurance Agency, LLC, and
Network E&S Brokers, LLC
First Amendment, effective as of September 5 ,
2017, to the Management and Operations
Agreement, Amended and Restated as of January 1,
2015 by and among State Automobile Mutual
Insurance Company, State Auto Financial
Corporation, State Auto Property and Casualty
Insurance Company, State Auto Insurance
Company of Ohio, Milbank Insurance Company,
Meridian Security Insurance Company, Patrons
Mutual Insurance Company, Stateco Financial
Services, Inc., 518 Property Management and
Leasing, LLC, State Auto Holdings, Inc.,
Facilitators, Inc., Partners General Insurance
Agency, LLC, Network E&S Brokers, LLC, and
State Auto Labs Corp.
Second Amendment, effective as of March 1, 2018,
to the Management and Operations Agreement,
Amended and Restated as of January 1, 2015 by
and among State Automobile Mutual Insurance
Company, State Auto Financial Corporation, State
Auto Property and Casualty Insurance Company,
State Auto Insurance Company of Ohio, Milbank
Insurance Company, Meridian Security Insurance
Company, Patrons Mutual Insurance Company,
Stateco Financial Services, Inc., 518 Property
Management and Leasing, LLC, State Auto
Holdings, Inc., Facilitators, Inc., Network E&S
Brokers, LLC, and State Auto Labs Corp.
111
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 10-Q Quarterly Report for the period ended
September 30, 2009 (see Exhibit 10.01 therein)
Form 10-K Annual Report for the year ended
December 31, 2012 (see Exhibit 10.35 therein)
Form 8-K Current Report filed on November 25,
2009 (see Exhibit 10.1 therein)
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, 2012 (see Exhibit 10.39 therein)
Exhibit
No.
10.21
10.22
10.23
10.24
10.25
Description of Exhibit
Consulting Services Agreement dated as of
November 1, 2009, by and between State
Automobile Mutual Insurance Company, State
Auto Property & Casualty Insurance Company,
Meridian Security Insurance Company, Meridian
Citizens Mutual Insurance Company, Farmers
Casualty Insurance Company, Milbank Insurance
Company, and RTW, Inc.
Amended and Restated Appendix B , effective as of
January 1, 2013, to the Consulting Service
Agreement, dated as of November 1, 2009, by and
between State Automobile Mutual Insurance
Company, State Auto Property & Casualty
Insurance Company, Meridian Security Insurance
Company, Meridian Citizens Mutual Insurance
Company, Farmers Casualty Insurance Company,
Milbank Insurance Company, and RTW, Inc.
Underwriting Management Agreement effective as
of November 20, 2009, by and between Rockhill
Insurance Company, Plaza Insurance Company,
American Compensation Insurance Company,
Bloomington Compensation Insurance Company,
State Automobile Mutual Insurance Company, State
Auto Property & Casualty Insurance Company,
Meridian Security Insurance Company, Milbank
Insurance Company, Farmers Casualty Insurance
Company, and Risk Evaluation and Design, LLC
Amended and Restated Management and
Operations Agreement, effective as of January 1,
2011, by and among State Auto Property &
Casualty Insurance Company, State Automobile
Mutual Insurance Company, Rockhill Insurance
Company, Plaza Insurance Company, American
Compensation Insurance Company, Bloomington
Compensation Insurance Company, Rockhill
Holding Company, National Environmental
Coverage Corporation of the South, LLC, National
Environmental Coverage Corporation, RTW, Inc.,
Rockhill Insurance Services, LLC and Rockhill
Underwriting Management, LLC.
First Amendment, effective as of January 1, 2013,
to Amended and Restated Management and
Operations Agreement, effective as of January 1,
2011 by and among State Auto Property & Casualty
Insurance Company, State Automobile Mutual
Insurance Company, Rockhill Insurance Company,
Plaza Insurance Company, American Compensation
Insurance Company, Bloomington Compensation
Insurance Company, Rockhill Holding Company,
National Environmental Coverage Corporation of
the South, LLC, National Environmental Coverage
Corporation, RTW, Inc., Rockhill Insurance
Services, LLC and Rockhill Underwriting
Management, LLC.
112
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)
Form 10-K Annual Report for year ended
December 31, 2011 (see Exhibit 10.45 therein)
Form 10-Q Quarterly Report for the period ended
March 31, 2013 (see Exhibit 10.1 therein)
Form 10-Q Quarterly Report for the period ended
September 30, 2014 (see Exhibit 10.01 therein)
Exhibit
No.
10.26
10.27
10.28
10.29
Description of Exhibit
Reinsurance Pooling Agreement Amended and
Restated as of January 1, 2011, entered into as of
January 3, 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 Insurance Company, Meridian Security
Insurance Company, Meridian Citizens Mutual
Insurance Company, Patrons Mutual Insurance
Company of Connecticut, Litchfield Mutual Fire
Insurance Company, Beacon National Insurance
Company, Rockhill Insurance Company, Plaza
Insurance Company, American Compensation
Insurance Company and Bloomington
Compensation Insurance Company
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 Insurance
Company, Meridian Security Insurance Company,
Meridian Citizens Mutual Insurance Company,
Patrons Mutual Insurance Company of Connecticut,
Litchfield Mutual Fire Insurance Company, Beacon
National Insurance Company, Rockhill Insurance
Company, Plaza Insurance Company, American
Compensation Insurance Company and
Bloomington Compensation Insurance Company
Second Amendment, effective March 31, 2013, 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, State Auto Insurance
Company of Ohio, Meridian Security Insurance
Company, Meridian Citizens Mutual Insurance
Company, Patrons Mutual Insurance Company of
Connecticut, Rockhill Insurance Company, Plaza
Insurance Company, American Compensation
Insurance Company and Bloomington
Compensation Insurance Company
Third Amendment, effective July 1, 2014, 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, State Auto Insurance
Company of Ohio, Meridian Security Insurance
Company, Patrons Mutual Insurance Company of
Connecticut, Rockhill Insurance Company, Plaza
Insurance Company, American Compensation
Insurance Company and Bloomington
Compensation Insurance Company
10.30
Amended and Restated Declaration of Trust of
STFC Capital Trust I, dated as of May 22, 2003
Form 10-Q Quarterly Report for the period ended
June 30, 2003 (see 10(XX) therein)
113
Exhibit
No.
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41*
10.42*
10.43*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Indenture dated as of May 22, 2003, for Floating
Rate Junior Subordinated Debt Securities Due 2033
Form 10-Q Quarterly Report for the period ended
June 30, 2003 (see 10(YY) therein)
Form 8-K Current Report filed on May 26, 2009
(see Exhibit 10.1 therein)
Form 8-K Current Report filed May 8, 2019 (see
Exhibit 10.02 therein)
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.1 therein)
Form 8-K Current Report filed May 8, 2019 (see
Exhibit 10.01 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2013 (see Exhibit 10.02 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2013 (see Exhibit 10.03 therein)
Form 10-Q Quarterly Report for the period ended
September 30, 2016 (see Exhibit 10.01 therein)
Form 8-K Current Report filed on April 2, 2019
(see Exhibit 10.01 therein)
Form 8-K Current Report filed on May 23, 2018
(see Exhibit 10.1 therein)
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.42 therein)
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.43 therein)
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.44 therein)
Credit Agreement dated as of May 19, 2009,
between State Automobile Mutual Insurance
Company, as borrower, and Milbank Insurance
Company, as lender
Addendum, effective May 19, 2019, to the Credit
Agreement dated as of May 19, 2009, between
Milbank Insurance Company and State Automobile
Mutual Insurance Company
Credit Agreement dated as of May 8, 2009, between
State Automobile Mutual Insurance Company, as
borrower, and State Auto Property & Casualty, as
lender
Addendum, effective May 8, 2019, to the Credit
Agreement dated as of May 8, 2009, between State
Auto Property & Casualty Insurance Company and
State Automobile Mutual Insurance Company
Blanket Security Agreement effective February 15,
2013 between State Auto Property & Casualty
Insurance Company and Federal Home Loan Bank
of Cincinnati
Insurance Company Member Addendum to Blanket
Security Agreement effective February 15, 2013
between State Auto Property & Casualty Insurance
Company and Federal Home Loan Bank of
Cincinnati
Application for Callable Advance signed September
2, 2016 by State Auto Property & Casualty
Insurance Company with respect to Blanket
Security Agreement effective February 15, 2013
between State Auto Property & Casualty Insurance
Company and Federal Home Loan Bank of
Cincinnati
Open Line of Credit Application dated as of April
2, 2019, between State Auto Property & Casualty
and Federal Home Loan Bank of Cincinnati.
Advance dated as of May 17, 2018, between State
Auto Property & Casualty and Federal Home Loan
Bank of Cincinnati.
Employment Agreement, dated as of November 28,
2017, commencing as of January 1, 2018, among
State Auto Financial Corporation, State Auto
Property & Casualty Insurance Company, State
Automobile Mutual Insurance Company and
Michael E. LaRocco
Executive Change of Control Agreement dated as
of October 26, 2017, 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 26, 2017, among State Auto Financial
Corporation, State Auto Property & Casualty
Insurance Company, State Automobile Mutual
Insurance Company and Gregory A. Tacchetti
114
Exhibit
No.
10.44*
10.45*
10.46*
10.47*
10.48*
10.49*
10.50*
10.51*
10.52*
10.53*
10.54*
10.55*
10.56*
10.57*
10.58*
10.59*
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
Executive Change of Control Agreement dated as
of November 28, 2017 among State Auto Financial
Corporation, State Auto Property & Casualty
Insurance Company, State Automobile Mutual
Insurance Company and Michael E. LaRocco
Executive Change of Control Agreement dated as
of October 26, 2017 among State Auto Financial
Corporation, State Auto Property & Casualty
Insurance Company, State Automobile Mutual
Insurance Company and Kim B. Garland
Executive Change of Control Agreement dated as
of October 26, 2017 among State Auto Financial
Corporation, State Auto Property & Casualty
Insurance Company, State Automobile Mutual
Insurance Company and Paul M. Stachura
Included herein
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.46 therein)
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.47 therein)
Form of Indemnification Agreement between State
Auto Financial Corporation and each of its directors
Form 8-K Current Report filed on November 20,
2008 (see Exhibit 99.1 therein)
Officer Indemnification Agreement dated as of
March 16, 2018, between State Auto Financial
Corporation and Michael E. LaRocco
Officer Indemnification Agreement dated as of
March 16, 2018, between State Auto Financial
Corporation and Paul M. Stachura
Officer Indemnification Agreement dated as of
March 16, 2018, between State Auto Financial
Corporation and Gregory A. Tacchetti
Form 8-K Current Report filed on March 22, 2018
(see Exhibit 10.1 therein)
Form 8-K Current Report filed on March 22, 2018
(see Exhibit 10.2 therein)
Form 8-K Current Report filed on March 22, 2018
(see Exhibit 10.3 therein)
Officer Indemnification Agreement dated as of May
8, 2009, between State Auto Financial Corporation
and Steven E. English
Form 8-K Current Report filed on May 13, 2009
(see Exhibit 10.3 therein)
State Auto Financial Corporation 2017 Long-Term
Incentive Plan
Form 10-Q Quarterly Report for the period ended
June 30, 2017 (see Exhibit 10.01 therein)
Form of PAU Award Agreement under the State
Auto Financial Corporation 2017 Long-Term
Incentive Plan
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.50 therein)
Form of Performance Unit Award Agreement under
the State Auto Financial Corporation 2017 Long-
Term Incentive Plan
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.51 therein)
Form of Time Based Restricted Stock Award
Agreement under the State Auto Financial
Corporation 2017 Long-Term Incentive Plan
Form of Time Based Deferred Stock Unit Award
Agreement under the State Auto Financial
Corporation 2017 Long-Term Incentive Plan
Form of Performance Based Deferred Stock Award
Agreement under the State Auto Financial
Corporation 2017 Long-Term Incentive Plan
Form of Performance Based Restricted Stock
Award Agreement under the State Auto Financial
Corporation 2017 Long-Term Incentive Plan
Amended and Restated Equity Incentive
Compensation Plan of State Auto Financial
Corporation
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.52 therein)
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.53 therein)
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.54 therein)
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 10.55 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2005 (see Exhibit 10.60 therein)
115
Exhibit
No.
10.60*
10.61*
10.62*
10.63*
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
Amendment Number 1 to the Amended and
Restated Equity Incentive Compensation Plan of
State Auto Financial Corporation (amendment
effective August 15, 2008)
Form of Non-Qualified Stock Option Agreement
under the Amended and Restated Equity Incentive
Compensation Plan of State Auto Financial
Corporation
Form of Incentive Stock Option Agreement under
the Amended and Restated Equity Incentive
Compensation Plan of State Auto Financial
Corporation
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.63 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2005 (see Exhibit 10.62 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2005 (see Exhibit 10.63 therein)
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
Amendment No. 2 to the 2009 Equity Incentive
Compensation Plan of State Auto Financial
Corporation
Amendment No. 3 to the 2009 Equity Incentive
Compensation Plan of State Auto Financial
Corporation
Amendment No. 4 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 6,
2014 between State Auto Financial Corporation and
Steven E. English
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of March 5,
2015 between State Auto Financial Corporation and
Steven E. English
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of May 7,
2015 between State Auto Financial Corporation and
Michael E. LaRocco
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of March 3,
2016 between State Auto Financial Corporation and
Michael E. LaRocco
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of March 3,
2016 between State Auto Financial Corporation and
Steven E. English
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of March 3,
2016 between State Auto Financial Corporation and
Jessica E. Clark
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of August
24, 2015 between State Auto Financial Corporation
and Kim B. Garland
116
Form 10-Q Quarterly Report for the period ended
June 30, 2011 (see Exhibit 10.01 therein)
Form 10-Q Quarterly Report for the period ended
September 30, 2013 (see Exhibit 10.01 therein)
Form 10-K Annual Report for the year ended
December 31, 2014 (see Exhibit 10.69 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2016 (see Exhibit 10.01 therein)
Form 10-Q Quarterly Report for the period ended
March 31, 2014 (see Exhibit 10.02 therein)
Form 8-K Current Report filed on May 13, 2015
(see Exhibit 10.02 therein)
Form 8-K Current Report filed on May 13, 2015
(see Exhibit 10.06 therein)
Form 10-Q Quarterly Report for the period ended
March 31, 2016 (see Exhibit 10.01 therein)
Form 10-Q Quarterly Report for the period ended
March 31, 2016 (see Exhibit 10.02 therein)
Form 10-Q Quarterly Report for the period ended
March 31, 2016 (see Exhibit 10.03 therein)
Form 10-Q Quarterly Report for the period ended
March 31, 2016 (see Exhibit 10.04 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*
10.87*
10.88*
10.89*
10.90*
Description of Exhibit
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of August
24, 2015 between State Auto Financial Corporation
and Kim B. Garland
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of March 3,
2016 between State Auto Financial Corporation and
Kim B. Garland
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of September
9, 2015 between State Auto Financial Corporation
and Paul M. Stachura
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of September
9, 2015 between State Auto Financial Corporation
and Paul M. Stachura
Restricted Stock Agreement under the 2009 Equity
Incentive Compensation Plan dated as of March 3,
2016 between State Auto Financial Corporation and
Paul M. Stachura
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 10-Q Quarterly Report for the period ended
March 31, 2016 (see Exhibit 10.05 therein)
Form 10-Q Quarterly Report for the period ended
March 31, 2016 (see Exhibit 10.06 therein)
Form 10-K Annual Report for the year ended
December 31, 2016 (see Exhibit 10.74 therein)
Form 10-K Annual Report for the year ended
December 31, 2016 (see Exhibit 10.75 therein)
Form 10-K Annual Report for the year ended
December 31, 2016 (see Exhibit 10.76 therein)
Outside Directors Restricted Share Unit Plan of
State Auto Financial Corporation
Form 10-Q Quarterly Report for the period ended
June 30, 2005 (see Exhibit 10.61 therein)
First Amendment to the Outside Directors
Restricted Share Unit Plan of State Auto Financial
Corporation
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 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 10.73 therein)
Form 10-K Annual Report for year ended
December 31, 2010 (see Exhibit 10.89 therein)
Outside Directors Restricted Share Unit Plan of
State Auto Financial Corporation
Form 10-Q Quarterly Report for the period ended
June 30, 2016 (see Exhibit 10.02 therein)
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
Employees of State Auto Insurance Companies
effective as of May 1, 2010
First Amendment to the Supplemental Retirement
Plan for Executive Employees of State Auto
Insurance Companies (amendment effective
December 1, 2010)
State Auto Financial Corporation Supplemental
Executive Retirement Plan, effective January 1,
2007
First Amendment to the State Auto Financial
Corporation Supplemental Executive Retirement
Plan effective December 1, 2010
Form 10-Q Quarterly Report for the period ended
June 30, 2005 (see Exhibit 10.64 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2005 (see Exhibit 10.65 therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2010 (see Exhibit 10.01 therein)
Form 10-K Annual Report for year ended
December 31, 2010 (see Exhibit 10.96 therein)
Form 10-Q Quarterly Report for the period ended
September 30, 2007 (see Exhibit 10.72 therein)
Form 10-K Annual Report for year ended
December 31, 2010 (see Exhibit 10.98 therein)
117
Exhibit
No.
10.91*
10.92*
10.93*
10.94*
10.95*
10.96*
10.97*
10.98*
10.99*
10.100*
10.101*
10.102*
10.103*
If incorporated by reference document with which Exhibit was
previously filed with SEC
Form 10-Q Quarterly Report for the period ended
September 30, 2007 (see Exhibit 10.73 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.58 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.59 therein)
Form 10-Q Quarterly Report for the period ended
September 30, 2008 (see Exhibit 10.02 therein)
Form 10-K Annual Report for the year ended
December 31, 2008 (see Exhibit 10.84 therein)
1933 Act Registration Statement No. 333-170564
on Form S-8 (see Exhibit 4(j) therein)
Form 10-Q Quarterly Report for the period ended
September 30, 2012 (see Exhibit 10.1 therein)
Form 10-K Annual Report for the year ended
December 31, 2005 (see Exhibit 10.60 therein)
Description of Exhibit
Form of Designation of Distribution Election for
the State Auto Financial Corporation Supplemental
Executive Retirement Plan
State Auto Insurance Companies Amended and
Restated Directors Deferred Compensation Plan
(amended and restated as of March 1, 2001)
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
Fifth Amendment to the State Auto Insurance
Companies Amended and Restated Directors
Deferred Compensation Plan effective January 1,
2012
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) regarding the State Auto
Insurance Companies Amended and Restated
Directors Deferred Compensation Plan
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
First Amendment to the State Auto Property &
Casualty Insurance Company Amended and
Restated Incentive Deferred Compensation Plan
(amendment effective July 1, 2010)
Second Amendment to the State Auto Property &
Casualty Insurance Company Amended and
Restated Incentive Deferred Compensation
Plan (amendment effective November 1, 2010)
Third Amendment to the State Auto Property &
Casualty Insurance Company Amended and
Restated Incentive Deferred Compensation
Plan (amendment effective January 1, 2011)
1933 Act Registration Statement No. 333-165366
on Form S-8 (see Exhibit 4(e) therein)
Form 10-Q Quarterly Report for the period ended
June 30, 2010 (see Exhibit 10.02 therein)
1933 Act Registration Statement No. 333-170568
on Form S-8 (see Exhibit 4(h) therein)
Form 10-K Annual Report for year ended
December 31, 2011 (see Exhibit 10.109 therein)
10.104*
State Auto Financial Corporation One Team
Incentive Plan
Form 10-Q Quarterly Report for the period ended
June 30, 2016 (see Exhibit 10.03 therein)
118
Exhibit
No.
21.01
23.01
24.01
Description of Exhibit
If incorporated by reference document with which Exhibit was
previously filed with SEC
List of Subsidiaries of State Auto Financial
Corporation
Consent of Independent Registered Public
Accounting Firm
Included herein
Included herein
Powers of Attorney - Robert E. Baker, Michael J.
Fiorile, Kym M. Hubbard, Eileen A. Mallesch,
David R. Meuse and S. Elaine Roberts
Form 10-K Annual Report for year ended
December 31, 2016 (see Exhibit 24.01 therein)
24.02
Power of Attorney- Setareh Pouraghabagher
Form 10-K Annual Report for the year ended
December 31, 2017 (see Exhibit 24.02 therein)
31.01
31.02
32.01
32.02
CEO certification required by Section 302 of
Sarbanes-Oxley Act of 2002
CFO certification required by Section 302 of
Sarbanes-Oxley Act of 2002
CEO certification required by Section 906 of
Sarbanes-Oxley Act of 2002
CFO certification required by Section 906 of
Sarbanes-Oxley Act of 2002
101.INS
The instance document does not appear in the
interactive data file because its XBRL tags are
embedded within
Included herein
Included herein
Included herein
Included herein
101.SCH XBRL Taxonomy Extension Schema Document
Included herein
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Document
Included herein
101.DEF
XBRL Taxonomy Definition Linkbase Document
Included herein
101.LAB
101.PRE
XBRL Taxonomy Extension Label Linkbase
Document
Included herein
XBRL Taxonomy Extension Presentation Linkbase
Document
Included herein
*
Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit.
(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.
119
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: February 27, 2020
STATE AUTO FINANCIAL CORPORATION
/s/ Michael E. LaRocco
Michael E. LaRocco
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
/s/ Michael E. LaRocco
Michael E. LaRocco
Chairman, President and Chief Executive Officer
(principal executive officer)
Date
February 27, 2020
February 27, 2020
/s/ Steven E. English
Steven E. English
/s/ Matthew R. Pollak
Matthew R. Pollak
Robert E. Baker*
Robert E. Baker
Michael J. Fiorile*
Michael J. Fiorile
Kym M. Hubbard*
Kym M. Hubbard
Eileen A. Mallesch*
Eileen A. Mallesch
David R. Meuse*
David R. Meuse
Setareh Pouraghabagher*
Setareh Pouraghabagher
S. Elaine Roberts*
S. Elaine Roberts
Senior Vice President and Chief Financial Officer
(principal financial officer)
Vice President, Treasurer and Chief Accounting Officer
(principal accounting officer)
February 27, 2020
Director
Director
Director
Director
Director
Director
Director
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
*
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
Steven E. English
Attorney in Fact
February 27, 2020
120
EXHIBIT 21.01
List of Subsidiaries of
State Auto Financial Corporation
State Auto Property and Casualty Insurance Company, an Iowa corporation
Stateco Financial Services, Inc., an Ohio corporation
Milbank Insurance Company, an Iowa corporation
State Auto Insurance Company of Ohio, an Ohio corporation
518 Property Management and Leasing, LLC, an Ohio limited liability company
EXHIBIT 23.01
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
1. Registration Statement (Form S-8, No. 33-44667 and 33-89400) pertaining to the 1991 Stock Option Plan
2. Registration Statement(Form S-8, No. 33-44666) pertaining to the 1991 Directors’ Stock Option Plan
3. Registration Statement (Form S-8, No. 33-41423, 333-05755, 333-147333, 333-206148, and 333-233012) pertaining
to the 1991 Employee Stock Purchase and Dividend Reinvestment Plan
4. Registration Statement (Form S-8, No. 333-43882) pertaining to the 2000 Directors’ Stock Option Plan
5. Registration Statement (Form S-8, No. 333-43880) pertaining to the 2000 Stock Option Plan
6. Registration Statement (Form S-3, No. 333-41849 and 333-209878) pertaining to the Monthly Stock Purchase Plan for
Independent Agents
7. Registration Statement (Form S-3, No. 333-90529) pertaining to the 1998 State Auto Agents’ Stock Option Plan
8. Registration Statement (Form S-8, No. 333-127172) pertaining to the 2005 Outside Directors Restricted Share Unit
Plan
9. Registration Statement (Form S-8, No. 333-165364, 333-192158, and 333-214472) pertaining to the State Auto
Financial Corporation 2009 Equity Incentive Compensation Plan
10. Registration Statement (Form S-8, No. 333-165366 and 333-170568) pertaining to the State Auto Property & Casualty
Insurance Company Amended and Restated Incentive Deferred Compensation Plan
11. Registration Statement (Form S-8, No. 333-170564) pertaining to the State Auto Property & Casualty Insurance
Company Amended and Restated Directors Deferred Compensation Plan,
12. Registration Statement (Form S-8, No. 333-214471) pertaining to the Outside Directors Restricted Share Unit Plan of
State Auto Financial Corporation, and
13. Registration Statement (Form S-8, No. 333-223305) pertaining to the 2017 Long-Term Incentive Plan;
of our reports dated February 27, 2020, 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 included in this Annual Report (Form 10-K) of State Auto Financial Corporation for the year ended
December 31, 2019.
/s/ Ernst & Young LLP
Grandview Heights, Ohio
February 27, 2020
I, Michael E. LaRocco, certify that:
CERTIFICATION
EXHIBIT 31.01
1.
2.
3.
4.
I have reviewed this Form 10-K of State Auto Financial Corporation;
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;
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;
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.
b.
c.
d.
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;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
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
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.
b.
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
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: February 27, 2020
/s/ Michael E. LaRocco
Michael E. LaRocco, Chief Executive Officer
Chief Executive Officer
(Principal Executive Officer)
I, Steven E. English, certify that:
CERTIFICATION
EXHIBIT 31.02
1.
2.
3.
4.
I have reviewed this Form 10-K of State Auto Financial Corporation;
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;
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;
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.
b.
c.
d.
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;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
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
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.
b.
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
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: February 27, 2020
/s/ Steven E. English
Steven E. English,
Chief Financial Officer
(Principal Financial Officer)
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, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael E.
LaRocco, 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/ Michael E. LaRocco
Michael E. LaRocco
Chief Executive Officer
February 27, 2020
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.
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, 2019, 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
February 27, 2020
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.
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:
2019
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
Dividend
$34.75
$36.45
$35.04
$34.99
$28.10
$28.46
$32.11
$30.33
$0.10
$0.10
$0.10
$0.10
High
Low
Dividend
$35.05
$32.96
$34.31
$30.40
$28.75
$28.57
$27.59
$25.92
$0.10
$0.10
$0.10
$0.10
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 Regrading Forward-
Looking Statements” preceding Part I of the Company’s Annual
Report on Form 10-K for the fiscal year ended Dec.31, 2019,
which is included with this Annual Report.
Annual Meeting
11 a.m. ET Friday, May 8, 2020,
at Corporate Headquarters
Shareholder Inquiries
Natalie Schoolcraft
Director of Investor Relations
State Auto Financial Corporation
518 E. Broad St.
Columbus, Ohio 43215
Phone (614) 917-4341
Fax (614) 887-1640
Natalie.Schoolcraft@StateAuto.com
Independent Auditors
Ernst & Young LLP
800 Yard St., Ste. 200
Grandview Heights, Ohio 43212
Legal Counsel
Baker & Hostetler LLP
200 Civic Center Dr., Ste. 1200
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.computershare.com/investor
Stock Trading
Common shares are traded in the Nasdaq Global Select
National Market System uder the symbol STFC. As of
Feb. 21, 2020, there were 1,010 shareholders of the
Company’s common shares.
®
STATE AUTO FINANCIAL CORPORATION ANNUAL REPORT
STATE AUTO FINANCIAL CORPORATION
STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY
MILBANK INSURANCE COMPANY
STATE AUTO INSURANCE COMPANY OF OHIO
STATECO FINANCIAL SERVICES INC.
518 PROPERTY MANAGEMENT & LEASING LLC
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
STATE AUTO INSURANCE COMPANY OF WISCONSIN
MERIDIAN SECURITY INSURANCE COMPANY
PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT
ROCKHILL INSURANCE COMPANY
PLAZA INSURANCE COMPANY
AMERICAN COMPENSATION INSURANCE COMPANY
BLOOMINGTON COMPENSATION INSURANCE COMPANY
STATE AUTO FINANCIAL CORPORATION
518 E. BROAD ST.
COLUMBUS, OH 43215
STATEAUTO.COM