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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017 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
STFCGRAPHICA01.JPG
STATE AUTO FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
 
Ohio
 
31-1324304
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
518 East Broad Street, Columbus, Ohio
 
43215-3976
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(614) 464-5000
 
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
 
Accelerated filer ý
Non-accelerated filer ¨
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
Emerging growth company ¨
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, 2017, 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 $416,265,622.
On February 23, 2018, the Registrant had 42,668,535 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 11, 2018 (the “2018 Proxy Statement”), which will be filed within 120 days of December 31, 2017, 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, 2017
Form 10-K
Item
Description
Page
Part I
1
8
 
 
15
 
1A
16
 
1B
27
 
2
27
 
3
27
 
4
27
Part II
5
28
 
6
30
 
7
30
 
7A
72
 
8
72
 
 
73
 
9
121
 
9A
121
 
9B
121
Part III
10
122
 
 
 
 
 
11
122
 
12
122
 
13
122
 
14
123
Part IV
15
124
 
 
136

2



IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical facts, included in this Annual Report on Form 10-K (this “Form 10-K”) of State Auto Financial Corporation (“State Auto Financial” or “STFC”) or incorporated herein by reference, including, without limitation, statements regarding State Auto Financial’s future financial position, business strategy, budgets, projected costs, goals and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. Forward-looking statements speak only as the date the statements were made. Although State Auto Financial believes that the expectations reflected in forward-looking statements have a reasonable basis, it can give no assurance that these expectations will prove to be correct. Forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. For a discussion of the most significant risks and uncertainties that could cause State Auto Financial’s actual results to differ materially from those projected, see “Risk Factors” in Item 1A of this Form 10-K. Except to the limited extent required by applicable law, State Auto Financial undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3



IMPORTANT DEFINED TERMS USED IN THIS FORM 10-K
Glossary of Terms for State Auto Financial Corporation and Its Subsidiaries and Affiliates
 
 
 
State Auto Financial or STFC
 
Refers to our holding company, State Auto Financial Corporation.
 
 
 
We, us, our or the Company
 
Refers to STFC and its consolidated subsidiaries, namely State Auto Property & Casualty Insurance Company (“State Auto P&C”), Milbank Insurance Company (“Milbank”), State Auto Insurance Company of Ohio (“SA Ohio”), and Stateco Financial Services, Inc. (“Stateco”).
 
 
 
State Auto Mutual
 
Refers to State Automobile Mutual Insurance Company, which owns approximately 61.2% 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 Insurance Group
 
Refers to Rockhill Holding Company, its insurance subsidiaries, namely RIC, Plaza, American Compensation and Bloomington Compensation, and its other non-insurance subsidiaries, including RTW, Inc. (“RTW”), a holding company that owns 100% of American Compensation and Bloomington Compensation.
 
 
 
Rockhill Insurers
 
Refers to RIC, Plaza, American Compensation and Bloomington Compensation.
 
 
 
State Auto Group
 
Refers to the Pooled Companies

4



Glossary of Selected Insurance and Accounting Terms
 
 
 
Accident year
 
The calendar year in which loss events occur, regardless of when the losses are actually reported, booked or paid.
 
 
 
Accounting standards codification or ASC
 
The Codification is the single source of authoritative nongovernmental GAAP developed by the Financial Accounting Standards Board (“FASB”).
 
 
 
Admitted insurer
 
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.
 
 
 
American Institute of Certified Public Accountants or AICPA
 
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.
 
 
 
Allocated loss adjustment expenses or ALAE
 
The costs that can be related to a specific claim, which may include attorney fees, external claims adjusters and investigation costs, among others.
 
 
 
Book value per share
 
Total common stockholders’ equity divided by the number of common shares outstanding.
 
 
 
Catastrophe loss
 
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.
 
 
 
Combined ratio
 
The sum of the loss and LAE ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
 
 
 
Debt to capital ratio
 
The ratio of notes payable to the sum of total stockholders’ equity and notes payable.
 
 
 
Deferred acquisition costs or DAC
 
Expenses that vary with, and are primarily related to, the production 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.
 
 
 
Direct written premiums
 
The amounts charged by an insurer to insureds in exchange for coverages provided in accordance with the terms of an insurance contract. The amounts exclude the impact of all reinsurance premiums, either assumed or ceded.
 
 
 
Duration
 
A measure of the sensitivity of a financial asset’s price to interest rate movements.
 
 
 
Earned premiums or premiums earned
 
The portion of written premiums that applies to the expired portion of the policy term. Earned premiums are recognized as revenue under both SAP and GAAP.
 
 
 
Excess and surplus lines insurance
 
Specialized property and liability coverages written by non-admitted insurers. These coverages include exposures that do not fit within normal underwriting patterns, involve a degree of risk that is not commensurate with standard rates and/or policy forms, or are not written by admitted insurers because of general market conditions.
 
 
 
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.

5



 
 
 
Financial Accounting Standards Board or FASB
 
In the United States, a non-governmental body the SEC has charged with establishing and maintaining generally accepted standards for professional accountants.
Generally accepted accounting principles or GAAP
 
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
 
Estimated losses and LAE that have been incurred but not yet reported to the insurer. This includes amounts for unreported claims, development on known cases, and re-opened claims.
 
 
 
Loss adjustment expenses or LAE
 
The expenses of settling claims, including legal and other fees, and the portion of general expenses allocated to claim settlement. LAE is comprised of ALAE and ULAE.
 
 
 
Loss and LAE ratio or loss ratio
 
For both SAP and GAAP, it is the ratio of incurred losses and LAE to earned premiums.
 
 
 
Loss reserves
 
Liabilities established by insurers and reinsurers to reflect the estimated cost of claims incurred that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance it has written. Reserves are established for losses and for LAE, and consist of case reserves and IBNR reserves.
 
 
 
Managing general underwriter or MGU
 
An independent insurance professional firm that acts as an intermediary between the insurer and retail agents, much like a wholesaler. MGUs frequently have binding authority to issue insurance policies on behalf of an insurer that fit into the underwriting guidelines provided by that insurer. MGUs typically are compensated by an override commission on the insurance coverages sold by their sub-agents.
 
 
 
National Association of Insurance Commissioners or NAIC
 
An organization of the insurance commissioners or directors of all 50 states, the District of Columbia and the five U.S. territories organized to promote consistency of regulatory practices and statutory accounting standards throughout the United States.
 
 
 
Net premiums written to surplus ratio or leverage ratio
 
A SAP calculation which measures statutory surplus available to absorb losses. This ratio is calculated by dividing the net statutory premiums written for a rolling twelve month period by the ending statutory surplus for the period. For example, a ratio of 1.5 means that for every dollar of surplus, the insurer wrote $1.50 in premiums.
 
 
 
Net written premiums
 
Direct written premiums plus assumed reinsurance premiums less ceded reinsurance premiums.
 
 
 
Non-admitted insurer or surplus lines carrier
 
An insurer that is not required to be licensed in a state but is allowed to do business in that state subject to certain regulatory oversight by that state’s insurance regulatory authority. Non-admitted insurers are not subject to most of the rate and form regulations imposed on admitted insurers because they write specialized property and liability coverages, also known as excess and surplus lines insurance, which allows them the flexibility to change coverages offered and rates charged without time constraints and financial costs associated with the filing process. As such, these insurers offer an opportunity for coverage for specialized exposures that otherwise might not be insurable.
 
 
 
Retail agent or retail agency
 
An independent insurance professional who represents, and acts as an intermediary for, admitted insurers, generally recommending, marketing and selling insurance products and services to insurance consumers.
 
 
 
Return on average equity
 
The percent derived by dividing net income by average total stockholders’ equity.
 
 
 
Risk-based capital or RBC
 
A measure adopted by the NAIC and state regulatory authorities for determining the minimum statutory capital and surplus requirements of insurers. Insurers having total adjusted capital less than that required by the RBC calculation will be subject to varying degrees of regulatory action depending on the level of capital inadequacy.
 
 
 

6



Standard insurance
 
Insurance which is typically written by admitted insurers. Our personal and business insurance segments are comprised of standard insurance.
 
 
 
Statutory accounting practices or SAP
 
The practices and procedures prescribed or permitted by state insurance regulatory authorities in the United States for recording transactions and preparing financial statements.
 
 
 
Statutory surplus
 
Under SAP, the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state to be recognized on the balance sheet prepared in accordance with SAP.
 
 
 
Unallocated loss adjustment expenses or ULAE
 
The costs incurred in settling claims, such as in-house processing costs, which cannot be associated with a specific claim.
 
 
 
Underwriting gain or loss
  
Under SAP, earned premiums less loss and LAE and underwriting expenses.
 
 
 
Unearned premiums
  
The portion of written premiums that applies to the unexpired portion of the policy term. Unearned premiums are not recognized as revenues under both SAP and GAAP.
 
 
 
Wholesale broker
  
An independent insurance professional who offers specialized insurance products and serves as an intermediary between a retail agent and an insurer, while typically having no contact with the insured. A wholesale broker may represent both admitted and non-admitted insurers, and may offer both standard and excess and surplus lines insurance.

7



PART I
Item 1. Business
State Auto Financial is an Ohio domiciled property and casualty insurance holding company incorporated in 1990. We are engaged in writing personal, business and specialty 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 61.2% 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 described in more detail below, we are exiting our excess and surplus lines specialty business, which will result in the elimination of our specialty insurance segment and its related underwriting results from the State Auto Group. We expect to cease writing this business by mid-2018. However, exposure to the risks underlying this business will continue as the premiums are earned through mid-2019.
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, commercial insurance and specialty insurance (collectively the “insurance segments”). These insurance segments are aligned consistent with the reporting lines to our principal operating decision makers. 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.
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
Specialty Insurance Segment - E&S property, E&S casualty and programs
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).

8



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 which include 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).
Marketing
We market our personal and commercial insurance through approximately 2,800 retail agencies. We view our retail agents as our primary customers, because they are in a position to recommend either our insurance products or those of a competitor to their customers. We strongly support the independent agency system and believe its maintenance is essential to our present and future success. We continually develop programs and procedures to enhance our agency relationships, including the following: regular travel by senior management and regional office staff to meet with agents in their home states; training opportunities; and incentives related to profit and growth. In addition, we share the cost of approved marketing with selected agencies.
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.
SPECIALTY INSURANCE
In contrast to standard insurance markets which are characterized by regulated products, uniform coverages and more predictable exposures, specialty risks, due to the nature of the particular risk or activities of the insured, often do not lend themselves to the strict, uniform underwriting criteria of standard insurers and require unique underwriting solutions. As a result, competition in the specialty markets focuses on expertise, flexibility and customer service.
During the second half of 2017, management undertook a review of strategic alternatives for our excess and surplus lines business, which constitutes all of the business, along with programs which was previously placed into run-off, within our specialty insurance segment, to determine whether or not this business was core to our ongoing business strategy. As a result of this review, management determined this business was not core to our strategy and decided to begin exiting the excess and surplus lines business either through a series of renewal right transactions or by placing lines of business into run-off. The impact of this decision, along with the run-off of the programs business, will result in the elimination of the specialty insurance segment and its related underwriting results from the State Auto Group. We expect to stop writing specialty business by the middle of 2018; however, exposure to the risks underlying this business will continue as the premiums are earned through mid-2019.
Because the specialty markets generally involve higher perceived insurance risks than those characteristic in the standard markets, through our specialty insurance segment we offer commercial coverages that require specialized product underwriting, claims handling and/or risk management services. We offer our specialty products through a distribution channel of retail agents and wholesale brokers, including program administrators and other specialty sources. Our specialty insurance products are written through our admitted and non-admitted insurers. Our units within the specialty insurance segment are Excess & Surplus (“E&S”) Property, Excess & Surplus (“E&S”) Casualty and programs.
Our E&S Property unit markets and underwrites specialized property exposures, primarily in the Gulf, Southeast and West regions of the United States with a focus on catastrophe exposed risks.  Individual risk catastrophe modeling, specialized underwriters, underwriting guidelines and specialized rating plans are leveraged.  In addition, catastrophe portfolio exposure management is utilized to produce the optimal portfolio of risk. Coverages offered by this unit are property and general liability.
Our E&S Casualty unit markets and underwrites commercial exposures that have unique insurance requirements. This includes difficult to place classes of commercial business, which may require customized rates and forms, along with customized insurance programs for specialty niche and homogeneous groups of exposures. Coverages offered by this unit may include commercial auto, healthcare, umbrella, property, and general liability.
Our Programs unit, in run-off since 2016, markets and distributes business through specialty program managers to whom we have outsourced underwriting and policy administration. Program business typically consists of homogeneous risks that require specialized underwriting and claims expertise. Accordingly, our program managers have specialized underwriting expertise in the particular risks covered by the program. Coverages offered through this unit included commercial auto, general liability, and property.

9



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 insurance segment 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.
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.”

10



GEOGRAPHIC DISTRIBUTION
The following table sets forth the geographic distribution of our direct written premiums for the year ended December 31, 2017:
State
% of Total
Ohio
9.0
%
Texas
8.7

Kentucky
6.2

California
4.8

Minnesota
4.2

Georgia
4.0

South Carolina
3.7

Tennessee
3.7

Indiana
3.6

Illinois
3.4

Maryland
3.2

Mississippi
3.2

North Carolina
3.1

Pennsylvania
3.1

All others (1)
36.1

Total
100.0
%
 
 
 
(1)
No other single state accounted for 3.0% or more of the total direct written premiums written in 2017.
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 IBNR. Loss reserves are management’s best estimate at a given point in time of what we expect to pay to settle all losses incurred as of the end of the accounting period, based on facts, circumstances and historical trends then known. During the loss settlement period, additional facts regarding individual claims may become known, and consequently, it often becomes necessary to revise our estimate of the liability. The results of our operations and financial condition could be impacted, perhaps significantly, in the future if our estimate of ultimate payments required to settle claims varies from the loss reserves currently recorded.
Loss reserves for reported losses are initially established on either a case-by-case or formula basis depending on the type and circumstances of the loss. The case-by-case reserve amounts are determined based on our reserving practices, which take into account the type of risk, the circumstances surrounding each claim and applicable policy provisions. The formula reserves are based on historical paid loss data for similar claims with provisions for 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.”

11



The following table sets forth our one-year development information on changes in the loss reserve for the years ended December 31, 2017, 2016 and 2015:
($ millions)
Year Ended December 31
  
2017
 
2016
 
2015
Beginning of Year:
 
 
 
 
 
Loss and loss expenses payable
$
1,181.6

 
$
1,053.0

 
$
983.2

Less: Reinsurance recoverable on losses and loss expenses payable
3.6

 
5.9

 
9.6

Net losses and loss expenses payable(1)
1,178.0

 
1,047.1

 
973.6

Provision for losses and loss expenses occurring:
 
 
 
 
 
Current year
964.9

 
915.4

 
852.8

Prior years(2) 
(46.6
)
 
27.0

 
10.0

Total
918.3

 
942.4

 
862.8

Loss and loss expense payments for claims occurring during:
 
 
 
 
 
Current year
445.2

 
417.8

 
421.5

Prior years
398.6

 
393.7

 
367.8

Total
843.8

 
811.5

 
789.3

End of Year:
 
 
 
 
 
Net losses and loss expenses payable
1,252.5

 
1,178.0

 
1,047.1

Add: Reinsurance recoverable on losses and loss expenses payable
3.1

 
3.6

 
5.9

Losses and loss expenses payable(3)
$
1,255.6

 
$
1,181.6

 
$
1,053.0

 
 
 
 
 
 
 
(1)
Includes net amounts assumed from affiliates of $630.9 million, $532.4 million, and $494.3 million at beginning of year 2017, 2016, and 2015, 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 $711.4 million, $630.9 million, and $532.4 million at end of year 2017, 2016, and 2015, respectively.
COMPETITION
The property and casualty insurance industry is highly competitive. We compete with numerous insurance companies, with varying size and financial resources. We compete in the personal and business insurance markets based on 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, making us a preferred business partner. In addition, because most of our retail agents and wholesale brokers represent more than one insurer, we face competition within each agency and broker.
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. Pursuant to these laws, all transactions within our holding company system affecting any insurance subsidiary within the State Auto Group must be fair and equitable. In addition, approval of the applicable state insurance commissioner is required prior to the consummation of transactions affecting the control of an insurer. The insurance laws of all the domiciliary states of the State Auto Group provide that no person may acquire direct or indirect control of a domestic insurer without obtaining the prior written approval of the state insurance commissioner for such acquisition.
In addition to being regulated by the insurance department of its state of domicile, each of our insurance companies is subject to supervision and regulation in the states in which we transact business. Such supervision and regulation relate to numerous aspects of an insurance company’s business operations and financial condition. The primary purpose of such supervision and regulation is to ensure financial stability of insurance companies for the protection of policyholders. The laws of the various states establish insurance departments with broad regulatory powers relative to granting and revoking licenses to transact business,

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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 2017, 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, $85.8 million is available in 2018 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 $15.0 million, $10.0 million and $15.0 million in 2017, 2016 and 2015, 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 2017 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.
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, 2017, each of the Pooled Companies had adequate levels of capital as defined by the NAIC with its respective risk-based capital requirements.
The property and casualty insurance industry is also affected by court decisions. In general, premium rates are actuarially determined to enable an insurance company to generate an underwriting profit. These rates contemplate a certain level of risk. The courts may modify, in a number of ways, the level of risk which insurers had expected to assume, including eliminating exclusions, expanding the terms of the contract, multiplying limits of coverage, creating rights for policyholders not intended to be included in the contract and interpreting applicable statutes expansively to create obligations on insurers not originally considered when the statute was passed. Courts have also undone legal reforms passed by legislatures, which reforms were intended to reduce a litigant’s rights of action or amounts recoverable and so reduce the costs borne by the insurance mechanism. These court decisions can adversely affect an insurer’s profitability. They also create pressure on rates charged for coverages adversely affected, and this can cause a legislative response resulting in rate suppression that can unfavorably impact an insurer.
The Terrorism Risk Insurance Act of 2002 and its successors, the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (collectively, the “Terrorism Acts”), has been extended until 2020.   Under the Terrorism Acts, commercial property and casualty insurers like State Auto Group, in exchange for making terrorism insurance 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 Acts, the loss must meet the aggregate industry loss minimum and must be the

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result of an act of terrorism as certified by the Secretary of the Treasury.  For 2015, the aggregate industry loss minimum was $100.0 million and, beginning in 2016, increases by $20.0 million annually to $200.0 million in 2020. The Terrorism Acts require insurance carriers to retain 15% of any claims from a certified terrorist event in excess of the federally mandated deductible in 2015 subject to an annual industry-wide cap of $100.0 billion. This retention will increase, beginning on January 1, 2016, by 1% each calendar year until it reaches 20% in 2020. The federally mandated deductible represents 20% of direct earned premium for the covered lines of business of the prior year.  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 cover only such acts of terrorism that are not certified acts under the Terrorism Acts and continue to apply policy exclusions that may limit any coverage from loss due to nuclear, biological or chemical agents. Our current commercial property reinsurance excludes certified acts of foreign terrorism and loss due to nuclear, biological or chemical agents. Beginning in 2016, 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 Form 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 23, 2018, we had approximately 1,962 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.

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Executive Officers of the Registrant
Name of Executive Officer and
Position(s) with Company
Age(1)
Principal Occupation(s)
During the Past Five Years
An Executive Officer
of the Company Since(2)
Michael E. LaRocco,
Chairman, President and Chief Executive Officer
61
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.
2015
Steven E. English,
Senior Vice President, Chief Financial Officer
57
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.
2006
Jason E. Berkey,
Senior Vice President, Personal Lines
43
Senior Vice President of Personal Lines of STFC and State Auto Mutual, 9/17 to present; 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.
2017
Melissa A. Centers,
Senior Vice President, Secretary and General Counsel
46
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.

2015

Kim B. Garland,
Senior Vice President, Director of Commercial Lines
52
Senior Vice President of Commercial Lines of STFC and State Auto Mutual, 9/17 to present; 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.
2015
John M. Petrucci,
Senior Vice President, Customer Service
59
Senior Vice President, Customer Service, 04/16 to present; Senior Vice President, Service and Administration, 9/15 to present; Vice President and Director of Sales of STFC and State Auto Mutual, 3/00 to 9/15.
2015
Elise D. Spriggs,
Senior Vice President, Associate and External Relations
47
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
2016
Paul M. Stachura,
Senior Vice President, Chief CARE Officer
60
Senior Vice President and Chief Claims 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.
2015
Gregory A. Tacchetti,
Senior Vice President, Chief Information and Strategy Officer
49
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.
2015
Scott A. Jones,
Vice President, Chief Investment Officer
53
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.
2012
Matthew S. Mrozek,
Vice President, Chief Actuarial Officer
49
Vice President and Chief Actuarial Officer of STFC and State Auto Mutual, 3/09 to present.
2015
Matthew R. Pollak,
Vice President, Chief Accounting Officer and Treasurer
52
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.
2013
(1)
Age as of February 28, 2018.
(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.

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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.
In the discussion below, we have organized risks according to categories of risk factors; however, many of the risks may have correlations and ramifications in more than one category. For example, the timely availability of sufficient, reliable data and information is included in Underwriting and Pricing, yet may also affect a number of risk factor categories. The categories, therefore, should be viewed as a starting point for understanding the significant risks we face, not as a limitation on the potential impact of risks.
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.
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 in a regular, ongoing process as historical loss experience develops and additional claims are reported and settled. We record adjustments to loss reserves in the results of operations for the periods in which the estimates are changed. In establishing loss reserves, we take into account estimated recoveries for reinsurance, salvage and subrogation.
Because estimating loss reserves is an inherently uncertain process, currently established loss reserves may not be adequate. If we conclude the estimates are incorrect and our loss reserves are inadequate, we are obligated to increase them. An increase in loss reserves results in an increase in losses, reducing our net income for the period in which the deficiency is identified. Accordingly, an increase in loss reserves could have a material adverse effect on our results of operations, liquidity and financial condition.
CATASTROPHE LOSSES AND GEOGRAPHIC CONCENTRATIONS
The occurrence of catastrophic events could cause volatility in our results of operations and could materially reduce our level of profitability 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, fires 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

16



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 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:
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;

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the development, selection and application of appropriate rating formula or other pricing methodologies;
our use of predictive modeling or other underwriting tools to assist with correctly and consistently achieving the intended results in underwriting and pricing;
our ability to establish and consistently follow company underwriting guidelines;
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 innovations in automobiles, such as accident avoidance systems and advances leading to autonomous cars;
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 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.
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.

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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 2017, we continued the rollout of our “State Auto Connect” digital quote and issue platform. We have now launched State Auto Connect for personal lines in 22 of the 28 states where we write private passenger auto and homeowners business. We plan on launching State Auto Connect in the remaining six personal lines states in 2018. We launched new business owners’ policies and commercial auto products to our Illinois agents in September 2017 via our State Auto Connect commercial lines platform. Arizona, Ohio, Indiana and Wisconsin were added to the State Auto Connect commercial lines platform in November 2017. We plan on launching State Auto Connect in additional states and lines of coverage for commercial lines throughout 2018. 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 2018 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 other business, information technology or administrative functions, or otherwise rely on certain 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 material adverse effect on our results of operations or financial condition.

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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.
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 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.

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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 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 in periods of increasing loss costs.
ECONOMIC CONDITIONS
Economic conditions may adversely affect our business.
The current challenging national and global economy, as well as negative economic conditions in the future, 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 businesses to decrease their spending, which may impact the demand for insurance products. For example, declining automotive sales and weaknesses in the housing market generally impact the purchase of our personal auto and homeowners insurance products by consumers and business insurance products by businesses involved in these industries. 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 underinsured 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 among our current business insurance customers can negatively affect our retention. Reductions in new business start-ups may negatively affect the number of future potential business insurance customers.
In 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.
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.
We market our insurance products exclusively through independent, non-exclusive insurance agents, including platform 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 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

22



changes to their policies. This single distribution system may place us at a disadvantage with consumers who prefer to purchase insurance products online or through other alternative distribution channels.
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.
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 business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, 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.
From time to time, some states in which we conduct business have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. In other situations, states in which we conduct business have considered or enacted laws that impact the competitive environment and marketplace for property and casualty insurance.
Nearly all states require licensed insurers to participate in guaranty funds through assessments covering a portion of insurance claims against impaired or insolvent insurers. An increase in the magnitude of impaired companies could result in an increase in our share of such assessments. Residual market or pooling arrangements exist in many states to provide certain types of insurance coverage to those that are otherwise unable to find private insurers willing to insure them. Licensed insurers voluntarily writing such coverage are required to participate in these residual markets or pooling mechanisms. Such participation exposes 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 time investigate the current condition of insurance regulation in the United States to determine whether to impose federal regulation or to allow an optional federal charter, similar to banks. In addition, changes in federal legislation and administrative policies in several areas, including changes in the Gramm-Leach-Bliley Act, financial services regulation and federal taxation, or repeal of McCarran-Ferguson Act (which largely exempts the insurance industry from the federal antitrust laws), could significantly impact the insurance industry and us.
The Federal Insurance Office was established in 2010 by the enactment of the Dodd-Frank Act. The Federal Insurance Office is a separate office within the United States Department of Treasury. The primary objective of the Federal Insurance Office is to monitor all aspects of the insurance industry. The Federal Insurance Office also coordinates and develops federal policy on international insurance matters, including representing the United States in the International Association of Insurance Supervisors, assists in negotiating certain international agreements, monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons, and assists in the administration of the terrorism risk insurance program. However, the Federal Insurance Office lacks regulatory authority, and it is not clear how this federal office will coordinate and interact with the NAIC or state insurance regulators.
Although we do not write health insurance, rules affecting health care services can affect insurance we write, including workers’ compensation, commercial and personal automobile and liability insurance. The enactment of the Patient Protection and Affordable Care Act of 2010 and additional health care reform legislation may have an impact on various aspects of our business.

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In addition, we may be impacted as a business enterprise by potential tax issues and changes in employee benefits. We will continue to monitor and assess the impact of health care legislation or regulations, or changing interpretations, at the federal or state levels.
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. The Tax Cuts and Jobs Act of 2017 (the “TCJA”), a comprehensive federal tax reform initiative, was enacted into law in December 2017. Among other things, the TCJA reduces the corporate tax rate to 21 percent as of January 1, 2018. As a result of the TCJA, we revalued our deferred tax assets and liabilities for the year ended 2017. This revaluation resulted in the recognition of $36.4 million of provisional deferred tax expense. We are continuing to assess the impact of the TCJA on our financial statements and tax positions.
There can be no assurance that our effective tax rate or tax positions will not be adversely affected by the TCJA or other 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.

24



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.
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 2017, 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.

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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. Continuation of the current low interest rate environment puts downward pressure on investment income. Future increases in interest rates could cause the values of our fixed income portfolios to decline, with the magnitude of the decline depending on the duration of our portfolio. Individual securities in our fixed income portfolio are subject to credit risk and default. Downgrades in the credit ratings of fixed maturities can have a significant negative effect on the market valuation of such securities. For example, budget strains on certain states and local governments could negatively affect the credit quality and ratings of their issued securities.
Our fixed income portfolio includes certain securities with call features permitting them to be redeemed by the issuers prior to stated maturity. Reinvestment risk exists with such securities as it may not be possible to reinvest the proceeds from the called securities at equivalent yields.
If the fixed income or equity portfolios, or both, were to be impaired by market, sector or issuer-specific conditions to a substantial degree, our liquidity, financial position and financial results could be materially adversely affected. Under these circumstances, our income from these investments could be materially reduced, and declines in the value of certain securities could further reduce our reported earnings and capital levels. A decrease in value of our investment portfolio could also put our insurance subsidiaries at risk of failing to satisfy regulatory minimum capital requirements. If we were not at that time able to supplement our subsidiaries’ capital from STFC or by issuing debt or equity securities on acceptable terms, our business could be materially adversely affected. Also, a decline in market rates of fixed income securities or a decline in the fair value of equity securities could cause the investments in our pension plans to decrease, resulting in additional expense and increasing required contributions to the pension plan.
In addition, our investments are subject to risks inherent in the nation’s and world’s capital markets. The functioning of those markets, the values of the investments held by us and our ability to liquidate investments on favorable terms or short notice may be adversely affected if those markets are disrupted or otherwise affected by local, national or international events, such as power outages, system failures, wars or terrorist attacks or by recessions or depressions, a significant change in inflation expectations, a significant devaluation of governmental or private sector credit, currencies or financial markets and other factors or events.
Changes in tax laws impacting marginal tax rates and/or the preferred tax treatment of municipal obligations under current law, could adversely affect the market value of municipal obligations. Since a significant portion of our investment portfolio is invested in tax-exempt municipal obligations, any such changes in tax law could adversely affect the value of the investment portfolio. Additionally, any such changes in tax law could reduce the difference between tax-exempt interest rates and taxable rates.
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.
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, 2017, State Auto Mutual owned approximately 61.2% 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.
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 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. 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.
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.

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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. We and State Auto Mutual also own and lease other office facilities in numerous locations throughout the State Auto Group’s geographical areas of operation.
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.

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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 23, 2018, there were 1,112 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:
2017
High
 
Low
 
Dividend
First Quarter
$
27.97

 
$
23.60

 
$
0.10

Second Quarter
27.62

 
23.89

 
0.10

Third Quarter
27.00

 
22.11

 
0.10

Fourth Quarter
30.85

 
24.84

 
0.10

2016
High
 
Low
 
Dividend
First Quarter
$
22.83

 
$
17.84

 
$
0.10

Second Quarter
22.22

 
18.69

 
0.10

Third Quarter
24.35

 
20.76

 
0.10

Fourth Quarter
27.42

 
19.54

 
0.10

(1)  Adjusted for stock splits.
 
 
 
 
 
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.

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Performance Graph
The line graph below compares the total return on $100.00 invested on December 31, 2012, 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.
CHART-F45070FD06AB513CB9A.JPG
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
STFC
100.00

 
145.26

 
154.81

 
163.68

 
216.86

 
239.14

NASDAQ Index
100.00

 
140.17

 
160.96

 
172.40

 
187.86

 
243.71

NASDAQ Ins. Index
100.00

 
131.15

 
144.99

 
157.63

 
185.46

 
194.61


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Item 6. Selected Consolidated Financial Data
(dollars and shares in millions, except per share data)
Year ended December 31
 
2017
 
2016
 
2015
 
2014
 
2013
Statement of Income Data — GAAP Basis:
 
 
 
 
 
 
 
 
 
Earned premiums
$
1,275.1

 
1,291.9

 
1,270.5

 
1,074.1

 
1,055.0

Net investment income
$
78.8

 
74.7

 
71.7

 
74.7

 
72.8

Total revenues
$
1,421.3

 
1,405.4

 
1,368.6

 
1,172.7

 
1,153.0

Net (loss) income
$
(10.7
)
 
21.0

 
51.2

 
107.4

 
60.8

Earned premium (decline) growth
(1.3
)%
 
1.7
%
 
18.3
%
 
1.8
%
 
1.2
%
Return on average invested assets(1)
3.1
 %
 
3.1
%
 
3.1
%
 
3.5
%
 
3.4
%
Balance Sheet Data — GAAP Basis:
 
 
 
 
 
 
 
 
 
Total investments
$
2,689.7

 
2,612.6

 
2,471.7

 
2,357.9

 
2,251.3

Total assets
$
3,014.3

 
2,959.4

 
2,828.2

 
2,766.6

 
2,496.1

Total notes payable
$
122.1

 
122.1

 
100.5

 
100.5

 
100.5

Total stockholders’ equity
$
880.9

 
891.3

 
884.6

 
872.9

 
785.0

Common shares outstanding
42.4

 
41.8

 
41.3

 
40.9

 
40.7

Return on average equity
(1.2
)%
 
2.4
%
 
5.8
%
 
13.0
%
 
8.0
%
Debt to capital ratio
12.2
 %
 
12.0
%
 
10.2
%
 
10.4
%
 
11.4
%
Per Common Share Data — GAAP Basis:
 
 
 
 
 
 
 
 
 
Basic EPS
$
(0.25
)
 
0.50

 
1.25

 
2.63

 
1.50

Diluted EPS
$
(0.25
)
 
0.50

 
1.23

 
2.60

 
1.49

Cash dividends per share
$
0.40

 
0.40

 
0.40

 
0.40

 
0.40

Book value per share
$
20.76

 
21.31

 
21.40

 
21.32

 
19.27

Common Share Price:
 
 
 
 
 
 
 
 
 
High
$
30.85

 
27.42

 
27.37

 
25.43

 
23.10

Low
$
22.11

 
17.84

 
20.01

 
18.35

 
14.10

Close at December 31
$
29.12

 
26.81

 
20.59

 
22.22

 
21.24

Close price to book value per share
1.40

 
1.26

 
0.96

 
1.04

 
1.10

GAAP Ratios:
 
 
 
 
 
 
 
 
 
Loss and LAE ratio
72.0
 %
 
72.9

 
67.9

 
71.8

 
68.2

Expense ratio
35.7
 %
 
33.3

 
33.6

 
33.7

 
33.6

Combined ratio
107.7
 %
 
106.2

 
101.5

 
105.5

 
101.8

Statutory Ratios:
 
 
 
 
 
 
 
 
 
Loss and LAE ratio
72.2
 %
 
73.1

 
68.0

 
72.1

 
68.5

Expense ratio
35.1
 %
 
33.4

 
33.9

 
33.9

 
34.5

Combined ratio
107.3
 %
 
106.5

 
101.9

 
106.0

 
103.0

Net premiums written to surplus
1.5

 
1.5

 
1.6

 
1.5

 
1.4

(1)
Invested assets include investments and cash equivalents.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Capitalized terms used in this Item 7 and not otherwise defined have the meanings ascribed to such terms under the caption “Important Defined Terms Used in this Form 10-K” which immediately precedes Part I of this Form 10-K. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K and the narrative description of our business contained in Item 1 of this Form 10-K.
OVERVIEW
State Auto Financial is a property and casualty insurance holding company. Our insurance subsidiaries are part of the State Auto Group and Pooling Arrangement described below. The State Auto Group markets its insurance products throughout the United States primarily through independent agencies, which include retail agencies and brokers. Our Pooled Companies are rated A- (Excellent) by A.M. Best.
State Auto Financial’s principal subsidiaries are State Auto P&C, Milbank and SA Ohio, each of which is a property and casualty insurance company, and Stateco, which provides investment management services to affiliated insurance companies.

30



Our reportable insurance segments are personal insurance, commercial insurance and specialty insurance. These insurance segments are aligned with the reporting lines to our principal operating decision makers. Investment operations is also a reportable segment. See “Personal and Commercial Insurance” and “Specialty Insurance” in Item 1 of this Form 10-K for more information about our insurance segments.
We evaluate the performance of our insurance segments using industry financial measurements determined 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 2017 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
We delivered significant progress in 2017 toward our goal of profitable growth. During 2017, we continued the rollout of our “State Auto Connect” digital quote and issue platform for personal auto and homeowners new business. State Auto Connect is now accessible to agents in 22 of the 28 states where we are licensed to write personal auto and homeowners policies. We plan on launching the remaining six personal lines states in 2018. We are now a solely digital insurance company for new customers in those states. Additionally, we launched State Auto Connect for our commercial auto and small commercial package products in the fourth quarter of 2017 and will continue the rollout of this platform to our existing states throughout 2018. Both of our platforms include new products and rates, and incorporate advanced data analytics. We believe these platforms will make us the carrier of choice for independent agents as their customers increasingly demand products and services from digital companies. We plan to complete our transformation to digital for commercial auto and small commercial package in 2018. Our workers’ compensation and farm and ranch products will follow.
Our decision to exit our excess and surplus specialty business during the second half of 2017, in addition to our 2016 decision to exit our programs business, will enable us to fully focus on achieving profitable growth within our core personal insurance and commercial insurance products. We believe that the changes we have made improve our competitiveness and better position us to achieve our goal of profitable growth.
Insurance Operations
Personal insurance segment: Throughout 2017, work continued to address the underwriting and pricing issues that impacted our underwriting results in recent years. We continued to take rate actions in a number of states for both our personal auto and homeowners products to improve overall profitability. We experienced a year-over-year increase in written premiums, driven by our rate actions and new business growth. Our new auto product incorporates discounts if customers decide to sign up for telematics, which enables us to further refine our pricing based on an insured’s driving habits. Our new homeowners product incorporates discounts for homes with smart technologies (i.e., technologies that monitor activity within the home and immediately notify a homeowner in the event of a potential loss event such as a water leak or fire). Homeowners policies-in-force (“PIF”) increased compared to 2016, the first year-over-year PIF growth in eight years, driven by the launch of State Auto Connect.
Commercial insurance segment: During 2017, we continued to address underwriting and pricing issues that impacted our commercial insurance underwriting results in recent years, particularly commercial auto. Commercial auto results improved in 2017 compared to 2016 due primarily to (i) greater favorable development of prior accident year losses and (ii) pricing and other actions we have undertaken since 2016; however, the pricing and other actions contributed to an overall decline in written premiums as retention declines offset increases in new business. Softening marketing conditions within the workers’ compensation market place impacted our workers’ compensation written premium as both new business and renewal premiums were down.
While expenses remain a challenge, associates at all levels are focused on identifying ways we can increase efficiencies and lower expenses. We continued to invest in new technology solutions, enabling us to replace outdated and inefficient legacy technologies. In addition to State Auto Connect, which enables us to improve overall underwriting efficiency and lower acquisition costs, during 2017 we began an effort to replace our legacy financial and human resource systems and successfully launched a new integrated platform in January 2018. We have also utilized robotics to improve efficiencies within our claims and customer service units and continue to identify other processes throughout the organization that can be made more efficient with the use of robotics. These investments will put pressure on our expense ratios in the short-term, but we believe that the efficiency benefits will result in consistently lower expense ratios in the long-term.
Claims
Our Claims and Risk Engineering (CARE) associates are focused on being faster and more effective while still maintaining quality. They continue to identify improvements to our claim handling capabilities. As an example, during 2017 we began offering claimants the option to receive claim payments electronically, which not only streamlines the claims payment process, but also lowers our overall payment costs.

31



Culture
We recognize that we can’t become the transformational company we aspire to be without a culture that is aligned with that objective. We have made great strides in developing a culture that encourages openness, candor and collaboration; one in which all associates are empowered to speak up and are comfortable doing so; and finally, one in which the sharing of information is an expectation. Additionally, we strive to create a culture in which mistakes are not viewed as failures, but opportunities to learn and improve. We have built an environment that is diverse and inclusive of thought, opinions, ideas and people. We continue building upon a nearly century-long commitment to giving back to the communities in which we live and work through our time and financial resources.
Moving forward
With the successful rollout of our digital platform for personal lines and the launch of our commercial lines-focused digital platform, we now have the critical technology pieces of our foundation in place. With our decision to exit specialty business now behind us, we can fully focus our efforts on digital delivery, product management, claims handling, data and analytics and underwriting that is best suited for personal and commercial insurance. We are committed to making the same amount of progress toward becoming profitable, and will do so with the people, the processes and technology required to deliver.
POOLING ARRANGEMENT
The STFC Pooled Companies and the Mutual Pooled Companies participate in a quota share reinsurance pooling arrangement referred to as the “Pooling Arrangement.” Under the Pooling Arrangement, State Auto Mutual assumes premiums, losses and expenses from each of the Pooled Companies and in turn cedes to each of the Pooled Companies a specified portion of premiums, losses and expenses based on each of the Pooled Companies’ respective pooling percentages. State Auto Mutual then retains the balance of the pooled business.
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 2017.
STFC Pooled Companies:
 
 
State Auto P&C
 
51.0
%
Milbank
 
14.0

SA Ohio
 
0.0

Total STFC Pooled Companies
 
65.0

State Auto Mutual Pooled Companies:
 
 
State Auto Mutual
 
34.5

SA Wisconsin
 
0.0

Meridian Security
 
0.0

Patrons Mutual
 
0.5

RIC
 
0.0

Plaza
 
0.0

American Compensation
 
0.0

Bloomington Compensation
 
0.0

Total State Auto Mutual Pooled Companies
 
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

32



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, 2017, 2016 and 2015:
($ millions, except per share data)
2017
 
2016
 
2015
GAAP Basis:
 
 
 
 
 
Total revenues
$
1,421.3

 
$
1,405.4

 
$
1,368.6

Income before federal income taxes
$
33.4

 
$
19.2

 
$
67.3

Net (loss) income
$
(10.7
)
 
$
21.0

 
$
51.2

Stockholders’ equity
$
880.9

 
$
891.3

 
$
884.6

Book value per share
$
20.76

 
$
21.31

 
$
21.40

Return on average equity
(1.2
)%
 
2.4
%
 
5.8
%
Debt to capital ratio
12.2
 %
 
12.0
%
 
10.2
%
Cat loss and ALAE ratio
9.7
 %
 
6.3
%
 
4.0
%
Non-cat loss and LAE ratio
62.3
 %
 
66.6
%
 
63.9
%
Loss and LAE ratio
72.0
 %
 
72.9
%
 
67.9
%
Expense ratio
35.7
 %
 
33.3
%
 
33.6
%
Combined ratio
107.7
 %
 
106.2
%
 
101.5
%
Premiums written growth
(1.9
)%
 
1.6
%
 
6.6
%
Investment yield
3.1
 %
 
3.1
%
 
3.1
%
 
 
 
 
 
 
SAP Basis:
 
 
 
 
 
Cat loss and ALAE ratio
9.7
 %
 
6.3
%
 
4.0
%
Non-cat loss and ALAE ratio
56.8
 %
 
60.9
%
 
57.7
%
ULAE ratio
5.7
 %
 
5.9
%
 
6.3
%
Loss and LAE ratio
72.2
 %
 
73.1
%
 
68.0
%
Expense ratio
35.1
 %
 
33.4
%
 
33.9
%
Combined ratio
107.3
 %
 
106.5
%
 
101.9
%
Net premiums written to surplus
1.5

 
1.5

 
1.6

Our 2017 net loss was $10.7 million compared to net income of $21.0 million and $51.2 million in 2016 and 2015, respectively. Our 2017 results included a provisional net charge of $36.4 million resulting from revaluing our deferred tax assets and liabilities as a result of the enactment of the TCJA.
The following highlights other significant factors that impacted 2017 results as compared to 2016 and 2015:
Earned premiums in 2017 were $1,275.1 million compared to $1,291.9 million and $1,270.5 million in 2016 and 2015, respectively. Earned premiums declined in 2017 compared to 2016 due to (i) underwriting and pricing decisions within the commercial insurance segment to improve overall profitability and (ii) our decision to exit Program business in 2016. Earned premiums in 2016 increased when compared to 2015 primarily driven by new business growth in the specialty insurance segment.
The SAP cat loss and ALAE ratio for 2017 was 9.7% compared to 6.3% and 4.0% for 2016 and 2015, respectively. The 2017 cat loss ratio increased when compared to the same 2016 and 2015 periods primarily driven by (i) Hurricanes Harvey and Irma during the third quarter of 2017 and (ii) widespread storms that impacted the Ohio Valley region, South Carolina, Texas, Mississippi and Georgia during the first quarter of 2017. The 2016 cat loss ratio increased when compared to 2015 primarily due to the impact of (i) increased storm activity, including wind and hail storms, in Texas, (ii) Hurricane Matthew, and (iii) wildfires in Tennessee.
The SAP non-catastrophe loss and ALAE ratio for 2017 was 56.8% compared to 60.9% and 57.7% for 2016 and 2015, respectively. The 2017 loss ratio improved 4.1 points compared to 2016 primarily attributable to 3.2 points,

34



or $41.4 million, of favorable development of prior accident year losses and loss adjustment expenses in 2017 compared to 1.9 points, or $24.7 million, of adverse development in 2016. Favorable development in 2017 was primarily due to $44.0 million of favorable development in the commercial insurance segment. All commercial insurance products developed favorably due primarily to lower than anticipated severity emerging from multiple accident years. The 2016 loss ratio increased 3.2 points compared to 2015 due primarily to higher severity in lines of business with auto exposures.
Net realized gains on investments were $65.1 million in 2017 compared to $36.5 million and $24.7 million in 2016 and 2015, respectively. Net realized gains in 2017 were impacted by (i) realized gains of $18.5 million from the sale of our U.S. small-cap equity portfolio and (ii) sales within our U.S. large-cap equity portfolio. The proceeds from the sale of our U.S. small-cap equity portfolio were reinvested in U.S. small-cap focused mutual and exchange traded funds. Net realized gains in 2016 were impacted by the recognition of a $12.0 million gain from the redemption of a limited partnership investment in international equities.

35



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.
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, 2017, 2016 and 2015:
($ in millions)
 
 
 
 
 
 
 
 
2017
 
Personal
 
Commercial
 
Specialty
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
609.7

 
$
453.6

 
$
206.0

 
$
1,269.3

Net earned premiums
 
580.3

 
455.7

 
239.1

 
1,275.1

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
43.4

 
26.7

 
53.9

 
124.0

Non-cat loss and ALAE
 
335.2

 
232.2

 
156.1

 
723.5

Total Loss and ALAE
 
378.6

 
258.9

 
210.0

 
847.5

ULAE
 
37.7

 
25.3

 
9.5

 
72.5

Total Loss and LAE
 
416.3

 
284.2

 
219.5

 
920.0

Underwriting expenses
 
187.3

 
182.1

 
76.6

 
446.0

Net underwriting loss
 
$
(23.3
)
 
$
(10.6
)
 
$
(57.0
)
 
$
(90.9
)
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
7.5
%
 
5.9
%
 
22.5
%
 
9.7
%
Non-cat loss and ALAE ratio
 
57.7
%
 
50.9
%
 
65.3
%
 
56.8
%
Total Loss and ALAE ratio
 
65.2
%
 
56.8
%
 
87.8
%
 
66.5
%
ULAE ratio
 
6.5
%
 
5.6
%
 
4.0
%
 
5.7
%
Total Loss and LAE ratio
 
71.7
%
 
62.4
%
 
91.8
%
 
72.2
%
Expense ratio
 
30.7
%
 
40.2
%
 
37.2
%
 
35.1
%
Combined ratio
 
102.4
%
 
102.6
%
 
129.0
%
 
107.3
%
 
 
 
 
 
 
 
 
 

36



($ in millions)
 
 
 
 
 
 
 
 
2016
 
Personal
 
Commercial
 
Specialty
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
577.2

 
$
459.4

 
$
256.7

 
$
1,293.3

Net earned premiums
 
578.5

 
472.6

 
240.8

 
1,291.9

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
48.5

 
25.6

 
7.5

 
81.6

Non-cat loss and ALAE
 
336.7

 
276.4

 
173.7

 
786.8

Total Loss and ALAE
 
385.2

 
302.0

 
181.2

 
868.4

ULAE
 
36.8

 
29.5

 
9.4

 
75.7

Total Loss and LAE
 
422.0

 
331.5

 
190.6

 
944.1

Underwriting expenses
 
166.8

 
172.7

 
92.9

 
432.4

Net underwriting loss
 
$
(10.3
)
 
$
(31.6
)
 
$
(42.7
)
 
$
(84.6
)
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
8.4
%
 
5.4
%
 
3.1
%
 
6.3
%
Non-cat loss and ALAE ratio
 
58.2
%
 
58.5
%
 
72.2
%
 
60.9
%
Total Loss and ALAE ratio
 
66.6
%
 
63.9
%
 
75.3
%
 
67.2
%
ULAE ratio
 
6.3
%
 
6.2
%
 
3.9
%
 
5.9
%
Total Loss and LAE ratio
 
72.9
%
 
70.1
%
 
79.2
%
 
73.1
%
Expense ratio
 
28.9
%
 
37.6
%
 
36.2
%
 
33.4
%
Combined ratio
 
101.8
%
 
107.7
%
 
115.4
%
 
106.5
%
 
 
 
 
 
 
 
 
 
($ in millions)
 
 
 
 
 
 
 
 
2015
 
Personal
 
Commercial
 
Specialty
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
581.0

 
$
481.5

 
$
211.0

 
$
1,273.5

Net earned premiums
 
591.3

 
476.5

 
202.7

 
1,270.5

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
34.2

 
16.5

 
0.3

 
51.1

Non-cat loss and ALAE
 
322.9

 
288.8

 
121.1

 
732.7

Total Loss and ALAE
 
357.1

 
305.3

 
121.4

 
783.8

ULAE
 
39.1

 
33.3

 
8.0

 
80.5

Total Loss and LAE
 
396.2

 
338.6

 
129.4

 
864.3

Underwriting expenses
 
167.5

 
184.7

 
79.1

 
431.3

Net underwriting gain (loss)
 
$
27.5

 
$
(46.8
)
 
$
(5.9
)
 
$
(25.1
)
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
5.8
%
 
3.5
%
 
0.2
%
 
4.0
%
Non-cat loss and ALAE ratio
 
54.6
%
 
60.6
%
 
59.7
%
 
57.7
%
Total Loss and ALAE ratio
 
60.4
%
 
64.1
%
 
59.9
%
 
61.7
%
ULAE ratio
 
6.6
%
 
7.0
%
 
4.0
%
 
6.3
%
Total Loss and LAE ratio
 
67.0
%
 
71.1
%
 
63.9
%
 
68.0
%
Expense ratio
 
28.8
%
 
38.4
%
 
37.5
%
 
33.9
%
Combined ratio
 
95.8
%
 
109.5
%
 
101.4
%
 
101.9
%
 
 
 
 
 
 
 
 
 

37



Personal Insurance Segment
The following table sets forth certain key performance indicators by major product line of business for our personal insurance segment for the years ended December 31, 2017, 2016 and 2015:
Table 1
($ in millions)
 
 
 
 
 
 
 
 
2017
 
Personal Auto
 
Homeowners
 
Other Personal
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
362.9

 
$
227.9

 
$
18.9

 
$
609.7

Net earned premiums
 
340.7

 
220.7

 
18.9

 
580.3

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
7.9

 
34.4

 
1.1

 
43.4

Non-cat loss and ALAE
 
237.2

 
89.2

 
8.8

 
335.2

Total Loss and ALAE
 
245.1

 
123.6

 
9.9

 
378.6

ULAE
 
21.7

 
14.8

 
1.2

 
37.7

Total Loss and LAE
 
266.8

 
138.4

 
11.1

 
416.3

Underwriting expenses
 
104.2

 
76.0

 
7.1

 
187.3

Net underwriting (loss) gain
 
$
(30.3
)
 
$
6.3

 
$
0.7

 
$
(23.3
)
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
2.3
%
 
15.6
%
 
5.7
%
 
7.5
%
Non-cat loss and ALAE ratio
 
69.6
%
 
40.4
%
 
46.5
%
 
57.7
%
Total Loss and ALAE ratio
 
71.9
%
 
56.0
%
 
52.2
%
 
65.2
%
ULAE ratio
 
6.4
%
 
6.7
%
 
6.5
%
 
6.5
%
Total Loss and LAE ratio
 
78.3
%
 
62.7
%
 
58.7
%
 
71.7
%
Expense ratio
 
28.7
%
 
33.4
%
 
37.4
%
 
30.7
%
Combined ratio
 
107.0
%
 
96.1
%
 
96.1
%
 
102.4
%
 
 
 
 
 
 
 
 
 

38



Table 2
($ in millions)
 
 
 
 
 
 
 
 
2016
 
Personal Auto
 
Homeowners
 
Other Personal
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
333.8

 
$
223.0

 
$
20.4

 
$
577.2

Net earned premiums
 
330.6

 
226.8

 
21.1

 
578.5

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
7.0

 
40.4

 
1.1

 
48.5

Non-cat loss and ALAE
 
243.9

 
84.2

 
8.6

 
336.7

Total Loss and ALAE
 
250.9

 
124.6

 
9.7

 
385.2

ULAE
 
20.4

 
15.0

 
1.4

 
36.8

Total Loss and LAE
 
271.3

 
139.6

 
11.1

 
422.0

Underwriting expenses
 
89.7

 
69.7

 
7.4

 
166.8

Net underwriting (loss) gain
 
$
(30.4
)
 
$
17.5

 
$
2.6

 
$
(10.3
)
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
2.1
%
 
17.8
%
 
5.1
%
 
8.4
%
Non-cat loss and ALAE ratio
 
73.8
%
 
37.2
%
 
41.1
%
 
58.2
%
Total Loss and ALAE ratio
 
75.9
%
 
55.0
%
 
46.2
%
 
66.6
%
ULAE ratio
 
6.1
%
 
6.6
%
 
6.8
%
 
6.3
%
Total Loss and LAE ratio
 
82.0
%
 
61.6
%
 
53.0
%
 
72.9
%
Expense ratio
 
26.9
%
 
31.2
%
 
36.8
%
 
28.9
%
Combined ratio
 
108.9
%
 
92.8
%
 
89.8
%
 
101.8
%
 
 
 
 
 
 
 
 
 
Table 3
($ in millions)
 
 
 
 
 
 
 
 
2015
 
Personal Auto
 
Homeowners
 
Other Personal
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
334.4

 
$
224.9

 
$
21.7

 
$
581.0

Net earned premiums
 
339.1

 
229.8

 
22.4

 
591.3

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
4.6

 
28.9

 
0.7

 
34.2

Non-cat loss and ALAE
 
236.1

 
76.9

 
9.9

 
322.9

Total Loss and ALAE
 
240.6

 
105.9

 
10.6

 
357.1

ULAE
 
28.9

 
9.4

 
0.8

 
39.1

Total Loss and LAE
 
269.6

 
115.3

 
11.4

 
396.2

Underwriting expenses
 
90.0

 
69.6

 
7.9

 
167.5

Net underwriting (loss) gain
 
$
(20.5
)
 
$
44.9

 
$
3.1

 
$
27.5

 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
1.3
%
 
12.6
%
 
3.3
%
 
5.8
%
Non-cat loss and ALAE ratio
 
69.7
%
 
33.5
%
 
44.0
%
 
54.6
%
Total Loss and ALAE ratio
 
71.0
%
 
46.1
%
 
47.3
%
 
60.4
%
ULAE ratio
 
8.5
%
 
4.1
%
 
3.5
%
 
6.6
%
Total Loss and LAE ratio
 
79.5
%
 
50.2
%
 
50.8
%
 
67.0
%
Expense ratio
 
26.9
%
 
31.0
%
 
36.4
%
 
28.8
%
Combined ratio
 
106.4
%
 
81.2
%
 
87.2
%
 
95.8
%
 
 
 
 
 
 
 
 
 



39



In October 2016, we launched State Auto Connect for our personal auto and homeowners products in five states. State Auto Connect is a fully digital quote and issue platform that incorporates advanced data analytics and updated pricing models, enabling us to offer new products and coverages for our personal auto and homeowners products. The platform enables our agents to submit, quote, bind, issue and bill policies through a completely digital and integrated platform. We continued the rollout of State Auto Connect throughout 2017, launching it in all but six of our states prior to December 31, 2017. We expect to complete the rollout of our personal auto and homeowners products to our remaining six states during the first half of 2018.
Net written premiums for the year ended December 31, 2017 increased 5.7% compared to 2016 (Tables 1 - 2) driven by (i) rate increases for our personal auto product implemented beginning in 2016 and continuing throughout 2017 and (ii) new business growth in personal auto and homeowners. The new business growth experienced during 2017 was due to production generated through State Auto Connect.
Net written premiums for the year ended December 31, 2016 were flat compared to 2015 (Tables 2 - 3). While total policies in force continued to decline, new business policy counts were up, and personal auto and homeowners new business premiums increased when compared to the same 2015 period. During 2016, we took actions to improve our new business trends, including increasing the number of personal lines agency appointments and launching State Auto Connect in five states in October for our personal auto and homeowners products.
The SAP catastrophe loss ratio for the year ended December 31, 2017 was 7.5%, compared to 8.4% in 2016 and 5.8% in 2015 (Tables 1 - 3). During 2017, we were primarily impacted by (i) Hurricanes Harvey and Irma and (ii) widespread storms that affected the Ohio Valley region, South Carolina, Texas, Mississippi and Georgia. During 2016, we were impacted by (i) storms in Texas, primarily wind and hail, (ii) Hurricane Matthew, and (iii) wildfires in Tennessee.
The SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 was 57.7%, compared to 58.2% in 2016 and 54.6% in 2015. (Tables 1 - 3). The SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 improved 0.5 points when compared to 2016 (Tables 1 - 2). The 2017 results were impacted by favorable development of prior accident year losses of $4.4 million in personal auto compared to adverse development of $7.9 million in 2016. The 2017 favorable development was attributable to lower than expected bodily injury severity, primarily from accident years 2015 and 2016. Slightly offsetting the 2017 improvement was a 3.2 point increase in the homeowners SAP non-catastrophe loss and ALAE ratio when compared to 2016, primarily driven by an increase in current accident year non-catastrophe weather-related losses.
The SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2016 increased 3.6 points when compared to 2015 (Tables 2 -3). Personal auto results in 2016 were impacted by increased levels of bodily injury severity trends that resulted in increases in ultimate loss and ALAE estimates for prior accident years, primarily 2014 and 2015. In addition, the 2016 accident year loss and ALAE estimates reflected the impact of continued increased bodily injury severity trends.

40



Commercial Insurance Segment
The following table sets forth certain key performance indicators by major product line of business for our commercial insurance segment for the years ended December 31, 2017, 2016 and 2015:
Table 4
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
Commercial Auto
 
Small Commercial Package
 
Middle Market Commercial
 
Workers' Comp
 
Farm & Ranch
 
Other Commercial
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
73.5

 
$
123.8

 
$
111.1

 
$
88.4

 
$
42.6

 
$
14.2

 
$
453.6

Net earned premiums
 
76.2

 
127.4

 
109.1

 
88.8

 
39.6

 
14.6

 
455.7

Losses and LAE incurred:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
0.8

 
12.4

 
8.4

 

 
5.1

 

 
26.7

Non-cat loss and ALAE
 
44.7

 
61.1

 
50.6

 
50.2

 
23.0

 
2.6

 
232.2

Total Loss and ALAE
 
45.5

 
73.5

 
59.0

 
50.2

 
28.1

 
2.6

 
258.9

ULAE
 
4.5

 
6.1

 
4.8

 
6.7

 
 
 
1.1

 
25.3

Total Loss and LAE
 
50.0

 
79.6

 
63.8

 
56.9

 
30.2

 
3.7

 
284.2

Underwriting expenses
 
31.5

 
55.7

 
42.5

 
28.4

 
16.3

 
7.7

 
182.1

Net underwriting (loss) gain
 
$
(5.3
)
 
$
(7.9
)
 
$
2.8

 
$
3.5

 
$
(6.9
)
 
$
3.2

 
$
(10.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
1.1
%
 
9.7
%
 
7.7
%
 
%
 
13.0
%
 
0.1
%
 
5.9
%
Non-cat loss and ALAE ratio
 
58.6
%
 
48.0
%
 
46.4
%
 
56.5
%
 
57.9
%
 
18.4
%
 
50.9
%
Total Loss and ALAE ratio
 
59.7
%
 
57.7
%
 
54.1
%
 
56.5
%
 
70.9
%
 
18.5
%
 
56.8
%
ULAE ratio
 
5.9
%
 
4.8
%
 
4.4
%
 
7.6
%
 
5.5
%
 
7.0
%
 
5.6
%
Total Loss and LAE ratio
 
65.6
%
 
62.5
%
 
58.5
%
 
64.1
%
 
76.4
%
 
25.5
%
 
62.4
%
Expense ratio
 
43.0
%
 
45.0
%
 
38.3
%
 
32.1
%
 
38.2
%
 
54.4
%
 
40.2
%
Combined ratio
 
108.6
%
 
107.5
%
 
96.8
%
 
96.2
%
 
114.6
%
 
79.9
%
 
102.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
















41



Table 5
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
Commercial Auto
 
Small Commercial Package
 
Middle Market Commercial
 
Workers' Comp
 
Farm & Ranch
 
Other Commercial
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
79.0

 
$
125.6

 
$
108.8

 
$
92.0

 
$
37.0

 
$
17.0

 
$
459.4

Net earned premiums
 
88.3

 
127.5

 
110.5

 
93.8

 
35.5

 
17.0

 
472.6

Losses and LAE incurred:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
0.8

 
12.9

 
8.4

 

 
3.5

 

 
25.6

Non-cat loss and ALAE
 
70.1

 
65.3

 
61.8

 
58.5

 
14.4

 
6.3

 
276.4

Total Loss and ALAE
 
70.9

 
78.2

 
70.2

 
58.5

 
17.9

 
6.3

 
302.0

ULAE
 
4.8

 
6.9

 
6.0

 
8.4

 
2.2

 
1.2

 
29.5

Total Loss and LAE
 
75.7

 
85.1

 
76.2

 
66.9

 
20.1

 
7.5

 
331.5

Underwriting expenses
 
30.5

 
51.3

 
43.0

 
26.7

 
14.1

 
7.2

 
172.7

Net underwriting (loss) gain
 
$
(17.9
)
 
$
(8.9
)
 
$
(8.7
)
 
$
0.2

 
$
1.3

 
$
2.3

 
$
(31.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
1.0
%
 
10.1
%
 
7.6
%
 
%
 
9.9
%
 
 %
 
5.4
%
Non-cat loss and ALAE ratio
 
79.4
%
 
51.2
%
 
55.9
%
 
62.3
%
 
40.8
%
 
37.2
 %
 
58.5
%
Total Loss and ALAE ratio
 
80.4
%
 
61.3
%
 
63.5
%
 
62.3
%
 
50.7
%
 
37.2
 %
 
63.9
%
ULAE ratio
 
5.5
%
 
5.3
%
 
5.3
%
 
9.0
%
 
6.0
%
 
7.6
 %
 
6.2
%
Total Loss and LAE ratio
 
85.9
%
 
66.6
%
 
68.8
%
 
71.3
%
 
56.7
%
 
44.8
 %
 
70.1
%
Expense ratio
 
38.5
%
 
40.8
%
 
39.5
%
 
29.1
%
 
38.1
%
 
42.4
 %
 
37.6
%
Combined ratio
 
124.4
%
 
107.4
%
 
108.3
%
 
100.4
%
 
94.8
%
 
87.2
 %
 
107.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 6
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
Commercial Auto
 
Small Commercial Package
 
Middle Market Commercial
 
Workers' Comp
 
Farm & Ranch
 
Other Commercial
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
96.1

 
$
128.4

 
$
113.1

 
$
92.8

 
$
34.0

 
$
17.2

 
$
481.5

Net earned premiums
 
95.4

 
128.5

 
113.4

 
89.3

 
32.9

 
17.1

 
476.5

Losses and LAE incurred:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
0.6

 
8.3

 
6.1

 

 
1.6

 

 
16.5

Non-cat loss and ALAE
 
79.3

 
77.4

 
58.1

 
54.6

 
14.0

 
5.2

 
288.8

Total Loss and ALAE
 
79.9

 
85.7

 
64.2

 
54.6

 
15.6

 
5.2

 
305.3

ULAE
 
7.2

 
11.6

 
6.4

 
5.5

 
1.2

 
1.3

 
33.3

Total Loss and LAE
 
87.1

 
97.3

 
70.6

 
60.1

 
16.9

 
6.5

 
338.6

Underwriting expenses
 
34.3

 
55.4

 
48.3

 
25.5

 
13.7

 
7.4

 
184.7

Net underwriting (loss) gain
 
$
(26.1
)
 
$
(24.2
)
 
$
(5.6
)
 
$
3.7

 
$
2.4

 
$
3.1

 
$
(46.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
0.6
%
 
6.5
%
 
5.4
%
 
%
 
4.9
%
 
(0.2
)%
 
3.5
%
Non-cat loss and ALAE ratio
 
83.2
%
 
60.2
%
 
51.2
%
 
61.2
%
 
42.6
%
 
30.6
 %
 
60.6
%
Total Loss and ALAE ratio
 
83.8
%
 
66.7
%
 
56.6
%
 
61.2
%
 
47.5
%
 
30.4
 %
 
64.1
%
ULAE ratio
 
7.6
%
 
9.0
%
 
5.7
%
 
6.1
%
 
3.7
%
 
8.0
 %
 
7.0
%
Total Loss and LAE ratio
 
91.4
%
 
75.7
%
 
62.3
%
 
67.3
%
 
51.2
%
 
38.4
 %
 
71.1
%
Expense ratio
 
35.7
%
 
43.2
%
 
42.7
%
 
27.5
%
 
40.2
%
 
43.3
 %
 
38.4
%
Combined ratio
 
127.1
%
 
118.9
%
 
105.0
%
 
94.8
%
 
91.4
%
 
81.7
 %
 
109.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

42



Net written premiums for the year ended December 31, 2017 decreased 1.3% compared to 2016 (Tables 4 - 5), as new business premium growth was offset by a decline in renewal premiums. While overall new business premium for commercial insurance products increased 6.6% compared to 2016, new business policy counts declined 8.3%. The new business premium growth reflects the impact of rate and other actions taken beginning in 2016 and continuing into 2017. With the exception of workers’ compensation, new business premiums for each of the remaining commercial insurance products increased in 2017 compared to 2016. Renewal premiums and policy counts both declined in 2017 compared to 2016 due to (i) rate actions to improve profitability in commercial auto, (ii) more competitive market conditions in workers' compensation, and (iii) our continued focus on underwriting discipline across our commercial insurance products.
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. The platform enables our agents to submit, quote, bind, issue and bill policies through a completely digital and integrated platform. During 2018, we plan on completing the rollout of State Auto Connect in our remaining states for commercial auto and small commercial package and we also plan on expanding the products offered through the platform to include middle market commercial, workers’ compensation and farm & ranch.
Net written premiums for the year ended December 31, 2016 decreased 4.6% compared to 2015 (Tables 5 - 6). The 2016 decrease was primarily due to (i) our decision to exit our large account business, (ii) rate and underwriting actions to improve profitability in commercial auto, and (iii) changes made to our regional sales teams during the first quarter of 2016, including staff reductions and reassignment of agency relationships among the remaining staff.
The SAP catastrophe loss and ALAE ratio for 2017 was 5.9% compared to 5.4% and 3.5% in 2016 and 2015, respectively (Tables 4 - 6). The 2017 and 2016 commercial insurance segment's cat loss and ALAE ratios were impacted by the same events described in the preceding personal insurance segment discussion.
The commercial insurance segment SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 was 50.9% compared to 58.5% and 60.6% in 2016 and 2015, respectively (Tables 4 - 6). The 7.6 point improvement in the 2017 ratio compared to 2016 (Tables 4 - 5) was primarily driven by (i) greater favorable development of prior accident year losses compared to 2016 and (ii) pricing, underwriting and claims improvements implemented throughout the last two years, including improved risk classification, rate increases and reductions in claims leakage
The commercial auto SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 improved 20.8 points when compared to 2016 (Tables 4 - 5) primarily due to favorable development of prior accident year losses of $8.9 million compared to adverse development of $3.6 million in 2016. The majority of the 2017 favorable development was driven by lower than anticipated bodily injury severity from accident years 2014 and 2015. The 2016 commercial auto ratio improved 3.8 points compared to 2015 (Tables 5 - 6) primarily due to less adverse development of prior accident year losses as a result of revising our previous estimates for accident years 2014 and 2015, slightly offset by increases in the current accident year loss and ALAE estimates that reflect the impact of increasing bodily injury severity trends.
The small commercial package SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 improved 3.2 points compared to 2016 (Tables 4 -5) primarily driven by greater favorable development of prior accident year losses compared to 2016. The 2017 favorable development was primarily due to lower than anticipated bodily injury severity from the 2016 accident year. The 2016 small commercial package ratio improved 9.0 points when compared to the same 2015 period primarily driven by (i) underwriting actions taken to improve production and profitability and (ii) large fire losses that occurred during the second half of 2015.
The middle market commercial SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 improved 9.5 points compared to 2016 (Tables 4 - 5) primarily driven by greater favorable development of prior accident year losses compared to 2016. The 2017 favorable development was attributable to lower than anticipated liability severity from accident years 2014 and 2015. The 2016 middle market commercial ratio increased 4.7 points compared to 2015 (Tables 5 - 6) primarily driven by (i) less favorable development of prior accident year losses compared to 2015 and (ii) large fire losses that occurred during the second half of 2016.
The workers’ compensation SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 improved 5.8 points compared to 2016 (Tables 4 - 5) primarily driven by greater favorable development of prior accident year losses compared to 2016. The 2017 favorable development occurred primarily within accident years 2015 and 2016. While lower than anticipated severity accounted for the majority of the development, lower than expected frequency contributed as well. The 2016 workers’ compensation ratio increased 1.1 points compared to 2015 (Tables 5 - 6) primarily due to less favorable development of prior accident year losses when compared to the same 2015 period.

43



The farm and ranch SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 increased 17.1 points compared to 2016 (Tables 4 - 5) primarily driven by large fire losses. The 2016 farm and ranch ratio improved 1.8 points compared to 2015 (Tables 5 - 6) primarily driven by greater favorable development of prior accident year losses compared to 2015.
Specialty Insurance Segment
The following table sets forth certain key performance indicators for our specialty insurance segment for the years ended December 31, 2017, 2016 and 2015:
Table 7
($ in millions)
 
 
 
 
 
 
 
 
2017
 
E&S Property
 
E&S Casualty
 
Programs
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
30.1

 
$
110.3

 
$
65.6

 
$
206.0

Net earned premiums
 
40.5

 
103.1

 
95.5

 
239.1

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
52.6

 
0.1

 
1.2

 
53.9

Non-cat loss and ALAE
 
12.6

 
72.0

 
71.5

 
156.1

Total Loss and ALAE
 
65.2

 
72.1

 
72.7

 
210.0

ULAE
 
0.1

 
3.7

 
5.7

 
9.5

Total Loss and LAE
 
65.3

 
75.8

 
78.4

 
219.5

Underwriting expenses
 
17.4

 
39.2

 
20.0

 
76.6

Net underwriting loss
 
$
(42.2
)
 
$
(11.9
)
 
$
(2.9
)
 
$
(57.0
)
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
130.1
%
 
0.1
%
 
1.2
%
 
22.5
%
Non-cat loss and ALAE ratio
 
31.2
%
 
69.8
%
 
74.9
%
 
65.3
%
Total Loss and ALAE ratio
 
161.3
%
 
69.9
%
 
76.1
%
 
87.8
%
ULAE ratio
 
%
 
3.6
%
 
5.9
%
 
4.0
%
Total Loss and LAE ratio
 
161.3
%
 
73.5
%
 
82.0
%
 
91.8
%
Expense ratio
 
57.9
%
 
35.5
%
 
30.5
%
 
37.2
%
Combined ratio
 
219.2
%
 
109.0
%
 
112.5
%
 
129.0
%
 
 
 
 
 
 
 
 
 


44



Table 8
($ in millions)
 
 
 
 
 
 
 
 
2016
 
E&S Property
 
E&S Casualty
 
Programs
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
44.4

 
$
99.6

 
$
112.7

 
$
256.7

Net earned premiums
 
40.4

 
91.0

 
109.4

 
240.8

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
6.9

 
0.1

 
0.5

 
7.5

Non-cat loss and ALAE
 
13.5

 
65.3

 
94.9

 
173.7

Total Loss and ALAE
 
20.4

 
65.4

 
95.4

 
181.2

ULAE
 
(0.4
)
 
4.3

 
5.5

 
9.4

Total Loss and LAE
 
20.0

 
69.7

 
100.9

 
190.6

Underwriting expenses
 
20.1

 
35.5

 
37.3

 
92.9

Net underwriting gain (loss)
 
$
0.3

 
$
(14.2
)
 
$
(28.8
)
 
$
(42.7
)
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
17.0
 %
 
0.1
%
 
0.5
%
 
3.1
%
Non-cat loss and ALAE ratio
 
33.5
 %
 
71.8
%
 
86.7
%
 
72.2
%
Total Loss and ALAE ratio
 
50.5
 %
 
71.9
%
 
87.2
%
 
75.3
%
ULAE ratio
 
(0.9
)%
 
4.7
%
 
5.1
%
 
3.9
%
Total Loss and LAE ratio
 
49.6
 %
 
76.6
%
 
92.3
%
 
79.2
%
Expense ratio
 
45.1
 %
 
35.6
%
 
33.1
%
 
36.2
%
Combined ratio
 
94.7
 %
 
112.2
%
 
125.4
%
 
115.4
%
 
 
 
 
 
 
 
 
 
Table 9
($ in millions)
 
 
 
 
 
 
 
 
2015
 
E&S Property
 
E&S Casualty
 
Programs
 
Total
 
 
 
 
 
 
 
 
 
Net written premiums
 
$
44.5

 
$
70.5

 
$
96.0

 
$
211.0

Net earned premiums
 
49.3

 
64.0

 
89.3

 
202.7

Losses and LAE incurred:
 
 
 
 
 
 
 
 
Cat loss and ALAE
 
0.1

 

 
0.2

 
0.3

Non-cat loss and ALAE
 
6.8

 
41.2

 
73.0

 
121.1

Total Loss and ALAE
 
7.0

 
41.2

 
73.2

 
121.4

ULAE
 
0.8

 
2.3

 
4.9

 
8.0

Total Loss and LAE
 
7.7

 
43.5

 
78.2

 
129.4

Underwriting expenses
 
21.1

 
24.6

 
33.4

 
79.1

Net underwriting gain (loss)
 
$
20.5

 
$
(4.1
)
 
$
(22.2
)
 
$
(5.9
)
 
 
 
 
 
 
 
 
 
Cat loss and ALAE ratio
 
0.3
%
 
%
 
0.2
%
 
0.2
%
Non-cat loss and ALAE ratio
 
13.8
%
 
64.4
%
 
81.8
%
 
59.7
%
Total Loss and ALAE ratio
 
14.1
%
 
64.4
%
 
82.0
%
 
59.9
%
ULAE ratio
 
1.6
%
 
3.6
%
 
5.5
%
 
4.0
%
Total Loss and LAE ratio
 
15.7
%
 
68.0
%
 
87.5
%
 
63.9
%
Expense ratio
 
47.5
%
 
34.9
%
 
34.8
%
 
37.5
%
Combined ratio
 
63.2
%
 
102.9
%
 
122.3
%
 
101.4
%
 
 
 
 
 
 
 
 
 
Net written premiums for the year ended December 31, 2017 decreased 19.8% compared to 2016 (Tables 7 - 8). The change was primarily driven by (i) our third quarter 2016 decision to exit program business and (ii) a decline in E&S property net written

45



premiums due to our 2017 decision to exit E&S property business (further described below) and continued competitiveness within the catastrophe-exposed property market. These decreases were partially offset by new business growth in E&S casualty, primarily driven by increased production from our umbrella and gas & propane distribution underwriting teams.
During the second half of 2017, management undertook a review of strategic alternatives for our specialty insurance segment products and ultimately determined that these products were not core to our overall corporate strategy. The decision was then made to begin exiting the excess and surplus lines business either through a series of renewal right transactions or by placing lines of business into run-off. This decision will result in the elimination of the specialty insurance segment and its related underwriting results from the State Auto Group. During November 2017, E&S property was placed into run-off. The number of in-force E&S property policies will decline throughout 2018 as they are non-renewed upon expiration, with the majority of the non-renewals occurring during the first half of 2018. By the end of 2018, we expect that all business within our E&S casualty line of business will either be in run-off or will no longer be written by us.
Net written premiums for the year ended December 31, 2016 increased 21.7% compared to 2015 (Tables 8 - 9). E&S casualty net written premiums increased 41.3% compared to 2015 primarily due to (i) continued organic growth within our general liability and umbrella lines, which comprised the majority of the increase, (ii) changes to the reinsurance treaty covering casualty risks within the specialty insurance segment, including an increase in our retention per loss occurrence (see “Liquidity and Capital Resources – Reinsurance Arrangements" in this Item 7 for further information), and (iii) the impact of the reinsurance correction recorded in the second quarter of 2015, which reduced E&S casualty net written premiums by $7.2 million. Programs unit net written premiums increased 17.4% compared to 2015 due to new programs added during the second half of 2015 and growth of existing programs. E&S property net written premiums were flat compared to the same 2015 period as a result of continuing competitiveness of the catastrophe-exposed property market.
The SAP catastrophe loss and ALAE ratio for 2017 was 22.5% compared to 3.1% and 0.2% in 2016 and 2015, respectively (Tables 7 - 9). The 2017 cat loss ratio reflects the impact of Hurricane’s Harvey and Irma, which added 21.2 points, or $50.6 million, to the cat loss ratio. The 2016 SAP catastrophe loss ratio reflects the impact of Hurricane Matthew which added 2.4 points, or $5.9 million, to the cat loss ratio.
The specialty insurance segment SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 was 65.3% compared to 72.2% and 59.7% in 2016 and 2015, respectively (Tables 7 - 9). The 2017 non-cat loss and ALAE ratio was impacted by $4.2 million of adverse development of prior accident year losses compared to $20.8 million in 2016. The 2017 adverse development was due to higher than anticipated severity for liability coverages on Florida package business in run-off in E&S property and related primarily to accident years 2013 - 2016. The 2016 development was primarily driven by (i) elevated severity trends within programs with commercial auto exposures and (ii) increases to prior accident year ultimate loss and ALAE estimates for the run-off healthcare line of business within E&S casualty.
The 2016 E&S property SAP non-catastrophe loss and ALAE ratio increased 19.7 points compared to 2015 (Tables 8 - 9) primarily driven by increases in the ultimate loss and ALAE estimates for prior accident years for the liability coverage of our Florida package business. The 2016 E&S casualty non-cat loss and ALAE ratio increased 7.4 points compared to 2015 driven by (i) increases in the ultimate loss and ALAE estimates for the current and prior accident years for our healthcare line, which was placed in run-off during the first quarter of 2016, and (ii) an increase in the ultimate loss and ALAE estimates for the current accident year in our general liability line due to increased severity. The programs loss and ALAE ratio increased 4.9 points compared to 2015 primarily driven by elevated severity trends within programs with commercial auto exposures, which contributed to (i) higher 2016 accident year loss and ALAE ratios and (ii) adverse development of prior accident year losses.




46



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, 2017, 2016 and 2015:
($ millions)
2017
 
%
GAAP Loss
and LAE Ratio
 
2016
 
%
GAAP  Loss
and LAE Ratio
 
2015
 
%
GAAP Loss
and LAE Ratio
Provision for losses and loss expenses occurring:
 
 
 
 
 
 
 
 
 
 
 
Current year
$
964.9

 
75.7

 
$
915.4

 
70.8
 
$
852.8

 
67.1
Prior years
(46.6
)
 
(3.7
)
 
27.0

 
2.1
 
10.0

 
0.8
Total losses and loss expenses
$
918.3

 
72.0

 
$
942.4

 
72.9
 
$
862.8

 
67.9
 
 
 
 
 
 
 
 
 
 
 
 
As shown above, the impact on 2017 loss and loss expenses attributable to prior years was $46.6 million, or favorable development in the estimated ultimate liability for prior years’ claims.

47



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, 2017, 2016 and 2015:
($ millions)
 
2017
 
2016
 
2015
 
 
Redundancy /(Deficiency)
Non-cat loss and ALAE:
 
 
 
 
 
 
Personal Insurance Segment:
 
 
 
 
 
 
Personal Auto
 
$
4.4

 
$
(7.9
)
 
$
(11.1
)
Homeowners
 
(1.5
)
 
(0.5
)
 
2.5

Other Personal
 
(1.3
)
 
(0.6
)
 
(1.9
)
Personal Insurance Segment
 
1.6

 
(9.0
)
 
(10.5
)
 
 
 
 
 
 
 
Commercial Insurance Segment:
 
 
 
 
 
 
Commercial Auto
 
8.9

 
(3.6
)
 
(9.8
)
Small Commercial Package
 
11.4

 
0.6

 
(1.0
)
Middle Market Commercial
 
8.2

 
0.4

 
4.3

Workers' Compensation
 
8.9

 
4.2

 
5.1

Farm & Ranch
 
0.9

 
1.7

 
0.6

Other Commercial
 
5.7

 
1.8

 
1.5

Commercial Insurance Segment
 
44.0

 
5.1

 
0.7

 
 
 
 
 
 
 
Specialty Insurance Segment:
 
 
 
 
 
 
E&S Property
 
(3.0
)
 
(1.9
)
 
5.2

E&S Casualty
 
(0.5
)
 
(4.6
)
 
(2.7
)
Programs
 
(0.7
)
 
(14.3
)
 
(9.6
)
Specialty Insurance Segment
 
(4.2
)
 
(20.8
)
 
(7.1
)
 
 
 
 
 
 
 
Cat Loss and ALAE
 
2.0

 
1.4

 
0.7

ULAE
 
3.2

 
(3.7
)
 
6.2

Total
 
$
46.6

 
$
(27.0
)
 
$
(10.0
)
 
 
 
 
 
 
 
For further information, see the discussion below and the "Personal Insurance Segment", "Commercial Insurance Segment" and "Specialty Insurance Segment" sections of “Results of Operations – Insurance Segments” included in this Item 7.











48



The following table sets forth a tabular presentation of the development of the ultimate liability by accident year for the year ended December 31, 2017:
($ millions)
 
Accident Year
2017
 
Redundancy /(Deficiency)
2007 and prior
$
(1.5
)
2008
0.7

2009
0.4

2010
1.9

2011
3.5

2012
7.7

2013
2.5

2014
7.9

2015
13.8

2016
9.7

Total
$
46.6

 
 
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 2017 development were as follows:
The commercial insurance segment non-catastrophe loss and ALAE reserves contributed $44.0 million of favorable development, driven by small commercial package, workers’ compensation, commercial auto and middle market commercial of $11.4 million, $8.9 million, $8.9 million and $8.2 million, respectively. Favorable development in these lines was driven by lower than anticipated severity emerging from multiple accident years.
ULAE was $3.2 million lower than anticipated in the reserves at December 31, 2016.
Catastrophe reserves contributed $2.0 million of favorable development.
The personal insurance segment non-catastrophe loss and ALAE reserves contributed $1.6 million of the favorable development, driven by personal auto which contributed $4.4 million of favorable development, primarily due to lower than anticipated bodily injury severity from the prior two accident years. This was partially offset by homeowners and other personal, which contributed $1.5 million and $1.3 million of adverse development, respectively.
The specialty insurance segment non-catastrophe loss and ALAE reserves accounted for $4.2 million of adverse development, which was 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 the run-off Florida package business. ​For programs, adverse development was $0.7 million, with adverse development of $5.7 million attributable to accident years 2013 - 2015 mostly offset by favorable development of $5.0 million, primarily from accident years 2012 and 2011.


49



The following table sets forth a tabular presentation of the development of the ultimate liability by accident year for the year ended December 31, 2016:
($ millions)
 
Accident Year
2016
 
Redundancy /(Deficiency)
2006 and prior
$
(3.4
)
2007
3.3

2008
1.7

2009
(1.6
)
2010
0.5

2011
1.7

2012
1.9

2013
(2.1
)
2014
(6.4
)
2015
(22.6
)
Total
$
(27.0
)
 
 
While emergence by accident year includes normal fluctuations due to the uncertainty associated with loss reserve development and claim settlement, the adverse development in 2016 resulted primarily from accident years 2015 and 2014. The more notable items contributing to 2016 development were as follows:
The specialty insurance segment non-catastrophe loss and ALAE reserves accounted for $20.8 million of adverse development, which was driven by programs and E&S casualty with adverse development of $14.3 million and $4.6 million, respectively. Programs adverse development was driven by higher than expected severity in programs with commercial auto exposures. E&S casualty adverse development was driven by increased severity from the healthcare line, which was placed in run-off in the first quarter of 2016.
The personal insurance segment non-catastrophe loss and ALAE reserves contributed $9.0 million of the adverse development, driven by personal auto which contributed $7.9 million of adverse development, primarily due to higher than anticipated bodily injury severity from the prior two accident years.
ULAE was $3.7 million higher than anticipated in the reserves at December 31, 2015.
The commercial insurance segment non-catastrophe loss and ALAE reserves contributed $5.1 million of favorable development, primarily driven by workers’ compensation, other commercial, and farm & ranch, of $4.2 million, $1.8 million, and $1.7 million respectively. Favorable development in these lines was driven by lower than anticipated severity emerging from multiple accident years. The favorable development was partially offset by adverse development in commercial auto of $3.6 million, which was driven by higher than anticipated bodily injury severity from the prior two accident years.
Catastrophe reserves contributed $1.4 million of favorable development.









50



The following table sets forth a tabular presentation of the favorable development by accident year for the year ended December 31, 2015:
($ millions)
 
Accident Year
2015
 
Redundancy /(Deficiency)
2005 and prior
$
1.1

2006
(0.2
)
2007
(0.1
)
2008
1.8

2009
2.0

2010
3.4

2011
(1.7
)
2012
(2.8
)
2013
(11.5
)
2014
(2.0
)
Total
$
(10.0
)
 
 
While emergence by accident year includes normal fluctuations due to the uncertainty associated with loss reserve development and claim settlement, the adverse development in 2015 resulted primarily from accident year 2013. The more notable items contributing to 2015 development were as follows:
The personal insurance segment contributed $10.5 million of the adverse development, primarily driven by personal auto which developed unfavorably by $11.1 million, due to higher than anticipated bodily injury severity trends from the 2014 and 2013 accident years. Partially offsetting the unfavorable development was favorable development of $2.5 million in homeowners.
In the specialty insurance segment, the non-catastrophe loss and ALAE reserves accounted for $7.1 million of adverse development, which was due to programs and E&S casualty with unfavorable development of $9.6 million and $2.7 million, respectively. Unfavorable development in programs was due to higher than expected severity in programs with commercial auto exposure. Partially offsetting the unfavorable development was favorable development of $5.2 million in the E&S property unit due to lower than anticipated severity emerging from accident year 2014.
ULAE was $6.2 million lower than anticipated in the reserves at December 31, 2014.
We experienced favorable catastrophe loss development of $0.7 million in 2015 related to catastrophe losses primarily from accident year 2014.
The commercial insurance segment contributed $0.7 million of favorable development, primarily due to favorable development in workers’ compensation and middle market commercial of $5.1 million and $4.3 million, respectively, driven by lower than anticipated severity emerging from multiple accident years. Partially offsetting the favorable development was adverse development in commercial auto of $9.8 million driven by higher than anticipated bodily injury severity from the prior two accident years.

51



The following table sets forth loss and loss expenses payable by major line of business at December 31, 2017 and 2016: 
($ millions)
2017
 
2016
 
$
Change
Personal Insurance Segment:
 
 
 
 
 
Personal auto
$
191.8

 
$
192.7

 
$
(0.9
)
Homeowners
50.5

 
50.5

 

Other Personal
13.8

 
11.3

 
2.5

Total Personal Insurance Segment
256.1

 
254.5

 
1.6

Commercial Insurance Segment:
 
 
 
 
 
Commercial Auto
92.1

 
98.3

 
(6.2
)
Small Commercial Package
124.5

 
125.4

 
(0.9
)
Middle Market Commercial
151.4

 
154.2

 
(2.8
)
Workers’ Compensation
193.4

 
185.6

 
7.8

Farm & Ranch
16.4

 
14.3

 
2.1

Other Commercial
26.5

 
24.7

 
1.8

Total Commercial Insurance Segment
604.3

 
602.5

 
1.8

Specialty Insurance Segment:
 
 
 
 
 
E&S Property
64.8

 
29.8

 
35.0

E&S Casualty
176.8

 
137.4

 
39.4

Programs
150.5

 
153.8

 
(3.3
)
Total Specialty Insurance Segment
392.1

 
321.0

 
71.1

Total losses and loss expenses payable net of reinsurance recoverable on losses and loss expenses payable
$
1,252.5

 
$
1,178.0

 
$
74.5

 
 
 
 
 
 
The loss and loss expenses payable at December 31, 2017 increased $74.5 million from the loss and loss expenses payable at December 31, 2016, primarily due to exposure growth and higher current accident year loss estimates in E&S casualty and a higher level of current accident year weather-related losses, predominantly in E&S property, driven by the impact of Hurricanes Harvey and Irma.
We conduct quarterly reviews of loss development reports and make judgments in determining the reserves for ultimate losses and loss expenses payable. Several factors are considered by us when estimating ultimate liabilities, including consistency in relative case reserve adequacy, consistency in claims settlement practices, recent legal developments, historical data, actuarial projections, accounting projections, exposure changes, anticipated inflation, current business conditions, catastrophe developments, late reported claims, and other reasonableness tests.
The risks and uncertainties inherent in our estimates include, but are not limited to, actual settlement experience different from historical data trends, changes in business and economic conditions, court decisions creating unanticipated liabilities, ongoing interpretation of policy provisions by the courts, inconsistent decisions in lawsuits regarding coverage and additional information discovered before settlement of claims. Our results of operations and financial condition 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 expense ratio was 35.7% in 2017 compared to 33.3% and 33.6% in 2016 and 2015, respectively. Acquisition and operating expenses for 2017 increased 2.4 points when compared to 2016 primarily driven by (i) the impact of our technology investments, including amortization and system and infrastructure support and (ii) an increase in contingent commissions. The 2016 expense ratio decreased 0.3 points compared to 2015, primarily driven by decreases in personnel costs and incentive compensation partially offset by an increase in technology investments.
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, and MLP exchange traded funds. 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

52



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.
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. At December 31, 2017, there was one fixed maturity investment rated below investment grade in our available-for-sale investment portfolio. This security is rated below investment grade due to a rating downgrade subsequent to the purchase of the security.
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 (“ETF”) 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 compare to how we manage our large-cap equity holdings.
At December 31, 2017, our investments in fixed maturities, equity securities and certain other invested assets were held as available-for-sale and carried at fair value. The unrealized holding gains or losses, net of applicable deferred taxes, are included as a separate component of stockholders’ equity as accumulated other comprehensive income (loss) and as such are not included in the determination of net income.
Composition of Investment Portfolio
The following table sets forth the composition of our investment portfolio at carrying value at December 31, 2017 and 2016:
($ millions)
2017
 
% of
Total
 
2016
 
% of
Total
Cash and cash equivalents
$
91.5

 
3.3
 
$
51.1

 
1.9
Fixed maturities, at fair value:
 
 
 
 
 
 
 
Fixed maturities
2,037.0

 
73.2
 
1,947.5

 
73.1
Treasury inflation-protected securities
155.8

 
5.6
 
161.8

 
6.1
Total fixed maturities
2,192.8

 
78.8
 
2,109.3

 
79.2
Notes receivable from affiliate (1)
70.0

 
2.5
 
70.0

 
2.6
Equity securities, at fair value:
 
 
 
 
 
 
 
Large-cap securities
96.8

 
3.5
 
139.0

 
5.2
Small-cap securities

 
 
79.1

 
3.0
Mutual and exchange traded funds
268.5

 
9.7
 
164.7

 
6.2
Total equity securities
365.3

 
13.2
 
382.8

 
14.4
Other invested assets, at fair value:
 
 
 
 
 
 
 
International instruments
45.2

 
1.6
 
35.7

 
1.3
Other invested assets
10.8

 
0.4
 
9.4

 
0.4
Total other invested assets, at fair value
56.0

 
2.0
 
45.1

 
1.7
Other invested assets, at cost
5.6

 
0.2
 
5.4

 
0.2
Total portfolio
$
2,781.2

 
100.0
 
$
2,663.7

 
100.0
 
 
 
 
 
 
 
 
(1)
In May 2009, we entered into two separate Credit Agreements with State Auto Mutual. Under these Credit Agreements, State Auto Mutual borrowed a total of $70.0 million from us on an unsecured basis. Interest is payable semi-annually at a fixed annual interest rate of 7.00%. Principal is payable May 2019.

53



The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at December 31, 2017:
($ millions)
Amortized
Cost
 
Fair
Value
Due in 1 year or less
$
5.9

 
$
5.9

Due after 1 year through 5 years
543.8

 
545.0

Due after 5 years through 10 years
419.1

 
420.3

Due after 10 years
499.6

 
521.2

U.S. government agencies residential mortgage-backed securities
704.7

 
700.4

Total
$
2,173.1

 
$
2,192.8

 
 
 
 
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, 2017, our equity portfolio consisted of approximately 42 different large-cap stocks and 15 mutual and exchange traded funds. The largest single fund holding was 20.2% of the equity portfolio based on fair value and the top ten positions accounted for 71.1% of the equity portfolio. During the fourth quarter of 2017, we sold our externally-managed small-cap holdings and reinvested the proceeds into small-cap focused mutual and exchange traded funds. At December 31, 2016, our equity portfolio consisted of approximately 44 different large-cap stock, 73 small-cap stocks and 11 mutual and exchange traded funds. The largest single fund holding was 12.7% of the equity portfolio based on fair value and the top ten positions accounted for 45.5% of the equity portfolio.
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 4.23 and 4.45 as of December 31, 2017 and 2016, 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, 2017:
($ millions)
Fair Value
 
-200 bps
Change
 
-100 bps
Change
 
Actual
 
+100 bps
Change
 
+200 bps
Change
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
478.8

 
$
456.8

 
$
436.9

 
$
418.6

 
$
401.9

Obligations of states and political subdivisions
573.5

 
549.0

 
525.8

 
502.8

 
477.2

Corporate securities
560.7

 
545.2

 
529.7

 
512.8

 
496.0

U.S. government agencies mortgage-backed securities
755.5

 
730.5

 
700.4

 
664.9

 
629.3

Balance as of December 31, 2017
$
2,368.5

 
$
2,281.5

 
$
2,192.8

 
$
2,099.1

 
$
2,004.4

 
 
 
 
 
 
 
 
 
 
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 63.1% of the bonds we own are rated AA 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

54



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, 2017, approximately $700.4 million, or 31.9%, of our fixed maturity available-for-sale investment portfolio was in either GNMA pools, which are guaranteed by the full faith and credit of the U.S. Government, or FNMA or Freddie Mac pools.
The following table sets forth the credit ratings of our municipal securities based on ratings by nationally recognized rating agencies at December 31, 2017:
($ millions)
 
 
 
Rating
Total fair
value
 
%
AAA
$
36.6

 
7.0
AA*
318.2

 
60.5
A
161.1

 
30.6
BBB
9.9

 
1.9
Total
$
525.8

 
100.0
 
 
 
 
 
 
*
Our AA rating category includes securities that have been either pre-funded or escrowed to maturity.
We believe our Muni Portfolio is well diversified by issuer and state. We have 7.6% 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 15.0% 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 57.8% of our Muni Portfolio and state and local government general obligation bonds make up 18.8% 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, 2017, our large-cap equity portfolio had a beta of 1.03 using the S&P 500 Index as the benchmark. At December 31, 2017, our mutual and exchange traded funds portfolio had a beta of 0.97 using the S&P 500 Index as a benchmark. Beta estimates the degree the portfolio’s price will fluctuate based on a given movement in the market index. The following tables set forth what changes might occur in the value of the large-cap equity portfolio and the mutual and exchange traded funds portfolio given a change in the S&P 500 Index at December 31, 2017:
Large-cap equity portfolio:
 
 
 
 
 
 
 
 
 
 
Fair value ($ millions)
 
$
116.7

 
$
106.8

 
$
96.8

 
$
86.8

 
$
76.9

Change in S&P 500 Index
 
+20%

 
+10%

 

 
-10
 %
 
-20
 %
Value as % of original value
 
121
%
 
110
%
 
100
%
 
90
 %
 
79
 %
Mutual and exchange traded funds portfolio:
 
 
 
 
 
 
 
 
 
 
Fair value ($ millions)
 
$
320.6

 
$
294.6

 
$
268.5

 
$
242.5

 
$
216.4

Change in Russell 2000 Index
 
+20%

 
+10%

 

 
-10
 %
 
-20
 %
Value as % of original value
 
119
%
 
110
%
 
100
%
 
90
 %
 
81
 %
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

55



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, 2017, we have one international fund which is included in other invested assets available-for-sale. The international fund had a beta of 0.70 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, 2017:
International fund:
 
 
 
 
 
 
 
 
 
 
Fair value ($ millions)
 
$
51.6

 
$
48.4

 
$
45.2

 
$
42.1

 
$
38.9

Change in MSCI EAFE Index
 
+20%

 
+10%

 

 
-10
%
 
-20
%
Value as % of original value
 
114
%
 
107
%
 
100
%
 
93
%
 
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.
Investment Operations Revenue
The following table sets forth the components of net investment income for the years ended December 31, 2017, 2016 and 2015:
($ millions)
Year Ended December 31
  
2017
 
2016
 
2015
Gross investment income:
 
 
 
 
 
Fixed maturities
$
63.2

 
$
63.4

 
$
61.3

Equity securities
10.5

 
7.3

 
6.5

Other
6.3

 
5.6

 
5.9

Total gross investment income
80.0

 
76.3

 
73.7

Less: Investment expenses
1.2

 
1.6

 
2.0

Net investment income
$
78.8

 
$
74.7

 
$
71.7

 
 
 
 
 
 
Average invested assets (at cost)
$
2,561.1

 
$
2,443.0

 
$
2,313.3

Annualized investment yield
3.1
%
 
3.1
%
 
3.1
%
Annualized investment yield, after tax
2.2
%
 
2.3
%
 
2.4
%
Net investment income, after tax
$
57.0

 
$
55.7

 
$
55.3

Effective tax rate
27.7
%
 
25.5
%
 
22.8
%
 
 
 
 
 
 
Our investment operations revenue for the year ended December 31, 2017 was primarily impacted by an increase in dividend income when compared to the same 2016 and 2015 periods. The dividend income increase was due primarily to higher dividends from our international fund and master limited partnership (MLP) holdings. With the enactment of TCJA, we anticipate that our effective tax rate on investment income will be approximately 17% in 2018.

56



The following table sets forth realized gains (losses) and the proceeds received on sale for our investment portfolio for the years ended December 31, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
 
Realized
gains
(losses)
 
Proceeds
received
on sale
 
Realized
gains
(losses)
 
Proceeds
received
on sale
 
Realized
gains
(losses)
 
Proceeds
received
on sale
Realized gains:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
$
2.8

 
$
184.8

 
$
2.8

 
$
211.6

 
$
4.6

 
$
180.7

Equity securities
66.7

 
243.2

 
29.2

 
147.0

 
29.6

 
135.1

Other invested assets
0.2

 
1.1

 
12.1

 
0.8

 
0.2

 
0.7

Total realized gains
$
69.7

 
$
429.1

 
$
44.1

 
$
359.4

 
$
34.4

 
$
316.5

Realized losses:
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Sales
$
(1.1
)
 
$
9.5

 
$
(0.8
)
 
$
6.0

 
$
(1.8
)
 
$
9.7

OTTI
(3.5
)
 

 
(4.5
)
 

 
(7.9
)
 

Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
OTTI

 

 
(2.3
)
 

 

 

Total realized losses
$
(4.6
)
 
$
9.5

 
$
(7.6
)
 
$
6.0

 
$
(9.7
)
 
$
9.7

Net realized gains on investments
$
65.1

 
$
438.6

 
$
36.5

 
$
365.4

 
$
24.7

 
$
326.2

 
 
 
 
 
 
 
 
 
 
 
 
Net realized gains increased $28.6 million and $11.8 million, respectively, when compared to the same 2016 and 2015 periods. Net realized gains in 2017 were impacted by (i) realized gains of $18.5 million from the sale of our U.S. small-cap equity portfolio and (ii) sales within our U.S. large-cap equity portfolio. The proceeds from the sale of our U.S. small-cap equity portfolio were reinvested in U.S. small-cap focused mutual and exchange traded funds. During the fourth quarter of 2016, we redeemed a limited partnership investment in international equities that had been classified as other invested assets. The redemption proceeds were reinvested in an international equity mutual fund classified as an equity security. The Company recognized a gain of $12.0 million on the redemption. Out of the total proceeds related to this redemption and reinvestment, $44.0 million was non-cash and therefore excluded from net cash used in investing activities in the consolidated statements of cash flows.
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. See “Critical Accounting Policies – Investments” included in this Item 7 for OTTI impairment indicators. Future increases or decreases in fair value, if not other-than-temporary, are included in accumulated other comprehensive income (loss). We recognized $2.3 million of OTTI on our fixed maturity portfolio during 2016. We did not recognize any impairments on our fixed maturity portfolio during 2017 or 2015.
When an equity security or other invested asset has been determined to have a decline in fair value that is other-than-temporary, we adjust the cost basis of the security to fair value. See “Critical Accounting Policies – Investments” included in this Item 7 for OTTI impairment indicators. This results in a charge to earnings as a realized loss, which is not reversed for subsequent recoveries in fair value. Future increases or decreases in fair value, if not other-than-temporary, are included in accumulated other comprehensive income (loss).
The following table sets forth the realized losses related to OTTI on our investment portfolio recognized for the years ended December 31, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
 
Number
of
positions
 
Total
impairment
 
Number
of
positions
 
Total
impairment
 
Number
of
positions
 
Total
impairment
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Large-cap securities
1

 
$
(1.5
)
 
2

 
$
(0.6
)
 
1

 
$
(2.2
)
Small-cap securities
22

 
(2.0
)
 
28

 
(3.9
)
 
41

 
(5.7
)
Fixed maturities

 

 
1

 
(2.3
)
 

 

Total OTTI
23

 
$
(3.5
)
 
31

 
$
(6.8
)
 
42


$
(7.9
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross Unrealized Investment Gains and Losses
Based upon our review of our investment portfolio at December 31, 2017, 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, 2017:
($ millions, except number of positions)
 
 
Cost or
amortized
cost
 
Gross
unrealized
holding
gains
 
Number of
gain
positions
 
Gross
unrealized
holding
losses
 
Number of
loss
positions
 
Fair
value
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
433.8

 
$
9.3

 
17

 
$
(6.2
)
 
40

 
$
436.9

Obligations of states and political subdivisions
507.1

 
19.1

 
113

 
(0.4
)
 
10

 
525.8

Corporate securities
527.5

 
4.5

 
53

 
(2.3
)
 
33

 
529.7

U.S. government agencies mortgage-backed securities
704.7

 
7.1

 
43

 
(11.4
)
 
72

 
700.4

Total fixed maturities
2,173.1

 
40.0

 
226

 
(20.3
)
 
155

 
2,192.8

Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
Large-cap securities
62.4

 
35.1

 
38

 
(0.7
)
 
4

 
96.8

Mutual and exchange traded funds
256.2

 
21.6

 
14

 
(9.3
)
 
1

 
268.5

Total equity securities
318.6

 
56.7

 
52

 
(10.0
)
 
5

 
365.3

Other invested assets
25.8

 
30.2

 
2

 

 

 
56.0

Total available-for-sale investments
$
2,517.5

 
$
126.9

 
280

 
$
(30.3
)
 
160

 
$
2,614.1

 
 
 
 
 
 
 
 
 
 
 
 

57



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, 2017 and 2016, and the change in unrealized holding gains, net of deferred tax, for the year ended December 31, 2017:
($ millions)
2017
 
2016
 
$
Change
Available-for-sale investments
 
 
 
 
 
Unrealized gains:
 
 
 
 
 
Fixed maturities
$
19.7

 
$
13.4

 
$
6.3

Equity securities
46.7

 
59.7

 
(13.0
)
Other invested assets
30.2

 
19.6

 
10.6

Unrealized gains
96.6

 
92.7

 
3.9

Deferred federal income tax liability
(30.6
)
 
(29.9
)
 
(0.7
)
Unrealized gains, net of tax
$
66.0

 
$
62.8

 
$
3.2

 
 
 
 
 
 
Fair Value Measurements
We primarily use one independent nationally recognized pricing service in developing fair value estimates. We obtain one price per security, and our processes and control procedures are designed to ensure the value is accurately recorded on an unadjusted basis. Through discussions with the pricing service, we gain an understanding of the methodologies used to price the different types of securities, that the data and the valuation methods utilized are appropriate and consistently applied, and that the assumptions are reasonable and representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service, we compare to other fair value pricing information gathered from other independent pricing sources. See Note 3, “Fair Value of Financial Instruments” to our consolidated financial statements included in Item 8 of this Form 10-K for a presentation of our available-for-sale investments within the fair value hierarchy at December 31, 2017.
As of December 31, 2017, we no longer hold any Level 3 assets.

58



Other Items
Income Taxes
For the year ended December 31, 2017, the federal income tax expense was $44.1 million compared to an income tax benefit of $1.8 million for 2016 and an income tax expense of $16.1 million for 2015. Our effective tax rate for 2017 was 132.0% compared with (9.4%) in 2016 and 23.9% in 2015. The change in our effective tax rate in 2017 was primarily due to the revaluation of our net deferred tax asset as a result of the enactment of the TCJA. The revaluation of our deferred tax asset resulted in a provisional deferred tax charge of $36.4 million.
Income taxes for the year ended 2016 reflect the impact of a correction of prior period deferred tax expense related to expired stock options. As a result of the correction, deferred federal income tax expense and additional paid-in-capital were reduced by $1.6 million, respectively.
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, 2017, 2016 and 2015.
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 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 credit facility is available for general corporate purposes such as funding liquidity needs.  See “Liquidity and Capital Resources – Borrowing Arrangements - Credit Facility” 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 2017, 2016 or 2015.

59



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, 2017 and 2016, we had $91.5 million and $51.1 million, respectively, in cash and cash equivalents, and $2,614.1 million and 2,537.2 million, respectively, of total available-for-sale investments. Substantially all of our fixed maturity and equity securities are traded on public markets. Included in our fixed maturities available-for-sale were $9.3 million and $9.2 million, respectively, of securities on deposit with insurance regulators, as required by law, at December 31, 2017 and 2016. In addition, 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 Loans. For a further discussion regarding investments, see “Results of Operations – Investments Operations Segment” included in this Item 7.
Net cash provided by operating activities was $67.9 million, $113.5 million and $149.8 million in 2017, 2016 and 2015, respectively. Net cash from operations will vary from period to period if there are significant changes in underwriting results, primarily a combination of the level of premiums written and loss and loss expenses paid, changes in cash flows from investment income or federal income tax activity.
Net cash used in investing activities was $20.5 million, $127.6 million and $167.7 million in 2017, 2016 and 2015, respectively. The change from 2017 compared to 2016 and 2015 was primarily due to an increase in proceeds from sales of equity securities. In addition to investment objectives, sales were executed during the year in order to meet operational needs.
Net cash used in financing activities was $7.0 million in 2017 compared to net cash provided by of $7.1 million in 2016, and net cash used by $10.3 million in 2015, respectively. The decrease year over year was primarily driven by proceeds from the new term loan with the Federal Home Loan Bank of Cincinnati ("the "FHLB") in the principal amount of $21.5 million in 2016.
Borrowing Arrangements
Credit Facility
State Auto P&C has a credit facility (the “SPC Credit Facility”) with a syndicate of lenders that provides State Auto P&C with a $100.0 million five-year revolving credit facility maturing in July 2018. During the term of the SPC Credit Facility, State Auto P&C has the right to increase the total facility to a maximum amount of $150.0 million, provided that no event of default has occurred. The SPC Credit Facility is available for general corporate purposes and provides for interest-only payments during its term, with principal and interest due in full at maturity. Interest is based on LIBOR or a base rate plus a calculated margin amount. All advances under the SPC Credit Facility are to be fully secured by a pledge of specific investment securities of State Auto P&C. The SPC Credit Facility includes certain covenants and requirements, including financial requirements that State Auto Financial maintain a minimum net worth and a certain debt to capitalization ratio. As of December 31, 2017, State Auto P&C had not made any borrowings under the SPC Credit Facility and State Auto P&C and State Auto Financial were in compliance with all covenants and requirements of the SPC Credit Facility.
FHLB Loans
State Auto P&C has a term loan from the FHLB in the principal amount of $21.5 million (the “2016 FHLB Loan”). The 2016 FHLB Loan matures in September 2021 and may be called (prepaid) after September 2018 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 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C. Proceeds from the loan were contributed to our pension plan to reduce our future pension costs.
In addition, State Auto P&C has a loan from the FHLB in the principal amount of $85.0 million ("2013 FHLB Loan"). The 2013 FHLB Loan is a 20-year term loan that may be currently called (prepaid) at any time with no prepayment penalty. The interest rate is fixed over the term of the loan at 5.03%.
The 2013 and 2016 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, 2017 and 2016 were 5.68% and 5.13%, respectively.

60



Notes Payable Summary
The following table sets forth our notes payable at December 31, 2017: 
($ millions)
Carrying
Value
 
Fair
Value
 
Interest
Rate
Subordinated Debentures due 2033: issued $15.5 million, May 2003 with variable interest adjusting quarterly
$
15.2

 
$
15.2

 
5.68
%
FHLB loan due 2033: issued $85.0 million, July 2013 with fixed interest
85.4

 
85.7

 
5.03
%
FHLB loan due 2021: issued $21.5 million , September 2016 with fixed interest
21.5

 
20.9

 
1.73
%
Total notes payable
$
122.1

 
$
121.8

 
 
 
 
 
 
 
 
Related to our notes payable, our primary market risk exposure is to the change in interest rates and our credit rating. For a discussion regarding our credit ratings see “Liquidity and Capital Resources – Credit and Financial Strength Ratings” included in this Item 7. Based upon the notes payable carrying value at December 31, 2017, we had $15.2 million notes payable with variable interest and $85.4 million and $21.5 million of notes payable with interest fixed at 5.03% and 1.73%, respectively, and, which equated to approximately 12.4% variable interest debt and 87.6% 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.
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 premium rates established by the state sponsor or operator, thereby transferring risk of loss to the participating insurers in exchange for premiums which may not be commensurate with the risk assumed.
Adverse Development Cover
The State Auto Group has an adverse development reinsurance agreement that provides $40.0 million of coverage for adverse development in excess of carried reserves for 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, 2017. 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 $325.0 million of covered loss, each occurrence. The reinsurers are responsible for 95.0% of the excess over $75.0 million up to $400.0 million of covered losses, each occurrence. The State Auto Group is responsible for catastrophe losses above $400.0 million.

61



Property Per Risk Treaty
As of July 1, 2017, the State Auto Group renewed its property per risk excess of loss reinsurance agreement. This reinsurance agreement provides individual property risk coverage for the State Auto Group for losses exceeding $3.0 million, subject to an additional $2 million annual aggregate retention (AAD). Claims arising from named storms and earthquake for E&S property are excluded from this treaty. The reinsurers are responsible for 100.0% of the loss excess of the $3.0 million retention and $2.0 million AAD for property business up to $20.0 million of covered loss.
Casualty and Workers' Compensation Treaties
As of July 1, 2017, the State Auto Group renewed its casualty excess of loss reinsurance agreement. Under this reinsurance agreement, the State Auto Group is responsible for the first $2.0 million of losses that involve workers' compensation, auto liability, other liability and umbrella liability policies, subject to an additional $2.0 million AAD. 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. E&S casualty and programs units risks are not subject to this casualty excess of loss reinsurance agreement.
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 $30.0 million of coverage in excess of $10.0 million retention for each loss occurrence. This Clash reinsurance coverage sits above the $8.0 million excess of $2.0 million arrangement. Policies underwritten by the E&S casualty and programs units are not subject to this casualty excess of loss reinsurance agreement.
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.
As of July 1, 2017, the State Auto Group renewed its reinsurance coverage for E&S casualty and programs casualty risks. Under this reinsurance agreement, the State Auto Group is responsible for the first $2.0 million of losses. This reinsurance agreement provides 95.0% coverage up to $9.0 million excess of $2.0 million for any one insured, all policies, and 100.0% of $14.0 million excess of $11.0 million clash only coverage.
The rates for all of our treaty reinsurance agreements are negotiated annually.

62



Contractual Obligations
The following table sets forth our significant contractual obligations at December 31, 2017:
($ millions)
Total
 
Due
1 year
or less
 
Due
1-3
years
 
Due
3-5
years
 
Due
after 5
years
Direct loss and ALAE reserves(1)
$
1,252.5

 
$
526.9

 
$
443.5

 
$
147.4

 
$
134.7

Notes payable(2):
 
 
 
 
 
 
 
 
 
Subordinated Debentures due 2033:
issued $15.5, May 2003 with variable interest(3) adjusting
quarterly
15.5

 

 

 

 
15.5

FHLB loan due 2033; issued $85.0 million, July 2013 with fixed interest
85.0

 

 

 

 
85.0

FHLB loan due 2021: issued $21.5 million , September 2016 with fixed interest
21.5

 
 
 
 
 
 
 
21.5

Total notes payable
122.0

 

 

 

 
122.0

Interest payable (2):
 
 
 
 
 
 
 
 
 
Subordinated Debentures due 2033:
issued $15.5, May 2003 with variable interest(3) adjusting
quarterly
14.6

 
0.9

 
1.8

 
1.8

 
10.1

FHLB loan due 2021: issued $21.5 million , September 2016 with fixed interest
1.5

 
0.4

 
0.7

 
0.4

 

FHLB loan due 2033; issued $85.0 million, July 2013 with fixed interest
70.7

 
4.3

 
8.6

 
8.6

 
49.2

Total interest payable
86.8

 
5.6

 
11.1

 
10.8

 
59.3

Postretirement benefits
12.9

 
1.5

 
2.9

 
2.6

 
5.9

Pension funding(4)
47.2

 
4.2

 
8.8

 
9.5

 
24.7

Total
$
1,521.4

 
$
538.2

 
$
466.3

 
$
170.3

 
$
346.6

 
 
 
 
 
 
 
 
 
 
 
 
(1)
We derived expected payment patterns separately for the direct loss and ALAE reserves. Amounts included the STFC Pooled Companies net additional share of transactions assumed from State Auto Mutual through the Pooling Arrangement. For a 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, 2017, 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.
(2)
For a discussion of these debt instruments, see “Liquidity and Capital Resources—Borrowing Arrangements” included in this Item 7.
(3)
Interest on the subordinated debentures was calculated using an interest rate equal to the three-month LIBOR rate at December 31, 2017 of 1.4806% plus 4.20%, or 5.6806%.
(4)
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 STFC’s share of expected benefit payments from the State Auto Group’s defined benefit pension plan.
 
 
 
Leases and other purchase obligations of State Auto Mutual are allocated to us through the Pooling Arrangement.
Regulatory Considerations
At December 31, 2017, 2016 and 2015, 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.

63



The following table sets forth the statutory leverage ratios for our insurance subsidiaries at December 31, 2017, 2016 and 2015:
Statutory Leverage Ratios
2017
 
2016
 
2015
State Auto P&C
1.5

 
1.5

 
1.5

Milbank
1.8

 
1.9

 
1.9

Weighted Average
1.6

 
1.5

 
1.6

 
 
 
 
 
 
 
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, $85.8 million is available for payment to State Auto Financial from its insurance subsidiaries in 2018 without prior approval. State Auto Financial received dividends from its insurance subsidiaries in the amount of $15.0 million, $10.0 million and $15.0 million in 2017, 2016 and 2015.
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. At December 31, 2017, the ratio of total adjusted statutory capital to authorized control level of State Auto Financial’s insurance subsidiaries ranged from 434% to 10,530%.
Credit and Financial Strength Ratings
As of June 6, 2017, 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.

64



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 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, equity security and certain other invested asset investments are classified as available-for-sale and carried at fair value. The unrealized holding gains or losses, net of applicable deferred taxes, are shown as a separate component of stockholders’ equity in accumulated other comprehensive income (loss), and as such are not included in the determination of net income. Investment income is recognized when earned, and capital gains and losses are recognized when investments are sold.
We regularly monitor our investment portfolio for declines in value that are other-than-temporarily impaired (“OTTI”), an assessment that requires significant management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known which could negatively impact the amounts reported herein. We consider the following factors when assessing our equity securities and other invested assets for OTTI: (i) the length of time and/or the significance of decline below cost; (ii) our ability and intent to hold these securities through their recovery periods; (iii) the current financial condition of the issuer and its future business prospects; and (iv) the ability of the market value to recover to cost in the near term. We recognize OTTI charges on our externally managed small-cap equity portfolio, as we are unable to make the assertion regarding our intent to hold these securities that are currently valued below cost until recovery in the near term. When an equity security or other invested asset has been determined to have a decline in fair value that is other-than-temporary, we adjust the cost basis of the security to fair value. This results in a charge to earnings as a realized loss, which is not reversed for subsequent recoveries in fair value. Future increases or decreases in fair value, if not other-than-temporary, are included in other comprehensive income (loss).
We also consider the following factors when assessing our fixed maturity investments for OTTI: (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.

65



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 IBNR claims. Our loss reserves are not discounted to present value.
Loss reserves are management’s best estimates (“MBE”) at a given point in time of what we expect to pay to settle all claims incurred as of that date based on known facts, circumstances and historical trends. Loss reserves at the individual claim level are established on either a case reserve basis or formula reserve basis 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 regular basis, and as new data becomes available, estimates are updated resulting in adjustments to loss reserves. Generally, reported losses initially reserved on a formula basis and not settled after six months are case reserved at that time. The process for calculating the IBNR component of the loss reserve is to develop an estimate of the ultimate losses and allocated loss expenses incurred, and subtract all amounts already paid or held as case or formula reserves.
The determination of ultimate losses integrates information and analysis provided by several disciplines within our Company, including claims, actuarial and accounting. This assessment requires considerable judgment in understanding how claims mature, which lines of business are the most volatile, and how trends change over time. Loss reserves represent an estimate at a given point in time based on many variables including historical and statistical 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, accounting projections, exposure growth, current business conditions, catastrophe developments and late reported claims. In addition, reasonableness tests are performed on many of the assumptions underlying each reserving methodology, such as claim frequency, claim severity and loss ratios. Nonetheless, changes which are not contemplated do occur over time, and those changes are incorporated in subsequent valuations of our loss reserves.
We use a number of different methodologies to estimate the IBNR component of our loss reserves. Our loss reserves include amounts related to short-tail and long-tail lines of business. “Tail” refers to the time period between the occurrence of a loss and the settlement of the claim. In general, the longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary. The reserving methods and strengths and weaknesses of each are described below.
Short-Tail Business: For short-tail business, claims are typically settled within five years, and the most common actuarial estimates are based on techniques using link ratio projections of incurred losses, paid losses, claim counts and claim severities. Each of these methods is described below in detail. Separate projections are made for catastrophes that are in the very early stages of development based on specific information known through the reporting date.
Incurred Loss Development Method: The Incurred Loss Development Method is probably the most common actuarial method used in projecting indicated IBNR reserves. This method uses paid loss experience as well as the outstanding estimates (formula

66



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. The underlying assumption of the Incurred Loss Development Method is that case reserve adequacy remains consistent over time. This method’s advantage is its responsiveness to changes in reported losses, which is particularly valuable in the less mature accident years. The disadvantage of the Incurred Loss Development Method is that case reserve adequacy changes will distort the IBNR projections.
Paid Loss Development Method: The Paid Loss Development Method uses calculations that are very similar to the Incurred Loss Development Method. The key difference is that the data used in the paid method exclude case reserve estimates, so only paid losses are utilized. With this method, a payment pattern is estimated to project ultimate settlement values for each accident year, with the underlying assumption that claims are settled at a consistent rate over time. Neither case reserves nor the rate at which claims are reported (except to the 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 other methods. The incurred claim counts reported to date are projected to an ultimate number. Similarly, the incurred loss severities are projected to an ultimate value. The ultimate incurred count is multiplied by the ultimate incurred severity, for each accident year, to arrive at the ultimate incurred loss.
Long-Tail Business: For long-tail business, a material portion of claims may not be settled within five years. Reserve estimates for long-tail business use the same methods listed above along with several other methods as determined by the actuary. For example, premium-based methods may be used in developing ultimate loss estimates, including the Expected Loss Ratio, Bornhuetter-Ferguson, and Least-Squares techniques as described below.
Expected Loss Ratio Method: The Expected Loss Ratio Method generates indicated IBNR by multiplying an expected loss ratio by earned premiums, then subtracting incurred-to-date losses. For slower reporting lines of business, new products, or data that is very immature, the actual claim data is often too limited or too volatile for other projection methods. With this method the premiums are used as a measure of loss exposure, and the loss ratios can be derived from pricing expectations.
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 as the weight. This method is particularly useful where there is a low volume of data in the current accident period, or where the experience is volatile. In general, this method produces estimates that are similar to the Incurred Loss Development Method.
​Paid Bornhuetter-Ferguson Method:  The Paid Bornhuetter-Ferguson Method is a weighted average of the Expected Loss Ratio Method and the Paid Development Method, using the percentage of losses paid as the weight.  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.
Least Square Loss Development Method: In the Least Squares Loss Development Method, the statistical technique of least squares regression is applied to a triangle of reported loss ratios to project the ultimate loss ratio in each accident year. Using historical loss ratios puts the data for each time period on a more consistent exposure basis, because premium levels are generally correlated with insured exposures. A by-product of the regression function is an estimate of credibility for each stage of development. In cases where the regression parameters fall outside of a reasonable range, the projection defaults to the incurred loss method.
Selection Process: In determining which reserving method to use for a particular line of business or accident year, diagnostic tests of loss ratios and severity trends are considered, as well as the 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 and prior period development. For example, if more than one method provides a reasonable projection, the actuary may select an average of those methods. There is considerable judgment applied in the analysis of the historical patterns and in applying business knowledge of our underwriting and claims functions.
Reserve ranges provide a quantification of the variability in the loss reserve projections. The primary determinant in estimating the loss reserve range boundaries are the variances measured within the historical reserving data for the various lines of business. MBE of loss reserves considers the expected variation to establish an appropriate position within a range. At December 31, 2017, MBE of our direct loss and ALAE reserves for the STFC Pooled Companies’ share of the Pooled Companies’ reserves were $1,258.6 million, within an estimated range of $1,094.6 million to $1,311.9 million.

67



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, $1,311.9 million, the reserve increase of $53.3 million corresponds to an after-tax decrease of $42.1 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, $1,094.6 million, the $164.0 million reserve decrease would add $129.6 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, 2017, workers’ compensation loss and ALAE reserve to generate estimated annual incremental loss and ALAE payments for each subsequent calendar year. Then, for purposes of sensitivity testing, an additional annual loss cost trend of 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 $110.9 million on reserves, or a $87.6 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’ reserves.
In addition to establishing loss reserves, as described above, we establish reserves for ULAE. Historical patterns of paid ULAE relative to paid loss are analyzed along with historical claim counts including claims opened, claims closed, and claims remaining open. The product of this analysis is an estimate of the relationship, or ratio, between ULAE and loss underlying the current loss reserves. This ratio is applied to the current outstanding loss reserves to estimate the required ULAE reserve. Consequently, this component of the loss expense reserve has a proportional relationship to the overall claim inventory and held loss reserves. The method assumes that the underlying claims process and mix of business do not change materially from period to period.

68



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, 2017 and 2016. The STFC Pooled Companies net additional share of transactions assumed from State Auto Mutual through the Pooling Arrangement for the years ended December 31, 2017 and 2016, respectively, has been reflected in the table below as assumed by STFC Pooled Companies.
($ millions)
2017
 
2016
Direct loss and ALAE reserve:
 
 
 
STFC Pooled Companies
$
527.1

 
536.9

Assumed by STFC Pooled Companies
731.5

 
643.8

Total direct loss and ALAE reserve
1,258.6

 
1,180.7

Direct ULAE reserve:
 
 
 
STFC Pooled Companies
29.8

 
31.3

Assumed by STFC Pooled Companies
33.8

 
32.2

Total direct ULAE reserve
63.6

 
63.5

Direct salvage and subrogation recoverable:
 
 
 
STFC Pooled Companies
(21.9
)
 
(22.5
)
Assumed by STFC Pooled Companies
(3.6
)
 
(4.5
)
Total direct salvage and subrogation recoverable
(25.5
)
 
(27.0
)
Reinsurance recoverable
(3.1
)
 
(3.6
)
Assumed reinsurance
9.2

 
5.1

Reinsurance assumed by STFC Pooled Companies
(50.3
)
 
(40.7
)
Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable of $3.1 million and $3.6 million in 2017 and 2016, respectively
$
1,252.5

 
1,178.0

 
 
 
 
The following tables set forth the net losses and loss expenses payable by major line of business at December 31, 2017 and 2016:
($ millions)
Ending
Loss &
ALAE
Case &
Formula
 
Ending
Loss &
ALAE
IBNR
 
Ending
ULAE
Bulk
 
Total
Reserves
December 31, 2017
 
 
 
Personal Insurance Segment:
 
 
 
 
 
 
 
Personal Auto
$
125.7

 
56.4

 
9.7

 
191.8

Homeowners
28.8

 
18.5

 
3.2

 
50.5

Other personal
5.6

 
7.6

 
0.6

 
13.8

Total Personal Insurance Segment
160.1

 
82.5

 
13.5

 
256.1

Commercial Insurance Segment:
 
 
 
 
 
 
 
Commercial Auto
53.2

 
35.7

 
3.2

 
92.1

Small Commercial Package
51.6

 
66.7

 
6.2

 
124.5

Middle Market Commercial
59.6

 
77.8

 
14.0

 
151.4

Workers’ Compensation
68.3

 
112.5

 
12.6

 
193.4

Farm & Ranch
10.1

 
5.5

 
0.8

 
16.4

Other Commercial
3.8

 
22.6

 
0.1

 
26.5

Total Commercial Insurance Segment
246.6

 
320.8

 
36.9

 
604.3

Specialty Insurance Segment:
 
 
 
 
 
 
 
E&S Property
44.3

 
19.6

 
0.9

 
64.8

E&S Casualty
38.7

 
129.2

 
8.9

 
176.8

Programs
58.6

 
88.1

 
3.8

 
150.5

Total Specialty Insurance Segment
141.6

 
236.9

 
13.6

 
392.1

Total losses and loss expenses payable net of reinsurance recoverable on losses and loss expenses payable
$
548.3

 
640.2

 
64.0

 
1,252.5

 
 
 
 
 
 
 
 

69



($ millions)
Ending
Loss &
ALAE
Case &
Formula
 
Ending
Loss &
ALAE
IBNR
 
Ending
ULAE
Bulk
 
Total
Reserves
December 31, 2016
 
 
 
Personal Insurance Segment:
 
 
 
 
 
 
 
Personal Auto
$
121.6

 
60.3

 
10.8

 
192.7

Homeowners
32.8

 
14.9

 
2.8

 
50.5

Other personal
2.2

 
8.6

 
0.5

 
11.3

Total Personal Insurance Segment
156.6

 
83.8

 
14.1

 
254.5

Commercial Insurance Segment:
 
 
 
 
 
 
 
Commercial Auto
47.8

 
46.6

 
3.9

 
98.3

Small Commercial Package
55.9

 
62.5

 
7.0

 
125.4

Middle Market Commercial
63.4

 
76.8

 
14.0

 
154.2

Workers’ Compensation
68.0

 
106.0

 
11.6

 
185.6

Farm & Ranch
8.5

 
5.1

 
0.7

 
14.3

Other Commercial
1.0

 
23.6

 
0.1

 
24.7

Total Commercial Insurance Segment
244.6

 
320.6

 
37.3

 
602.5

Specialty Insurance Segment:
 
 
 
 
 
 
 
E&S Property
12.0

 
16.2

 
1.6

 
29.8

E&S Casualty
30.2

 
99.5

 
7.7

 
137.4

Programs
68.1

 
82.6

 
3.1

 
153.8

Total Specialty Insurance Segment
110.3

 
198.3

 
12.4

 
321.0

Total losses and loss expenses payable net of reinsurance recoverable on losses and loss expenses payable
$
511.5

 
602.7

 
63.8

 
1,178.0

 
 
 
 
 
 
 
 
 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.
Asbestos reserves are $1.2 million, and environmental reserves are $17.1 million, for a total of $18.3 million, or 1.5% of net losses and loss expenses payable. Asbestos and environmental reserves increased $0.1 million and $2.0 million, respectively, from 2016.
Pension and Postretirement Benefit Obligations
Pension and postretirement benefit obligations are long-term in nature and require management’s judgment in estimating the factors used to determine these amounts. We review these factors annually, including the discount rate and expected long-term rate of return on plan assets. Because these obligations are based on estimates which could change, the ultimate benefit obligation could be different from the amount estimated.
The State Auto Group has a defined benefit pension plan covering substantially all employees hired prior to January 1, 2010 and a postretirement healthcare plan covering certain associates and retirees (collectively “the benefit plans”). Several factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the benefit plans. Key factors include assumptions about the expected rates of return on plan assets, discount rates, and health care cost trend rates. We consider market conditions, including changes in investment returns and interest rates, in making these assumptions. The actuarial assumptions used by us in determining benefit obligations may differ materially from actual results due to changing market and economic conditions, higher or lower turnover and retirement rates, or longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect our financial position or results of operations.
For the December 31, 2017 and 2016 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 Scale MP-2017 to reflect mortality improvement (Scale MP-2016 was used at the beginning of the year). The January 1, 2018 and 2017 actuarial reports of the benefit plans included these revised mortality assumptions.

70



To calculate the State Auto Group’s December 31, 2017 benefit obligation for each of the benefit plans, we used a discount rate of 3.50% 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, 2017 and net periodic benefit cost for the year ended December 31, 2018, a discount rate of 3.50% and an expected long-term rate of return on plan assets of 7.00% 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 increased $0.7 million for the year ended December 31, 2017 and increased $2.9 million for the year ended December 31, 2016.
The following table sets forth an illustration of variability with respect to the discount rate on our share of the State Auto Group’s December 31, 2017 benefit obligation and expected net periodic benefit cost for the year ending December 31, 2018, along with the variability of the expected return on plan assets to our expected net periodic benefit cost for the year ending December 31, 2018. Holding all other assumptions constant, sensitivity to changes in any one of our key assumptions are as follows:
($ millions)
Pension
 
Postretirement
 
Discount rate
 
Discount rate
 
3.25%
 
3.50%
 
3.75%
 
3.25%
 
3.50%
 
3.75%
Benefit obligation
$
315.7

 
304.2

 
292.8

 
$
18.8

 
18.3

 
18.0

Net periodic benefit cost (benefit)
$
6.6

 
5.6

 
4.8

 
$
(4.7
)
 
(4.6
)
 
(4.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Expected return on plan assets
 
 
 
 
 
 
 
6.75%
 
7.00%
 
7.25%
 
 
 
 
 
 
Net periodic benefit cost
$
6.3

 
5.6

 
5.0

 
 
 
 
 
 
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, 2017, our share of the State Auto Group’s ABO and PBO was $287.9 million and $304.2 million, respectively. At December 31, 2017, STFC’s share of the defined benefit pension plan’s fair value of the assets was $265.0 million, which resulted in an underfunded status within our balance sheet of $39.2 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 2018.
The unfunded status on the pension plan and supplemental executive retirement plan decreased from $55.6 million at December 31, 2016, to $46.2 million at December 31, 2017. 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 2017, we recognized federal income tax expense of $44.1 million compared to a federal income tax benefit of $1.8 million for 2016 and federal income tax expense of $16.1 million for 2015. Income taxes for the year ended 2017 reflect provisional deferred tax expense of $34.6 million attributable to the revaluation of our deferred tax assets and liabilities as a result of the enactment of the TCJA. Income taxes for the year ended 2016 reflect the impact of a correction of prior period deferred tax expense related to expired stock options. As a result of the correction, deferred federal income tax expense and additional paid-in-capital were reduced by $1.6 million, respectively.
In computing taxable income, property and casualty insurers are required to discount their unpaid loss reserves. The discount is determined using interest rates and claim payment patterns prescribed by the U.S. Treasury. The TCJA changed the prescribed

71



interest rates to rates based on corporate bond yield curves and extends the applicable time periods for the claim payment pattern. Management determined the provisional change in discounted loss reserves attributable to the TCJA changes to be $50.9 million pre-tax. As a result of changes to the Section 846 of the IRS Code, deferred tax assets were increased by that amount, with an offsetting deferred tax liability. The deferred tax liability will be amortized over a period of eight years beginning in 2018. The provisional amount will be adjusted once the IRS publishes the official discount factors that should be used.
Deferred income tax assets and liabilities represent the tax effect of the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. In accordance with the FASB’s ASC 740, Income Taxes (ASC 740), we periodically evaluate our deferred tax assets, which requires significant judgment, to determine if they are realizable based upon weighing all available evidence, both positive and negative, including our historical and anticipated future taxable income. In making such judgments, significant weight is given to evidence that can be objectively verified.
Management anticipates generating taxable income over the next three years that will allow for the realization of all of our net operating loss (“NOL”) carryforwards by the end of 2020. The NOL carryforwards do not begin to expire until 2030 and will not fully expire until 2036.
The following table sets forth the components of our federal income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
Income before federal income taxes
$
33.4

 
$
19.2

 
$
67.3

 
 
 
 
 
 
Current tax expense (benefit)
0.4

 
(1.7
)
 
2.9

Deferred tax expense (benefit)
43.7

 
(0.1
)
 
13.2

Total federal income tax expense (benefit)
44.1

 
(1.8
)
 
16.1

Net (loss) income
$
(10.7
)
 
$
21.0

 
$
51.2

 
 
 
 
 
 
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:

72



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, 2017 and 2016, 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, 2017, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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, 2017, 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 28, 2018 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 28, 2018
 
 


73



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, 2017, 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, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the PCAOB) , the consolidated balance sheets of the Company as of December 31, 2017 and 2016, 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, 2017, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 28, 2018, 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 28, 2018
 
 


74



STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Balance Sheets
($ and shares in millions, except per share amounts)
December 31
 
2017
 
2016
Assets
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $2,173.1 and $2,095.9, respectively)
$
2,192.8

 
$
2,109.3

Equity securities, available-for-sale, at fair value (cost $318.6 and $323.1, respectively)
365.3

 
382.8

Other invested assets, available-for-sale, at fair value (cost $25.8 and $25.5, respectively)
56.0

 
45.1

Other invested assets
5.6

 
5.4

Notes receivable from affiliate
70.0

 
70.0

Total investments
2,689.7

 
2,612.6

Cash and cash equivalents
91.5

 
51.1

Accrued investment income and other assets
36.5

 
40.0

Deferred policy acquisition costs (affiliated net assumed $64.7 and $50.7, respectively)
117.8

 
129.8

Reinsurance recoverable on losses and loss expenses payable
3.1

 
3.6

Prepaid reinsurance premiums
6.4

 
6.1

Current federal income taxes
4.8

 
6.7

Net deferred federal income taxes
57.2

 
102.1

Property and equipment, at cost (net of accumulated depreciation of $6.8 and $6.6, respectively)
7.3

 
7.4

Total assets
$
3,014.3

 
$
2,959.4

Liabilities and Stockholders’ Equity
 
 
 
Losses and loss expenses payable (affiliated net assumed $711.4 and $630.9, respectively)
$
1,255.6

 
$
1,181.6

Unearned premiums (affiliated net assumed $187.9 and $220.9, respectively)
611.8

 
617.8

Notes payable (affiliates $15.2 and $15.2, respectively)
122.1

 
122.1

Postretirement and pension benefits (affiliated net ceded $34.8 and $40.1, respectively)
64.5

 
74.4

Due to affiliate
2.7

 
2.4

Other liabilities (affiliated net assumed $15.5 and $11.0, respectively)
76.7

 
69.8

Total liabilities
2,133.4

 
2,068.1

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; 49.2 and 48.6 shares issued, respectively, at stated value of $2.50 per share
123.0

 
121.6

Treasury stock, 6.8 and 6.8 shares, respectively, at cost
(116.8
)
 
(116.5
)
Additional paid-in capital
171.8

 
159.9

Accumulated other comprehensive income (affiliated net ceded $50.7 and $53.7, respectively)
36.7

 
32.5

Retained earnings
666.2

 
693.8

Total stockholders’ equity
880.9

 
891.3

Total liabilities and stockholders’ equity
$
3,014.3

 
$
2,959.4

 
 
 
 
See accompanying notes to consolidated financial statements.

75



STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Income
($ millions, except per share amounts)
Year ended December 31
 
2017
 
2016
 
2015
 
 
 
 
 
 
Earned premiums (affiliated net assumed $458.0, $472.0 and $437.6, respectively)
$
1,275.1

 
$
1,291.9

 
$
1,270.5

Net investment income (affiliates $4.9, $4.9 and $4.9, respectively)
78.8

 
74.7

 
71.7

Net realized gain on investments:
 
 
 
 
 
Total other-than-temporary impairment losses
(3.5
)
 
(6.8
)
 
(7.9
)
Portion of loss recognized in other comprehensive income

 

 

Other net realized investment gains
68.6

 
43.3

 
32.2

Total net realized gain on investments
65.1

 
36.5

 
24.3

Other income (affiliates $2.3, $2.3 and $2.1, respectively)
2.3

 
2.3

 
2.1

Total revenues
1,421.3

 
1,405.4

 
1,368.6

Losses and loss expenses (affiliated net assumed $379.6, $383.8 and $293.3, respectively)
918.3

 
942.4

 
862.8

Acquisition and operating expenses (affiliated net assumed $270.7, $285.8 and $248.6, respectively)
455.8

 
430.4

 
426.8

Interest expense (affiliates $0.8, $0.8 and $0.7, respectively)
5.9

 
5.5

 
5.4

Other expenses
7.9

 
7.9

 
6.3

Total expenses
1,387.9

 
1,386.2

 
1,301.3

Income before federal income taxes
33.4

 
19.2

 
67.3

Federal income tax expense (benefit):
 
 
 
 
 
Current
0.4

 
(1.7
)
 
2.9

Deferred
43.7

 
(0.1
)
 
13.2

Total federal income tax expense (benefit)
44.1

 
(1.8
)
 
16.1

Net (loss) income
$
(10.7
)
 
$
21.0

 
$
51.2

(Loss) earnings per common share:
 
 
 
 
 
Basic
$
(0.25
)
 
$
0.50

 
$
1.25

Diluted
$
(0.25
)
 
$
0.50

 
$
1.23

Dividends paid per common share
$
0.40

 
$
0.40

 
$
0.40

 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

76



STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Comprehensive Income
($ millions)
Year ended December 31
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net (loss) income
$
(10.7
)
 
$
21.0

 
$
51.2

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Net change in unrealized holding gains (losses) on investments:
 
 
 
 
 
Unrealized holding gains (losses) arising during year
69.0

 
27.8

 
(39.2
)
Reclassification adjustments for gains realized in net income
(65.1
)
 
(36.5
)
 
(24.7
)
Income tax (expense) benefit
(0.7
)
 
3.0

 
22.4

Total change in net unrealized holding gains (losses) on investments
3.2

 
(5.7
)
 
(41.5
)
Net unrecognized benefit plan obligations:
 
 
 
 
 
Net actuarial (loss) gain arising during period
(1.0
)
 
(3.0
)
 
5.3

Reclassification adjustments for amortization to statements of income:
 
 
 
 
 
Negative prior service cost
(5.5
)
 
(5.5
)
 
(5.4
)
Net actuarial gain
8.0

 
9.4

 
11.5

Income tax expense
(0.5
)
 
(0.3
)
 
(4.0
)
Total net unrecognized benefit plan obligations
1.0

 
0.6

 
7.4

Other comprehensive income (loss)
4.2

 
(5.1
)
 
(34.1
)
Comprehensive (loss) income
$
(6.5
)
 
$
15.9

 
$
17.1

 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

77



STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Stockholders’ Equity
(in millions)
Year ended December 31
 
2017
 
2016
 
2015
Common shares:
 
 
 
 
 
Balance at beginning of year
48.6

 
48.1

 
47.7

Issuance of shares
0.6

 
0.5

 
0.4

Balance at end of year
49.2

 
48.6

 
48.1

Treasury shares:
 
 
 
Balance at beginning of year
(6.8
)
 
(6.8
)
 
(6.8
)
Balance at end of year
(6.8
)
 
(6.8
)
 
(6.8
)
Common stock:
 
 
 
Balance at beginning of year
$
121.6

 
$
120.4

 
$
119.3

Issuance of shares
1.4

 
1.2

 
1.1

Balance at end of year
$
123.0

 
$
121.6

 
$
120.4

Treasury stock:
 
 
 
Balance at beginning of year
$
(116.5
)
 
$
(116.3
)
 
$
(116.0
)
Shares acquired on stock award exercises and vested restricted shares
(0.3
)
 
(0.2
)
 
(0.3
)
Balance at end of year
$
(116.8
)
 
$
(116.5
)
 
$
(116.3
)
Additional paid-in capital:
 
 
 
Balance at beginning of year
$
159.9

 
$
153.5

 
$
143.2

Issuance of common stock
8.8

 
6.8

 
5.2

Tax (expense) benefit from stock option exercises

 
(3.0
)
 
0.3

Stock awards granted
3.1

 
2.6

 
4.8

Balance at end of year
$
171.8

 
$
159.9

 
$
153.5

Accumulated other comprehensive income:
 
 
 
Balance at beginning of year
$
32.5

 
$
37.6

 
$
71.7

Change in unrealized holding gains (losses) on investments, net of tax
3.2

 
(5.7
)
 
(41.5
)
Change in unrecognized benefit plan obligations, net of tax and reclassification adjustments
1.0

 
0.6

 
7.4

Balance at end of year
$
36.7

 
$
32.5

 
$
37.6

Retained earnings:
 
 
 
Balance at beginning of year
$
693.8

 
$
689.4

 
$
654.7

Net (loss) income
(10.7
)
 
21.0

 
51.2

Cash dividends paid (affiliates $10.4, $10.4 and $10.4, respectively)
$
(16.9
)
 
$
(16.6
)
 
$
(16.5
)
Balance at end of year
666.2

 
693.8

 
689.4

Total stockholders’ equity at end of year
$
880.9

 
$
891.3

 
$
884.6

 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Cash Flows
($ millions)
Year ended December 31
 
2017
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
 
Net (loss) income
$
(10.7
)
 
$
21.0

 
$
51.2

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization, net
12.5

 
14.6

 
15.7

Share-based compensation
4.2

 
3.7

 
4.5

Net realized gain on investments
(65.1
)
 
(36.5
)
 
(24.3
)
Changes in operating assets and liabilities:
 
 
 
 
 
Deferred policy acquisition benefits
12.0

 
(0.7
)
 
(2.6
)
Accrued investment income and other assets
3.5

 
(4.5
)
 
(2.4
)
Postretirement and pension benefits
(9.0
)
 
(28.8
)
 
(6.0
)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums
0.2

 
3.0

 
3.0

Other liabilities and due to/from affiliates, net
6.0

 
7.3

 
(39.9
)
Losses and loss expenses payable
74.0

 
128.6

 
69.8

Unearned premiums
(6.0
)
 
1.5

 
3.9

Excess tax expense on share-based awards

 
(0.2
)
 
(0.3
)
Federal income taxes
46.3

 
4.5

 
13.7

Cash provided from December 31, 2014 unearned premium transfer related to the homeowners quota-share reinsurance arrangement

 

 
63.5

Net cash provided by operating activities
$
67.9

 
$
113.5

 
$
149.8

Cash flows from investing activities:
 
 
 
 
 
Purchases of fixed maturities available-for-sale
$
(505.4
)
 
$
(589.3
)
 
$
(573.9
)
Purchases of equity securities available-for-sale
(185.9
)
 
(143.1
)
 
(154.0
)
Purchases of other invested assets
(1.4
)
 
(1.5
)
 
(6.9
)
Maturities, calls and pay downs of fixed maturities available-for-sale
233.6

 
240.9

 
241.0

Sales of fixed maturities available-for-sale
184.8

 
211.6

 
180.7

Sales of equity securities available-for-sale
252.7

 
153.0

 
144.8

Sales of other invested assets available-for-sale
1.1

 
0.8

 
0.7

Net disposals of property and equipment

 

 
(0.1
)
Net cash used in investing activities
$
(20.5
)
 
$
(127.6
)
 
$
(167.7
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from issuance of common stock
$
10.2

 
$
2.2

 
$
6.2

Payments to acquire treasury stock
(0.3
)
 
(0.2
)
 
(0.3
)
Payments of dividends (affiliates $10.4, $10.4 and $10.4, respectively)
(16.9
)
 
(16.6
)
 
(16.5
)
Excess tax expense on share-based awards

 
0.2

 
0.3

Proceeds from long-term debt

 
21.5

 

Net cash (used in) provided by financing activities
$
(7.0
)
 
$
7.1

 
$
(10.3
)
Net increase (decrease) in cash and cash equivalents
40.4

 
(7.0
)
 
(28.2
)
Cash and cash equivalents at beginning of year
51.1

 
58.1

 
86.3

Cash and cash equivalents at end of year
$
91.5

 
$
51.1

 
$
58.1

Supplemental disclosures:
 
 
 
 
 
Interest paid (affiliates $0.8, $0.8 and $0.7, respectively)
$
5.7

 
$
5.4

 
$
5.3

Federal income tax (refund) paid
$
(1.6
)
 
$

 
$
6.4

 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

78



STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include State Auto Financial Corporation (“State Auto Financial”), an Ohio corporation, and the following wholly owned subsidiaries of State Auto Financial:
State Auto Property and Casualty Insurance Company (“State Auto P&C”), an Iowa corporation
Milbank Insurance Company (“Milbank”), an Iowa corporation
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

79

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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 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, equity securities and certain other invested assets are classified as available-for-sale and are carried at fair value. The unrealized holding gains and losses, net of applicable deferred income taxes, are shown as a separate component of stockholders’ equity as a part of accumulated other comprehensive income 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 and equity securities 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 comprehensive income. Future increases or decreases in fair value, if not other-than-temporary, are included in other comprehensive income.
Among the factors that management considers for equity securities and other invested assets are the length of time and/or the significance of decline below cost, the Company’s ability and intent to hold these securities through their recovery periods, the current financial condition of the issuer and its future business prospects, and the ability of the market value to recover to cost in the near term. When an equity security or other invested asset has been determined to have a decline in fair value that is other-than-temporary, the cost basis of the security is adjusted to fair value. This results in a charge to earnings as a realized loss, which is not reversed for subsequent recoveries in fair value. Future increases or decreases in fair value, if not other-than-temporary, are included in other comprehensive income.
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

80

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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.
The following table sets forth net deferred acquisition costs for the years ended December 31, 2017, 2016 and 2015:
($ millions)
 
2017
 
2016
 
2015
Balance, beginning of year
 
$
129.8

 
$
129.1

 
$
126.5

Acquisition costs deferred
 
245.7

 
291.0

 
285.6

Acquisition costs amortized to expense
 
(257.7
)
 
(290.3
)
 
(283.0
)
Balance, end of year
 
$
117.8

 
$
129.8

 
$
129.1

 
 
 
 
 
 
 

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 $25.5 million and $27.0 million at December 31, 2017 and 2016, respectively, has been established to cover the estimated ultimate cost to settle insured losses. The amounts are based on estimates of future rates of inflation and other factors, and accordingly, there can be no assurance that the ultimate liability will not vary materially from such estimates. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations (see Note 4). Anticipated salvage and subrogation is estimated using historical experience. As such, losses and loss expenses payable represent management’s best estimate of the ultimate liability related to reported and unreported claims.
i. Premiums
Premiums are recognized as earned prorata over the policy period. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage.
j. Comprehensive Income
Comprehensive (loss) income 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 (loss) income includes net (loss) income 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.

81

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

k. New Accounting Standards
Adoption of Recent Accounting Pronouncements
Employee Share-Based Payment Accounting
The amendments in this guidance simplify the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities, classification of excess tax benefits, and classification on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this guidance prospectively at January 1, 2017, and prior periods were not adjusted. For the year ended December 31, 2017, the Company recognized $1.5 million of income tax expense as a result of adopting this guidance. There were no other material impacts to the Company’s results of operations or consolidated financial position as a result of adopting this guidance.
Pending Adoption of Recent Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this new guidance. The guidance is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The guidance has not yet been adopted. The Company completed its contract analysis during the third quarter of 2017 and noted that 0.1% of revenue, primarily affiliated investment management fee revenue, is subject to the new revenue recognition guidance. Revenue will not change under the new guidance; thus, upon adoption, the Company does not expect any impact to its' results of operations and consolidated financial position.
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically the guidance (i) requires equity investments, including equity securities and limited partnership interests, that are not accounted for under the equity method of accounting or result in consolidation to be measured at fair value with changes in fair value recognized in earnings, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost, (iv) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in  the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option, (vi) requires separate presentation of financial assets and liabilities by measurement category and form on the balance sheet or the notes to the financial statements, and (vii) clarifies that the need for a valuation allowance on a deferred tax asset related to an available for sale security should be evaluated with other deferred tax assets. The guidance is effective beginning January 1, 2018. The Company will recognize $60.7 million of net unrealized gains (net of tax) as a cumulative effect adjustment that will increase retained earnings as of January 1, 2018 and decrease accumulated other comprehensive income (“AOCI”) by a corresponding amount. There are no other significant impacts anticipated to the Company’s results of operations, consolidated financial position or cash flows.
Leases
In February 2016, the FASB issued guidance 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 is effective beginning January 1, 2019 and the Company is currently evaluating the impact on its results of operations and consolidated financial position; however, it is not expected to have a material impact on the Company’s results of operations, consolidated financial position or cash flows.

82

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance that amended previous guidance on the impairment of financial instruments by adding an impairment model that allows 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 through an allowance and not as a direct write-down. The guidance is effective beginning January 1, 2020 and the Company is currently evaluating the impact on its results of operations and consolidated financial position.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued guidance that addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. The new guidance is effective beginning January 1, 2018 and it is not expected to have a material impact on the Company's cash flows.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued guidance that addresses certain stranded income tax effects in AOCI resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA”). Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of TCJA related to items in AOCI. The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the TCJA related to items remaining in AOCI are recognized or at the beginning of the period of adoption. Early adoption is permitted. The Company expects to adopt the updated guidance effective January 1, 2018. The adoption of this guidance will not affect the Company's results of operations, consolidated financial position, or liquidity.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued guidance on how to present the components of net periodic benefit costs in the income statement for pension plans and other post-retirement benefit plans. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The guidance has not yet been adopted; however, it will not have a material impact on the Company's results of operations, consolidated financial position, or cash flows.
2. Investments
The following tables set forth the cost or amortized cost and fair value of available-for-sale securities by lot at December 31, 2017 and 2016: 
($ millions)
 
Cost or
amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
December 31, 2017
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
 
$
433.8

 
$
9.3

 
$
(6.2
)
 
$
436.9

Obligations of states and political subdivisions
 
507.1

 
19.1

 
(0.4
)
 
525.8

Corporate securities
 
527.5

 
4.5

 
(2.3
)
 
529.7

U.S. government agencies mortgage-backed securities
 
704.7

 
7.1

 
(11.4
)
 
700.4

Total fixed maturities
 
2,173.1

 
40.0

 
(20.3
)
 
2,192.8

Equity securities:
 
 
 
 
 
 
 
 
Large-cap securities
 
62.4

 
35.1

 
(0.7
)
 
96.8

Mutual and exchange traded funds
 
256.2

 
21.6

 
(9.3
)
 
268.5

Total equity securities
 
318.6

 
56.7

 
(10.0
)
 
365.3

Other invested assets
 
25.8

 
30.2

 

 
56.0

Total available-for-sale securities
 
$
2,517.5

 
$
126.9

 
$
(30.3
)
 
$
2,614.1

 
 
 
 
 
 
 
 
 

83

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

($ millions)
 
Cost or
amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
December 31, 2016
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
 
$
401.9

 
$
8.9

 
$
(6.1
)
 
$
404.7

Obligations of states and political subdivisions
 
634.6

 
12.3

 
(3.2
)
 
643.7

Corporate securities
 
445.7

 
6.1

 
(2.2
)
 
449.6

U.S. government agencies mortgage-backed securities
 
613.7

 
8.5

 
(10.9
)
 
611.3

Total fixed maturities
 
2,095.9

 
35.8

 
(22.4
)
 
2,109.3

Equity securities:
 
 
 
 
 
 
 
 
Large-cap securities
 
108.9

 
32.7

 
(2.6
)
 
139.0

Small-cap securities
 
57.2

 
21.9

 

 
79.1

Mutual and exchange traded funds
 
157.0

 
8.5

 
(0.8
)
 
164.7

Total equity securities
 
323.1

 
63.1

 
(3.4
)
 
382.8

Other invested assets
 
25.5

 
19.6

 

 
45.1

Total available-for-sale securities
 
$
2,444.5

 
$
118.5

 
$
(25.8
)
 
$
2,537.2

 
 
 
 
 
 
 
 
 

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, 2017 and 2016: 
($ millions, except # of positions)
Less than 12 months
 
12 months or more
 
Total
December 31, 2017
Fair
value
 
Unrealized
losses
 
Number
of
positions
 
Fair
value
 
Unrealized
losses
 
Number
of
positions
 
Fair
value
 
Unrealized
losses
 
Number
of
positions
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
102.4

 
$
(0.6
)
 
18

 
$
196.1

 
$
(5.6
)
 
22

 
$
298.5

 
$
(6.2
)
 
40

Obligations of states and political subdivisions
58.6

 
(0.4
)
 
10

 

 

 

 
58.6

 
(0.4
)
 
10

Corporate securities
153.2

 
(1.3
)
 
23

 
67.3

 
(1.0
)
 
10

 
220.5

 
(2.3
)
 
33

U.S. government agencies mortgage-backed securities
188.6

 
(2.9
)
 
31

 
252.2

 
(8.5
)
 
41

 
440.8

 
(11.4
)
 
72

Total fixed maturities
502.8

 
(5.2
)
 
82

 
515.6

 
(15.1
)
 
73

 
1,018.4

 
(20.3
)
 
155

Large-cap equity securities
4.4

 
(0.7
)
 
4

 

 

 

 
4.4

 
(0.7
)
 
4

Mutual and exchange traded funds
66.9

 
(9.3
)
 
1

 

 

 

 
66.9

 
(9.3
)
 
1

Total equity securities
71.3

 
(10.0
)
 
5

 

 

 

 
71.3

 
(10.0
)
 
5

Total temporarily impaired securities
$
574.1

 
$
(15.2
)
 
87

 
$
515.6

 
$
(15.1
)
 
73

 
$
1,089.7

 
$
(30.3
)
 
160

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

84

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

($ millions, except # of positions)
Less than 12 months
 
12 months or more
 
Total
December 31, 2016
Fair
value
 
Unrealized
losses
 
Number
of
positions
 
Fair
value
 
Unrealized
losses
 
Number
of
positions
 
Fair
value
 
Unrealized
losses
 
Number
of
positions
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
229.1

 
$
(6.1
)
 
30

 
$

 
$

 

 
$
229.1

 
$
(6.1
)
 
30

Obligations of states and political subdivisions
178.9

 
(3.2
)
 
26

 

 

 

 
178.9

 
(3.2
)
 
26

Corporate securities
102.9

 
(1.4
)
 
16

 
29.4

 
(0.8
)
 
4

 
132.3

 
(2.2
)
 
20

U.S. government agencies mortgage-backed securities
341.7

 
(10.1
)
 
43

 
20.5

 
(0.8
)
 
11

 
362.2

 
(10.9
)
 
54

Total fixed maturities
852.6

 
(20.8
)
 
115

 
49.9

 
(1.6
)
 
15

 
902.5

 
(22.4
)
 
130

Large-cap equity securities
9.1

 
(0.9
)
 
7

 
8.8

 
(1.7
)
 
5

 
17.9

 
(2.6
)
 
12

Mutual and exchange traded funds
29.9

 
(0.8
)
 
2

 

 

 

 
29.9

 
(0.8
)
 
2

Total equity securities
39.0

 
(1.7
)
 
9

 
8.8

 
(1.7
)
 
5

 
47.8

 
(3.4
)
 
14

Total temporarily impaired securities
$
891.6

 
$
(22.5
)
 
124

 
$
58.7

 
$
(3.3
)
 
20

 
$
950.3

 
$
(25.8
)
 
144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The following table sets forth the realized losses related to other-than-temporary impairments on the Company’s investment portfolio recognized for the years ended December 31, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
Equity securities:
 
 
 
 
 
Large-cap securities
$
(1.5
)
 
$
(0.6
)
 
$
(2.2
)
Small-cap securities
(2.0
)
 
(3.9
)
 
(5.7
)
Fixed maturities

 
(2.3
)
 

Total other-than-temporary impairments
$
(3.5
)
 
$
(6.8
)
 
$
(7.9
)
 
 
 
 
 
 

The Company reviewed its investments at December 31, 2017, and determined that no additional other-than-temporary impairment exists in the gross unrealized holding losses.
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at December 31, 2017:
($ millions)
Amortized
cost
 
Fair
value
Due in 1 year or less
$
5.9

 
$
5.9

Due after 1 year through 5 years
543.8

 
545.0

Due after 5 years through 10 years
419.1

 
420.3

Due after 10 years
499.6

 
521.2

U.S. government agencies mortgage-backed securities
704.7

 
700.4

Total
$
2,173.1

 
$
2,192.8

 
 
 
 

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, 2017, 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.
Fixed maturities with fair values of approximately $9.3 million and $9.2 million were on deposit with insurance regulators as required by law at December 31, 2017 and 2016, respectively.

85

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

The following table sets forth the components of net investment income for the years ended December 31, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
Fixed maturities
$
63.2

 
$
63.4

 
$
61.3

Equity securities
10.5

 
7.3

 
6.5

Cash and cash equivalents, and other
6.3

 
5.6

 
5.9

Investment income
80.0

 
76.3

 
73.7

Investment expenses
1.2

 
1.6

 
2.0

Net investment income
$
78.8

 
$
74.7

 
$
71.7

 
 
 
 
 
 

The Company’s current investment strategy does not rely on the use of derivative financial instruments.
Proceeds on sales of available-for-sale securities in 2017, 2016 and 2015 were $438.6 million, $365.4 million and $326.2 million, respectively.
The following table sets forth the realized and unrealized holding gains (losses) on the Company’s investment portfolio for the years ended December 31, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
Realized gains:
 
 
 
 
 
Fixed maturities
$
2.8

 
$
2.8

 
$
4.6

Equity securities
66.7

 
29.2

 
29.6

Other invested assets
0.2

 
12.1

 
0.2

Total realized gains
69.7

 
44.1

 
34.4

Realized losses:
 
 
 
 
 
Equity securities:
 
 
 
 
 
Sales
(1.1
)
 
(0.8
)
 
(1.8
)
OTTI
(3.5
)
 
(4.5
)
 
(7.9
)
Fixed maturities:
 
 
 
 
 
OTTI

 
(2.3
)
 

Total realized losses
(4.6
)
 
(7.6
)
 
(9.7
)
Net realized gains on investments
$
65.1

 
$
36.5

 
$
24.7

Change in unrealized holding gains (losses), net of tax:
 
 
 
 
 
Fixed maturities
$
6.3

 
$
(14.4
)
 
$
(32.8
)
Equity securities
(13.0
)
 
14.3

 
(29.5
)
Other invested assets
10.6

 
(8.6
)
 
(1.6
)
Deferred federal income tax
(0.7
)
 
3.0

 
22.4

Change in unrealized holding gains (losses), net of tax
$
3.2

 
$
(5.7
)
 
$
(41.5
)
 
 
 
 
 
 

During the fourth quarter of 2016, the Company redeemed a limited partnership investment in international equities that had been classified as other invested assets. The redemption proceeds were reinvested in an international equity mutual fund classified as an equity security. The Company recognized a gain of $12.0 million on the redemption. Out of the total proceeds related to this redemption and reinvestment, $44.0 million was non-cash and therefore excluded from net cash used in investing activities in the consolidated statements of cash flows.

86

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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 one nationally recognized pricing service to estimate the majority of its available-for-sale investment portfolio’s fair value. The Company obtains one price per security. 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, 2017 and 2016, 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, 2017 and 2016.
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 (except for a security discussed below), 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. The Company held one fixed maturity corporate security included in Level 3 and estimated its fair value using the present value of the future cash flows. This security was sold during the second quarter of 2017.
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.

87

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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 $45.2 million and $35.7 million at December 31, 2017 and 2016, 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.
At December 31, 2015, the Company held another international fund that was managed by third party investment managers. During the fourth quarter of 2016, the Company redeemed its investment in the fund. At December 31, 2015, the fund had a fair value of $43.7 million.
In accordance with Accounting Standard Codification 820-10, since the investments are measured at fair value using the net asset value per share practical expedient they have 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.

88

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

The following tables set forth the Company’s available-for-sale investments within the fair value hierarchy at December 31, 2017 and 2016:
($ millions)
Total
 
Quoted prices
in active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
December 31, 2017
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
436.9

 
$

 
$
436.9

 
$

Obligations of states and political subdivisions
525.8

 

 
525.8

 

Corporate securities
529.7

 

 
529.7

 

U.S. government agencies mortgage-backed securities
700.4

 

 
700.4

 

Total fixed maturities
2,192.8

 

 
2,192.8

 

Equity securities:
 
 
 
 
 
 
 
Large-cap securities
96.8

 
96.8

 

 

Small-cap securities

 

 

 

Mutual and exchange traded funds
268.5

 
268.5

 

 

Total equity securities
365.3

 
365.3

 

 

Other invested assets
10.8

 
10.8

 

 

Total available-for-sale investments
$
2,568.9

 
$
376.1

 
$
2,192.8

 
$

 
 
 
 
 
 
 
 
($ millions)
Total
 
Quoted prices
in active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
December 31, 2016
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
404.7

 
$

 
$
404.7

 
$

Obligations of states and political subdivisions
643.7

 

 
643.7

 

Corporate securities
449.6

 

 
446.1

 
3.5

U.S. government agencies mortgage-backed securities
611.3

 

 
611.3

 

Total fixed maturities
2,109.3

 

 
2,105.8

 
3.5

Equity securities:
 
 
 
 
 
 
 
Large-cap securities
139.0

 
139.0

 

 

Small-cap securities
79.1

 
79.1

 

 

Mutual and exchange traded funds
164.7

 
164.7

 

 

Total equity securities
382.8

 
382.8

 

 

Other invested assets
9.4

 
9.4

 

 

Total available-for-sale investments
$
2,501.5

 
$
392.2

 
$
2,105.8

 
$
3.5

 
 
 
 
 
 
 
 


89

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

For assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following tables set forth a reconciliation of the beginning and ending balances for 2017 and 2016, separately for each major category of assets. This security was sold during the second quarter of 2017.
($ millions)
Fixed
maturities
Balance at January 1, 2017
$
3.5

Total realized gains (losses)—included in earnings
1.4

Total unrealized gains (losses)—included in other comprehensive income

Purchases
0.1

Sales
(5.0
)
Transfers into Level 3

Transfers out of Level 3

Balance at December 31, 2017
$

 
($ millions)
Fixed
maturities
Balance at January 1, 2016
$
3.3

Total realized gains (losses)—included in earnings

Total unrealized gains (losses)—included in other comprehensive income

Purchases
0.2

Sales

Transfers into Level 3

Transfers out of Level 3

Balance at December 31, 2016
$
3.5

 
 




90

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, 2017 was $5.1 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 $70.0 million. The Company estimates the fair value of the notes receivable from affiliates using market quotations for U.S. treasury securities with similar maturity dates and applies an appropriate credit spread. This has been placed in Level 2 of the fair value hierarchy.
($ millions, except interest rates)
December 31, 2017
 
December 31, 2016
 
Carrying
value
 
Fair
value
 
Interest
rate
 
Carrying
value
 
Fair
value
 
Interest
rate
Notes receivable from affiliate
$
70.0

 
$
72.6

 
7.00
%
 
$
70.0

 
$
75.7

 
7.00
%
 
 
 
 
 
 
 
 
 
 
 
 

Notes Payable
Included in notes payable are the FHLB Loans, consisting of the 2013 FHLB Loan and the 2016 FHLB Loan (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, 2017
 
December 31, 2016
Carrying
value
 
Fair
Value
 
Interest
rate
 
Carrying
value
 
Fair
value
 
Interest
rate
FHLB Loan due 2021:, issued $21.5, September 2016 with fixed interest
$
21.5

 
$
20.9

 
1.73
%
 
$
21.5

 
$
21.0

 
1.73
%
FHLB Loan due 2033:, issued $85.0, July 2013 with fixed interest
85.4

 
85.7

 
5.03
%
 
85.4

 
85.6

 
5.03
%
Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest
15.2

 
15.2

 
5.68
%
 
15.2

 
15.2

 
5.13
%
Total notes payable
$
122.1

 
$
121.8

 
 
 
$
122.1

 
$
121.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 


91

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)
2017
 
2016
 
2015
Losses and loss expenses payable, at beginning of year
$
1,181.6

 
$
1,053.0

 
$
983.2

Less: reinsurance recoverable on losses and loss expenses payable
3.6

 
5.9

 
9.6

Net balance at beginning of year
1,178.0

 
1,047.1

 
973.6

Incurred related to:
 
 
 
 
 
Current year
964.9

 
915.4

 
852.8

Prior years
(46.6
)
 
27.0

 
10.0

Total incurred
918.3

 
942.4

 
862.8

Paid related to:
 
 
 
 
 
Current year
445.2

 
417.8

 
421.5

Prior years
398.6

 
393.7

 
367.8

Total paid
843.8

 
811.5

 
789.3

Net balance at end of year
1,252.5

 
1,178.0

 
1,047.1

Plus: reinsurance recoverable on losses and loss expenses payable
3.1

 
3.6

 
5.9

Losses and loss expenses payable, at end of year (affiliates $711.4, $630.9, and $532.4, respectively)
$
1,255.6

 
$
1,181.6

 
$
1,053.0

 
 
 
 
 
 

The Company recorded favorable development related to prior years’ loss and loss expense reserves in 2017 of $46.6 million, compared to adverse development in 2016 and 2015 of $27.0 million and $10.0 million, respectively. Unallocated loss adjustment expenses and catastrophe reserves contributed $3.2 million and $2.0 million, respectively, of favorable development in 2017. 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.
Unallocated loss adjustment expenses contributed $3.7 million of the adverse development and catastrophe reserves contributed $1.4 million of the favorable development in 2016. The personal insurance segment non-catastrophe loss and ALAE reserves accounted for $9.0 million of the adverse development, driven by personal auto which contributed $7.9 million of adverse development, primarily due to higher than anticipated bodily injury severity from the prior two accident years. The commercial insurance segment non-catastrophe loss and ALAE reserves contributed $5.1 million of favorable development, driven by workers’ compensation, other commercial, and farm & ranch of $4.2 million, $1.8 million, and $1.7 million respectively. Favorable development in these lines was driven by lower than anticipated severity emerging from multiple accident years. The favorable development was partially offset by adverse development in commercial auto of $3.6 million, which was driven by higher than anticipated bodily injury severity from the prior two accident years. The specialty insurance segment non-catastrophe loss and ALAE reserves accounted for $20.8 million of adverse development in 2016, which was driven by programs and E&S casualty with adverse development of $14.3 million and $4.6 million, respectively. Programs adverse development was driven by higher than expected severity in programs with commercial auto exposures. E&S casualty adverse development was driven by increased severity from the healthcare line, which was placed in run-off in the first quarter of 2016.
Favorable development of unallocated loss adjustment expenses and catastrophe reserves were approximately $6.2 million and $0.7 million, respectively, of the 2015 development. The personal insurance segment contributed $10.5 million of the adverse development, driven by personal auto which developed unfavorably by $11.1 million, primarily due to higher than anticipated bodily injury severity from the prior two accident years. The commercial insurance segment contributed $0.7 million of favorable development, driven by favorable development in workers’ compensation and middle market commercial of $5.1 million and $4.3

92

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

million, respectively. Favorable development in these lines was driven by lower than anticipated severity emerging from multiple accident years. The favorable development was offset by commercial auto which developed unfavorably by $9.8 million, due to higher than anticipated bodily injury severity from the prior two accident years. The specialty insurance segment non-catastrophe loss and ALAE reserves accounted for $7.1 million of adverse development, which was driven by programs and E&S casualty with adverse development of $9.6 million and $2.7 million, respectively. Adverse development in programs was driven by higher than expected severity in programs with commercial auto exposures. Somewhat offsetting the adverse development was favorable development of $5.2 million in the E&S property unit driven by lower than anticipated severity emerging from accident year 2014.
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; and
cumulative claim frequency information for each accident year;
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 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. The tables below have been restated to conform to the December 31, 2017 segment presentation. See Note 16 for discussion of the Company’s reportable segments.
The personal insurance segment generally only consists of short-tail business, whereas the commercial and specialty insurance segments have both short and long-tail business. The Company determined that these disaggregated groupings have 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 techniques using link ratio 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 Form10-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, Bornhuetter-Ferguson, and Least-Squares techniques as described in the "Losses and Loss Expenses Payable" section of "Critical Accounting Policies" included in Item 7 of this Form10-K. Statistical models may also be used when the historical patterns can be reasonably approximated.
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).

93

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

Personal Insurance Segment - Short-Tail
($ in millions except number of claims)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
Accident Year
 
2013*(1)
 
2014*(1)
 
2015*
 
2016
 
2017
 
IBNR+
 
Reported Claims (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
$
291.3

 
$
286.1

 
$
290.3

 
$
290.0

 
$
289.8

 
$
1.5

 
190,310

2014
 
 
 
273.2

 
274.9

 
277.3

 
276.0

 
2.7

 
172,678

2015
 
 
 
 
 
339.0

 
345.5

 
341.0

 
7.4

 
152,698

2016
 
 
 
 
 
 
 
368.5

 
370.0

 
22.8

 
150,364

2017
 
 
 
 
 
 
 
 
 
372.4

 
54.0

 
140,258

 
 
 
 
 
 
 
 
Total

 
$
1,649.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Supplementary information and unaudited
 
 
 
(1) Allocated claim adjustment expenses, net of reinsurance, for accident years 2013 and 2014 were impacted by the HO QS Arrangement. See Note 6 for a more detailed discussion of the HO QS Arrangement.
 
 
(2) 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
 
 
 
 
 
 
 
Accident Year
 
2013*(1)
 
2014*(1)
 
2015*
 
2016
 
2017
 
 
 
 
 
 
 
 
 
 
 
2013
 
$
178.1

 
$
239.5

 
$
267.6

 
$
279.4

 
$
286.2

2014
 
 
 
174.2

 
228.4

 
254.3

 
266.3

2015
 
 
 
 
 
216.5

 
290.8

 
318.0

2016
 
 
 
 
 
 
 
231.9

 
316.2

2017
 
 
 
 
 
 
 
 
 
236.8

 
 
 
 
 
 
 
 
Total

 
$
1,423.5

All outstanding liabilities before 2013, net of reinsurance
 
 
$
3.7

Losses and allocated loss adjustment expenses payable, net of reinsurance
$
229.4

 
 
 
 
 
 
 
 
 
 
 
* Supplementary information and unaudited
(1) Cumulative paid claims for accident years 2013 and 2014 were impacted by the HO QS Arrangement. See Note 6 for a more detailed discussion of the HO QS Arrangement.
 
 







94

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

Commercial Insurance Segment - Short-Tail
The change in incurred losses and loss adjustment expenses for prior accident years was caused by lower than expected emergence during 2017 in the commercial auto, small commercial package and middle market commercial products. The unanticipated emergence in these products was driven by lower than expected severity from (i) accident years 2013 and 2014 in commercial auto, (ii) accident years 2013 - 2016 in small commercial package, and (iii) accident years 2014 - 2016 in middle market commercial. These accident years account for approximately 80% of the change in incurred losses and loss adjustment expenses.
($ in millions except number of claims)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
Accident Year
 
2013*
 
2014*
 
2015*
 
2016
 
2017
 
IBNR+
 
Reported Claims(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
$
214.6

 
$
211.9

 
$
217.6

 
$
217.6

 
$
213.9

 
$
10.4

 
39,984

2014
 
 
 
227.0

 
231.3

 
233.7

 
226.3

 
15.3

 
38,657

2015
 
 
 
 
 
239.4

 
239.9

 
232.5

 
28.4

 
37,556

2016
 
 
 
 
 
 
 
237.0

 
227.6

 
47.6

 
34,088

2017
 
 
 
 
 
 
 
 
 
236.8

 
69.5

 
28,605

 
 
 
 
 
 
 
 
Total

 
$
1,137.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
 
 
 
 
 
 
 
Accident Year
 
2013*
 
2014*
 
2015*
 
2016
 
2017
 
 
 
 
 
 
 
 
 
 
 
2013
 
$
89.9

 
$
146.1

 
$
168.9

 
$
185.4

 
$
196.4

2014
 
 
 
103.0

 
151.9

 
180.8

 
195.9

2015
 
 
 
 
 
101.5

 
148.3

 
169.6

2016
 
 
 
 
 
 
 
99.2

 
147.3

2017
 
 
 
 
 
 
 
 
 
104.9

 
 
 
 
 
 
 
 
Total

 
$
814.1

All outstanding liabilities before 2013, net of reinsurance
 
 
$
37.2

Losses and allocated loss adjustment expenses payable, net of reinsurance
$
360.2

 
 
 
 
 
 
 
 
 
 
 
* Supplementary information and unaudited
 





95

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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 during 2017 in the workers’ compensation product. The unanticipated emergence in the workers’ compensation product was driven by lower than expected severity from accident years 2015 and 2016.
($ in millions except number of claims)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
Accident Year
 
2008*
 
2009*
 
2010*
 
2011*
 
2012*
 
2013*
 
2014*
 
2015*
 
2016
 
2017
 
IBNR+
 
Reported Claims(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
 
$
46.6

 
$
45.2

 
$
42.7

 
$
43.6

 
$
43.7

 
$
43.4

 
$
43.3

 
$
43.3

 
$
43.0

 
$
42.4

 
$
2.2

 
4,461

2009
 
 
 
47.3

 
48.1

 
46.8

 
46.7

 
46.3

 
46.0

 
45.8

 
45.5

 
45.0

 
2.4

 
4,889

2010
 
 
 
 
 
38.8

 
41.3

 
41.6

 
40.4

 
40.3

 
40.4

 
40.8

 
40.2

 
2.9

 
5,257

2011
 
 
 
 
 
 
 
44.6

 
47.4

 
45.5

 
44.8

 
44.8

 
44.9

 
43.9

 
4.2

 
12,220

2012
 
 
 
 
 
 
 
 
 
49.7

 
45.8

 
43.7

 
44.1

 
43.9

 
42.9

 
5.0

 
12,754

2013
 
 
 
 
 
 
 
 
 
 
 
48.7

 
45.4

 
44.1

 
43.4

 
42.9

 
6.9

 
11,305

2014
 
 
 
 
 
 
 
 
 
 
 
 
 
51.6

 
50.0

 
47.1

 
45.7

 
9.5

 
11,563

2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
59.7

 
59.4

 
56.5

 
14.3

 
11,118

2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
62.6

 
60.6

 
22.3

 
12,362

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
59.0

 
29.3

 
11,728

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total

 
$
479.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


96

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
 
2008*
 
2009*
 
2010*
 
2011*
 
2012*
 
2013*
 
2014*
 
2015*
 
2016
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
 
$
10.7

 
$
26.2

 
$
29.9

 
$
32.8

 
$
34.8

 
$
35.8

 
$
37.0

 
$
37.4

 
$
38.0

 
$
38.2

2009
 
 
 
11.9

 
26.4

 
33.2

 
37.2

 
38.7

 
40.0

 
40.4

 
41.1

 
41.4

2010
 
 
 
 
 
9.0

 
21.6

 
28.0

 
31.4

 
33.2

 
34.6

 
35.4

 
35.8

2011
 
 
 
 
 
 
 
12.4

 
25.4

 
31.9

 
35.0

 
36.9

 
37.7

 
38.1

2012
 
 
 
 
 
 
 
 
 
12.6

 
23.5

 
29.8

 
32.7

 
34.7

 
35.8

2013
 
 
 
 
 
 
 
 
 
 
 
12.3

 
23.3

 
29.0

 
32.3

 
33.7

2014
 
 
 
 
 
 
 
 
 
 
 
 
 
12.4

 
24.4

 
30.0

 
32.8

2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.9

 
28.2

 
35.7

2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12.6

 
26.8

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
331.4

 
 
 
 
 
 
All outstanding liabilities before 2008, net of reinsurance
 
 
$
33.1

 
 
 
 
 
 
Losses and allocated loss adjustment expenses payable, net of reinsurance
 
 
$
180.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Supplementary information and unaudited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


97

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

Specialty Insurance Segment - Short-Tail
The change in incurred losses and loss adjustment expenses for prior accident years was attributable to greater than expected emergence during 2017 in E&S property. The unanticipated emergence in E&S property was driven by higher than expected severity from accident years 2013 - 2016 for the liability portion of our Florida package business.
($ in millions except number of claims)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
Accident Year
 
2013*
 
2014*
 
2015*
 
2016
 
2017
 
IBNR+
 
Reported Claims(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
$
70.9

 
$
82.9

 
$
85.0

 
$
90.9

 
$
93.8

 
$
2.8

 
7,689

2014
 
 
 
55.7

 
56.9

 
58.5

 
60.9

 
4.4

 
7,805

2015
 
 
 
 
 
75.5

 
85.4

 
87.8

 
10.8

 
7,955

2016
 
 
 
 
 
 
 
99.3

 
99.5

 
28.8

 
6,811

2017
 
 
 
 
 
 
 
 
 
134.2

 
48.5

 
7,917

 
 
 
 
 
 
 
 
Total

 
$
476.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Supplementary information and unaudited
 
 
 
(1) Specialty insurance segment-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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
 
 
 
 
 
 
 
Accident Year
 
2013*
 
2014*
 
2015*
 
2016
 
2017
 
 
 
 
 
 
 
 
 
 
 
2013
 
$
18.2

 
$
37.7

 
$
55.5

 
$
72.0

 
$
83.1

2014
 
 
 
22.0

 
34.9

 
44.0

 
49.3

2015
 
 
 
 
 
24.0

 
48.3

 
62.8

2016
 
 
 
 
 
 
 
25.2

 
50.2

2017
 
 
 
 
 
 
 
 
 
39.0

 
 
 
 
 
 
 
 
Total

 
$
284.4

 
 
All outstanding liabilities before 2012, net of reinsurance
 
 
$
18.8

 
 
Losses and allocated loss adjustment expenses payable, net of reinsurance
$
210.6

 
 
 
 
 
 
 
 
 
 
 
* Supplementary information and unaudited
 


98

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

Specialty Insurance Segment - Long-Tail
($ in millions except number of claims)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
 
 
 
Accident Year
 
2008*
 
2009*
 
2010*
 
2011*
 
2012*
 
2013*
 
2014*
 
2015*
 
2016
 
2017
 
IBNR+
 
Reported Claims(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
 
$
6.4

 
$
6.7

 
$
6.7

 
$
6.8

 
$
6.1

 
$
6.0

 
$
5.8

 
$
6.0

 
$
4.9

 
$
4.8

 
$
1.3

 
1,652

2009
 
 
 
10.3

 
11.0

 
10.0

 
10.4

 
11.0

 
11.0

 
10.6

 
12.4

 
12.9

 
2.5

 
1,504

2010
 
 
 
 
 
11.2

 
10.9

 
9.9

 
9.7

 
9.8

 
9.9

 
10.3

 
10.1

 
1.8

 
1,224

2011
 
 
 
 
 
 
 
11.9

 
10.7

 
10.7

 
10.2

 
10.1

 
10.9

 
10.5

 
1.8

 
953

2012
 
 
 
 
 
 
 
 
 
16.7

 
16.7

 
15.4

 
17.6

 
17.4

 
16.5

 
1.9

 
860

2013
 
 
 
 
 
 
 
 
 
 
 
20.1

 
18.9

 
17.9

 
16.5

 
15.9

 
3.1

 
1,055

2014
 
 
 
 
 
 
 
 
 
 
 
 
 
23.3

 
25.2

 
27.1

 
28.3

 
6.8

 
1,265

2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
38.6

 
44.9

 
44.8

 
14.7

 
2,001

2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
60.8

 
62.9

 
34.7

 
4,348

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
71.6

 
58.7

 
4,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total

 
$
278.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Supplementary information and unaudited
 
 
 
(1) Specialty insurance segment-long-tail consists of the E&S Casualty product line. E&S Casualty reported claims are counted by claimant.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 Accident
Year
 
2008*
 
2009*
 
2010*
 
2011*
 
2012*
 
2013*
 
2014*
 
2015*
 
2016
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
 
$
0.1

 
$
0.3

 
$
0.8

 
$
1.3

 
$
1.7

 
$
2.1

 
$
2.4

 
$
2.8

 
$
3.0

 
$
3.3

2009
 
 
 
0.2

 
2.4

 
4.9

 
7.2

 
8.6

 
9.4

 
9.2

 
10.0

 
10.4

2010
 
 
 
 
 
0.8

 
2.2

 
5.2

 
6.5

 
7.7

 
7.6

 
8.1

 
8.2

2011
 
 
 
 
 
 
 
0.9

 
3.0

 
5.2

 
6.6

 
7.1

 
7.9

 
8.1

2012
 
 
 
 
 
 
 
 
 
0.9

 
4.0

 
7.3

 
10.3

 
12.5

 
14.0

2013
 
 
 
 
 
 
 
 
 
 
 
1.1

 
3.7

 
6.7

 
9.0

 
10.5

2014
 
 
 
 
 
 
 
 
 
 
 
 
 
1.2

 
7.2

 
12.5

 
16.7

2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.7

 
10.9

 
20.6

2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6.0

 
15.7

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
113.0

 
 
 
 
 
 
All outstanding liabilities before 2008, net of reinsurance
 
 
$
2.7

 
 
 
 
 
 
Losses and allocated loss adjustment expenses payable, net of reinsurance
 
 
$
167.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Supplementary information and unaudited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


99

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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)
 
2017
 
2016
 
2015
Net losses and allocated loss adjustment expenses payable:
 
 
 
 
 
 
Personal Insurance Segment
 
 
 
 
 
 
 
 
Short-tail
 
$
229.4

 
$
229.6

 
$
208.3

 
 
Other personal
 
13.2

 
10.8

 
12.8

Commercial Insurance Segment
 
 
 
 
 
 
 
 
Short-tail
 
360.2

 
226.4

 
332.4

 
 
Long-tail
 
180.8

 
314.2

 
158.8

 
 
Other commercial
 
26.4

 
24.6

 
24.1

Specialty Insurance Segment
 
 
 
 
 
 
 
 
Short-tail
 
210.6

 
178.9

 
165.8

 
 
Long-tail
 
167.9

 
129.7

 
91.1

Net losses and loss expenses payable
 
1,188.5

 
1,114.2

 
993.3

 
 
 
 
 
 
 
ULAE
 
64.0

 
63.8

 
53.8

 
 
 
 
 
 
 
 
 
Reinsurance recoverable on losses and loss expenses payable
 
3.1

 
3.6

 
5.9

 
 
 
 
 
 
 
 
 
Total losses and loss expenses payable
 
$
1,255.6

 
$
1,181.6

 
$
1,053.0

 
 
 
 
 
 
 
 
 

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
 
62.9
%
 
21.4
%
 
9.0
%
 
4.2
%
 
2.3
%
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

Commercial Insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-tail
 
43.8
%
 
22.3
%
 
10.9
%
 
7.2
%
 
5.1
%
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

Long-tail
 
25.5
%
 
28.4
%
 
13.5
%
 
7.4
%
 
4.1
%
 
2.6
%
 
1.7
%
 
1.1
%
 
1.1
%
 
0.4
%
Specialty Insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-tail
 
27.5
%
 
23.7
%
 
16.8
%
 
13.1
%
 
11.9
%
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

Long-tail
 
6.0
%
 
16.0
%
 
20.1
%
 
14.6
%
 
9.6
%
 
6.1
%
 
2.7
%
 
5.9
%
 
3.3
%
 
5.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* 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.

100

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. The recoverability of these assets depends on the reinsurers’ ability to perform under the reinsurance agreements. The Company evaluates and monitors the financial condition and concentrations of credit risk associated with its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. The Company has reported ceded losses and loss expenses payable and prepaid reinsurance premiums with other insurers and reinsurers as assets. All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance.
On December 31, 2011, the State Auto Group entered into the Homeowners Quota Share Arrangement, which was a three-year quota share agreement covering its homeowners line of business. Under the arrangement, the State Auto Group ceded to reinsurers 75% of its homeowners business under policies in force at the effective date and new and renewal policies thereafter issued during the term of the agreement. The arrangement expired on December 31, 2014. The Company received $89.5 million of unearned premiums related to the expiration of this arrangement. Subject to the terms and conditions of the arrangement, the participating reinsurers’ margin was capped at 9.0%, with any excess returned to the Company in the form of profit commission. For the years ended December 31, 2017, 2016 and 2015, the Company recognized profit commission of $0.7 million, $1.9 million, and $4.2 million, respectively, reflected as a reduction in acquisition and operating expenses on the consolidated statements of income. The amount of ceding commission earned was limited to the amount of deferred acquisition costs that would have been deferred if not for entering in the arrangement.
The following table sets forth the effect of the Company’s external reinsurance on its balance sheets at December 31, 2017 and 2016, prior to the reinsurance transaction with State Auto Mutual under the Pooling Arrangement, as discussed in Note 7a:
($ millions)
2017
 
2016
Losses and loss expenses payable:
 
 
 
Direct
$
535.0

 
$
545.7

Assumed
9.2

 
5.0

Ceded
(3.1
)
 
(3.6
)
Net losses and loss expenses payable
$
541.1

 
$
547.1

Unearned premiums:
 
 
 
Direct
$
402.5

 
$
395.6

Assumed
21.4

 
1.3

Ceded
(6.4
)
 
(6.1
)
Net unearned premiums
$
417.5

 
$
390.8

 
 
 
 


101

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, 2017, 2016 and 2015, prior to the reinsurance transaction with State Auto Mutual under the Pooling Arrangement, as discussed in Note 7a:
($ millions)
2017
 
2016
 
2015
Written premiums:
 
 
 
 
 
Direct
$
835.6

 
$
835.4

 
$
854.1

Assumed
31.1

 
5.0

 
4.7

Ceded
(22.9
)
 
(24.9
)
 
(35.4
)
Net written premiums
$
843.8

 
$
815.5

 
$
823.4

Earned premiums:
 
 
 
 
 
Direct
$
828.7

 
$
840.6

 
$
863.1

Assumed
11.0

 
4.9

 
4.5

Ceded
(22.6
)
 
(25.6
)
 
(34.7
)
Net earned premiums
$
817.1

 
$
819.9

 
$
832.9

Losses and loss expenses incurred:
 
 
 
 
 
Direct
$
530.9

 
$
559.1

 
$
569.0

Assumed
10.4

 
3.9

 
3.4

Ceded
(2.5
)
 
(4.4
)
 
(2.9
)
Net losses and loss expenses incurred
$
538.8

 
$
558.6

 
$
569.5

 
 
 
 
 
 

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).

102

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, 2017 and 2016:
($ millions)
2017
 
2016
Assets
 
 
 
Deferred policy acquisition costs:
 
 
 
Ceded
$
(53.1
)
 
$
(79.1
)
Assumed
117.8

 
129.8

Net assumed
$
64.7

 
$
50.7

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Losses and loss expenses payable:
 
 
 
Ceded
$
(541.1
)
 
$
(547.1
)
Assumed
1,252.5

 
1,178.0

Net assumed
$
711.4

 
$
630.9

Unearned premiums:
 
 
 
Ceded
$
(417.5
)
 
$
(390.8
)
Assumed
605.4

 
611.7

Net assumed
$
187.9

 
$
220.9

Pension and postretirement benefits:
 
 
 
Ceded
$
(99.3
)
 
$
(114.5
)
Assumed
64.5

 
74.4

Net ceded
$
(34.8
)
 
$
(40.1
)
Other liabilities:
 
 
 
Ceded
$
(43.0
)
 
$
(42.9
)
Assumed
58.5

 
53.9

Net assumed
$
15.5

 
$
11.0

Stockholders’ Equity
 
 
 
Accumulated other comprehensive income:
 
 
 
         Ceded
$
(144.7
)
 
$
(153.5
)
         Assumed
94.0

 
99.8

Net ceded
$
(50.7
)
 
$
(53.7
)
 
 
 
 


103

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 income statements for the Pooling Arrangement between the STFC Pooled Companies and State Auto Mutual for the years ended December 31, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
Written premiums:
 
 
 
 
 
Ceded
$
(843.8
)
 
$
(815.5
)
 
$
(823.4
)
Assumed
1,269.3

 
1,293.3

 
1,273.5

Net assumed
$
425.5

 
$
477.8

 
$
450.1

Earned premiums:
 
 
 
 
 
Ceded
$
(817.1
)
 
$
(819.9
)
 
$
(832.9
)
Assumed
1,275.1

 
1,291.9

 
1,270.5

Net assumed
$
458.0

 
$
472.0

 
$
437.6

Losses and loss expenses incurred:
 
 
 
 
 
Ceded
$
(540.4
)
 
$
(560.3
)
 
$
(570.9
)
Assumed
920.0

 
944.1

 
864.2

Net assumed
$
379.6

 
$
383.8

 
$
293.3

Acquisition and operating expenses:
 
 
 
 
 
Ceded
(189.7
)
 
(148.5
)
 
(183.9
)
Assumed
460.4

 
434.3

 
432.5

Net assumed
$
270.7

 
$
285.8

 
$
248.6

 
 
 
 
 
 
 

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, 2017 and 2016 is approximately $323.1 million and $310.5 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 5.68% at December 31, 2017). Because the interest rate and interest payment dates on the Subordinated Debentures are the same as the interest rate and interest payment dates on the Trust Securities, payments from the Subordinated Debentures finance the distributions paid on the Trust Securities. State Auto Financial has the right to redeem the Subordinated Debentures, in whole or in part, on or after May 2008. State Auto Financial has unconditionally and irrevocably guaranteed payment of any required distributions on the capital securities, the redemption price when the capital securities are to be redeemed, and any amounts due if the Capital Trust is liquidated or terminated. State Auto Financial’s equity interest in the Capital Trust is included in other invested assets. In accordance with the Consolidation Topic of the FASB ASC 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.

104

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

c. Notes Receivable
In May 2009, the Company entered into two separate credit agreements with State Auto Mutual pursuant to which it loaned State Auto Mutual a total of $70.0 million. Interest is payable semi-annually at a fixed annual interest rate of 7.00%, with the principal payable in May 2019. There is no prepayment penalty, and no collateral was given as security for the payment of this loan.
Under these agreements, the Company earned interest of $4.9 million for each of the three years ended December 31, 2017, 2016 and 2015, 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 $2.0 million, $1.9 million and $1.8 million in 2017, 2016 and 2015, respectively, and is included in other income (affiliates) on the consolidated statements of income.
8. Notes Payable and Credit Facility
FHLB Loans
State Auto Financial’s subsidiary, State Auto P&C, is a member of the Federal Home Loan Bank of Cincinnati (the “FHLB”) and in September 2016 entered into a new 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 called (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 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C. State Auto P&C has a term loan with the FHLB in the principal amount of $85.0 million (the “2013 FHLB Loan”). The 2013 FHLB Loan is a 20-year term loan and is callable after three years with no prepayment penalty thereafter. The 2013 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 5.03%. The 2013 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C.
Credit Facility
State Auto P&C has a credit facility (the “SPC Credit Facility”) with a syndicate of lenders that provides State Auto P&C with a $100.0 million five-year revolving credit facility maturing in July 2018. During the term of the SPC Credit Facility, State Auto P&C has the right to increase the total facility to a maximum amount of $150.0 million, provided that no event of default has occurred and is continuing. The SPC Credit Facility is available for general corporate purposes and provides for interest-only payments during its term, with principal and interest due in full at maturity. Interest is based on the London Interbank Offered Rate (“LIBOR”) or a base rate plus a calculated margin amount. All advances under the SPC Credit Facility are to be fully secured by a pledge of specific investment securities of State Auto P&C. The SPC Credit Facility includes certain requirements, including financial requirements that State Auto Financial maintain a minimum net worth and a certain debt to capitalization ratio.
As of December 31, 2017, State Auto P&C had not made any borrowings and both State Auto P&C and State Auto Financial were in compliance with all covenants and requirements of the SPC Credit Facility.
9. Federal Income Taxes
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 are reflected in the net deferred tax asset that is reported on the Company's balance sheet at December 31, 2017.

105

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

The following table sets forth the reconciliation between actual federal income tax (benefit) expense and the amount computed at the indicated statutory rate for the years ended December 31, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
Amount at statutory rate
$
11.7

 
35.0
 %
 
$
6.7

 
35.0
 %
 
$
23.5

 
35.0
 %
Tax-exempt interest and dividends received deduction
(5.7
)
 
(17.1
)
 
(7.1
)
 
(37.2
)
 
(8.7
)
 
(13.0
)
Other, net
1.7

 
5.4

 
(1.4
)
 
(7.2
)
 
1.3

 
1.9

Federal income tax expense (benefit)
7.7

 
23.3

 
(1.8)

 
(9.4
)%
 
16.1

 
23.9
 %
Impact of TCJA at enactment
36.4

 
108.7

 

 

 

 

Federal income tax expense (benefit)
$
44.1

 
132.0
 %
 
$
(1.8
)
 
(9.4
)%
 
$
16.1

 
23.9
 %
 
 
 
 
 
 
 
 
 
 
 
 

Total income tax expense for 2017 included a provisional net charge of $36.4 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 changes the prescribed interest rates to rates based on corporate bond yield curves, requires the use of IRS-prescribed claims payment patterns and extends the applicable time periods for the claims payment patterns. These changes are effective for tax years beginning after 2017 and are 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 is determined to be $50.9 million. 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. The provisional amount will be adjusted once the IRS publishes the official discount factors that should be used.
Income taxes for the year ended December 31, 2016 reflect the impact of a correction of prior period deferred tax expense related to expired stock options. As a result of the correction, deferred federal income tax expense (“other, net” above) and additional paid-in-capital were reduced by $1.6 million, respectively.
The following table sets forth the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016:
($ millions)
2017
 
2016
Deferred tax assets:
 
 
 
Unearned premiums not currently deductible
$
25.5

 
$
42.6

Losses and loss expenses payable discounting
22.0

 
19.7

Postretirement and pension benefits
13.6

 
26.1

Realized loss on other-than-temporary impairment
2.1

 
5.8

Other liabilities
9.2

 
16.6

Net operating loss carryforward
34.3

 
58.9

Tax credit carryforward
3.7

 
3.3

Other
2.5

 
7.0

Total deferred tax assets
112.9

 
180.0

Deferred tax liabilities:
 
 
 
Deferral of policy acquisition costs
24.7

 
45.4

Net unrealized holding gains on investments
20.3

 
32.5

Losses and loss expenses payable discounting (transition rule)
10.7

 

Total deferred tax liabilities
55.7

 
77.9

Net deferred federal income taxes
$
57.2

 
$
102.1

 
 
 
 

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,

106

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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, 2017, the tax benefit of the net operating loss (“NOL”) carryforward was $34.3 million. The NOL carryforwards do not begin to expire until 2030 and will not fully expire until 2036.
At December 31, 2017, the Company carried no balance for uncertain tax positions. The Company had no accrual for the payment of interest and penalties at December 31, 2017 or 2016.
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 2014. 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 annual periodic costs related to the Company’s benefit plans are allocated to affiliated companies based on allocations pursuant to intercompany management agreements including the Pooling Arrangement for insurance subsidiaries and affiliates party to this agreement.
The Company provides a defined benefit pension plan for its eligible employees. Substantially all Company employees hired prior to January 1, 2010 become eligible to participate the year after becoming 20 years of age and vest with 5 years of credited service or attaining age 65. The Company’s policy is to fund pension costs in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Benefits are determined by applying factors specified in the plan to a participant’s defined average annual compensation.
The 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, 2017 and 2016:
($ millions)
Pension
 
Postretirement
 
2017
 
2016
 
2017
 
2016
Change in benefit obligation:
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
284.5

 
$
281.3

 
$
18.8

 
$
20.3

Service cost
5.6

 
6.1

 

 

Interest cost
11.1

 
11.6

 
0.7

 
0.8

Actuarial loss (gain)
17.0

 
4.5

 
0.6

 
(0.9
)
Benefits paid
(14.0
)
 
(19.0
)
 
(1.8
)
 
(1.4
)
The Company’s portion of benefit obligation at end of year
$
304.2

 
$
284.5

 
$
18.3

 
$
18.8

Change in plan assets available for plan benefits:
 
 
 
 
 
 
 
Fair value of plan assets available for plan benefits at beginning of year
$
235.7

 
$
204.4

 
$

 
$

Employer contribution
9.8

 
34.5

 

 

Actual return on plan assets
33.5

 
15.8

 

 

Benefits paid
(14.0
)
 
(19.0
)
 

 

The Company’s portion of fair value of plan assets at end of year
$
265.0

 
$
235.7

 
$

 
$

Supplemental executive retirement plan
(7.0
)
 
(6.8
)
 

 

Funded status at end of year
$
(46.2
)
 
$
(55.6
)
 
$
(18.3
)
 
$
(18.8
)
Accumulated benefit obligation end of year
$
287.9

 
$
267.5

 
 
 
 
 
 
 
 
 
 
 
 

No assets are expected to be returned during the fiscal year ending December 31, 2018.

107

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

The following table sets forth the Company’s share of the amounts included in accumulated other comprehensive income (loss) that have not been recognized in net periodic cost at December 31, 2017 and 2016:
($ millions)
2017
 
2016
Prior service benefit
$
(48.6
)
 
$
(54.1
)
Net actuarial loss
111.6

 
118.5

Total
$
63.0

 
$
64.4

 
 
 
 

The following table sets forth the Company’s share of amortization expected to be recognized for the year ending December 31, 2018:
($ millions)
2018
Prior service benefit
$
(5.5
)
Net actuarial loss
8.4

Total
$
2.9

 
 

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, 2017, 2016 and 2015:
($ millions)
Pension
 
Postretirement
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Components of net periodic cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
5.7

 
$
6.2

 
$
7.9

 
$

 
$

 
$

Interest cost
11.4

 
11.9

 
11.3

 
0.8

 
0.9

 
1.1

Expected return on plan assets
(16.7
)
 
(15.1
)
 
(13.8
)
 

 

 

Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service benefit

 

 

 
(5.5
)
 
(5.5
)
 
(5.4
)
Net actuarial loss
7.8

 
9.2

 
10.9

 
0.2

 
0.2

 
0.6

Net periodic cost (benefit)
$
8.2

 
$
12.2

 
$
16.3

 
$
(4.5
)
 
$
(4.4
)
 
$
(3.7
)
 
 
 
 
 
 
 
 
 
 
 
 

The following table sets forth the Company’s share of the benefit payments, which reflect expected future service, expected to be paid:
($ millions)
Pension
 
Postretirement
2018
$
11.2

 
$
1.5

2019
11.5

 
1.5

2020
12.0

 
1.4

2021
12.5

 
1.4

2022
12.9

 
1.3

2023-2027
76.2

 
5.9


The postretirement plan’s gross benefit payments for 2017 were $1.8 million, including the prescription drug benefits. The postretirement plan’s subsidy related to Medicare Prescription Drug Improvement and Modernization Act of 2003 was $0.2 million for 2017 and estimates future annual subsidies to be approximately $0.1 million.

108

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

The following table sets forth the weighted average assumptions used to determine the benefit plans’ obligations at December 31, 2017 and 2016:
 
Pension
 
Postretirement
  
2017
 
2016
 
2017
 
2016
Benefit obligations weighted-average assumptions:
 
 
 
 
 
 
 
Discount rate
3.50
%
 
4.00
%
 
3.50
%
 
4.00
%
Rates of increase in compensation levels
3.25

 
3.50

 

 


The following table sets forth the weighted average assumptions used to determine the benefit plans’ net periodic cost for the years ended December 31, 2017, 2016 and 2015:
 
Pension
 
Postretirement
 
  
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
Weighted-average assumptions:
 
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.00
%
 
4.20
%
 
3.85
%
 
4.00
%
 
4.20
%
 
3.85
%
 
Expected long-term rate of return on assets
7.00

 
7.00

 
7.00

  

 

 

 
Rates of increase in compensation levels
3.50

 
3.50

 
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.
The following table sets forth the assumed health care cost trend rates used for the years ended December 31, 2017, 2016 and 2015:
 
Postretirement
  
2017
 
2016
 
2015
Assumed health care cost trend rates:
 
 
 
 
 
Health care cost trend rate assumed for the next year
6.00
%
 
6.50
%
 
6.50
%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
3.80
%
 
3.90
%
 
3.80
%
Year that the rate reaches the ultimate trend rate
2075

 
2075

 
2076


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, 2017:
($ millions)
Postretirement
  
Increase
 
(Decrease)
One percentage point change:
 
 
 
Effect on total service and interest cost
$
0.1

 
$
(0.1
)
Effect on accumulated postretirement benefit obligation
1.7

 
(1.5
)


109

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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
allocation
target
(0 to 100%)
Asset Category:
 
Fixed maturity
52.0
%
U.S. large-cap equity
24.2

U.S. small-cap equity
10.3

International equity
9.4

Emerging market equity
4.1

Total
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 will occur over a period of 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.  The new allocation strategy reduces exposure to equity holdings and increases exposure to long duration fixed maturity holdings.  This change will result 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 will increase 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, 2017 and 2016.
Included in the pension plan’s available-for-sale securities are two international funds (“the funds”) that invest in equity securities of foreign issuers and are managed by third party investment managers. The funds had a fair value of $26.6 million and $20.0 million at December 31, 2017 and 2016, respectively, which was determined using the funds’ net asset value. In accordance with Accounting Standard Codification 820-10, since these investments are measured at fair value using the net asset value per share practical expedient these have not been classified in the table below.
At December 31, 2016, the Company held an international fund (classified as available-for-sale) that was managed by third party investment managers. During the fourth quarter of 2017, the Company redeemed its investment in the fund. At December 31, 2016, the fund had a fair value of $11.3 million.

110

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

The following tables set forth the Company’s share of pension plan’s available-for-sale securities within the fair value hierarchy at December 31, 2017 and 2016:
($ millions)
Total
 
Quoted prices
in active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
December 31, 2017
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
70.1

 
$

 
$
70.1

 
$

Corporate securities
60.7

 

 
60.7

 

U.S. government agencies mortgage-backed securities
4.4

 

 
4.4

 

Total fixed maturities
135.2

 

 
135.2

 

Equity securities:
 
 
 
 
 
 
 
Large-cap securities
71.6

 
71.6

 

 

Mutual and exchange traded funds
25.1

 
25.1

 

 

Total equity securities
96.7

 
96.7

 

 

Total pension plan investments
$
231.9

 
$
96.7

 
$
135.2

 
$

 
 
 
 
 
 
 
 
($ millions)
Total
 
Quoted prices
in active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
December 31, 2016
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
60.4

 
$

 
$
60.4

 
$

Corporate securities
48.0

 

 
48.0

 

U.S. government agencies mortgage-backed securities
4.6

 

 
4.6

 

Total fixed maturities
113.0

 

 
113.0

 

Equity securities:
 
 
 
 
 
 
 
Large-cap securities
59.6

 
59.6

 

 

Small-cap securities
26.3

 
26.3

 

 

Total equity securities
85.9

 
85.9

 

 

Short-term fixed maturities
$
2.0

 
$

 
$
2.0

 
$

Total pension plan investments
$
200.9

 
$
85.9

 
$
115.0

 
$

 
 
 
 
 
 
 
 

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’s share of expected contributions during 2018 is approximately $10.0 million.
The Company maintains a defined contribution plan that covers substantially all employees of the Company. The Company matches the first 1% of contributions of participants’ salary at the rate of one dollar for each dollar contributed. Participant contributions of 2% to 6% are matched at a rate of 50 cents for each dollar contributed. In addition, the Company contributes a percentage of the employee’s annual income for those employees hired 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, $6.3 million and $5.1 million for 2017, 2016 and 2015, respectively.

111

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

11. Other Comprehensive Income and Accumulated Other Comprehensive Income
The following tables set forth the changes in the Company’s accumulated other comprehensive income component (AOCI), net of tax, for the years ended December 31, 2017, 2016 and 2015:
($ millions)
 
 

Unrealized Gains and Losses on Available-for-Sale Securities
 
Benefit Plan Items
 
Total
Beginning balance at January 1, 2017
$
62.8

 
$
(30.3
)
 
$
32.5

Other comprehensive income before reclassifications
45.5

 
(1.0
)
 
44.5

Amounts reclassified from AOCI (a)
(42.3
)
 
2.0

 
(40.3
)
Net current period other comprehensive income
3.2

 
1.0

 
4.2

Ending balance at December 31, 2017
$
66.0

 
$
(29.3
)
 
$
36.7

 
 
 
 
 
 
 
Beginning balance at January 1, 2016
$
68.5

 
$
(30.9
)
 
$
37.6

Other comprehensive income before reclassifications
18.0

 
(3.0
)
 
15.0

Amounts reclassified from AOCI (a)
(23.7
)
 
3.6

 
(20.1
)
Net current period other comprehensive income
(5.7
)
 
0.6

 
(5.1
)
Ending balance at December 31, 2016
$
62.8

 
$
(30.3
)
 
$
32.5

 
 
 
 
 
 
 
Beginning balance at January 1, 2015
$
110.0

 
$
(38.3
)
 
$
71.7

Other comprehensive income before reclassifications
(25.4
)
 
5.3

 
(20.1
)
Amounts reclassified from AOCI (a)
(16.1
)
 
2.1

 
(14.0
)
Net current period other comprehensive income
(41.5
)
 
7.4

 
(34.1
)
Ending balance at December 31, 2015
$
68.5

 
$
(30.9
)
 
$
37.6

 
 
 
 
 
 
 
(a)
See separate table below for details about these reclassifications

The following tables set forth the reclassifications out of accumulated other comprehensive income, by component, to the Company’s consolidated statement of income for the years ended December 31, 2017, 2016 and 2015:
($ millions)
 
 
 
 
 
 
 
 
Details about Accumulated Other 
 
December 31
 
Affected line item in the Condensed
Comprehensive Income Components
 
2017
 
2016
 
2015
 
Consolidated Statements of Income
Unrealized gains on available for sale securities
 
$
65.1

 
$
36.5

 
$
24.7

 
Realized gain on sale of securities
 
 
 
65.1

 
36.5

 
24.7

 
Total before tax
 
 
 
(22.8
)
 
(12.8
)
 
(8.6
)
 
Tax expense
 
 
 
42.3

 
23.7

 
16.1

 
Net of tax
Amortization of benefit plan items:
 
 
 
 
 
 
 
 
Negative prior service costs
 
5.5

 
5.5

 
5.4

 
(a)
Net loss
 
(8.0
)
 
(9.4
)
 
(11.5
)
 
(a)
 
 
 
(2.5
)
 
(3.9
)
 
(6.1
)
 
Total before tax
 
 
 
0.5

 
0.3

 
4.0

 
Tax benefit
 
 
 
(2.0
)
 
(3.6
)
 
(2.1
)
 
Net of tax
Total reclassifications for the period
 
$
40.3

 
$
20.1

 
$
14.0

 
 
 
 
 
 
 
 
 
 
 
 
(a)
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).

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 $85.8 million is available for payment to State Auto Financial from its insurance subsidiaries in 2016 without prior approval. State Auto Financial received dividends from its insurance subsidiaries in the amount of $15.0 million, $10.0 million and $15.0 million in 2017, 2016 and 2015, respectively.
The Company’s insurance subsidiaries are subject to risk-based capital (“RBC”) requirements that have been adopted by individual states. These requirements subject insurers having statutory capital less than that required by the RBC calculation to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC formulas specify various weighting factors to be applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital to authorized control level RBC. Generally no remedial action is required by an insurance company if its adjusted statutory surplus exceeds 200% of the authorized level RBC. As of December 31, 2017, each of the Company’s insurance subsidiaries maintained adjusted statutory surplus in excess of 400% of the authorized control level RBC.
The following tables set forth reconciliations of statutory capital and surplus and net income, as determined using SAP, to the amounts included in the accompanying consolidated financial statements:
($ millions)
2017
 
2016
Statutory capital and surplus of insurance subsidiaries
$
858.4

 
$
844.4

Net liabilities of non-insurance parent and affiliates
(89.8
)
 
(84.9
)
 
768.6

 
759.5

Increases (decreases):
 
 
 
Deferred acquisition costs
117.8

 
129.8

Postretirement and pension benefits
22.3

 
22.7

Deferred federal income taxes
(61.2
)
 
(49.1
)
Fixed maturities, at fair value
19.6

 
13.5

Other, net
13.8

 
14.9

Stockholders’ equity per accompanying consolidated financial statements
$
880.9

 
$
891.3

 
 
 
 
($ millions)
Year ended December 31
  
2017
 
2016
 
2015
Statutory net income of insurance subsidiaries
$
42.8

 
$
22.7

 
$
65.4

Net loss of non-insurance parent and affiliates
(13.1
)
 
(3.0
)
 
(4.1
)
 
29.7

 
19.7

 
61.3

Increases (decreases):
 
 
 
 
 
Deferred acquisition costs
(12.0
)
 
0.7

 
2.5

Postretirement and pension benefits
4.3

 
4.4

 
4.2

Deferred federal income taxes
(34.6
)
 
(5.4
)
 
(12.2
)
Share-based compensation expense

 

 
(0.1
)
Other, net
1.9

 
1.6

 
(4.5
)
Net (loss) income per accompanying consolidated financial statements
$
(10.7
)
 
$
21.0

 
$
51.2

 
 
 
 
 
 

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.

112

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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.

113

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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 and agents. 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, 2017, a total of 2.2 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 5.0 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 Company recognizes compensation expense based on the number of restricted shares granted at the then grant date fair value over the Restriction Period.
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 set forth the Company’s total activity and related information for employee restricted stock and performance unit award activity for the years ended December 31, 2017, 2016 and 2015:
 
2017
 
2016
 
2015
  
Shares
 
Weighted
Average
Grant
Date Fair
Value
 
Shares
 
Weighted
Average
Grant
Date Fair
Value
 
Shares
 
Weighted
Average
Grant
Date Fair
Value
Outstanding, beginning of year
107,297

 
$
22.04

 
111,084

 
$
22.19

 
76,472

 
$
19.06

Granted
177,846

 
27.20

 
45,252

 
21.55

 
74,020

 
22.83

Vested
(26,271
)
 
21.39

 
(33,414
)
 
21.93

 
(35,859
)
 
16.88

Forfeited
(39,425
)
 
25.68

 
(15,625
)
 
21.91

 
(3,549
)
 
21.92

Outstanding, end of year
219,447

 
$
25.65

 
107,297

 
$
22.04

 
111,084

 
$
22.19

 
 
 
 
 
 
 
 
 
 
 
 

As of December 31, 2017, there was $2.3 million of total unrecognized compensation cost related to restricted stock and performance unit awards. The remaining cost is expected to be recognized over a period of 2.25 years.

114

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

Stock Options
In accordance with the terms of the 2009 Equity Plan, stock options were granted at an option price not less than the fair market value of the common shares at the date of grant and that nonqualified stock options may be granted at any price determined by the Compensation Committee of the Board of Directors. Options granted generally vest over a three-year period, with one-third of the options vesting on each anniversary of the grant date, and must be exercised no later than ten years from the date of grant.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes closed-form pricing model. The pricing model requires assumptions such as the expected life of the option and expected volatility of the Company’s stock over the expected life of the option, which significantly impacts the assumed fair value. The Company uses historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future periods.
The following tables present the weighted-average assumptions used in the option pricing model for options granted to employees during 2016 and 2015. The expected life of the options for employees represents the period of time the options are expected to be outstanding and is based on historical trends. For non-employees the expected life of the option approximates the remaining contractual term of the option. The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life and the expected dividend yield is based on the Company’s most recent period’s dividend payout. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and has a term approximating the expected life of the option.
The fair value of share-based awards granted to employees was estimated at the date of grant using the Black-Scholes option-pricing model. The following table sets forth the weighted average fair values and related assumptions for options granted for the years ended December 31, 2016 and 2015:
 
2017
 
2016
 
2015
Fair value per share
N/A(1)
 
$
6.75

 
$
7.69

Expected dividend yield
N/A(1)
 
1.87
%
 
1.75
%
Risk free interest rate
N/A(1)
 
1.30
%
 
1.60
%
Expected volatility factor
N/A(1)
 
36.27
%
 
36.61
%
Expected life in years
N/A(1)
 
5.3

 
6.0

 
 
 
 
 
 
(1) No stock options granted during 2017
 
 
 
 
 
 
 
 
 
 
 

The following table sets forth the Company’s stock option activity and related information for the years ended December 31, 2017, 2016 and 2015:
(millions, except per share amounts)
2017
 
2016
 
2015
  
Options
 
Weighted-
Average
Exercise
Price
 
Options
 
Weighted-
Average
Exercise
Price
 
Options
 
Weighted-
Average
Exercise
Price
Outstanding, beginning of year
2.5

 
$
20.63

 
3.1

 
$
21.45

 
3.4

 
$
21.37

Granted

 

 
0.2

 
21.55

 
0.3

 
22.86

Exercised
(0.4
)
 
19.38

 
(0.4
)
 
17.18

 
(0.3
)
 
16.54

Canceled
(0.4
)
 
28.96

 
(0.4
)
 
30.70

 
(0.3
)
 
25.63

Outstanding, end of year
1.7

 
$
19.22

 
2.5

 
$
20.63

 
3.1

 
$
21.45

 
 
 
 
 
 
 
 
 
 
 
 

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, 2017, 2016 and 2015, the total intrinsic value of stock options exercised was $3.5 million, $3.0 million and $2.6 million, respectively. The tax benefit for tax deductions from share-based awards totaled $1.4 million and $0.3 million for the years ended December 31, 2016 and 2015, respectively. In addition, income taxes for the year ended December 31, 2016 reflected the impact of a $1.6 million correction of prior period deferred tax expense related to expired stock options. See Note 9 for additional information.

115

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

The following table sets forth information pertaining to the total options outstanding and exercisable at December 31, 2017:
(Options in millions)
Options Outstanding
 
Options Exercisable
  
Number
 
Weighted-
Average
Remaining
Contractual Life
 
Weighted-
Average
Exercise
Price
 
Number
 
Weighted-
Average
Exercise
Price
Range of Exercise Prices:
 
 
 
 
 
 
 
 
 
$10.01 – $20.00
1.0

 
3.6
 
$
16.53

 
1.0

 
$
16.53

$20.01 – $30.00
0.7

 
4.7
 
23.07

 
0.6

 
23.33

 
1.7

 
4.0
 
$
19.22

 
1.6

 
$
18.98

 
 
 
 
 
 
 
 
 
 

Aggregate intrinsic value for total options outstanding at December 31, 2017 was $16.1 million. Aggregate intrinsic value for total options exercisable at December 31, 2017 was $17.1 million.
Employee Stock Purchase Plan
The Company also has a broad-based employee stock purchase plan under which employees of the Company may choose, at two different specified time intervals each year, to have up to 6% of their annual base earnings withheld to purchase the Company’s common shares. The purchase price of the common shares is 85% of the lower of its beginning-of-interval or end-of-interval market price. The Company has reserved 3.7 million common shares under this plan. As of December 31, 2017, a total of 3.5 million common shares have been purchased under this plan. This plan remains in effect until terminated by the Board of Directors.
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 five- or ten-year period, as previously elected by the outside director. The administrative committee for the RSU Plan (currently the Company’s Compensation Committee) retains the right to increase the annual number of RSU awards granted to each outside director to as many as 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 26,323 RSUs, 22,832 RSUs, and 26,184 RSUs granted in 2017, 2016 and 2015, respectively.
During 2017 and 2016, common shares valued at approximately $106,581 and $753,000, respectively, were distributed by the Company under the RSU Plan.
Share-based compensation expense recognized during 2017, 2016 and 2015 was $4.2 million, $3.7 million and $4.5 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, 2017, there was $2.7 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 2.25 years.
15. Net (Loss) Earnings Per Common Share
The following table sets forth the compilation of basic and diluted net (loss) earnings per common share for the years ended December 31, 2017, 2016 and 2015:
(millions, except per share amounts)
2017
 
2016
 
2015
Numerator:
 
 
 
 
 
Net (loss) earnings for basic net earnings per common share
$
(10.7
)
 
$
21.0

 
$
51.2

Adjusted net (loss) earnings for dilutive net (loss) earnings per common share
$
(10.7
)
 
$
21.0

 
$
51.2

Denominator:
 
 
 
 
 
Weighted average shares for basic net (loss) earnings per common share
42.1

 
41.6

 
41.1

Effect of dilutive share-based awards

 
0.4

 
0.5

Adjusted weighted average shares for diluted net (loss) earnings per common share
42.1

 
42.0

 
41.6

 
 
 
 
 
 
Basic net (loss) earnings per common share
$
(0.25
)
 
$
0.50

 
$
1.25

Diluted net (loss) earnings per common share
$
(0.25
)
 
$
0.50

 
$
1.23

 
 
 
 
 
 

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, 2017, 2016 and 2015:
(millions)
2017
 
2016
 
2015
Total number of antidilutive options and awards
0.5

 
1.2

 
1.5

 
 
 
 
 
 

16. Reportable Segments
The Company has four reportable segments: personal insurance, commercial insurance, specialty insurance (the “insurance segments”) and investment operations. The insurance segments are business units managed separately because of the differences in the type of customers they serve or products they provide or services they offer.
The personal insurance segment 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 specialty insurance segment provides commercial coverages that require specialized product underwriting, claims handling or risk management services through a distribution channel of retail agents and wholesale brokers, which may include program administrators and other specialty sources.
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.

116

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

The Company’s reportable insurance segments, and the products within each, are as follows:
Personal Insurance Segment- personal auto, homeowners, farm & ranch and other personal
Commercial Insurance Segment - commercial auto, small commercial package, middle market commercial, workers’ compensation and other commercial
Specialty Insurance Segment - E&S property, E&S casualty and programs
After a review of strategic alternatives for our excess and surplus lines business in the specialty insurance segment, during the second half of 2017 management made the decision to begin exiting the excess and surplus lines business either through a series of renewal right transactions or by placing lines of business into run-off since this business is not core to the Company’s ongoing business strategy. The impact of this decision, along with the 2016 decision to exit programs business, on future results will result in the elimination of the specialty insurance segment and its related underwriting results from the State Auto Group.

117

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, 2017, 2016 and 2015:
($ millions)
2017
 
2016
 
2015
Revenues from external sources:
 
 
 
 
 
Insurance segments
 
 
 
 
 
Personal insurance
$
580.3

 
$
578.5

 
$
591.3

Commercial insurance
455.7

 
472.6

 
476.5

Specialty insurance
239.1

 
240.8

 
202.7

Total insurance segments
1,275.1

 
1,291.9

 
1,270.5

Investment operations segment
 
 
 
 
 
Net investment income
78.8

 
74.7

 
71.7

Net realized capital gains
65.1

 
36.5

 
24.7

Total investment operations segment
143.9

 
111.2

 
96.4

Total revenue from reportable segments
1,419.0

 
1,403.1

 
1,366.9

All other
2.3

 
2.3

 
1.7

Total revenues from external sources
1,421.3

 
1,405.4

 
1,368.6

Intersegment revenues
6.0

 
5.8

 
5.6

Total revenues
1,427.3

 
1,411.2

 
1,374.2

Reconciling items:
 
 
 
 
 
Eliminate intersegment revenues
(6.0
)
 
(5.8
)
 
(5.6
)
Total consolidated revenue
$
1,421.3

 
$
1,405.4

 
$
1,368.6

Segment loss before federal income taxes:
 
 
 
 
 
Insurance segments:
 
 
 
 
 
Personal insurance SAP underwriting (loss) gain
$
(23.3
)
 
$
(10.3
)
 
$
27.5

Commercial insurance SAP underwriting loss
(10.6
)
 
(31.6
)
 
(46.7
)
Specialty insurance SAP underwriting loss
(57.0
)
 
(42.7
)
 
(5.9
)
Total insurance segments
(90.9
)
 
(84.6
)
 
(25.1
)
Investment operations segment:
 
 
 
 
 
Net investment income
78.8

 
74.7

 
71.7

Net realized capital gains
65.1

 
36.5

 
24.7

Total investment operations segment
143.9

 
111.2

 
96.4

All other segments income
0.6

 
0.4

 
(0.1
)
Reconciling items:
 
 
 
 
 
GAAP adjustments
(10.2
)
 
2.0

 
4.2

Interest expense on corporate debt
(5.9
)
 
(5.5
)
 
(5.4
)
Corporate expenses
(4.1
)
 
(4.3
)
 
(2.7
)
Total reconciling items
$
(20.2
)
 
$
(7.8
)
 
$
(3.9
)
Total consolidated income before federal income taxes
$
33.4

 
$
19.2

 
$
67.3

 
 
 
 
 
 

The following table sets forth financial information regarding the Company’s reportable segments at December 31, 2017 and 2016:
($ millions)
2017
 
2016
Segment assets:
 
 
 
Investment operations segment
$
2,781.2

 
$
2,663.7

Total segment assets
2,781.2

 
2,663.7

Reconciling items:
 
 
 
Corporate assets
233.1

 
295.7

Total consolidated assets
$
3,014.3

 
$
2,959.4

 
 
 
 


118

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

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.
17. Quarterly Financial Data (unaudited)
The following tables set forth quarterly financial data for 2017 and 2016:
($ millions, except per share amounts)
2017
 
For three months ended
  
March 31
 
June 30
 
September 30
 
December 31
Total revenues
$
344.3

 
$
355.7

 
$
358.4

 
$
362.9

(Loss) income before federal income taxes
(5.2
)
 
11.9

 
(11.2
)
 
37.9

Net (loss) income
(4.1
)
 
8.7

 
(9.5
)
 
(5.8
)
(Loss) earnings per common share:
 
 
 
 
 
 
 
Basic
$
(0.10
)
 
$
0.21

 
$
(0.23
)
 
$
(0.14
)
Diluted
$
(0.10
)
 
$
0.21

 
$
(0.23
)
 
$
(0.14
)
 
 
 
 
 
 
 
 
 
2016
 
For three months ended
  
March 31
 
June 30
 
September 30
 
December 31
Total revenues
$
339.2

 
$
348.5

 
$
352.8

 
$
364.9

Income (loss) before federal income taxes
3.8

 
(25.1
)
 
7.4

 
33.1

Net income (loss)
3.0

 
(24.6
)
 
10.1

 
32.5

Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.07

 
$
(0.59
)
 
$
0.24

 
$
0.78

Diluted
$
0.07

 
$
(0.59
)
 
$
0.24

 
$
0.77

 
 
 
 
 
 
 
 


119

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Companies)
 

18. Contingencies
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 stages of development. The Company generally will contest these matters vigorously but may pursue settlement if 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.
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.

120

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
Not applicable.
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, 2017, 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.

121



PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our directors required by Items 401(a) and (d)-(f) of Regulation S-K will be found under the caption “Proposal One: Election of Directors” in the 2018 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 28, 2018, the members of our Audit Committee were Eileen A. Mallesch, Robert E. Baker, Kym M. Hubbard, David R. Meuse and Setareh Pouraghabagher. Ms. Mallesch 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 2018 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 2018 Proxy Statement. There has been no material change to the nomination procedures previously disclosed in the proxy statement for our 2018 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 2018 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, 2017” 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 2018 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 2018 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 2018 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 2018 Proxy Statement, which is incorporated herein by reference.

122



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’s Audit and Other Services Fees” in our 2018 Proxy Statement, which information is incorporated herein by reference.

123



PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1)    LISTING OF FINANCIAL STATEMENTS
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, 2017 and 2016
Consolidated Statements of Income for each of the three years in the period ended December 31, 2017
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2017
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2017
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017
Notes to Consolidated Financial Statements
(a)(2)    LISTING OF FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Company for the years 2017, 2016 and 2015 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
 
Schedule
 
 
 
I.
 
Summary of Investments—Other Than Investments in Related Parties
 
 
 
II.
 
Condensed Financial Information of Registrant
 
 
 
III.
 
Supplementary Insurance Information
 
 
 
IV.
 
Reinsurance
 
 
 
V.
 
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
 
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 3.01 therein)
 
 
 
 
 
3.02
 
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)
 
 
 
 
 
3.03
 
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)
 
 
 
 
 
3.04
 
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 3.04 therein)
 
 
 
 
 
3.05
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2010 (see Exhibit 3.05 therein)
 
 
 
 
 

124



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
3.06
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2016 (see Exhibit 3.01 therein)
 
 
 
 
 
10.01*
 
2000 Directors Stock Option Plan of State Auto Financial Corporation
  
Definitive Proxy Statement on Form DEF 14A, File No. 000-19289, for Annual Meeting of Shareholders held on May 26, 2000 (see Appendix B therein)
 
 
 
 
 
10.02*
 
  
Form 10-Q Quarterly Report for the period ended March 31, 2001 (see Exhibit 10(HH) therein)
 
 
 
 
 
10.03*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2001 (see Exhibit 10(KK) therein)
 
 
 
 
 
10.04*
 
  
Form 10-K Annual Report for the year ended December 31, 2001 (see Exhibit 10(EE) therein)
 
 
 
 
 
10.05*
 
  
Form 10-K Annual Report for year ended December 31, 2002 (see Exhibit 10(UU) therein)
 
 
 
 
 
10.06*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.66 therein)
 
 
 
 
 
10.07*
 
  
Form 8-K Current Report filed on March 13, 2008 (see Exhibit 10.3 therein)
 
 
 
 
 
10.08
 
Investment Management Agreement between Stateco Financial Services, Inc. and State Automobile Mutual Insurance Company, effective April 1, 1993
  
Form 10-K Annual Report for the year ended December 31, 1992 (see Exhibit 10 (N) therein)
 
 
 
 
 
10.09
 
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.09 therein)
 
 
 
 
 
10.10
 
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.10 therein)
 
 
 
 
 
10.11
 
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.17 therein)
 
 
 
 
 
10.12
 
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.12 therein)
 
 
 
 
 
10.13
  
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.19 therein)
 
 
 
 
 
10.14
  
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.15 therein)
 
 
 
 
 
10.15
  
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.20 therein)
 
 
 
 
 

125



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.16
  
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.17 therein)
 
 
 
 
 
10.17
  
  
Form 10-K Annual Report for the year ended December 31, 2007 (see Exhibit 10.22 therein)
 
 
 
 
 
10.18
  
  
Form 10-K Annual Report for year ended December 31, 2010 (see Exhibit 10.26 therein)
 
 
 
 
 
10.19
  
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.22 therein)
 
 
 
 
 
10.20
  
  
Form 10-K Annual Report for year ended December 31, 2010 (see Exhibit 10.27 therein)
 
 
 
 
 
10.21
  
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.24 therein)
 
 
 
 
 
10.22
  
  
Form 10-K Annual Report for year ended December 31, 2010 (see Exhibit 10.28) therein)
 
 
 
 
 
10.23
  
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.26 therein)
 
 
 
 
 
10.24
  
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.45 therein)
 
 
 
 
 
10.25
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2015 (see Exhibit10.01 therein)
 
 
 
 
 

126



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.26
 
 
Included herein.
10.27
  
  
Form 10-Q Quarterly Report for the period ended September 30, 2009 (see Exhibit 10.01 therein)
 
 
 
 
 
10.28
  
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.35 therein)
 
 
 
 
 
10.29
  
  
Form 8-K Current Report filed on November 25, 2009 (see Exhibit 10.1 therein)
 
 
 
 
 
10.30
  
  
Form 8-K Current Report filed on January 7, 2011 (see Exhibit 10.2 therein)
 
 
 
 
 

127



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.31
  
  
Form 10-K Annual Report for the year ended December 31, 2012 (see Exhibit 10.39 therein)
 
 
 
 
 
10.32
  
  
Form 8-K Current Report filed on January 7, 2011 (see Exhibit 10.1 therein)
 
 
 
 
 
10.33
  
  
Form 10-K Annual Report for year ended December 31, 2011 (see Exhibit 10.45 therein)
 
 
 
 
 
10.34
  
  
Form 10-Q Quarterly Report for the period ended March 31, 2013 (see Exhibit 10.1 therein)
 
 
 
 
 

128



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.35
 
 
Form 10-Q Quarterly Report for the period ended September 30, 2014 (see Exhibit 10.01 therein)
 
 
 
 
 
10.36
  
  
Form 10-K Annual Report for year ended December 31, 2011 (see Exhibit 10.46 therein)
 
 
 
 
 
10.37
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2003 (see 10(XX) therein)
 
 
 
 
 
10.38
  
  
Form 10-Q Quarterly Report for the period ended June 30, 2003 (see 10(YY) therein)
 
 
 
 
 
10.39
  
  
Form 8-K Current Report filed on May 26, 2009 (see Exhibit 10.1 therein)
 
 
 
 
 
10.40
 
  
Form 8-K Current Report filed on May 13, 2009 (see Exhibit 10.1 therein)
 
 
 
 
 
10.41
  
  
Form 8-K Current Report filed on September 30, 2011 (see Exhibit 10.1 therein)
 
 
 
 
 
10.42*
 
  
Included herein
 
 
 
 
 
10.43*
 
  
Included herein
 
 
 
 
 
10.44*
 
  
Included herein
 
 
 
 
 

129



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.45*
 
  
Included herein
 
 
 
 
 
10.46*
 
 
Included herein

 
 
 
 
 
10.47*
 
 
Included herein
 
 
 
 
 
10.48*
 
  
Form 8-K Current Report filed on November 20, 2008 (see Exhibit 99.1 therein)
 
 
 
 
 
10.49*
 
  
Form 8-K Current Report filed on May 13, 2009 (see Exhibit 10.3 therein)
 
 
 
 
 
10.50*
 
 
Included herein.
 
 
 
 
 
10.51*
 
 
Included herein.
 
 
 
 
 
10.52*
 
 
Included herein.
 
 
 
 
 
10.53*
 
 
Included herein.
 
 
 
 
 
10.54*
 
 
Included herein
 
 
 
 
 
10.55*
 
 
Included herein.
 
 
 
 
 
10.56*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.60 therein)
 
 
 
 
 

130



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.57*
 
  
Form 10-K Annual Report for the year ended December 31, 2008 (see Exhibit 10.63 therein)
 
 
 
 
 
10.58*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.62 therein)
 
 
 
 
 
10.59*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.63 therein)
 
 
 
 
 
10.60*
 
  
Form 8-K Current Report filed on May 13, 2009 (see Exhibit 10.7 therein)
 
 
 
 
 
10.61*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2011 (see Exhibit 10.01 therein)
 
 
 
 
 
10.62*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2013 (see Exhibit 10.01 therein)
 
 
 
 
 
10.63*
 
 
Form 10-K Annual Report for the year ended December 31, 2014 (see Exhibit 10.69 therein)
 
 
 
 
 
10.64*
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2016 (see Exhibit 10.01 therein)
 
 
 
 
 
10.65*
 
 
Form 10-Q Quarterly Report for the period ended March 31, 2014 (see Exhibit 10.02 therein)
 
 
 
 
 
10.66*
 
 
Form 8-K Current Report filed on May 13, 2015 (see Exhibit 10.02 therein)
 
 
 
 
 
10.67*
 
 
Form 8-K Current Report filed on May 13, 2015 (see Exhibit 10.06 therein)
 
 
 
 
 
10.68*
 
 
Form 10-Q Quarterly Report for the period ended March 31, 2016 (see Exhibit 10.01 therein)
 
 
 
 
 
10.69*
 
 
Form 10-Q Quarterly Report for the period ended March 31, 2016 (see Exhibit 10.02 therein)
 
 
 
 
 
10.70*
 
 
Form 10-Q Quarterly Report for the period ended March 31, 2016 (see Exhibit 10.03 therein)
 
 
 
 
 
10.71*
 
 
Form 10-Q Quarterly Report for the period ended March 31, 2016 (see Exhibit 10.04 therein)
 
 
 
 
 

131



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.72*
 
 
Form 10-Q Quarterly Report for the period ended March 31, 2016 (see Exhibit 10.05 therein)
 
 
 
 
 
10.73*
 
 
Form 10-Q Quarterly Report for the period ended March 31, 2016 (see Exhibit 10.06 therein)
 
 
 
 
 
10.74*
 
 
Form 10-K Annual Report for the year ended December 31, 2016 (see Exhibit 10.74 therein)
 
 
 
 
 
10.75*
 
 
Form 10-K Annual Report for the year ended December 31, 2016 (see Exhibit 10.75 therein)
 
 
 
 
 
10.76*
 
 
Form 10-K Annual Report for the year ended December 31, 2016 (see Exhibit 10.76 therein)
 
 
 
 
 
10.77*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.61 therein)
 
 
 
 
 
10.78*
 
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.54 therein)
 
 
 
 
 
10.79*
 
  
Form 10-K Annual Report for the year ended December 31, 2008 (see Exhibit 10.73 therein)
 
 
 
 
 
10.80*
 
  
Form 10-K Annual Report for year ended December 31, 2010 (see Exhibit 10.89 therein)
 
 
 
 
 
10.81*
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2016 (see Exhibit 10.02 therein)
 
 
 
 
 
10.82*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.64 therein)
 
 
 
 
 
10.83*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.65 therein)
 
 
 
 
 
10.84*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2010 (see Exhibit 10.01 therein)
 
 
 
 
 
10.85*
 
  
Form 10-K Annual Report for year ended December 31, 2010 (see Exhibit 10.96 therein)
 
 
 
 
 
10.86*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2007 (see Exhibit 10.72 therein)
 
 
 
 
 
10.87*
 
  
Form 10-K Annual Report for year ended December 31, 2010 (see Exhibit 10.98 therein)
 
 
 
 
 
10.88*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2007 (see Exhibit 10.73 therein)
 
 
 
 
 

132



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.89*
 
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.58 therein)
 
 
 
 
 
10.90*
 
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.59 therein)
 
 
 
 
 
10.91*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2008 (see Exhibit 10.02 therein)
 
 
 
 
 
10.92*
 
  
Form 10-K Annual Report for the year ended December 31, 2008 (see Exhibit 10.84 therein)
 
 
 
 
 
10.93*
 
  
1933 Act Registration Statement No. 333-170564 on Form S-8 (see Exhibit 4(j) therein)
 
 
 
 
 
10.94*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2012 (see Exhibit 10.1 therein)
 
 
 
 
 
10.95*
 
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.60 therein)
 
 
 
 
 
10.96*
 
  
Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.61 therein)
 
 
 
 
 
10.97*
 
  
1933 Act Registration Statement No. 333-165366 on Form S-8 (see Exhibit 4(e) therein)
 
 
 
 
 
10.98*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2010 (see Exhibit 10.02 therein)
 
 
 
 
 
10.99*
 
  
1933 Act Registration Statement No. 333-170568 on Form S-8 (see Exhibit 4(h) therein)
 
 
 
 
 
10.100*
 
  
Form 10-K Annual Report for year ended December 31, 2011 (see Exhibit 10.109 therein)
 
 
 
 
 
10.101*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2007 (see Exhibit 10.64 therein)
 
 
 
 
 
10.102*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2008 (see Exhibit 10.04 therein)
 
 
 
 
 

133



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
10.103*
 
  
Form 8-K Current Report filed on May 10, 2012 (see Exhibit 10.2 therein)
 
 
 
 
 
10.104*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2015 (see Exhibit 10.02 therein)
 
 
 
 
 
10.105*
 
  
Form 10-Q Quarterly Report for the period ended June 30, 2007 (see Exhibit 10.65 therein)
 
 
 
 
 
10.106*
 
  
Form 8-K Current Report filed on March 13, 2008 (see Exhibit 10.5 therein)
 
 
 
 
 
10.107*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2008 (see Exhibit 10.05 therein)
 
 
 
 
 
10.108*
 
  
Form 8-K Current Report filed on May 10, 2012 (see Exhibit 10.3 therein)
 
 
 
 
 
10.109*
 
  
Form 10-Q Quarterly Report for the period ended September 30, 2015 (see Exhibit 10.01 therein)
 
 
 
 
 
10.110*
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2017 (see Exhibit 10.01 therein)
 
 
 
 
 
10.111*
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2013 (see Exhibit 10.02 therein)
 
 
 
 
 
10.112*
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2013 (see Exhibit 10.03 therein)
 
 
 
 
 
10.113*
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2013 (see Exhibit 10.04 therein)
 
 
 
 
 
10.114*
 
 
Form 10-Q Quarterly Report for the period ended September 30, 2016 (see Exhibit 10.01 therein)
 
 
 
 
 
10.115*
 
 
Form 10-Q Quarterly Report for the period ended June 30, 2016 (see Exhibit 10.03 therein)
 
 
 
 
 
21.01
 
  
Included herein
 
 
 
 
 
23.01
 
  
Included herein
 
 
 
 
 

134



    Exhibit
    No.
 
Description of Exhibit
  
If incorporated by reference document with which Exhibit was
previously filed with SEC
 
 
 
 
 
24.01
 
  
Form 10-K Annual Report for year ended December 31, 2016 (see Exhibit 24.01 therein)

 
 
 
 
 
24.02
 
 
Included herein
 
 
 
 
 
31.01
 
  
Included herein
 
 
 
 
 
31.02
 
  
Included herein
 
 
 
 
 
32.01
 
  
Included herein
 
 
 
 
 
32.02
 
  
Included herein
 
 
 
 
 
101.INS
 
The instance document does not appear in the interactive data file because its XBRL tags are embedded within
  
 
 
 
 
 
 
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
 
XBRL Taxonomy Extension Label Linkbase Document
  
Included herein
 
 
 
 
 
101.PRE
 
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.

135



SIGNATURES
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.
 
STATE AUTO FINANCIAL CORPORATION
 
 
Dated: February 28, 2018
/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
 
Date
 
 
 
 
 
/s/    Michael E. LaRocco
 
Chairman, President and Chief Executive Officer
 
February 28, 2018
Michael E. LaRocco
 
(principal executive officer)
 
 
 
 
 
 
 
/s/    Steven E. English
 
Senior Vice President and Chief Financial Officer
 
February 28, 2018
Steven E. English
 
(principal financial officer)
 
 
 
 
 
 
 
/s/   Matthew R. Pollak
 
Vice President, Treasurer and Chief Accounting Officer
 
February 28, 2018
Matthew R. Pollak
 
(principal accounting officer)
 
 
 
 
 
 
 
Robert E. Baker*
 
Director
 
February 28, 2018
Robert E. Baker
 
 
 
 
 
 
 
 
 
Michael J. Fiorile*
 
Director
 
February 28, 2018
Michael J. Fiorile
 
 
 
 
 
 
 
 
 
Kym M. Hubbard*
 
Director
 
February 28, 2018
Kym M. Hubbard
 
 
 
 
 
 
 
 
 
Eileen A. Mallesch*
 
Director
 
February 28, 2018
Eileen A. Mallesch
 
 
 
 
 
 
 
 
 
Thomas E. Markert*
 
Director
 
February 28, 2018
Thomas E. Markert
 
 
 
 
 
 
 
 
 
David R. Meuse*
 
Director
 
February 28, 2018
David R. Meuse
 
 
 
 
 
 
 
 
 
Setareh Pouraghabagher*
 
Director
 
February 28, 2018
Setareh Pouraghabagher
 
 
 
 
 
 
 
 
 
S. Elaine Roberts*
 
Director
 
February 28, 2018
S. Elaine Roberts
 
 
 
 
 
 
 
 
 
*
Steven E. English by signing his name hereto, does sign this document on behalf of the person indicated above pursuant to a Power of Attorney duly executed by such person.
/s/     Steven E. English
 
Attorney in Fact
 
February 28, 2018
Steven E. English
 
 
 
 

136



STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE I – SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 2017
($ millions)
 
 
 
 
 
December 31, 2017
Cost or
amortized
cost (1)
 
Fair
value
 
Amount at
which shown
in the
balance sheet
Available-for-sale:
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
U.S. treasury securities and obligations of U.S. government agencies
$
433.8

 
$
436.9

 
$
436.9

Obligations of states and political subdivisions
507.1

 
525.8

 
525.8

Corporate securities
527.5

 
529.7

 
529.7

U.S. government agencies residential mortgage-backed securities
704.7

 
700.4

 
700.4

Total fixed maturities
2,173.1

 
2,192.8

 
2,192.8

Equity securities:
 
 
 
 
 
Large-cap securities
62.4

 
96.8

 
96.8

Mutual and exchange traded funds
256.2

 
268.5

 
268.5

Total equity securities
318.6

 
365.3

 
365.3

Other invested assets
25.8

 
56.0

 
56.0

Total available-for-sale securities
2,517.5

 
2,614.1

 
2,614.1

Other invested assets
5.6

 
5.6

 
5.6

Total investments – other than investments in related parties
$
2,523.1

 
$
2,619.7

 
$
2,619.7

 
 
 
 
 
 
 
(1)
Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts.







STATE AUTO FINANCIAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
(in millions, except per share amounts)
December 31
  
2017
 
2016
Assets
 
 
 
Investments in common stock of subsidiaries (equity method)
$
979.5

 
$
983.6

Fixed maturities, available-for-sale, at fair value

 
0.9

Other invested assets
4.2

 
3.5

Cash and cash equivalents
8.8

 
8.1

Other assets
0.1

 
0.2

Federal income tax, net
15.8

 
21.5

Total assets
$
1,008.4

 
$
1,017.8

Liabilities and Stockholders’ Equity
 
 
 
Notes payable (affiliates $116.5 and $116.5, respectively)
$
116.5

 
$
116.5

Due to affiliates
0.5

 
1.3

Other liabilities
10.5

 
8.7

Total liabilities
127.5

 
126.5

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; 49.2 and 48.6 shares issued, respectively, at stated value of $2.50 per share
123.0

 
121.6

Treasury stock, 6.8 and 6.8 shares, respectively, at cost
(116.8
)
 
(116.5
)
Additional paid-in capital
171.8

 
159.9

Accumulated other comprehensive income
36.7

 
32.5

Retained earnings
666.2

 
693.8

Total stockholders’ equity
880.9

 
891.3

Total liabilities and stockholders’ equity
$
1,008.4

 
$
1,017.8

 
 
 
 

See accompanying notes to condensed financial statements.





STATE AUTO FINANCIAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED

Condensed Statements of Income
 
($ millions)
Year ended December 31
 
2017
 
2016
 
2015
Net investment income
$
0.4

 
$
0.2

 
$
0.3

Net realized gain on investments
0.3

 

 

Total revenues
0.7

 
0.2

 
0.3

Interest expense (affiliates $6.1, $6.1 and $6.0, respectively)
6.1

 
6.1

 
6.0

Other operating expenses
6.7

 
7.0

 
4.9

Total expenses
12.8

 
13.1

 
10.9

Loss before federal income taxes
(12.1
)
 
(12.9
)
 
(10.6
)
Federal income tax expense (benefit)
5.1

 
(6.0
)
 
(2.8
)
Net (loss) income before equity in net income of subsidiaries
(17.2
)
 
(6.9
)
 
(7.8
)
Equity in net income of subsidiaries
6.5

 
27.9

 
59.0

Net (loss) income
$
(10.7
)
 
$
21.0

 
$
51.2

 
 
 
 
 
 

See accompanying notes to condensed financial statements.





STATE AUTO FINANCIAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED

Condensed Statements of Comprehensive Income
 
($ millions, except per share amounts)
Year ended December 31
 
2017
 
2016
 
2015
Net (loss) income
$
(10.7
)
 
$
21.0

 
$
51.2

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Net unrealized holding gains (losses) on investments:
 
 
 
 
 
Unrealized holding gains (losses) arising during the year
0.3

 
0.2

 
(0.1
)
Reclassification adjustments for gains realized in net income
0.3

 

 

Income tax expense
(0.1
)
 
(0.1
)
 

Total net unrealized holding gain (losses) on investments
0.5

 
0.1

 
(0.1
)
Unrealized equity in subsidiaries
3.7

 
(5.2
)
 
(34.0
)
Other comprehensive income (loss)
4.2

 
(5.1
)
 
(34.1
)
Comprehensive (loss) income
$
(6.5
)
 
$
15.9

 
$
17.1

 
 
 
 
 
 

See accompanying notes to condensed financial statements.





STATE AUTO FINANCIAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED

Condensed Statements of Cash Flows
 
($ millions)
Year ended December 31
  
2017
 
2016
 
2015
Cash flows used in operating activities:
 
 
 
 
 
Net (loss) income
$
(10.7
)
 
$
21.0

 
$
51.2

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
 
Depreciation and amortization, net

 
(0.3
)
 

Share-based compensation
1.1

 
1.2

 
(0.3
)
Net realized gain on investments
(0.3
)
 

 

Equity in net income from consolidated subsidiaries
(6.5
)
 
(27.9
)
 
(59.0
)
Changes in operating assets and liabilities:
 
 
 
 
 
Other liabilities and due from affiliates

 
0.9

 
0.9

Other assets

 
0.1

 

Excess tax benefits on share-based awards

 
(0.2
)
 
(0.5
)
Federal income taxes, net
5.6

 
3.3

 
(0.7
)
Net cash used in operating activities
(10.8
)
 
(1.9
)
 
(8.4
)
Cash flows from investing activities:
 
 
 
 
 
Dividends received from consolidated subsidiaries
17.7

 
14.2

 
18.0

Purchases of other invested assets
(0.4
)
 
(0.3
)
 
(0.3
)
Maturities, calls and pay downs of fixed maturities – available-for-sale
1.2

 

 

Net cash provided by investing activities
18.5

 
13.9

 
17.7

Cash flows from financing activities:
 
 
 
 
 
Proceeds from issuance of common stock
10.2

 
2.2

 
6.2

Payments to acquire treasury stock
(0.3
)
 
(0.2
)
 
(0.3
)
Payment of dividends
(16.9
)
 
(16.6
)
 
(16.5
)
Excess tax benefits on share-based awards

 
0.2

 
0.3

Net cash used in financing activities
(7.0
)
 
(14.4
)
 
(10.3
)
Net increase (decrease) in cash and cash equivalents
0.7

 
(2.4
)
 
(1.0
)
Cash and cash equivalents at beginning of year
8.1

 
10.5

 
11.5

Cash and cash equivalents at end of year
$
8.8

 
$
8.1

 
$
10.5

Supplemental Disclosures:
 
 
 
 
 
Federal income tax received
$
0.5

 
$
3.4

 
$
2.3

Interest paid (affiliates $6.1, $6.1 and $6.0, respectively)
$
(6.1
)
 
$
(6.1
)
 
$
(6.0
)
 
 
 
 
 
 

See accompanying notes to condensed financial statements.





STATE AUTO FINANCIAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED

Notes to Condensed Financial Statements
STFC’s investment in subsidiaries is stated at cost plus equity in net income from consolidated subsidiaries since the date of acquisition. STFC’s share of net income of its unconsolidated subsidiaries is included in consolidated income using the equity method.
These financial statements should be read in conjunction with the consolidated financial statements of State Auto Financial Corporation.
On July 11, 2013, STFC entered into two separate credit agreements with two of its subsidiaries, State Auto P&C and Milbank. Under the terms of the credit agreements, STFC borrowed $85.0 million and $15.0 million, from State Auto P&C and Milbank, respectively. Under the terms of each credit agreement, interest is payable semi-annually at a fixed annual interest rate of 5.28%, with the principal due at the maturity date. There are no prepayment penalties and no collateral was given as security for the payment of either of these loans.
Financial Instruments Disclosed, But Not Carried, At Fair Value
Notes Payable
Included in notes payable are the credit agreements described above with State Auto P&C and Milbank. STFC estimates the fair value of each note payable by obtaining market quotations for U.S. treasury securities with similar maturity dates and applies an appropriate credit spread. These have been placed in Level 3 of the fair value hierarchy.
($ millions, except interest rates)
 
December 31, 2017
 
December 31, 2016
Carrying
value
 
Fair
Value
 
Interest
rate
 
Carrying
value
 
Fair
value
 
Interest
rate
Affiliate note payable with Milbank, issued $15.0, July 2013 with fixed interest
$
15.0

 
$
15.8

 
5.28
%
 
$
15.0

 
$
15.4

 
5.28
%
Affiliate note payable with State Auto P&C, issued $85.0, July 2013 with fixed interest
85.0

 
89.6

 
5.28
%
 
85.0

 
87.1

 
5.28
%
Total notes payable to affiliates
$
100.0

 
$
105.4

 
 
 
$
100.0

 
$
102.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 







STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 2017, 2016 and 2015
($ millions)
 
 
Segment
Deferred
policy
acquisition
cost
 
Future
benefits,
claims and
losses(1)
 
Unearned
premiums
 
Other policy
claims and
benefits
payable
 
Premium
revenue
Year ended December 31, 2017:
 
 
 
 
 
 
 
 
 
Personal insurance segment
$
50.9

 
$
256.1

 
$
288.1

 
$

 
$
580.3

Commercial insurance segment
47.9

 
604.3

 
225.6

 

 
455.7

Specialty insurance segment
19.0

 
392.1

 
91.7

 

 
239.1

Investment operations segment

 

 

 

 

Total
$
117.8

 
$
1,252.5

 
$
605.4

 
$

 
$
1,275.1

Year ended December 31, 2016:
 
 
 
 
 
 
 
 
 
Personal insurance segment
$
47.0

 
$
254.5

 
$
258.7

 
$

 
$
578.5

Commercial insurance segment
47.4

 
602.5

 
227.9

 

 
472.6

Specialty insurance segment
35.4

 
321.0

 
124.8

 

 
240.8

Investment operations segment

 

 

 

 

Total
$
129.8

 
$
1,178.0

 
$
611.4

 
$

 
$
1,291.9

Year ended December 31, 2015:
 
 
 
 
 
 
 
 
 
Personal insurance segment
$
47.1

 
$
227.0

 
$
260.1

 
$

 
$
591.3

Commercial insurance segment
49.9

 
553.6

 
240.1

 

 
476.5

Specialty insurance segment
32.1

 
266.5

 
108.9

 

 
202.7

Investment operations segment

 

 

 

 

Total
$
129.1

 
$
1,047.1

 
$
609.1

 
$

 
$
1,270.5

Segment
Net
investment
income
 
Benefits,
losses and
settlement
expenses(2)
 
Amort.
of deferred
policy
acquisition
costs
 
Other
operating
expenses
 
Premiums
written
Year ended December 31, 2017:
 
 
 
 
 
 
 
 
 
Personal insurance segment
$

 
$
416.3

 
$
102.1

 
$
89.3

 
$
609.7

Commercial insurance segment

 
284.2

 
95.7

 
90.4

 
453.6

Specialty insurance segment

 
219.5

 
59.9

 
18.4

 
206.0

Investment operations segment
78.8

 

 

 

 

Total
$
78.8

 
$
920.0

 
$
257.7

 
$
198.1

 
$
1,269.3

Year ended December 31, 2016:
 
 
 
 
 
 
 
 
 
Personal insurance segment
$

 
$
422.0

 
$
103.3

 
$
62.7

 
$
577.2

Commercial insurance segment

 
331.5

 
110.4

 
61.6

 
459.4

Specialty insurance segment

 
190.6

 
76.6

 
15.7

 
256.7

Investment operations segment
74.7

 

 

 

 

Total
$
74.7

 
$
944.1

 
$
290.3

 
$
140.0

 
$
1,293.3

Year ended December 31, 2015:
 
 
 
 
 
 
 
 
 
Personal insurance segment
$

 
$
396.2

 
$
104.6

 
$
61.2

 
$
581.0

Commercial insurance segment

 
338.6

 
108.6

 
74.2

 
481.5

Specialty insurance segment

 
129.4

 
69.8

 
8.4

 
211.0

Investment operations segment
71.7

 

 

 

 

Total
$
71.7

 
$
864.2

 
$
283.0

 
$
143.8

 
$
1,273.5

 
 
 
 
 
 
 
 
 
 
 
(1)
Segmented balances are net of reinsurance recoverable on losses and loss expenses payable.
(2)
Benefits, losses and settlement expenses are monitored on a statutory basis.







STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV – REINSURANCE

Years Ended December 31, 2017, 2016 and 2015
 
($ million, except percentages)
 
 
 
Ceded to
 
Assumed from
 
 
 
 
 
 
 
Gross
Amount
 
Unaffiliated
Companies
 
Affiliated
Companies(1)
 
Unaffiliated
Companies
 
Affiliated
Companies(1)
 
Net
Amount
 
Percentage
of  amount
assumed
to net (2)
Property-casualty
earned premiums for
year ended December 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
$
828.7

 
$
22.6

 
$
817.1

 
$
11.0

 
$
1,275.1

 
$
1,275.1

 
0.9
%
2016
 
840.6

 
25.6

 
819.9

 
4.9

 
1,291.9

 
1,291.9

 
0.4
%
2015
 
863.1

 
34.7

 
832.9

 
4.5

 
1,270.5

 
1,270.5

 
0.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
These columns include the effect of intercompany pooling.
(2)
Calculated as earned premiums assumed from outside companies to net amount.






EXHIBIT 10.26
                        
FIRST AMENDMENT
to
MANAGEMENT AND OPERATIONS AGREEMENT
AMENDED AND RESTATED
As of January 1, 2015

This First Amendment (“First Amendment”) to the Management and Operations Agreement Amended and Restated as of January 1, 2015 (the 2015 Management Agreement”), is attached to and hereby expressly made a part of said 2015 Management Agreement by and among
State Automobile Mutual Insurance Company, an Ohio corporation (“Mutual”), State Auto Financial Corporation, an Ohio corporation (“STFC”), State Auto Property & Casualty Insurance Company, an Iowa corporation (“State Auto P&C”), State Auto Insurance Company of Ohio, an Ohio corporation (“SA OH”), Milbank Insurance Company, an Iowa corporation (“Milbank”), Meridian Security Insurance Company, an Indiana corporation (“Meridian”), Patrons Mutual Insurance Company of Connecticut, a Connecticut corporation (“Patrons”), Stateco Financial Services, Inc., an Ohio corporation (“Stateco”), 518 Property Management and Leasing, LLC, an Ohio limited liability company (“518 PML”), State Auto Holdings, Inc., an Ohio corporation (“SA Holdings”), Facilitators, Inc., a South Carolina corporation (“Facilitators”), Partners General Insurance Agency, LLC, a California limited liability company (“Partners”), Network E&S Insurance Brokers, LLC, a California limited liability company (“Network”) and State Auto Labs Corp., an Ohio corporation (“SA Labs”).

 
Background Information
The 2015 Management Agreement describes the operating relationship among substantially all of the affiliates of State Auto Mutual and State Auto Mutual, the ultimate controlling person in the State Auto Mutual insurance holding company system.
For purposes of the 2015 Management Agreement and this First Amendment, the “Mutual Group” or the “State Auto Mutual Group” shall mean State Auto Mutual, Meridian Security, Patrons, Facilitators, SA Holdings, Partners, Network and SA Labs, and the “State Auto Financial Group” shall mean STFC, State Auto P&C, Milbank, SA OH, Stateco, and 518 PML.

SA Labs is a wholly owned subsidiary of Mutual, formed on September 5, 2017 and domiciled in the State of Ohio.
CDC Holding, Inc. (“CDC”) was merged with and into Rockhill Holding Company (“RHC”) effective January 1, 2017, and is no longer a party to the 2015 Management Agreement.
With this First Amendment, the parties to this First Amendment intend to: 1) add SA Labs as party to the 2015 Management Agreement, and 2) delete CDC as a party to the 2015 Management Agreement.
In response to a recommendation from the Independent Committee of the Board of Directors of each of Mutual and STFC, the Boards of Directors of the State Auto Financial Group and the State Auto Mutual Group approved the 2015 Management Agreement.



Statement of Agreement
In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties to this Amendment agree to amend the 2015 Management Agreement as follows:

1.
Capitalized terms used in this First Amendment (including the Background Information) which are not otherwise defined herein shall have the meanings ascribed to such terms in the 2015 Management Agreement.

2.
Upon the Effective Date, SA Labs shall automatically become a Managed Company with all rights and duties thereof as set forth in the 2015 Management Agreement.

3. This First Amendment shall be effective as of 12:01 a.m. Columbus, Ohio time, on September 5, 2017 (the “Effective Date”). Notwithstanding the foregoing, this First Amendment shall only become operative as to SA Labs when this First Amendment





has been approved, or deemed approved, by all insurance regulators whose approval is necessary to implement the terms of the 2015 Management Agreement, as amended by this First Amendment. If this First Amendment is not approved as described in this section, this First Amendment shall be deemed null and void and shall not become operative to amend the 2015 Management Agreement in any manner whatsoever.

4.
This document is an amendment to the 2015 Management Agreement. In the event of any inconsistencies between the provisions of the 2015 Management Agreement and this First Amendment, the provisions of this First Amendment shall control. Except as expressly amended hereby, the 2015 Management Agreement shall continue in full force and effect without change for the balance of the term thereof.



In witness whereof, each of the parties hereto has subscribed its name below.


Date: September 5, 2017

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
STATE AUTO FINANCIAL CORPORATION
STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY
STATE AUTO INSURANCE COMPANY OF OHIO
STATE AUTO HOLDINGS, INC.
STATECO FINANCIAL SERVICES, INC.
MERIDIAN SECURITY INSURANCE COMPANY
PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT
MILBANK INSURANCE COMPANY
518 PROPERTY AND MANAGEMENT LEASING, LLC    
FACILITATORS, INC.
STATE AUTO LABS CORP.
            


___________________________________________________
Michael E. LaRocco, President



PARTNERS GENERAL INSURANCE AGENCY, LLC
NETWORK E&S INSURANCE BROKERS, LLC


_______________________________________________
Steven E. English, Manager








EXHIBIT 10.42

EMPLOYMENT AGREEMENT
This Employment Agreement (this “Agreement”) is made as of November 28, 2017, by and among State Auto Financial Corporation, an Ohio corporation (“State Auto Financial”), State Auto Property and Casualty Insurance Company, an Iowa-domiciled insurance company (“State Auto P&C”), State Automobile Mutual Insurance Company, an Ohio-domiciled mutual insurance company (“State Auto Mutual”), and Michael E. LaRocco (“Executive”). State Auto Financial, State Auto P&C, State Auto Mutual and each of their respective subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “State Auto.”
Background Information
WHEREAS, State Auto P&C is the principal operating subsidiary of State Auto Financial and the employer of record of all employees of State Auto and State Auto Financial is a majority owned subsidiary of State Auto Mutual, while State Auto Mutual is the ultimate controlling entity in the State Auto holding company system; and
WHEREAS, as a result of Executive’s role, as described below, in serving State Auto Financial, State Auto Mutual and the other State Auto companies, it is appropriate that this Employment Agreement be entered into among State Auto P&C, State Auto Financial, State Auto Mutual and Executive; and
WHEREAS, Executive has been serving as the Chief Executive Officer and President of State Auto pursuant to the terms of an employment agreement, dated March 27, 2015 between the parties (the "Prior Agreement"); and
WHEREAS, State Auto desires to continue to employ Executive as the Chief Executive Officer and President of State Auto and Executive desires to accept such continued employment pursuant to the terms of the Agreement; and
WHEREAS, the parties intend that, as of the Commencement Date, as defined below, the terms of this Agreement shall replace and supersede the terms of the Prior Agreement.
Statement of Agreement
NOW, THEREFORE, in consideration of such employment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:
Article I    Definitions.
Capitalized terms used herein which are not defined herein shall have the meanings ascribed to such terms in the Executive Change of Control Agreement November 28, 2017 among State Auto Financial, State Auto P&C, State Auto Mutual and Executive (the “Executive Agreement”), a copy of the form of which is attached hereto as Exhibit A and incorporated herein by this reference.
Article II    Actions by State Auto Boards
During the Employment Term, (A) each respective State Auto Board of Directors and applicable committees thereof shall take such actions as may be necessary or appropriate to elect Executive to the offices of Chief Executive Officer and President of such State Auto company; and (B) each respective State Auto Board of Directors shall take such actions as may be necessary or appropriate to elect Executive as a director of such State Auto company.
Article III    Employment Duties and Term.
(A)     Duties.
Upon his election to such offices, Executive shall perform the duties of Chief Executive Officer and President of State Auto as described in the Bylaws or the Code of Regulations, as applicable, of each State Auto company, as well as such other duties and services requested or directed by any State Auto Board of Directors. Executive shall devote his full time and attention and best efforts to the performance of such duties. Executive shall serve as an





officer of State Auto so long as Executive shall be duly elected by the respective State Auto Boards of Directors at any time or times during the term of this Agreement.
(B)    Term.
The term of this Agreement shall be for a period commencing on January 1, 2018 (“Commencement Date”), and ending on December 31, 2021, unless terminated at an earlier date pursuant to an event described in Article V of this Agreement (the “Employment Term”).
Article IV    Compensation.
State Auto agrees to pay to Executive and Executive agrees to accept the following amounts as compensation in full for Executive’s services in any capacity hereunder or in the performance of other like duties assigned to Executive by the Board of Directors of State Auto:
(A)    Base Compensation.
At the outset of the Employment Term, State Auto shall pay to Executive a base salary (the “Base Salary”) in the amount of One Million Forty Thousand Dollars ($1,040,000.00) per year, payable in accordance with State Auto’s general policies and procedures for payment of compensation to its salaried personnel, plus such increases in annual base compensation that the Compensation Committee of the Board of Directors of State Auto Financial (the “STFC Compensation Committee”) may authorize as provided herein. The compensation of Executive shall be reviewed by the STFC Compensation Committee no less often than once each calendar year during the Employment Term and may be increased by the STFC Compensation Committee as it determines in the good faith exercise of its business judgment based on such factors as the STFC Compensation Committee deems appropriate. In no event shall the Base Salary be less than the Base Salary set forth above; provided, however, that this restriction may be suspended by the STFC Compensation Committee if the STFC Compensation Committee determines, on the basis of such commercially reasonable factors as it deems appropriate in the good faith exercise of its business judgment, that imposing such suspension is in the best interests of State Auto Financial (“Exigent Circumstances”). Any reduction or suspension of any portion of Executive’s compensation, bonus or other payments based upon Exigent Circumstances will not constitute grounds for a claim by Executive that he has suffered an involuntary Termination Without Cause (as defined below).
(B)    Short Term Incentive Cash Compensation Plans.
Executive shall participate in the State Auto Financial Corporation short-term incentive bonus plan in effect as of the Commencement Date or any successor plan (the “S-T Incentive Plan”) with an incentive bonus target equal to no less than 120% of Executive’s then current Base Salary. It is contemplated that a portion of the bonus opportunity under the S-T Incentive Plan shall be “performance-based compensation,” as such term is used in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and payable based upon the achievement of performance goals determined by the STFC Compensation Committee and any remaining portion of the bonus opportunity shall be payable at the discretion of the STFC Compensation Committee. Executive’s participation in the S-T Incentive Plan shall be according to the terms and conditions of such plan. It is understood and agreed that the S-T Incentive Plan or any similar cash incentive compensation plan may be amended, suspended, or terminated by State Auto at any time. It is understood and agreed that the bonus compensation potential from the S-T Incentive Plan shall not be less than the bonus compensation potential available to Executive under the S-T Incentive Plan in effect for Executive on the date of this Agreement, provided that this restriction may be suspended due to Exigent Circumstances.
(C)    Long Term Incentive Compensation Plan.
Executive shall participate in the State Auto Financial Corporation Long-Term Incentive Program (the “LTIP”) or any successor plan with an incentive bonus target equal to no less than 180% of Executive’s current Base Salary. It is contemplated that the bonus opportunity under the LTIP or any successor plan shall be “performance-based compensation,” as such term is used in Section 162(m) of the Code, and payable based upon the achievement of peer comparison and/or other performance goals determined by the STFC Compensation Committee. Executive’s participation in the LTIP shall be according to the terms and conditions of the LTIP. It is understood and agreed that the LTIP or any similar cash incentive compensation plan may be amended, suspended, or terminated by State Auto at any time. It is understood and agreed that the bonus compensation potential from the LTIP shall not be less than the





bonus compensation potential available to Executive under the LTIP in effect for Executive on the date of this Agreement, provided that this restriction may be suspended due to Exigent Circumstances.
(D)    Special Equity Award.
For calendar year 2018, in addition to any other compensation or benefits, State Auto will provide Executive with a special equity award in the form of Forty Thousand (40,000) deferred stock units ("DSU's"). The terms and conditions applicable to the DSU's will be determined by the STFC Compensation Committee at the time of their grant. Further, upon termination of Executive's employment pursuant to any section of Article V, notwithstanding any provision contained in this Agreement to the contrary, the treatment of the DSU's will be governed bu the terms of the applicable award agreement.
(E)    Fringe Benefits and Expenses.
During the Employment Term, State Auto will provide Executive with all health and life insurance coverages, disability programs, tax-qualified retirement plans, nonqualified deferred compensation plans, equity compensation programs and such other fringe benefits of employment as State Auto may provide from time to time to actively employed senior executives of State Auto. Notwithstanding any provision contained in this Agreement, State Auto may discontinue or terminate at any time any employee benefit plan, policy or program described in this Section (E) of Article IV, now existing or hereafter adopted, to the extent permitted bu the terms of such plan, policy or program and will not be required to compensate Executive for such discontinuance or termination. In addition, Executive shall be entitled to reimbursement for all out-of-pocket expenses incurred by Executive in the performance of his duties hereunder; provided that such reimbursement shall be in accordance with State Auto’s then existing policy regarding the same and further provided that no reimbursement shall be made later than the end of the calendar year following the calendar year in which such expense was incurred. If such benefits are taxable, State Auto shall ensure that terms of the benefits will comply with Section 409A of the Code and the Treasury Regulations and other guidance promulgated or issued thereunder.
(F)    Paid Time Off.
Executive shall be entitled to four weeks of paid vacation and such other personal absence days as State Auto provides its other employees, or if greater, Executive shall be entitled to the number of paid time off days to which he is entitled under the paid time off policies of State Auto applicable to its other employees.
Article V    Termination.
(A)    Disability.
If during the Employment Term Executive shall be unable to substantially perform his duties hereunder because of illness or other incapacity constituting a disability as defined in Section 409A of the Code (referred to hereafter as “Disability”), and such Disability shall persist for a period of at least six months in any 12 month period, State Auto shall thereafter have the right, on not less than 45 days’ written notice to Executive, to terminate Executive’s employment under this Agreement, in which case the date of Executive’s separation from service (as defined in Section 409A of the Code) shall be not less than the 45th day following the date of written notice. In such event, in addition to any other benefits to which Executive would be entitled, State Auto shall be obligated to pay Executive his full compensation pursuant to Sections (A), (B), and (C) of Article IV hereof accruing through the date of such separation from service and per the terms of the applicable plan or program. A determination of Disability shall be subject to the certification of a qualified medical doctor agreed to by State Auto and Executive or, in the event of Executive’s incapacity to designate a qualified medical doctor, by Executive’s legal representative. If State Auto and Executive (or his legal representative, as the case may be) fail to agree upon a qualified medical doctor, each party shall nominate a qualified medical doctor and the two doctors shall select a third doctor, who shall make the determination as to Disability. In addition to the foregoing disability compensation described in this Article V Section (A), Executive shall continue to receive such health insurance benefits or their equivalent as he and his spouse receive on the date of Disability, as well as such group life insurance as Executive has in place on his life, as of the date of Disability, pursuant to the terms of such plans as are generally made available to State Auto employees. Executive’s compensation and other benefits described in Article IV shall be reinstated in full in the event of his return to employment with State Auto.





(B)     Death.
In the event of Executive’s death during his employment hereunder, in addition to any other benefits to which any person would be entitled upon Executive’s death, State Auto shall be obligated to pay Executive’s beneficiary, as designated on the form attached hereto as Exhibit B (the “Beneficiary”) Executive’s full compensation pursuant to Section (A) hereof accruing through the date of his death. In addition, State Auto shall pay the Beneficiary any amounts accrued to Executive through the date of his death under Sections (B) and (C) of Article IV in accordance with the terms of the applicable plan or program.
(C)    Voluntary Termination.
In the even Executive voluntarily terminates his employment without Good Reason, he shall cease to receive compensation as of the date of such separation from service, except that to which he may then be entitled under Sections (B) and (C) of Article IV in accordance with teh terms of the applicable plan or program.
(D)    Termination for Cause.
(1)
In the event that the Boards of Directors of State Auto Mutual, State Auto Financial and State Auto P&C (collectively, the “Boards”) jointly determine that this Agreement and Executive’s employment should be terminated for Cause, as defined in (2) below, Executive shall be entitled to receive payment of any Base Salary accrued through the date of separation from service. If the Boards decide to terminate this Agreement as provided in this Section, State Auto will give Executive 30 days’ advance written notice of its intention to terminate this Agreement. In the event of a termination for Cause, Executive’s service shall terminate upon the expiration of the notice period; provided, however, Executive may be relieved of his duties at the discretion of the Boards on the date the above described notice is delivered to Executive. It is further understood and agreed that should Executive dispute the fact that Cause, as defined herein, exists for such termination, Executive has the right to pursue a claim in Arbitration under Article X of the Executive Agreement for such benefits that would otherwise have been due to him under Section (E) of this Article V had he not been terminated for Cause.
(2)
For purposes of this Section D of Article V, it is understood and agreed that Cause shall mean the following: (a) the willful and continued failure of Executive to perform Executive’s duties with State Auto (other than any such failure resulting from incapacity due to a Disability), after a written demand for performance is delivered to the Executive by the Boards which specifically identifies the manner in which the Boards believe that Executive has not performed Executive’s duties: (b) the willful engaging by Executive in illegal conduct or gross misconduct which has a material adverse effect on State Auto, as determined by the Boards; (c) the breach of any provision of Article VII hereof as determined by the Boards; or (d) the willful failure to comply with any State Auto code of conduct or code of ethics applicable to Executive, as determined by the Boards. For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of State Auto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Boards or upon the advice of counsel for State Auto, shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of State Auto.
(E)    Involuntary Termination Without Cause or Termination by Executive for Good Reason.
(1)
In the event that the Boards determine that this Agreement and the employment of Executive should be terminated before the end of the Employment Term for a reason other than death, Disability, voluntary separation from service by Executive, or for Cause (such reason is hereafter referred to as a “Termination Without Cause”) or, before the end of the Employment Term, Executive terminates his employment for Good Reason, pursuant to the provisions of subsection (2) of this Section (E) below (such reason is hereafter referred to as a "Termination for Good Reason"), subject to the provisions of Section (I) below:
(a)    Executive, or the Beneficiary, shall be entitled to continue to receive the Base Salary Executive otherwise would have been entitled to receive (including but not limited to





amounts earned but not paid) had he remained employed for a period of twenty-four (24) months. Such amounts shall begin to be paid as soon as practicable after Executive’s separation from service and shall continue for a period of twenty-four (24) months.
(b)    Executive, or the Beneficiary, shall be entitled to receive a one-year bonus payment equal to the average of the amount earned under the S-T Incentive Plan and the LTIP in place for each of the two calendar years immediately preceding the calendar year in which the Termination Without Cause or Termination for Good Reason occurs, payable in the form and at the time specified in such plans.
(c)    Any stock options granted to Executive shall vest on the termination date, notwithstanding any vesting schedule set forth in any outstanding option agreements with Executive, and shall be exercisable under the terms of the plan.
(d)    Executive shall be entitled to receive from State Auto an amount equal to the then current monthly per employee cost of providing State Auto’s health insurance benefit multiplied by twenty-four (24) months, payable as a single lump sum payment as soon as practicable after separation from service.
(2)
Executive may resign and terminate the Employment Term and his employment with State Auto for "Good Reason" upon not less that 60 days prior written notice to State Auto. For purposes of this Agreement, Executive will have "Good Reason" to terminate his employment with State Auto if any of the following events occur without Executive's consent (provided State Auto does not fully cure the effect of such event within 30 days following its receipt of written notice of such event from Executive:
(a)    A material diminution in Executive Base Salary for any reason, other than in connection with either Exigent Circumstances or the termination of Executive's employment;
(b)    A material diminution in Executive's authority, duties or responsibilities as set forth in Section (A) of Article III;
(c)
A material change in the geographic location in which Executive must perform services under this Agreement; or
(d)
Any other action or inaction that constitutes a material breach of this Agreement
Notwithstanding the foregoing, Good Reason shall cease to exist for an event on the 90th day following the later of its occurrence or Executive's knowledge thereof, unless Executive has given State Auto written notice of such event prior to such date.
(3)
Notwithstanding any provision to the contrary, the payments and benefits due to Executive under this Section (E) of Article V shall be contingent upon Executive’s execution of a valid release of State Auto and their respective officers, directors, agents and employees, from any and all actions, suits, proceedings, claims and demands relating to Executive’s employment and Termination Without Cause. Provided such release is executed and not revoked within any revocation period provided by applicable law, the payment and benefits due under this Section (E) of Article V shall commence no later than 90 days after Executive’s Termination Without Cause. In the event that the time period required by applicable law to obtain a valid release (including the expiration of any revocation period) begins in one calendar year and ends in another calendar year, notwithstanding the provisions of the previous sentence, payments and benefits due to Executive under this Section (E) of Article V shall commence in the second calendar year.
(F)    Change of Control.
In the event that State Auto shall undergo a Change of Control, as defined in the Executive Agreement, and Executive either incurs a Termination Without Cause or terminates his employment for Good Reason, as defined in the Executive Agreement, in lieu of any compensation otherwise provided under this Agreement, Executive shall be entitled to the benefits described in the Executive Agreement.





(G)    Expiration of Employment Term.
In the event that the Employment Term expires and is not extended by the parties, Executive’s employment will terminate at the end of such Employment Term. In such event, in addition to any other benefits to which Executive would be entitled, State Auto shall be obligated to pay Executive his full compensation pursuant to Sections (A), (B) and (C) of Article IV hereof accruing through the date of such separation from service and per the terms of the applicable plan or program.
(H)    Mitigation.
In the event that Executive voluntarily terminates his employment, as set forth in Article V Section (C) herein, or Executive incurs a Termination Without Cause, as set forth in Article V Section (E) herein, or Executive is terminated pursuant to a Change of Control, as set forth in Article V Section (F) herein, Executive shall have no duty to mitigate his damages by seeking other employment, and State Auto shall not be entitled to set off against amounts payable hereunder any compensation which he may receive from future employment.
(I)    Specified Employee Delay.
In the event that the sum of any payments under this Agreement are determined (after the application of all exceptions) to be subject to Section 409A of the Code and the Executive is a Specified Employee as defined in Section 409A of the Code, any payments under this Agreement due to a separation from service (as defined in Section 409A of the Code) shall be delayed until a date that is six months after the date of separation from service (or, if earlier, the date of death of the Specified Employee). Payments to which a Specified Employee would otherwise be entitled during the first six months following the date of separation from service shall be accumulated and paid as of the first date of the seventh month following the date of separation from service.
(J)    Resignation from Boards and Offices.
Executive agrees that, upon termination of Executive’s employment for any reason set forth in this Article V or, if applicable, upon expiration of the Employment Term, Executive shall immediately resign as a director and officer from all State Auto companies or their respective successor(s). In addition, in the event that this Agreement remains in effect during the final calendar year of the Employment Term, at any time during such calendar year, State Auto reserves the right to (1) alter all of the Executive’s then current job titles, including Chief Executive Officer and/or President, as it deems necessary and (2) require that he resigns as a director from any and all State Auto company Boards. In the event that State Auto elects to alter Executive’s job title in accordance with the preceding sentence, Executive will resign immediately from any office, as so requested by State Auto. Any such alteration in job title and subsequent resignation as a director or officer as described herein will not constitute grounds for a claim by Executive that he has suffered an involuntary Termination Without Cause.
Article VI    Executive’s Rights Under Certain Plans.
Notwithstanding anything contained herein, State Auto agrees that the benefits provided to Executive herein are not in lieu of any rights and privileges to which Executive may be entitled as an employee of State Auto under any retirement, pension, insurance, hospitalization, or other plan which may now or hereafter be in effect, it being understood that, except to the extent currently provided in such plans, Executive shall have the same rights and privileges to participate in such plans or benefits as any other employee of State Auto.
Article VII    Confidentiality Information; Noncompetition Agreement; Clawback
(A)    Confidential Information.
Executive agrees to receive Confidential Information (as defined below) of State Auto in confidence, and not to disclose to others, assist others in the application of, or use for his own gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of such other or others by legal and equitable means and other than as a result of disclosure by Executive. Executive further agrees that, upon separation from service with State Auto, all documents, records, notebooks, and similar repositories (including electronic formats) containing Confidential Information, including copies thereof, then in Executive’s possession, whether prepared by him or others, will be left with State Auto. For purposes of this Article VII, “Confidential Information” means information disclosed to Executive or known by State Auto, which is not generally known in the business in





which State Auto is or may become engaged, including, but not limited to, information about State Auto’s services, trade secrets, financial information, customer lists, books, records, memoranda, other proprietary information of State Auto and any other information deemed to be Confidential Information as determined by the State Auto Mutual Board of Directors Corporate Governance Guidelines, the State Auto Code of Business Conduct and/or any other applicable State Auto policy. Executive further agrees that the obligation to maintain confidentiality created by this Article VII shall continue in effect for the duration of this Agreement and following the termination of Executive’s service with State Auto.
(B)    Devotion of Time to Performance of Duties.
Executive further agrees that during the Employment Term he will devote substantially all of his time and effort to the performance of his duties hereunder and will refrain from engaging on his own behalf or on the behalf of a third party in any line of activities or business in which State Auto is or may become engaged. With the concurrence of the Boards, and subject to the applicable provisions of the State Auto Mutual Board of Directors Corporate Governance Guidelines, the State Auto Code of Business Conduct and/or any other applicable State Auto policy, Executive may serve on the board of directors of another public company, in addition to the board of directors of State Auto Financial, if that opportunity presents itself.
(C)    Noncompetition Agreement.
(1)
Executive further agrees that for a period of two years following a separation from service with State Auto, Executive will not directly or indirectly engage in the property, casualty or specialty insurance underwriting business or any other line(s) of business in which State Auto is operating at the time of Executive’s separation from service as an officer, director, consultant or employee of an insurer which (a) has direct written premium in excess of $1 billion nationally as of the end of the calendar year immediately preceding Executive’s separation from service with State Auto, and (b) operates in any state where State Auto operates.
(2)
Executive also agrees that for a period of two years following a separation from service, he shall not directly or indirectly hire, solicit for hiring or otherwise induce any employee of State Auto to leave State Auto’s employment.
(3)
Nothing in this Section (C) shall be construed to prohibit Executive from owning, directly or indirectly, less than five percent of the securities of any class of any company listed on a national securities exchange or traded in the over-the-counter securities market.
(4)
The noncompetition period shall be tolled (i.e., temporarily suspended) during the period of any violation or attempted violation of this Section by Executive. State Auto shall provide written notice to Executive of any tolling of the noncompetition period.
(5)
Notwithstanding the foregoing provisions, in the event Executive voluntarily separates from service as provided in Section (C) of Article V of the Agreement above, the provisions of Section (C)(1) of this Article VII shall be limited to a period of one year following such separation from service.
(D)
Enforcement.
Executive understands that the provisions of Sections (A) and (C) of this Article VII are an essential element of this Agreement and that State Auto would not have entered into this Agreement without such Sections being included in it. Executive acknowledges that Sections (A) and (C) are reasonable and appropriate in all respects. In the event of any violation or attempted violation of these Sections, Executive agrees that money damages would not be a sufficient remedy for State Auto. Accordingly, State Auto shall be entitled to specific performance and injunctive and other equitable relief for any breach by Executive of Sections (A) or (C), without any showing of irreparable harm or damage or the posting of any bond. Such remedies shall not be deemed to be the exclusive remedies for a breach of these Sections, but shall be in addition to all other remedies available at law or equity. If any of the provisions of Sections (A) or (C) shall be held to be unenforceable because of the duration of such provision, the area covered thereby, or the type of conduct restricted therein, the parties agree that the court or arbitral body making such determination shall have the power to modify the duration, geographic area and/or other terms of such provision to the maximum extent permitted by law and, as so modified, said provision shall then be enforceable to the maximum extent permitted by law.





(E)    Forfeiture Events; Clawback Rights.
(1)
The Boards may, in their discretion, require Executive to repay State Auto all or any portion of the amounts paid as termination benefits provided under Article V (collectively, the “Termination Benefits”) if:
(a)
Executive violates any non-competition, non-solicitation or confidentiality covenant applicable to Executive and for the benefit of State Auto, including such covenants included in this Agreement;
(b)
It is later discovered that Executive engaged in conduct detrimental to State Auto during the Employment Term which has a material adverse effect on State Auto as determined by the Board of Directors of State Auto Mutual, in its discretion. For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered “detrimental to State Auto” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of State Auto; or
(c)
(i) The amount of any of the Termination Benefits was calculated based upon the achievement of certain financial results of State Auto that were subsequently the subject of a financial statement restatement by State Auto; and
(ii)    The amount of Executive’s Termination Benefits would have been lower than the amount actually awarded to Executive had the financial results been properly reported.
Notwithstanding the foregoing, if the Boards determine that Executive engaged in fraudulent conduct, then the Boards will seek repayment of all Termination Benefits. This provision shall not be the exclusive remedy of State Auto with respect to such matters.
(2)
The terms of any compensation recovery or recoupment policy heretofore or hereafter adopted by the Boards, including any and all amendments thereto (a “clawback policy”), are hereby incorporated into this Agreement by reference. In addition to the terms and conditions set forth in this Agreement, Executive agrees that any amounts payable or paid to Executive under this Agreement shall be subject to the terms of any clawback policy of the Boards.
Article VIII    Successors.
(A)    As to State Auto.
This Agreement shall inure to the benefit of and be binding upon State Auto, its successors and assigns, including without limitation, any person, partnership, or corporation which may acquire voting control of State Auto Financial or all or substantially all of its assets and business, or which may be a party to any consolidation, merger, or other transaction that results in a Change of Control of State Auto Financial or State Auto Mutual.
(B)    As to Executive.
This Agreement shall also inure to the benefit of and be binding on Executive, the Beneficiary, Executive’s heirs, successors, and legal representatives.
Article IX    Indemnification.
State Auto, as provided for in its Amended and Restated Articles of Incorporation, its Amended and Restated Bylaws, and its Indemnification Agreement with Executive, shall indemnify Executive to the full extent of the general laws of the State of Ohio, now or hereafter in force, including the advance of expenses under procedures provided by such laws.
Article X    General Provisions.
(A)    Entire Agreement.





This Agreement, together with the Executive Agreement, contains the entire agreement of the parties hereto with respect to the employment of Executive by State Auto, and completely supersedes any prior agreements or arrangements between the parties hereto. The parties hereto agree that this Agreement cannot be hereafter amended, modified, or supplemented in any respect, except by a subsequent written agreement signed by both parties hereto. The parties also agree that this Agreement shall be amended and/or modified as necessary to comply with Section 409A of the Code or regulations issued thereunder.
(B)    Applicable Law.
This Agreement shall be governed in all respects by the laws of the State of Ohio, without giving effect to any of its conflict of law provisions.
(C)    Venue.
State Auto and Executive designate the U.S. District Court in Columbus, Ohio as the exclusive venue for any actions or proceedings relating to this Agreement and hereby irrevocably consent to such designation and venue; provided such District Court has jurisdiction with respect to the applicable action or proceeding. In the event that the U.S. District Court in Columbus, Ohio does not have jurisdiction with respect to an action or proceeding relating to this Agreement, State Auto and Executive designate the Court of Common Pleas of Franklin County, Ohio as the exclusive venue with respect to such action or proceeding.
(D)    Notices.
All notices under this Agreement shall be in writing and will be duly given if sent by registered or certified mail to the respective parties to the addresses set forth below or such other addresses as the parties may hereafter designate in writing for such purpose:
(1)
If to either State Auto Financial, State Auto P&C or State Auto Mutual, to 518 East Broad Street, Columbus, Ohio 43215, Attention: General Counsel; and
(2)
If to Executive, to the last address on file with State Auto.
(E)     Assignment.
Except as expressly provided herein, neither this Agreement nor any rights, benefits, or obligations hereunder may be assigned by Executive without the prior written consent of State Auto Mutual and State Auto Financial.
(F)    Capacity.
(1)
State Auto Financial, State Auto P&C and State Auto Mutual represent and warrant to Executive that they have the capacity and right to enter into this Agreement and perform all of their obligations under this Agreement without any restriction by any agreement, document, restrictive covenant, or otherwise.
(2)
Executive represents and warrants to State Auto Financial, State Auto P&C and State Auto Mutual that he has the capacity and right to enter into this Agreement and perform all of his services and other obligations under this Agreement without any restriction by any agreement, document, restrictive covenant, or otherwise.
(G)     Waiver.
The failure by a party to exercise or enforce any of the terms or conditions of this Agreement will not constitute or be deemed a waiver of that party’s rights hereunder to enforce each and every term of this Agreement. The failure by a party to insist upon strict performance of any of the terms and provisions herein will not be deemed a waiver of any subsequent default in the terms or provisions herein.
(H)    Rights and Remedies Cumulative.
All rights and remedies of the parties hereunder are cumulative.





(I)    Divisibility.
The provisions of this Agreement are divisible. If any such provision shall be deemed invalid or unenforceable, it shall not affect the applicability or validity of any other provision of this Agreement, and if any such provision shall be deemed invalid or unenforceable as to any periods of time, territory, or business activities, such provision shall be deemed limited to the extent necessary to render it valid and enforceable.
(J)    Captions and Titles.
Captions and titles have been used in this Agreement only for convenience and in no way define, limit, or describe the meaning of any Article or any part thereof.
(K)    Counterparts.
This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
(L)    Section 409A of the Code.
It is intended that this Agreement shall comply with the provisions of Section 409A of the Code and the Treasury regulations relating thereto, or an exemption to Section 409A of the Code, and payments, rights and benefits may only be made, satisfied or provided under this Agreement upon an event and in a manner permitted by Section 409A of the Code, to the extent applicable, so as not to subject Executive to the payment of taxes and interest under Section 409A of the Code. In furtherance of this intent, this Agreement shall be interpreted, operated and administered in a manner consistent with these intentions. Terms defined in this Agreement shall have the meanings given to such terms under Section 409A of the Code if and to the extent required in order to comply with Section 409A of the Code. No payments to be made under this Agreement may be accelerated or deferred except as specifically permitted under Section 409A of the Code. To the extent that any regulations or other guidance issued under Section 409A of the Code would result in the Executive being subject to payment of additional income taxes or interest under Section 409A of the Code, the parties agree to amend this Agreement to maintain to the maximum extent practicable the original intent of this Agreement while avoiding the application of such taxes or interest under Section 409A of the Code. Any payments that qualify for the “short-term deferral” exception or another exception under Section 409A of the Code shall be paid under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under Section 409A of the Code, each payment of compensation under this Agreement shall be treated as a separate payment of compensation for purposes of applying the Section 409A of the Code deferral election rules and the exclusion under Section 409A of the Code for certain short-term deferral amounts. Any amounts payable solely on account of an involuntary termination shall be excludable from the requirements of Section 409A of the Code, either as separation pay or as short-term deferrals to the maximum possible extent. In no event may the Executive, directly or indirectly, designate the calendar year of any payment under this Agreement.















IN WITNESS WHEREOF, the parties have signed this Agreement which is effective as of the Commencement Date.
 
 
State Auto Financial Corporation
 
 
 
 
By
/s/ Robert E. Baker
 
 
Robert E. Baker, Chair of the State Auto Financial Corporation Compensation Committee
 
 
 
 
 
State Auto Property and Casualty Insurance Company
 
 
 
 
By
/s/ Robert E. Baker
 
 
Robert E. Baker, Chair of the State Auto Financial Corporation Compensation Committee
 
 
 
 
 
State Automobile Mutual Insurance Company
 
 
 
 
By
/s/ Robert E. Baker
 
 
Robert E. Baker, Chair of the State Automobile Mutual Insurance Company Compensation Committee
 
 
 
 
 
Executive
 
 
 
 
By
/s/ Michael E. LaRocco
 
 
Michael E. LaRocco







Exhibit A
Executive Agreement







Exhibit B
Beneficiary Designation
In the event of my death, I direct that any amounts due me under this Agreement, to which this Beneficiary Designation is attached, shall be distributed to the person designated below. If no beneficiary shall be living to receive such assets, they shall be paid to the administrator or executor of my estate.            
Executive:
 
 
 
 
 
/s/ Michael E. LaRocco
 
 
Michael E. LaRocco
 
 
 
 
 
Beneficiary:
Ann LaRocco
 
 
 
 
Relationship to Executive:
Wife
 
 
 
 
 
 
 
 
 
 
 
 
 





EXHIBIT 10.43
EXECUTIVE CHANGE OF CONTROL AGREEMENT
This Executive Change of Control Agreement (this “Agreement”) is made as of October 26, 2017 (the “Effective Date”), by and among State Auto Financial Corporation, an Ohio corporation (“State Auto Financial”), State Auto Property and Casualty Insurance Company, an Iowa-domiciled insurance company (“State Auto P&C”), State Automobile Mutual Insurance Company, an Ohio-domiciled mutual insurance company (“State Auto Mutual”), and Steven E. English (“Executive”). State Auto Financial, State Auto P&C, State Auto Mutual and each of their respective insurer subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “State Auto.”
Background Information
A.
State Auto P&C is the principal operating subsidiary of State Auto Financial and the employer of record of all employees of State Auto. State Auto Financial is a majority- owned, publicly-traded holding company subsidiary of State Auto Mutual. State Auto Mutual is the ultimate controlling entity in the State Auto holding company system.
B.
State Auto desires to establish and maintain a sound and vital management team as an important part of State Auto’s overall corporate strategy and as an essential means of protecting and enhancing the interests of State Auto, the Boards of State Auto Financial and State Auto Mutual (collectively, the “Boards”), and their shareholders and policyholders, respectively. As part of this corporate strategy, State Auto desires to act in the best interests of State Auto to address Executive’s continued service to State Auto and available benefits in the event of an actual or threatened Change of Control (as defined herein) of State Auto Financial or State Auto Mutual.
Statement of Agreement
The parties hereby acknowledge the accuracy of the foregoing Background Information and hereby agree as follows:
Article I         Definitions.
As used in this Agreement, the following defined terms shall have the meanings set forth below:
1.1
Annual Base Salary means the greater of (a) the highest annual rate of base salary in effect for Executive during the 12-month period immediately prior to a Change of Control, or (b) the annual rate of base salary in effect on the date Executive’s employment is terminated.
1.2
Average Annual Award means the average of the annual aggregate bonus under the Short Term Incentive Plans (or its successors) earned by Executive in each of the three (3) calendar years immediately preceding the calendar year in which the Change of Control occurs.
1.3
Cause means any of the following:
(a)
the willful and continued failure of Executive to perform Executive’s duties with State Auto (other than any such failure resulting from incapacity due to a Disability), after a written demand for performance is delivered to Executive by the Boards, or their designee, which specifically identifies the manner in which the Boards believe, in their sole discretion, that Executive has not performed Executive’s duties; or
(b)
the willful engaging by Executive in illegal conduct or gross misconduct which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(c)
the breach of any provision of Article IV hereof which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(d)
the willful failure to comply with any State Auto code of conduct or code of ethics applicable to Executive, as determined by the Boards in their sole discretion; or
(e)
the willful failure and refusal to cooperate with or assist State Auto in responding to governmental or regulatory inquiries, investigations or related activities, as determined by the Boards in their sole discretion.





For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of State Auto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Boards or upon the advice of counsel for State Auto, shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of State Auto.
1.4
Change of Control means the occurrence of any of the following:
(a)
any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), Directly or Indirectly, of securities of State Auto Financial representing thirty percent (30%) or more of the combined voting power of State Auto Financial’s then outstanding securities, excluding (i) any acquisition by State Auto Financial or any Subsidiary; (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by State Auto Financial, a Subsidiary or State Auto Mutual; or (iii) any acquisition by State Auto Mutual; or
(b)
a majority of the Board of Directors of State Auto Financial at any time is comprised of other than Continuing Directors; or
(c)
any event or transaction State Auto Financial would be required to report in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; or
(d)
any of the following occurs:
(i)
a merger or consolidation of State Auto Financial, other than a merger or consolidation in which the voting securities of State Auto Financial immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) more than fifty percent (50%) of the combined voting power of State Auto Financial or surviving entity immediately after the merger or consolidation with another entity;
(ii)
a sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of State Auto Financial which shall include, without limitation, the sale of assets or earning power aggregating more than fifty percent (50%) of the assets or earning power of State Auto Financial on a consolidated basis;
(iii)
a reorganization, reverse stock split, or recapitalization of State Auto Financial which would result in any of the foregoing; or
(iv)
a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.
(e)
With respect to State Auto Mutual, any of the following occurs:
(i)
State Auto Mutual affiliates with or is merged into or consolidated with a third party and as a result, a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors; or
(ii)
State Auto Mutual completes a conversion to a stock insurance company and as a result of which a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors.
Notwithstanding the foregoing, for purposes of this Change of Control definition, the percentage of securities ownership listed under subsection (a) above (i.e., 30%) shall increase or decrease, as the case may be, such that the percentage of securities ownership is consistent with any future changes to the percentage of securities ownership represented in the Change of Control definition in the State Auto Financial Corporation 2017 Long Term Incentive Plan, as amended from time to time.
1.5
Code means the Internal Revenue Code of 1986, as amended.





1.6
Confidential Information means information disclosed to Executive or known by State Auto, which is not generally known in the business in which State Auto is or may become engaged, including, but not limited to, information about State Auto's services, trade secrets, financial information, customer lists, books, records, memoranda and other proprietary information of State Auto. For purposes of this Agreement, “Confidential Information” shall also mean any information that could be considered a trade secret, as defined by applicable law.
1.7
Continuing Director of State Auto Financial or State Auto Mutual, as the case may be, means a director who was either:
(a)
first elected or appointed as a director on or prior to the Effective Date; or
(b)
subsequent to the Effective Date was elected or appointed as a director if such director was nominated by the Nominating and Governance Committee of State Auto Financial or the Nominating and Governance Committee of State Auto Mutual, as the case may be, or appointed by at least two-thirds of the total number of the then Continuing Directors of State Auto Financial or State Auto Mutual, as the case may be.
1.8
Directly or Indirectly means on Executive’s own behalf, or as an officer, director, shareholder, member, partner, owner, agent, consultant, advisor, coach or employee of any corporation, partnership, limited liability company or other entity.
1.9
Disability means illness or other incapacity as determined under State Auto’s group long-term disability benefit plan.
1.10
Employee Benefits means the benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital, or other insurance (whether funded by actual insurance or self-insured by State Auto), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist (and as may be modified from time to time) or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter (and as may be modified from time to time), providing benefits at least as great in a monetary equivalent as are payable thereunder prior to a Change of Control.
1.11
Good Reason means the occurrence of any one or more of the following:
(a)
The assignment to Executive of duties which are materially and adversely different from or inconsistent with the duties, responsibilities and status of Executive’s position at any time during the 12-month period prior to a Change of Control, or which result in a significant reduction in Executive’s authority and responsibility as a senior executive officer of State Auto;
(b)
A reduction by State Auto in Executive’s Annual Base Salary in place as of the day immediately prior to a Change of Control, or after a Change of Control the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of State Auto, or a reduction of Executive’s most recent Average Annual Award prior to a Change of Control;
(c)
After a Change of Control, a demand by State Auto that Executive relocate to a location in excess of 35 miles from the location where Executive is based as of the day immediately prior to a Change of Control, or in the event of any such relocation with Executive’s express written consent, the failure of State Auto or a Subsidiary to pay (or reimburse Executive for) all reasonable moving expenses incurred by Executive relating to a change of principal residence in connection with such relocation and to indemnify Executive against any loss in the sale of Executive’s principal residence in connection with any such change of residence and any expenses incurred by Executive that are directly attributable to such sale (for purposes of this provision, “loss” is understood to mean a sale of such principal residence at a price less than the adjusted basis in such residence);
(d)
The failure of State Auto to obtain a satisfactory agreement from any successor to State Auto to assume and agree to perform this Agreement, as contemplated in Section 5.1 of this Agreement;
(e)
The failure of State Auto to provide Executive with substantially the same Employee Benefits that were provided to him immediately prior to the Change of Control, or with a package of Employee Benefits that, though one or more of such benefits may vary from those in effect immediately prior to a Change of Control, is substantially comparable in all material respects to such Employee Benefits taken as a whole; or





(f)
Any material reduction in Executive’s compensation or benefits or a material adverse change in Executive’s location or duties, if such material reduction or material adverse change occurs at any time after the commencement of any discussion with a third party relating to a possible Change of Control of State Auto involving such third party, if such material reduction or material adverse change is in contemplation of such possible Change of Control and such Change of Control is actually consummated within twelve (12) months after the date of such material reduction or material adverse change.
The existence of Good Reason shall not be affected by Executive’s subsequent incapacity due to physical or mental illness. Executive’s continued employment shall not constitute a waiver of Executive’s rights with respect to any circumstance constituting Good Reason under this Agreement. Executive shall provide State Auto with written notice of the Executive’s intent to terminate with Good Reason within a period not to exceed ninety (90) calendar days of the initial existence of the condition constituting Good Reason. State Auto shall have a period of thirty (30) calendar days in which it may remedy the condition and prevent Executive’s termination for Good Reason.
1.12    OTIP means the State Auto Financial Corporation One Team Incentive Plan.
1.13
Severance Benefits means the benefits described in Section 2.1 of this Agreement, as adjusted by the applicable provisions of Section 9.1 of this Agreement.
1.14
Short Term Incentive Plans means OTIP and any other short term incentive compensation plan of State Auto.
1.15
Subsidiary means any corporation, insurance company or other entity with a majority of the voting control of which is directly or indirectly owned or controlled at the time by State Auto Financial.
1.16
Term means the time period commencing on the Effective Date of this Agreement and ending on November 30, 2020, both dates inclusive, however, that if a Change of Control occurs during the Term of this Agreement, the Term of this Agreement will be extended for thirty-six (36) months beyond the end of the month in which any such Change of Control occurs. Notwithstanding the foregoing, this Agreement shall terminate upon Executive’s termination of employment with State Auto for any other reason; provided, however, that Sections 2.3 and 2.4, Articles IV, VI through X, and Sections 11.3, 11.6 and 11.8 of the Agreement shall survive Executive’s termination of employment.
Article II    Change of Control.
2.1    Severance Benefits. In the event that State Auto shall undergo a Change of Control, and if Executive then becomes entitled to receive Severance Benefits, State Auto or its respective successor, shall pay or provide to Executive the following Severance Benefits, adjusted by the applicable provisions of Section 9.1:
(a)
Annual Base Salary. In addition to any accrued compensation payable as of Executive’s termination of employment, a lump sum cash amount equal to Executive’s Annual Base Salary multiplied by two.
(b)
Annual Incentive Compensation. In addition to any compensation otherwise payable pursuant to Executive’s bonus arrangements, a lump sum cash amount equal to Executive’s Average Annual Award multiplied by two. In addition, Executive shall be entitled to receive a prorated annual incentive payment for the year in which the Change of Control occurred, if otherwise eligible for such annual incentive. Such prorated annual incentive amount, if any, will be determined based on the target award levels established for the year in which the Change of Control occurred.
(c)
Stock Options and Other Equity Awards. Stock options and any other types of equity awards (e.g., restricted shares, performance shares, performance units, etc.) held by Executive become exercisable upon a Change of Control according to the terms of the applicable stock option or equity plan and related agreement (if any) under which such stock options or other equity awards were granted.
(d)
Outplacement. State Auto shall pay all fees for outplacement services incurred by Executive up to a maximum equal to fifteen percent (15%) of Executive’s Annual Base Salary, plus provide a travel expense account of up to $5,000 to reimburse job search travel. Such expenses and reimbursements shall be limited to those expenses incurred within the two (2) calendar years following the calendar year of Executive’s separation from service. Such expenses shall be paid no later than December 31st of the calendar year following the applicable calendar year in which such reimbursable expense was incurred.





(e)
Health Insurance Reimbursement. State Auto shall pay Executive an amount equal to State Auto’s then current monthly per employee cost of providing State Auto’s health insurance benefit multiplied by 24.
In computing and determining Severance Benefits under subsections (a) and (b), above, a decrease in Executive’s salary or incentive bonus potential shall be disregarded if such decrease occurs within six (6) months before a Change of Control, is in contemplation of such Change of Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change of Control. In such event, the salary and incentive bonus potential used to determine Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this Section 2.1.
The Severance Benefits provided in subsections (a), (b) and (e) above shall be paid on the 60th business day following the date Executive’s employment terminates, provided that Executive has executed a general release and waiver of any claims against State Auto or its successors and the period of time during which Executive may revoke the general release and waiver has expired on or before the 60th day following Executive’s separation from service. Notwithstanding the foregoing, if Executive is a “specified employee” as defined in Code Section 409A, such payment shall be subject to and paid according to the provisions of Section 2.4, as described below.
Executive acknowledges and agrees that the Severance Benefits provided in this Section 2.1 shall be the sole severance benefits payable to Executive in the event of any “change of control” (under any definition) of State Auto, and Executive hereby waives and relinquishes any and all rights or severance benefits under any other “change of control” provision applicable to Executive with respect to the Executive’s employment by State Auto.
2.2    Eligibility for Severance Benefits. State Auto, or its respective successor, shall pay or provide to Executive the Severance Benefits as defined above, in the event that Executive becomes eligible for such Severance Benefits because, during the Term of this Agreement:
(a)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause, the death or Disability of Executive within twenty-four (24) months after a Change of Control; or
(b)
Executive terminates employment for Good Reason within twenty-four (24) months after a Change of Control; or
(c)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause or the death or Disability of Executive after an agreement has been reached with an unaffiliated third party, the performance of which agreement would result in a Change of Control involving such third party, if such Change of Control is actually consummated within twelve (12) months after the date of such termination.
Executive’s termination of employment for all purposes under this Agreement shall be determined to have occurred in accordance with the “separation from service” requirements of Code Section 409A and applicable Treasury Regulations and guidance issued thereunder.
2.3    Liquidated Damages; Mitigation. State Auto hereby acknowledges that it will be difficult and may be impossible for Executive to find reasonably comparable employment, or to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the Severance Benefits by State Auto to Executive in accordance with the terms of this Agreement is hereby acknowledged by State Auto to be reasonable and will be liquidated damages, and Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Executive hereunder or otherwise. State Auto shall not be entitled to set off or counterclaim against amounts payable hereunder with respect to any claim, debt or obligation of Executive.
2.4    Specified Employee Delay. In the event Executive is a “specified employee” as defined in Code Section 409A, any payments under this Agreement due to a separation from service and subject to Code Section 409A shall be delayed until a date that is six (6) months after the date of separation from service (or, if earlier, the date of death of Executive). Payments to which a “specified employee” would otherwise be entitled during the first six (6) months following the date of separation shall be accumulated and paid as of the first date of the seventh month following the date of separation from service. Interest shall be paid on any such delayed payment at the applicable federal rate under Code Section 7872(f)(2)(A).
Article III     Executive's Rights Under Certain Plans.





Any references to specific employee benefits arrangements in this Agreement are not intended to exclude Executive from participation in other benefits available to executive personnel generally or to preclude Executive’s right to other compensation or benefits as may be authorized by the Boards at any time; provided that such other compensation or benefits are not severance benefits payable upon a Change in Control. The provisions of this Agreement and any payments provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish Executive’s existing rights, or rights which would accrue solely as the result of the passage of time under any compensation plan, benefit plan, incentive plan, stock option plan, employment agreement or other contract, plan or arrangement except as may be specified in such contract, plan or arrangement. Notwithstanding anything contained herein, State Auto agrees that the severance benefits provided to Executive herein are in addition to any rights and privileges to which Executive may be entitled as an employee of State Auto under any retirement, pension, insurance, hospitalization or other plan which may now or hereafter be in effect, it being understood that, except to the extent currently provided in such plans, Executive shall have the same rights and privileges to participate in such plans or benefits as any other employee of State Auto.
Article IV    Confidential Information; Forfeiture Events.
4.1    Confidential Information. Executive agrees to receive Confidential Information of State Auto in confidence, and not to disclose to others, assist others in the application of, or use for Executive’s own personal gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of such other or others by legal and equitable means and other than as a result of disclosure by Executive. Executive further agrees that, upon termination of Executive’s employment with State Auto, all documents, records, notebooks and similar repositories (including electronic formats) containing Confidential Information, including copies thereof, then in Executive's possession, whether prepared by Executive or others, will be left with and/or returned to State Auto. Executive further agrees that the obligation to maintain confidentiality created by this Article IV shall continue in effect for the duration of this Agreement and following the termination of Executive’s employment with State Auto for any reason.
4.2    Forfeiture Events; Clawback Rights.
(a)
The Board may, in its sole discretion, require Executive to repay to State Auto all or any portion of the amounts paid as Severance Benefits if:
(i)
Executive violates any non-competition, non-solicitation or confidentiality covenant applicable to the Executive and for the benefit of State Auto, including such covenants included in this Agreement;
(ii)
It is later discovered that Executive engaged in conduct detrimental to State Auto during the Executive’s employment with State Auto which has a material adverse effect on State Auto as determined by the Board of Directors of State Auto Mutual, in its sole discretion, acting in good faith; or
(iii)
(A)    The amount of any of the Severance Benefits was calculated based upon the achievement of certain financial results of State Auto that were subsequently the subject of a financial statement restatement by State Auto;
(B)    Executive engaged in conduct detrimental to State Auto that caused or substantially contributed to the need for the financial statement restatement by State Auto; and
(C)    The amount of Executive’s Severance Benefits would have been lower than the amount actually awarded to Executive had the financial results been properly reported.
Notwithstanding the foregoing, if the Boards determine in their sole discretion that Executive engaged in fraudulent conduct, then the Boards will seek repayment of the Severance Benefits. This provision shall not be the exclusive remedy of State Auto with respect to such matters.
(b)
The terms of any compensation recovery or recoupment policy heretofore or hereafter adopted by the Boards, including any and all amendments thereto (a “clawback policy”), are hereby incorporated into this Agreement by reference. In addition to the terms and conditions set forth in this Agreement, Executive agrees that any amounts payable or paid to Executive under this Agreement shall be subject to the terms of any clawback policy of the Boards.
Article V    Successors; Binding Agreement.





5.1    As to State Auto. This Agreement shall inure to the benefit of and be binding upon State Auto, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire voting control of State Auto Financial or all or substantially all of its assets and business, or which may be a party to any consolidation, merger or other transaction that results in a Change of Control of State Auto Financial or State Auto Mutual. State Auto will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of State Auto (or of any division or Subsidiary thereof employing Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that State Auto would be required to perform it if no such succession had taken place. Failure of State Auto to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from State Auto in the same amount and on the same terms to which Executive would be entitled hereunder if Executive terminated employment for Good Reason following a Change of Control.
5.2    As to Executive. This Agreement shall also inure to the benefit of and be binding on Executive, Executive’s heirs, successors and legal representatives. This Agreement shall be enforceable by Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Executive’s rights and benefits under this Agreement may not be assigned, except that if Executive dies while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid to the beneficiary indicated on the Beneficiary Designation attached as Exhibit A or, if there is no such beneficiary, to Executive’s estate. Such payments, if any, shall be made in the same form and at the same time, as such payment would have been made to Executive.

Article VI    COBRA Continuation Coverage.
Notwithstanding any provision of this Agreement to the contrary, in the event of any “qualifying event,” as defined in Code Section 4980B(f), Executive and Executive’s qualifying beneficiaries shall be entitled to continuation of health care coverage, as provided under Code Section 4980B(f). The foregoing is intended as a statement of Executive's continuation coverage rights and is in no way intended to limit any greater rights of Executive or Executive’s qualified beneficiaries.
Article VII    Indemnification; Enforcement Costs; Interest.
7.1    Indemnification. State Auto, as provided for in its Amended and Restated Articles of Incorporation and its Amended and Restated Bylaws, shall indemnify Executive to the full extent of the general laws of the State of Ohio, now or hereafter in force, including the advance of expenses under procedures provided by such laws. From the date of a Change of Control, State Auto shall (a) for a period of five (5) years after such Change of Control, provide Executive (including Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at State Auto's expense, and (b) indemnify and hold harmless Executive, to the fullest extent permitted or authorized by the law of the State of Ohio as it may from time to time be amended, if Executive is (whether before or after the Change of Control) made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Executive is or was a director, officer or employee of State Auto or any Subsidiary, or is or was serving at the request of State Auto or any Subsidiary, as a director, trustee, officer or employee of an insurance company, corporation, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 7.1 shall not be deemed exclusive of any other rights to which Executive may be entitled under the charter or bylaws of State Auto or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in Executive’s official capacity and as to action in another capacity while holding such office, and shall continue as to Executive after Executive has ceased to be a director, trustee, officer or employee and shall inure to the benefit of the heirs, executors and administrators of Executive.
7.2    Enforcement Cost. State Auto is aware that, upon the occurrence of a Change of Control, the Board or a shareholder or policyholder of State Auto, as the case may be, may then cause or attempt to cause State Auto to refuse to comply with their obligations under this Agreement, or may cause or attempt to cause State Auto to institute, or may institute, litigation, arbitration or other legal action seeking to have this Agreement declared unenforceable, or may take, or attempt to take, other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of State Auto that Executive not be required to incur the expenses associated with the enforcement of Executive’s rights under this Agreement by litigation, arbitration or other legal action nor be bound to negotiate any settlement of Executive’s rights hereunder under threat of incurring such expenses because the cost and expense thereof would substantially detract from the benefits intended to be extended to Executive under this Agreement. Accordingly, if following a Change of Control it should appear to Executive that State Auto has failed to comply with any of their obligations under this Agreement, or in the event that State Auto or any other person takes any action to declare this Agreement void or unenforceable, or institute any litigation or other legal action designed to deny, diminish or to recover from Executive, the benefits intended to be provided to Executive hereunder, State Auto irrevocably authorizes Executive from time to time to retain counsel (legal and accounting) of Executive’s choice at





the expense of State Auto as provided in this Section 7.2 to represent Executive in connection with the calculation of the Code Section 280G reduction, or the initiation or defense of any litigation or other legal action, whether by or against State Auto or any director, officer, stockholder or other person affiliated with State Auto. Notwithstanding any existing or prior attorney-client relationship between State Auto and such counsel, State Auto irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection State Auto and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by Executive as provided in this Section 7.2 shall be paid or reimbursed to Executive by State Auto on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with their customary practices.
7.3    Interest. In any action involving this Agreement, Executive shall be entitled to prejudgment interest on any amounts found to be due him from the date such amounts would have been payable to Executive pursuant to this Agreement at an annual rate of interest equal to the prime commercial rate in effect at the corporation’s principal bank or their successor from time to time during the prejudgment period plus four percent.
Article VIII    Cooperation with Regard to Litigation.
Executive agrees to cooperate with State Auto for a period of two (2) years following Executive’s termination of employment by being reasonably available to testify on behalf of State Auto in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to assist State Auto in any such action, suit or proceeding by providing information and meeting and consulting with the Boards or their counsel or counsel to State Auto as reasonably requested by the Boards or such counsel. Executive shall be reimbursed by State Auto for any expenses (including, but not limited to, legal fees) reasonably incurred by Executive in connection with the Executive’s compliance with the foregoing covenant.
Article IX    Payment of Taxes and Timing.
9.1    Excess Severance Payment. If any Severance Benefit or other benefit paid or provided under Section 2.1, or the acceleration of stock option vesting, would be subject to excise tax pursuant to Code Section 4999 (or any similar federal or state excise tax), but would not be so subject if the total of such payments would be reduced by ten percent (10%) or less, then such payment shall be reduced by the minimum amount necessary so as not to cause State Auto to have paid an Excess Severance Payment as defined in Code Section 280G(b)(1) and so Executive will not be subject to Excise Tax pursuant to Code Section 4999. The calculation of the Code Section 280G reduction shall be approved by State Auto’s independent certified public accounting firm engaged by State Auto immediately prior to the Change of Control and the calculation shall be provided to Executive in writing. Executive shall then be given fifteen (15) days, or such longer period as Executive reasonably requests and to which State Auto agrees, such agreement not to be unreasonably withheld, to accept or reject the calculation of the Code Section 280G reduction. If Executive rejects the Code Section 280G reduction calculation and the parties are thereafter unable to agree within an additional forty-five (45) days, the arbitration provisions of Section 10.1 shall control. State Auto shall reimburse Executive for all reasonable legal and accounting fees incurred with respect to the calculation of the Code Section 280G reduction and any disputes related thereto. Any payments owed to Executive under this Section 9.1, which are subject to the rules under Code Section 409A and related regulations, shall be made to Executive no later than the end of the calendar year following the calendar year in which the taxes are remitted to the taxing authority. In the event that the amount of any Severance Benefit that would be payable to or for the benefit of Executive under this Agreement must be modified or reduced to comply with this provision, it shall be modified or reduced on a pro-rata basis. In no event shall the total payments be reduced by more than ten percent (10%) in order to avoid treatment as an Excess Severance Payment.
9.2    Withholding of Taxes. State Auto may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as required by law; provided, however, that such payment may not exceed the amount of such taxes due as a result of the payments due under this Agreement.
In accordance with Code Section 409A and the regulations issued thereunder, this Agreement shall permit the payment of amounts necessary to (a) satisfy the employment tax withholding obligations that arise under this Agreement prior to the date that payment may otherwise be made under this Agreement and/or (b) satisfy the excise tax or underpayment penalties owed under Code Section 409A in the event of a violation of Code Section 409A under this Agreement.
9.3    Delayed Payments. In the event of a genuine dispute between State Auto or any Subsidiary and Executive regarding the amount or timing of benefits under this Agreement, a delay in the payment of amounts under this Agreement shall not cause Executive to violate Code Section 409A to the extent that such delay satisfies the conditions set forth in Code Section 409A and applicable regulations thereunder.





9.4    Savings Clause. If any payments otherwise payable to Executive under this Agreement are prohibited or limited by any statute or regulation in effect at the time the payments would otherwise be payable (any such limiting statute or regulation a “Limiting Rule”):
(a)
State Auto will use its best efforts to obtain the consent of the appropriate governmental agency to the payment by State Auto to Executive of the maximum amount that is permitted (up to the amounts that would be due to Executive absent the Limiting Rule); and
(b)
Executive will be entitled to elect to have apply, and therefore to receive benefits directly under, either (i) this Agreement (as limited by the Limiting Rule) or (ii) any generally applicable State Auto severance, separation pay and/or salary continuation plan that may be in effect at the time of Executive’s termination.
Following any such election, Executive will be entitled to receive benefits under this Agreement or plan elected only if and to the extent the Agreement or plan is applicable and subject to its specific terms.
Article X    Arbitration.
10.1    Arbitration. The method for resolving any dispute arising out of this Agreement shall be binding arbitration in accordance with this Section 10.1. Except as provided otherwise in this Section 10.1, arbitration pursuant to this Section 10.1 shall be governed by the Employment Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a description of the issue to be arbitrated. Within fifteen (15) calendar days after either party demands arbitration, State Auto and Executive shall each appoint an arbitrator. The fees and expenses of these arbitrators shall be paid by the party that selected such arbitrator. Within fifteen (15) additional calendar days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within this fifteen (15) calendar day period, then the third arbitrator shall be selected promptly pursuant to the rules of the American Arbitration Association for Employment Arbitration. The arbitration panel shall hold a hearing in Columbus, Ohio, within ninety (90) calendar days after the appointment of the third arbitrator. The fees and expenses of the third arbitrator, and any American Arbitration Association fees, shall be paid equally by the parties. Both State Auto and Executive may be represented by counsel (legal and accounting) and may present testimony and other evidence at the hearing. Each party shall be responsible for the legal fees and other expenses incurred by each party. Within ninety (90) calendar days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall be binding on the parties. Executive shall be entitled to seek specific performance of Executive’s rights under this Agreement during the period of time that any dispute or controversy arising under or in connection with this Agreement is pending.
Article XI    General Provisions.
11.1    Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the impact of a Change of Control on Executive, and completely supersedes any prior verbal or written agreements or arrangements between the parties hereto, if any, related to a Change of Control. The parties hereto agree that this Agreement cannot be hereafter amended, modified or supplemented in any respect, except by a subsequent written agreement signed by both parties hereto. The parties also agree that this Agreement shall be amended and/or modified as necessary to comply with Code Section 409A or regulations issued thereunder as well as requirements or regulations issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as applicable.
11.2    Applicable Law. This Agreement shall be governed in all respects by the laws of the State of Ohio, without giving effect to any of its conflict of law provisions.
11.3    Notices. All notices under this Agreement shall be in writing and will be duly given if sent by United States registered or certified mail, return receipt requested, to the respective parties to the addresses set forth below or such other addresses as the parties may hereafter designate in writing for such purpose:
(a)
If to either State Auto Financial, State Auto P&C or State Auto Mutual, to 518 East Broad Street, Columbus, Ohio 43215, Attention: Corporate Secretary; and
(b)    If to Executive, to the address set forth in the attached Exhibit A.
If the parties by mutual agreement supply each other with email addresses for the purposes of providing notice by email, such notice shall also be proper notice under this Agreement. Notice sent by certified or registered mail shall be effective two (2) days after deposit by delivery to the U.S. Post Office.





11.4    Assignment. Except as expressly provided herein, neither this Agreement nor any rights, benefits or obligations hereunder may be assigned by Executive without the prior written consent of State Auto Mutual and State Auto Financial.
11.5    Capacity.
(a)
State Auto Financial, State Auto P&C and State Auto Mutual represent and warrant to Executive that they have the capacity and right to enter into this Agreement and perform all of their obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
(b)
Executive represents and warrants to State Auto Financial, State Auto P&C and State Auto Mutual that he has the capacity and right to enter into this Agreement and perform all of Executive’s services and other obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
11.6    Waiver. The failure by a party to exercise or enforce any of the terms or conditions of this Agreement will not constitute or be deemed a waiver of that party's rights hereunder to enforce each and every term of this Agreement. The failure by a party to insist upon strict performance of any of the terms and provisions herein will not be deemed a waiver of any subsequent default in the terms or provisions herein.
11.7    Rights and Remedies Cumulative. All rights and remedies of the parties hereunder are cumulative.
11.8    Divisibility. The provisions of this Agreement are divisible. If any such provision shall be deemed invalid or unenforceable, it shall not affect the applicability or validity of any other provision of this Agreement, and if any such provision shall be deemed invalid or unenforceable as to any periods of time, territory or business activities, such provision shall be deemed limited to the extent necessary to render it valid and enforceable.
11.9    Captions and Titles. Captions and titles have been used in this Agreement only for convenience and in no way define, limit or describe the meaning of any Article or any part thereof.
11.10    Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
11.11    Code Section 409A Compliance. It is the intention of both Executive and State Auto that the benefits and rights to which Executive could be entitled to under this Agreement be exempt from or, to the extent that the requirements of Code Section 409A apply, comply with Code Section 409A and the Treasury Regulations thereunder, and the provisions of this Agreement shall be construed in a manner consistent with that intention. If Executive or State Auto believes, at any time, that any such benefit or right that is subject to Code Section 409A does not so comply, it shall promptly advise the other and shall negotiate reasonably and in good faith to amend the terms of such benefits and rights so that they comply with Code Section 409A (with the most limited possible economic effect on Executive and State Auto).
STATE AUTO FINANCIAL CORPORATION
 
 
By: /s/ Michael E. LaRocco
 
By: /s/ Steven E. English
Michael E. LaRocco
Chairman, President and CEO
 
Steven E. English
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
 
 
By: /s/ Michael E. LaRocco
 
 
Michael E. LaRocco
President and CEO
 
 
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
 
 
By: /s/ Michael E. LaRocco
 
 
Michael E. LaRocco
Chairman, President and CEO
 
 






Exhibit A
Beneficiary Designation and Notice Form
Beneficiary Designation
In the event of my death, I direct that any amounts due me under this Agreement to which this Beneficiary Designation is attached shall be distributed to the person designated below. If no beneficiary shall be living to receive such assets they shall be paid to the administrator or executor of my estate.
Notice
Until notified otherwise, pursuant to Section 11.3 of this Agreement, notices should be sent to me at the following address:
6608 Carinbough Place
Dublin, OH 43016
 
Date: 10/12/2017


 
/s/ Steven E. English
 
Signature of Executive
 
 
 
Steven E. English
 
Print Name of Executive
 
 
 
Deanna C. English
 
Beneficiary Name
 
 
 
Spouse
 
Relationship to Executive





EXHIBIT 10.44
EXECUTIVE CHANGE OF CONTROL AGREEMENT
This Executive Change of Control Agreement (this “Agreement”) is made as of October 26, 2017 (the “Effective Date”), by and among State Auto Financial Corporation, an Ohio corporation (“State Auto Financial”), State Auto Property and Casualty Insurance Company, an Iowa-domiciled insurance company (“State Auto P&C”), State Automobile Mutual Insurance Company, an Ohio-domiciled mutual insurance company (“State Auto Mutual”), and Gregory A. Tacchetti (“Executive”). State Auto Financial, State Auto P&C, State Auto Mutual and each of their respective insurer subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “State Auto.”
Background Information
A.
State Auto P&C is the principal operating subsidiary of State Auto Financial and the employer of record of all employees of State Auto. State Auto Financial is a majority- owned, publicly-traded holding company subsidiary of State Auto Mutual. State Auto Mutual is the ultimate controlling entity in the State Auto holding company system.
B.
State Auto desires to establish and maintain a sound and vital management team as an important part of State Auto’s overall corporate strategy and as an essential means of protecting and enhancing the interests of State Auto, the Boards of State Auto Financial and State Auto Mutual (collectively, the “Boards”), and their shareholders and policyholders, respectively. As part of this corporate strategy, State Auto desires to act in the best interests of State Auto to address Executive’s continued service to State Auto and available benefits in the event of an actual or threatened Change of Control (as defined herein) of State Auto Financial or State Auto Mutual.
Statement of Agreement
The parties hereby acknowledge the accuracy of the foregoing Background Information and hereby agree as follows:
Article I         Definitions.
As used in this Agreement, the following defined terms shall have the meanings set forth below:
1.1
Annual Base Salary means the greater of (a) the highest annual rate of base salary in effect for Executive during the 12-month period immediately prior to a Change of Control, or (b) the annual rate of base salary in effect on the date Executive’s employment is terminated.
1.2
Average Annual Award means the average of the annual aggregate bonus under the Short Term Incentive Plans (or its successors) earned by Executive in each of the three (3) calendar years immediately preceding the calendar year in which the Change of Control occurs.
1.3
Cause means any of the following:
(a)
the willful and continued failure of Executive to perform Executive’s duties with State Auto (other than any such failure resulting from incapacity due to a Disability), after a written demand for performance is delivered to Executive by the Boards, or their designee, which specifically identifies the manner in which the Boards believe, in their sole discretion, that Executive has not performed Executive’s duties; or
(b)
the willful engaging by Executive in illegal conduct or gross misconduct which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(c)
the breach of any provision of Article IV hereof which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(d)
the willful failure to comply with any State Auto code of conduct or code of ethics applicable to Executive, as determined by the Boards in their sole discretion; or
(e)
the willful failure and refusal to cooperate with or assist State Auto in responding to governmental or regulatory inquiries, investigations or related activities, as determined by the Boards in their sole discretion.





For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of State Auto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Boards or upon the advice of counsel for State Auto, shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of State Auto.
1.4
Change of Control means the occurrence of any of the following:
(a)
any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), Directly or Indirectly, of securities of State Auto Financial representing thirty percent (30%) or more of the combined voting power of State Auto Financial’s then outstanding securities, excluding (i) any acquisition by State Auto Financial or any Subsidiary; (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by State Auto Financial, a Subsidiary or State Auto Mutual; or (iii) any acquisition by State Auto Mutual; or
(b)
a majority of the Board of Directors of State Auto Financial at any time is comprised of other than Continuing Directors; or
(c)
any event or transaction State Auto Financial would be required to report in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; or
(d)
any of the following occurs:
(i)
a merger or consolidation of State Auto Financial, other than a merger or consolidation in which the voting securities of State Auto Financial immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) more than fifty percent (50%) of the combined voting power of State Auto Financial or surviving entity immediately after the merger or consolidation with another entity;
(ii)
a sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of State Auto Financial which shall include, without limitation, the sale of assets or earning power aggregating more than fifty percent (50%) of the assets or earning power of State Auto Financial on a consolidated basis;
(iii)
a reorganization, reverse stock split, or recapitalization of State Auto Financial which would result in any of the foregoing; or
(iv)
a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.
(e)
With respect to State Auto Mutual, any of the following occurs:
(i)
State Auto Mutual affiliates with or is merged into or consolidated with a third party and as a result, a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors; or
(ii)
State Auto Mutual completes a conversion to a stock insurance company and as a result of which a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors.
Notwithstanding the foregoing, for purposes of this Change of Control definition, the percentage of securities ownership listed under subsection (a) above (i.e., 30%) shall increase or decrease, as the case may be, such that the percentage of securities ownership is consistent with any future changes to the percentage of securities ownership represented in the Change of Control definition in the State Auto Financial Corporation 2017 Long Term Incentive Plan, as amended from time to time.
1.5
Code means the Internal Revenue Code of 1986, as amended.





1.6
Confidential Information means information disclosed to Executive or known by State Auto, which is not generally known in the business in which State Auto is or may become engaged, including, but not limited to, information about State Auto's services, trade secrets, financial information, customer lists, books, records, memoranda and other proprietary information of State Auto. For purposes of this Agreement, “Confidential Information” shall also mean any information that could be considered a trade secret, as defined by applicable law.
1.7
Continuing Director of State Auto Financial or State Auto Mutual, as the case may be, means a director who was either:
(a)
first elected or appointed as a director on or prior to the Effective Date; or
(b)
subsequent to the Effective Date was elected or appointed as a director if such director was nominated by the Nominating and Governance Committee of State Auto Financial or the Nominating and Governance Committee of State Auto Mutual, as the case may be, or appointed by at least two-thirds of the total number of the then Continuing Directors of State Auto Financial or State Auto Mutual, as the case may be.
1.8
Directly or Indirectly means on Executive’s own behalf, or as an officer, director, shareholder, member, partner, owner, agent, consultant, advisor, coach or employee of any corporation, partnership, limited liability company or other entity.
1.9
Disability means illness or other incapacity as determined under State Auto’s group long-term disability benefit plan.
1.10
Employee Benefits means the benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital, or other insurance (whether funded by actual insurance or self-insured by State Auto), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist (and as may be modified from time to time) or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter (and as may be modified from time to time), providing benefits at least as great in a monetary equivalent as are payable thereunder prior to a Change of Control.
1.11
Good Reason means the occurrence of any one or more of the following:
(a)
The assignment to Executive of duties which are materially and adversely different from or inconsistent with the duties, responsibilities and status of Executive’s position at any time during the 12-month period prior to a Change of Control, or which result in a significant reduction in Executive’s authority and responsibility as a senior executive officer of State Auto;
(b)
A reduction by State Auto in Executive’s Annual Base Salary in place as of the day immediately prior to a Change of Control, or after a Change of Control the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of State Auto, or a reduction of Executive’s most recent Average Annual Award prior to a Change of Control;
(c)
After a Change of Control, a demand by State Auto that Executive relocate to a location in excess of 35 miles from the location where Executive is based as of the day immediately prior to a Change of Control, or in the event of any such relocation with Executive’s express written consent, the failure of State Auto or a Subsidiary to pay (or reimburse Executive for) all reasonable moving expenses incurred by Executive relating to a change of principal residence in connection with such relocation and to indemnify Executive against any loss in the sale of Executive’s principal residence in connection with any such change of residence and any expenses incurred by Executive that are directly attributable to such sale (for purposes of this provision, “loss” is understood to mean a sale of such principal residence at a price less than the adjusted basis in such residence);
(d)
The failure of State Auto to obtain a satisfactory agreement from any successor to State Auto to assume and agree to perform this Agreement, as contemplated in Section 5.1 of this Agreement;
(e)
The failure of State Auto to provide Executive with substantially the same Employee Benefits that were provided to him immediately prior to the Change of Control, or with a package of Employee Benefits that, though one or more of such benefits may vary from those in effect immediately prior to a Change of Control, is substantially comparable in all material respects to such Employee Benefits taken as a whole; or





(f)
Any material reduction in Executive’s compensation or benefits or a material adverse change in Executive’s location or duties, if such material reduction or material adverse change occurs at any time after the commencement of any discussion with a third party relating to a possible Change of Control of State Auto involving such third party, if such material reduction or material adverse change is in contemplation of such possible Change of Control and such Change of Control is actually consummated within twelve (12) months after the date of such material reduction or material adverse change.
The existence of Good Reason shall not be affected by Executive’s subsequent incapacity due to physical or mental illness. Executive’s continued employment shall not constitute a waiver of Executive’s rights with respect to any circumstance constituting Good Reason under this Agreement. Executive shall provide State Auto with written notice of the Executive’s intent to terminate with Good Reason within a period not to exceed ninety (90) calendar days of the initial existence of the condition constituting Good Reason. State Auto shall have a period of thirty (30) calendar days in which it may remedy the condition and prevent Executive’s termination for Good Reason.
1.12    OTIP means the State Auto Financial Corporation One Team Incentive Plan.
1.13
Severance Benefits means the benefits described in Section 2.1 of this Agreement, as adjusted by the applicable provisions of Section 9.1 of this Agreement.
1.14
Short Term Incentive Plans means OTIP and any other short term incentive compensation plan of State Auto.
1.15
Subsidiary means any corporation, insurance company or other entity with a majority of the voting control of which is directly or indirectly owned or controlled at the time by State Auto Financial.
1.16
Term means the time period commencing on the Effective Date of this Agreement and ending on November 30, 2020, both dates inclusive, however, that if a Change of Control occurs during the Term of this Agreement, the Term of this Agreement will be extended for thirty-six (36) months beyond the end of the month in which any such Change of Control occurs. Notwithstanding the foregoing, this Agreement shall terminate upon Executive’s termination of employment with State Auto for any other reason; provided, however, that Sections 2.3 and 2.4, Articles IV, VI through X, and Sections 11.3, 11.6 and 11.8 of the Agreement shall survive Executive’s termination of employment.
Article II    Change of Control.
2.1    Severance Benefits. In the event that State Auto shall undergo a Change of Control, and if Executive then becomes entitled to receive Severance Benefits, State Auto or its respective successor, shall pay or provide to Executive the following Severance Benefits, adjusted by the applicable provisions of Section 9.1:
(a)
Annual Base Salary. In addition to any accrued compensation payable as of Executive’s termination of employment, a lump sum cash amount equal to Executive’s Annual Base Salary multiplied by two.
(b)
Annual Incentive Compensation. In addition to any compensation otherwise payable pursuant to Executive’s bonus arrangements, a lump sum cash amount equal to Executive’s Average Annual Award multiplied by two. In addition, Executive shall be entitled to receive a prorated annual incentive payment for the year in which the Change of Control occurred, if otherwise eligible for such annual incentive. Such prorated annual incentive amount, if any, will be determined based on the target award levels established for the year in which the Change of Control occurred.
(c)
Stock Options and Other Equity Awards. Stock options and any other types of equity awards (e.g., restricted shares, performance shares, performance units, etc.) held by Executive become exercisable upon a Change of Control according to the terms of the applicable stock option or equity plan and related agreement (if any) under which such stock options or other equity awards were granted.
(d)
Outplacement. State Auto shall pay all fees for outplacement services incurred by Executive up to a maximum equal to fifteen percent (15%) of Executive’s Annual Base Salary, plus provide a travel expense account of up to $5,000 to reimburse job search travel. Such expenses and reimbursements shall be limited to those expenses incurred within the two (2) calendar years following the calendar year of Executive’s separation from service. Such expenses shall be paid no later than December 31st of the calendar year following the applicable calendar year in which such reimbursable expense was incurred.





(e)
Health Insurance Reimbursement. State Auto shall pay Executive an amount equal to State Auto’s then current monthly per employee cost of providing State Auto’s health insurance benefit multiplied by 24.
In computing and determining Severance Benefits under subsections (a) and (b), above, a decrease in Executive’s salary or incentive bonus potential shall be disregarded if such decrease occurs within six (6) months before a Change of Control, is in contemplation of such Change of Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change of Control. In such event, the salary and incentive bonus potential used to determine Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this Section 2.1.
The Severance Benefits provided in subsections (a), (b) and (e) above shall be paid on the 60th business day following the date Executive’s employment terminates, provided that Executive has executed a general release and waiver of any claims against State Auto or its successors and the period of time during which Executive may revoke the general release and waiver has expired on or before the 60th day following Executive’s separation from service. Notwithstanding the foregoing, if Executive is a “specified employee” as defined in Code Section 409A, such payment shall be subject to and paid according to the provisions of Section 2.4, as described below.
Executive acknowledges and agrees that the Severance Benefits provided in this Section 2.1 shall be the sole severance benefits payable to Executive in the event of any “change of control” (under any definition) of State Auto, and Executive hereby waives and relinquishes any and all rights or severance benefits under any other “change of control” provision applicable to Executive with respect to the Executive’s employment by State Auto.
2.2    Eligibility for Severance Benefits. State Auto, or its respective successor, shall pay or provide to Executive the Severance Benefits as defined above, in the event that Executive becomes eligible for such Severance Benefits because, during the Term of this Agreement:
(a)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause, the death or Disability of Executive within twenty-four (24) months after a Change of Control; or
(b)
Executive terminates employment for Good Reason within twenty-four (24) months after a Change of Control; or
(c)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause or the death or Disability of Executive after an agreement has been reached with an unaffiliated third party, the performance of which agreement would result in a Change of Control involving such third party, if such Change of Control is actually consummated within twelve (12) months after the date of such termination.
Executive’s termination of employment for all purposes under this Agreement shall be determined to have occurred in accordance with the “separation from service” requirements of Code Section 409A and applicable Treasury Regulations and guidance issued thereunder.
2.3    Liquidated Damages; Mitigation. State Auto hereby acknowledges that it will be difficult and may be impossible for Executive to find reasonably comparable employment, or to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the Severance Benefits by State Auto to Executive in accordance with the terms of this Agreement is hereby acknowledged by State Auto to be reasonable and will be liquidated damages, and Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Executive hereunder or otherwise. State Auto shall not be entitled to set off or counterclaim against amounts payable hereunder with respect to any claim, debt or obligation of Executive.
2.4    Specified Employee Delay. In the event Executive is a “specified employee” as defined in Code Section 409A, any payments under this Agreement due to a separation from service and subject to Code Section 409A shall be delayed until a date that is six (6) months after the date of separation from service (or, if earlier, the date of death of Executive). Payments to which a “specified employee” would otherwise be entitled during the first six (6) months following the date of separation shall be accumulated and paid as of the first date of the seventh month following the date of separation from service. Interest shall be paid on any such delayed payment at the applicable federal rate under Code Section 7872(f)(2)(A).
Article III     Executive's Rights Under Certain Plans.





Any references to specific employee benefits arrangements in this Agreement are not intended to exclude Executive from participation in other benefits available to executive personnel generally or to preclude Executive’s right to other compensation or benefits as may be authorized by the Boards at any time; provided that such other compensation or benefits are not severance benefits payable upon a Change in Control. The provisions of this Agreement and any payments provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish Executive’s existing rights, or rights which would accrue solely as the result of the passage of time under any compensation plan, benefit plan, incentive plan, stock option plan, employment agreement or other contract, plan or arrangement except as may be specified in such contract, plan or arrangement. Notwithstanding anything contained herein, State Auto agrees that the severance benefits provided to Executive herein are in addition to any rights and privileges to which Executive may be entitled as an employee of State Auto under any retirement, pension, insurance, hospitalization or other plan which may now or hereafter be in effect, it being understood that, except to the extent currently provided in such plans, Executive shall have the same rights and privileges to participate in such plans or benefits as any other employee of State Auto.
Article IV    Confidential Information; Forfeiture Events.
4.1    Confidential Information. Executive agrees to receive Confidential Information of State Auto in confidence, and not to disclose to others, assist others in the application of, or use for Executive’s own personal gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of such other or others by legal and equitable means and other than as a result of disclosure by Executive. Executive further agrees that, upon termination of Executive’s employment with State Auto, all documents, records, notebooks and similar repositories (including electronic formats) containing Confidential Information, including copies thereof, then in Executive's possession, whether prepared by Executive or others, will be left with and/or returned to State Auto. Executive further agrees that the obligation to maintain confidentiality created by this Article IV shall continue in effect for the duration of this Agreement and following the termination of Executive’s employment with State Auto for any reason.
4.2    Forfeiture Events; Clawback Rights.
(a)
The Board may, in its sole discretion, require Executive to repay to State Auto all or any portion of the amounts paid as Severance Benefits if:
(i)
Executive violates any non-competition, non-solicitation or confidentiality covenant applicable to the Executive and for the benefit of State Auto, including such covenants included in this Agreement;
(ii)
It is later discovered that Executive engaged in conduct detrimental to State Auto during the Executive’s employment with State Auto which has a material adverse effect on State Auto as determined by the Board of Directors of State Auto Mutual, in its sole discretion, acting in good faith; or
(iii)
(A)    The amount of any of the Severance Benefits was calculated based upon the achievement of certain financial results of State Auto that were subsequently the subject of a financial statement restatement by State Auto;
(B)    Executive engaged in conduct detrimental to State Auto that caused or substantially contributed to the need for the financial statement restatement by State Auto; and
(C)    The amount of Executive’s Severance Benefits would have been lower than the amount actually awarded to Executive had the financial results been properly reported.
Notwithstanding the foregoing, if the Boards determine in their sole discretion that Executive engaged in fraudulent conduct, then the Boards will seek repayment of the Severance Benefits. This provision shall not be the exclusive remedy of State Auto with respect to such matters.
(b)
The terms of any compensation recovery or recoupment policy heretofore or hereafter adopted by the Boards, including any and all amendments thereto (a “clawback policy”), are hereby incorporated into this Agreement by reference. In addition to the terms and conditions set forth in this Agreement, Executive agrees that any amounts payable or paid to Executive under this Agreement shall be subject to the terms of any clawback policy of the Boards.
Article V    Successors; Binding Agreement.





5.1    As to State Auto. This Agreement shall inure to the benefit of and be binding upon State Auto, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire voting control of State Auto Financial or all or substantially all of its assets and business, or which may be a party to any consolidation, merger or other transaction that results in a Change of Control of State Auto Financial or State Auto Mutual. State Auto will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of State Auto (or of any division or Subsidiary thereof employing Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that State Auto would be required to perform it if no such succession had taken place. Failure of State Auto to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from State Auto in the same amount and on the same terms to which Executive would be entitled hereunder if Executive terminated employment for Good Reason following a Change of Control.
5.2    As to Executive. This Agreement shall also inure to the benefit of and be binding on Executive, Executive’s heirs, successors and legal representatives. This Agreement shall be enforceable by Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Executive’s rights and benefits under this Agreement may not be assigned, except that if Executive dies while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid to the beneficiary indicated on the Beneficiary Designation attached as Exhibit A or, if there is no such beneficiary, to Executive’s estate. Such payments, if any, shall be made in the same form and at the same time, as such payment would have been made to Executive.

Article VI    COBRA Continuation Coverage.
Notwithstanding any provision of this Agreement to the contrary, in the event of any “qualifying event,” as defined in Code Section 4980B(f), Executive and Executive’s qualifying beneficiaries shall be entitled to continuation of health care coverage, as provided under Code Section 4980B(f). The foregoing is intended as a statement of Executive's continuation coverage rights and is in no way intended to limit any greater rights of Executive or Executive’s qualified beneficiaries.
Article VII    Indemnification; Enforcement Costs; Interest.
7.1    Indemnification. State Auto, as provided for in its Amended and Restated Articles of Incorporation and its Amended and Restated Bylaws, shall indemnify Executive to the full extent of the general laws of the State of Ohio, now or hereafter in force, including the advance of expenses under procedures provided by such laws. From the date of a Change of Control, State Auto shall (a) for a period of five (5) years after such Change of Control, provide Executive (including Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at State Auto's expense, and (b) indemnify and hold harmless Executive, to the fullest extent permitted or authorized by the law of the State of Ohio as it may from time to time be amended, if Executive is (whether before or after the Change of Control) made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Executive is or was a director, officer or employee of State Auto or any Subsidiary, or is or was serving at the request of State Auto or any Subsidiary, as a director, trustee, officer or employee of an insurance company, corporation, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 7.1 shall not be deemed exclusive of any other rights to which Executive may be entitled under the charter or bylaws of State Auto or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in Executive’s official capacity and as to action in another capacity while holding such office, and shall continue as to Executive after Executive has ceased to be a director, trustee, officer or employee and shall inure to the benefit of the heirs, executors and administrators of Executive.
7.2    Enforcement Cost. State Auto is aware that, upon the occurrence of a Change of Control, the Board or a shareholder or policyholder of State Auto, as the case may be, may then cause or attempt to cause State Auto to refuse to comply with their obligations under this Agreement, or may cause or attempt to cause State Auto to institute, or may institute, litigation, arbitration or other legal action seeking to have this Agreement declared unenforceable, or may take, or attempt to take, other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of State Auto that Executive not be required to incur the expenses associated with the enforcement of Executive’s rights under this Agreement by litigation, arbitration or other legal action nor be bound to negotiate any settlement of Executive’s rights hereunder under threat of incurring such expenses because the cost and expense thereof would substantially detract from the benefits intended to be extended to Executive under this Agreement. Accordingly, if following a Change of Control it should appear to Executive that State Auto has failed to comply with any of their obligations under this Agreement, or in the event that State Auto or any other person takes any action to declare this Agreement void or unenforceable, or institute any litigation or other legal action designed to deny, diminish or to recover from Executive, the benefits intended to be provided to Executive hereunder, State Auto irrevocably authorizes Executive from time to time to retain counsel (legal and accounting) of Executive’s choice at





the expense of State Auto as provided in this Section 7.2 to represent Executive in connection with the calculation of the Code Section 280G reduction, or the initiation or defense of any litigation or other legal action, whether by or against State Auto or any director, officer, stockholder or other person affiliated with State Auto. Notwithstanding any existing or prior attorney-client relationship between State Auto and such counsel, State Auto irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection State Auto and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by Executive as provided in this Section 7.2 shall be paid or reimbursed to Executive by State Auto on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with their customary practices.
7.3    Interest. In any action involving this Agreement, Executive shall be entitled to prejudgment interest on any amounts found to be due him from the date such amounts would have been payable to Executive pursuant to this Agreement at an annual rate of interest equal to the prime commercial rate in effect at the corporation’s principal bank or their successor from time to time during the prejudgment period plus four percent.
Article VIII    Cooperation with Regard to Litigation.
Executive agrees to cooperate with State Auto for a period of two (2) years following Executive’s termination of employment by being reasonably available to testify on behalf of State Auto in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to assist State Auto in any such action, suit or proceeding by providing information and meeting and consulting with the Boards or their counsel or counsel to State Auto as reasonably requested by the Boards or such counsel. Executive shall be reimbursed by State Auto for any expenses (including, but not limited to, legal fees) reasonably incurred by Executive in connection with the Executive’s compliance with the foregoing covenant.
Article IX    Payment of Taxes and Timing.
9.1    Excess Severance Payment. If any Severance Benefit or other benefit paid or provided under Section 2.1, or the acceleration of stock option vesting, would be subject to excise tax pursuant to Code Section 4999 (or any similar federal or state excise tax), but would not be so subject if the total of such payments would be reduced by ten percent (10%) or less, then such payment shall be reduced by the minimum amount necessary so as not to cause State Auto to have paid an Excess Severance Payment as defined in Code Section 280G(b)(1) and so Executive will not be subject to Excise Tax pursuant to Code Section 4999. The calculation of the Code Section 280G reduction shall be approved by State Auto’s independent certified public accounting firm engaged by State Auto immediately prior to the Change of Control and the calculation shall be provided to Executive in writing. Executive shall then be given fifteen (15) days, or such longer period as Executive reasonably requests and to which State Auto agrees, such agreement not to be unreasonably withheld, to accept or reject the calculation of the Code Section 280G reduction. If Executive rejects the Code Section 280G reduction calculation and the parties are thereafter unable to agree within an additional forty-five (45) days, the arbitration provisions of Section 10.1 shall control. State Auto shall reimburse Executive for all reasonable legal and accounting fees incurred with respect to the calculation of the Code Section 280G reduction and any disputes related thereto. Any payments owed to Executive under this Section 9.1, which are subject to the rules under Code Section 409A and related regulations, shall be made to Executive no later than the end of the calendar year following the calendar year in which the taxes are remitted to the taxing authority. In the event that the amount of any Severance Benefit that would be payable to or for the benefit of Executive under this Agreement must be modified or reduced to comply with this provision, it shall be modified or reduced on a pro-rata basis. In no event shall the total payments be reduced by more than ten percent (10%) in order to avoid treatment as an Excess Severance Payment.
9.2    Withholding of Taxes. State Auto may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as required by law; provided, however, that such payment may not exceed the amount of such taxes due as a result of the payments due under this Agreement.
In accordance with Code Section 409A and the regulations issued thereunder, this Agreement shall permit the payment of amounts necessary to (a) satisfy the employment tax withholding obligations that arise under this Agreement prior to the date that payment may otherwise be made under this Agreement and/or (b) satisfy the excise tax or underpayment penalties owed under Code Section 409A in the event of a violation of Code Section 409A under this Agreement.
9.3    Delayed Payments. In the event of a genuine dispute between State Auto or any Subsidiary and Executive regarding the amount or timing of benefits under this Agreement, a delay in the payment of amounts under this Agreement shall not cause Executive to violate Code Section 409A to the extent that such delay satisfies the conditions set forth in Code Section 409A and applicable regulations thereunder.





9.4    Savings Clause. If any payments otherwise payable to Executive under this Agreement are prohibited or limited by any statute or regulation in effect at the time the payments would otherwise be payable (any such limiting statute or regulation a “Limiting Rule”):
(a)
State Auto will use its best efforts to obtain the consent of the appropriate governmental agency to the payment by State Auto to Executive of the maximum amount that is permitted (up to the amounts that would be due to Executive absent the Limiting Rule); and
(b)
Executive will be entitled to elect to have apply, and therefore to receive benefits directly under, either (i) this Agreement (as limited by the Limiting Rule) or (ii) any generally applicable State Auto severance, separation pay and/or salary continuation plan that may be in effect at the time of Executive’s termination.
Following any such election, Executive will be entitled to receive benefits under this Agreement or plan elected only if and to the extent the Agreement or plan is applicable and subject to its specific terms.
Article X    Arbitration.
10.1    Arbitration. The method for resolving any dispute arising out of this Agreement shall be binding arbitration in accordance with this Section 10.1. Except as provided otherwise in this Section 10.1, arbitration pursuant to this Section 10.1 shall be governed by the Employment Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a description of the issue to be arbitrated. Within fifteen (15) calendar days after either party demands arbitration, State Auto and Executive shall each appoint an arbitrator. The fees and expenses of these arbitrators shall be paid by the party that selected such arbitrator. Within fifteen (15) additional calendar days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within this fifteen (15) calendar day period, then the third arbitrator shall be selected promptly pursuant to the rules of the American Arbitration Association for Employment Arbitration. The arbitration panel shall hold a hearing in Columbus, Ohio, within ninety (90) calendar days after the appointment of the third arbitrator. The fees and expenses of the third arbitrator, and any American Arbitration Association fees, shall be paid equally by the parties. Both State Auto and Executive may be represented by counsel (legal and accounting) and may present testimony and other evidence at the hearing. Each party shall be responsible for the legal fees and other expenses incurred by each party. Within ninety (90) calendar days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall be binding on the parties. Executive shall be entitled to seek specific performance of Executive’s rights under this Agreement during the period of time that any dispute or controversy arising under or in connection with this Agreement is pending.
Article XI    General Provisions.
11.1    Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the impact of a Change of Control on Executive, and completely supersedes any prior verbal or written agreements or arrangements between the parties hereto, if any, related to a Change of Control. The parties hereto agree that this Agreement cannot be hereafter amended, modified or supplemented in any respect, except by a subsequent written agreement signed by both parties hereto. The parties also agree that this Agreement shall be amended and/or modified as necessary to comply with Code Section 409A or regulations issued thereunder as well as requirements or regulations issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as applicable.
11.2    Applicable Law. This Agreement shall be governed in all respects by the laws of the State of Ohio, without giving effect to any of its conflict of law provisions.
11.3    Notices. All notices under this Agreement shall be in writing and will be duly given if sent by United States registered or certified mail, return receipt requested, to the respective parties to the addresses set forth below or such other addresses as the parties may hereafter designate in writing for such purpose:
(a)
If to either State Auto Financial, State Auto P&C or State Auto Mutual, to 518 East Broad Street, Columbus, Ohio 43215, Attention: Corporate Secretary; and
(b)    If to Executive, to the address set forth in the attached Exhibit A.
If the parties by mutual agreement supply each other with email addresses for the purposes of providing notice by email, such notice shall also be proper notice under this Agreement. Notice sent by certified or registered mail shall be effective two (2) days after deposit by delivery to the U.S. Post Office.





11.4    Assignment. Except as expressly provided herein, neither this Agreement nor any rights, benefits or obligations hereunder may be assigned by Executive without the prior written consent of State Auto Mutual and State Auto Financial.
11.5    Capacity.
(a)
State Auto Financial, State Auto P&C and State Auto Mutual represent and warrant to Executive that they have the capacity and right to enter into this Agreement and perform all of their obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
(b)
Executive represents and warrants to State Auto Financial, State Auto P&C and State Auto Mutual that he has the capacity and right to enter into this Agreement and perform all of Executive’s services and other obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
11.6    Waiver. The failure by a party to exercise or enforce any of the terms or conditions of this Agreement will not constitute or be deemed a waiver of that party's rights hereunder to enforce each and every term of this Agreement. The failure by a party to insist upon strict performance of any of the terms and provisions herein will not be deemed a waiver of any subsequent default in the terms or provisions herein.
11.7    Rights and Remedies Cumulative. All rights and remedies of the parties hereunder are cumulative.
11.8    Divisibility. The provisions of this Agreement are divisible. If any such provision shall be deemed invalid or unenforceable, it shall not affect the applicability or validity of any other provision of this Agreement, and if any such provision shall be deemed invalid or unenforceable as to any periods of time, territory or business activities, such provision shall be deemed limited to the extent necessary to render it valid and enforceable.
11.9    Captions and Titles. Captions and titles have been used in this Agreement only for convenience and in no way define, limit or describe the meaning of any Article or any part thereof.
11.10    Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
11.11    Code Section 409A Compliance. It is the intention of both Executive and State Auto that the benefits and rights to which Executive could be entitled to under this Agreement be exempt from or, to the extent that the requirements of Code Section 409A apply, comply with Code Section 409A and the Treasury Regulations thereunder, and the provisions of this Agreement shall be construed in a manner consistent with that intention. If Executive or State Auto believes, at any time, that any such benefit or right that is subject to Code Section 409A does not so comply, it shall promptly advise the other and shall negotiate reasonably and in good faith to amend the terms of such benefits and rights so that they comply with Code Section 409A (with the most limited possible economic effect on Executive and State Auto).
STATE AUTO FINANCIAL CORPORATION
 
 
By: /s/ Michael E. LaRocco
 
By: /s/ Gregory A. Tacchetti
Michael E. LaRocco
Chairman, President and CEO
 
Gregory A. Tacchetti

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
 
 
By: /s/ Michael E. LaRocco
 
 
Michael E. LaRocco
President and CEO
 
 
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
 
 
By: /s/ Michael E. LaRocco
 
 
Michael E. LaRocco
Chairman, President and CEO
 
 






Exhibit A
Beneficiary Designation and Notice Form
Beneficiary Designation
In the event of my death, I direct that any amounts due me under this Agreement to which this Beneficiary Designation is attached shall be distributed to the person designated below. If no beneficiary shall be living to receive such assets they shall be paid to the administrator or executor of my estate.
Notice
Until notified otherwise, pursuant to Section 11.3 of this Agreement, notices should be sent to me at the following address:
7040 Bordeaux Ct
Dublin, OH 43016
 
Date: 10/12/2017


 
/s/ Gregory A. Tacchetti
 
Signature of Executive
 
 
 
Gregory A. Tacchetti
 
Print Name of Executive
 
 
 
Patricia Tacchetti
 
Beneficiary Name
 
 
 
Spouse
 
Relationship to Executive









EXHIBIT 10.45
EXECUTIVE CHANGE OF CONTROL AGREEMENT
This Executive Change of Control Agreement (this “Agreement”) is made as of November 28, 2017 to be effective as of January 1, 2018 (the “Effective Date”), by and among State Auto Financial Corporation, an Ohio corporation (“State Auto Financial”), State Auto Property and Casualty Insurance Company, an Iowa-domiciled insurance company (“State Auto P&C”), State Automobile Mutual Insurance Company, an Ohio-domiciled mutual insurance company (“State Auto Mutual”), and Michael E. LaRocco (“Executive”). State Auto Financial, State Auto P&C, State Auto Mutual and each of their respective insurer subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “State Auto.”
Background Information
A.
State Auto P&C is the principal operating subsidiary of State Auto Financial and the employer of record of all employees of State Auto. State Auto Financial is a majority- owned, publicly-traded holding company subsidiary of State Auto Mutual. State Auto Mutual is the ultimate controlling entity in the State Auto holding company system.
B.
State Auto desires to establish and maintain a sound and vital management team as an important part of State Auto’s overall corporate strategy and as an essential means of protecting and enhancing the interests of State Auto, the Boards of State Auto Financial and State Auto Mutual (collectively, the “Boards”), and their shareholders and policyholders, respectively. As part of this corporate strategy, State Auto desires to act in the best interests of State Auto to address Executive’s continued service to State Auto and available benefits in the event of an actual or threatened Change of Control (as defined herein) of State Auto Financial or State Auto Mutual.
Statement of Agreement
The parties hereby acknowledge the accuracy of the foregoing Background Information and hereby agree as follows:
Article I         Definitions.
As used in this Agreement, the following defined terms shall have the meanings set forth below:
1.1
Annual Base Salary means the greater of (a) the highest annual rate of base salary in effect for Executive during the 12-month period immediately prior to a Change of Control, or (b) the annual rate of base salary in effect on the date Executive’s employment is terminated.
1.2
Average Annual Award means the average of the annual aggregate bonus under the Short Term Incentive Plans (or its successors) earned by Executive in each of the three (3) calendar years immediately preceding the calendar year in which the Change of Control occurs.
1.3
Cause means any of the following:
(a)
the willful and continued failure of Executive to perform Executive’s duties with State Auto (other than any such failure resulting from incapacity due to a Disability), after a written demand for performance is delivered to Executive by the Boards, or their designee, which specifically identifies the manner in which the Boards believe, in their sole discretion, that Executive has not performed Executive’s duties; or
(b)
the willful engaging by Executive in illegal conduct or gross misconduct which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(c)
the breach of any provision of Article IV hereof which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(d)
the willful failure to comply with any State Auto code of conduct or code of ethics applicable to Executive, as determined by the Boards in their sole discretion; or
(e)
the willful failure and refusal to cooperate with or assist State Auto in responding to governmental or regulatory inquiries, investigations or related activities, as determined by the Boards in their sole discretion.





For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of State Auto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Boards or upon the advice of counsel for State Auto, shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of State Auto.
1.4
Change of Control means the occurrence of any of the following:
(a)
any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), Directly or Indirectly, of securities of State Auto Financial representing thirty percent (30%) or more of the combined voting power of State Auto Financial’s then outstanding securities, excluding (i) any acquisition by State Auto Financial or any Subsidiary; (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by State Auto Financial, a Subsidiary or State Auto Mutual; or (iii) any acquisition by State Auto Mutual; or
(b)
a majority of the Board of Directors of State Auto Financial at any time is comprised of other than Continuing Directors; or
(c)
any event or transaction State Auto Financial would be required to report in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; or
(d)
any of the following occurs:
(i)
a merger or consolidation of State Auto Financial, other than a merger or consolidation in which the voting securities of State Auto Financial immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) more than fifty percent (50%) of the combined voting power of State Auto Financial or surviving entity immediately after the merger or consolidation with another entity;
(ii)
a sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of State Auto Financial which shall include, without limitation, the sale of assets or earning power aggregating more than fifty percent (50%) of the assets or earning power of State Auto Financial on a consolidated basis;
(iii)
a reorganization, reverse stock split, or recapitalization of State Auto Financial which would result in any of the foregoing; or
(iv)
a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.
(e)
With respect to State Auto Mutual, any of the following occurs:
(i)
State Auto Mutual affiliates with or is merged into or consolidated with a third party and as a result, a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors; or
(ii)
State Auto Mutual completes a conversion to a stock insurance company and as a result of which a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors.
Notwithstanding the foregoing, for purposes of this Change of Control definition, the percentage of securities ownership listed under subsection (a) above (i.e., 30%) shall increase or decrease, as the case may be, such that the percentage of securities ownership is consistent with any future changes to the percentage of securities ownership represented in the Change of Control definition in the State Auto Financial Corporation 2017 Long Term Incentive Plan, as amended from time to time.
1.5
Code means the Internal Revenue Code of 1986, as amended.





1.6
Confidential Information means information disclosed to Executive or known by State Auto, which is not generally known in the business in which State Auto is or may become engaged, including, but not limited to, information about State Auto's services, trade secrets, financial information, customer lists, books, records, memoranda and other proprietary information of State Auto. For purposes of this Agreement, “Confidential Information” shall also mean any information that could be considered a trade secret, as defined by applicable law.
1.7
Continuing Director of State Auto Financial or State Auto Mutual, as the case may be, means a director who was either:
(a)
first elected or appointed as a director on or prior to the Effective Date; or
(b)
subsequent to the Effective Date was elected or appointed as a director if such director was nominated by the Nominating and Governance Committee of State Auto Financial or the Nominating and Governance Committee of State Auto Mutual, as the case may be, or appointed by at least two-thirds of the total number of the then Continuing Directors of State Auto Financial or State Auto Mutual, as the case may be.
1.8
Directly or Indirectly means on Executive’s own behalf, or as an officer, director, shareholder, member, partner, owner, agent, consultant, advisor, coach or employee of any corporation, partnership, limited liability company or other entity.
1.9
Disability means illness or other incapacity as determined under State Auto’s group long-term disability benefit plan.
1.10
Employee Benefits means the benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital, or other insurance (whether funded by actual insurance or self-insured by State Auto), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist (and as may be modified from time to time) or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter (and as may be modified from time to time), providing benefits at least as great in a monetary equivalent as are payable thereunder prior to a Change of Control.
1.11
Good Reason means the occurrence of any one or more of the following:
(a)
The assignment to Executive of duties which are materially and adversely different from or inconsistent with the duties, responsibilities and status of Executive’s position at any time during the 12-month period prior to a Change of Control, or which result in a significant reduction in Executive’s authority and responsibility as a senior executive officer of State Auto;
(b)
A reduction by State Auto in Executive’s Annual Base Salary in place as of the day immediately prior to a Change of Control, or after a Change of Control the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of State Auto, or a reduction of Executive’s most recent Average Annual Award prior to a Change of Control;
(c)
After a Change of Control, a demand by State Auto that Executive relocate to a location in excess of 35 miles from the location where Executive is based as of the day immediately prior to a Change of Control, or in the event of any such relocation with Executive’s express written consent, the failure of State Auto or a Subsidiary to pay (or reimburse Executive for) all reasonable moving expenses incurred by Executive relating to a change of principal residence in connection with such relocation and to indemnify Executive against any loss in the sale of Executive’s principal residence in connection with any such change of residence and any expenses incurred by Executive that are directly attributable to such sale (for purposes of this provision, “loss” is understood to mean a sale of such principal residence at a price less than the adjusted basis in such residence);
(d)
The failure of State Auto to obtain a satisfactory agreement from any successor to State Auto to assume and agree to perform this Agreement, as contemplated in Section 5.1 of this Agreement;
(e)
The failure of State Auto to provide Executive with substantially the same Employee Benefits that were provided to him immediately prior to the Change of Control, or with a package of Employee Benefits that, though one or more of such benefits may vary from those in effect immediately prior to a Change of Control, is substantially comparable in all material respects to such Employee Benefits taken as a whole; or





(f)
Any material reduction in Executive’s compensation or benefits or a material adverse change in Executive’s location or duties, if such material reduction or material adverse change occurs at any time after the commencement of any discussion with a third party relating to a possible Change of Control of State Auto involving such third party, if such material reduction or material adverse change is in contemplation of such possible Change of Control and such Change of Control is actually consummated within twelve (12) months after the date of such material reduction or material adverse change.
The existence of Good Reason shall not be affected by Executive’s subsequent incapacity due to physical or mental illness. Executive’s continued employment shall not constitute a waiver of Executive’s rights with respect to any circumstance constituting Good Reason under this Agreement. Executive shall provide State Auto with written notice of the Executive’s intent to terminate with Good Reason within a period not to exceed ninety (90) calendar days of the initial existence of the condition constituting Good Reason. State Auto shall have a period of thirty (30) calendar days in which it may remedy the condition and prevent Executive’s termination for Good Reason.
1.12    OTIP means the State Auto Financial Corporation One Team Incentive Plan.
1.13
Severance Benefits means the benefits described in Section 2.1 of this Agreement, as adjusted by the applicable provisions of Section 9.1 of this Agreement.
1.14
Short Term Incentive Plans means OTIP and any other short term incentive compensation plan of State Auto.
1.15
Subsidiary means any corporation, insurance company or other entity with a majority of the voting control of which is directly or indirectly owned or controlled at the time by State Auto Financial.
1.16
Term means the time period commencing on the Effective Date of this Agreement and ending on November 30, 2020, both dates inclusive, however, that if a Change of Control occurs during the Term of this Agreement, the Term of this Agreement will be extended for thirty-six (36) months beyond the end of the month in which any such Change of Control occurs. Notwithstanding the foregoing, this Agreement shall terminate upon Executive’s termination of employment with State Auto for any other reason; provided, however, that Sections 2.3 and 2.4, Articles IV, VI through X, and Sections 11.3, 11.6 and 11.8 of the Agreement shall survive Executive’s termination of employment.
Article II    Change of Control.
2.1    Severance Benefits. In the event that State Auto shall undergo a Change of Control, and if Executive then becomes entitled to receive Severance Benefits, State Auto or its respective successor, shall pay or provide to Executive the following Severance Benefits, adjusted by the applicable provisions of Section 9.1:
(a)
Annual Base Salary. In addition to any accrued compensation payable as of Executive’s termination of employment, a lump sum cash amount equal to Executive’s Annual Base Salary multiplied by two.
(b)
Annual Incentive Compensation. In addition to any compensation otherwise payable pursuant to Executive’s bonus arrangements, a lump sum cash amount equal to Executive’s Average Annual Award multiplied by two. In addition, Executive shall be entitled to receive a prorated annual incentive payment for the year in which the Change of Control occurred, if otherwise eligible for such annual incentive. Such prorated annual incentive amount, if any, will be determined based on the target award levels established for the year in which the Change of Control occurred.
(c)
Stock Options and Other Equity Awards. Stock options and any other types of equity awards (e.g., restricted shares, performance shares, performance units, etc.) held by Executive become exercisable upon a Change of Control according to the terms of the applicable stock option or equity plan and related agreement (if any) under which such stock options or other equity awards were granted.
(d)
Outplacement. State Auto shall pay all fees for outplacement services incurred by Executive up to a maximum equal to fifteen percent (15%) of Executive’s Annual Base Salary, plus provide a travel expense account of up to $5,000 to reimburse job search travel. Such expenses and reimbursements shall be limited to those expenses incurred within the two (2) calendar years following the calendar year of Executive’s separation from service. Such expenses shall be paid no later than December 31st of the calendar year following the applicable calendar year in which such reimbursable expense was incurred.





(e)
Health Insurance Reimbursement. State Auto shall pay Executive an amount equal to State Auto’s then current monthly per employee cost of providing State Auto’s health insurance benefit multiplied by 24.
In computing and determining Severance Benefits under subsections (a) and (b), above, a decrease in Executive’s salary or incentive bonus potential shall be disregarded if such decrease occurs within six (6) months before a Change of Control, is in contemplation of such Change of Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change of Control. In such event, the salary and incentive bonus potential used to determine Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this Section 2.1.
The Severance Benefits provided in subsections (a), (b) and (e) above shall be paid on the 60th business day following the date Executive’s employment terminates, provided that Executive has executed a general release and waiver of any claims against State Auto or its successors and the period of time during which Executive may revoke the general release and waiver has expired on or before the 60th day following Executive’s separation from service. Notwithstanding the foregoing, if Executive is a “specified employee” as defined in Code Section 409A, such payment shall be subject to and paid according to the provisions of Section 2.4, as described below.
Executive acknowledges and agrees that the Severance Benefits provided in this Section 2.1 shall be the sole severance benefits payable to Executive in the event of any “change of control” (under any definition) of State Auto, and Executive hereby waives and relinquishes any and all rights or severance benefits under any other “change of control” provision applicable to Executive with respect to the Executive’s employment by State Auto.
2.2    Eligibility for Severance Benefits. State Auto, or its respective successor, shall pay or provide to Executive the Severance Benefits as defined above, in the event that Executive becomes eligible for such Severance Benefits because, during the Term of this Agreement:
(a)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause, the death or Disability of Executive within twenty-four (24) months after a Change of Control; or
(b)
Executive terminates employment for Good Reason within twenty-four (24) months after a Change of Control; or
(c)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause or the death or Disability of Executive after an agreement has been reached with an unaffiliated third party, the performance of which agreement would result in a Change of Control involving such third party, if such Change of Control is actually consummated within twelve (12) months after the date of such termination.
Executive’s termination of employment for all purposes under this Agreement shall be determined to have occurred in accordance with the “separation from service” requirements of Code Section 409A and applicable Treasury Regulations and guidance issued thereunder.
2.3    Liquidated Damages; Mitigation. State Auto hereby acknowledges that it will be difficult and may be impossible for Executive to find reasonably comparable employment, or to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the Severance Benefits by State Auto to Executive in accordance with the terms of this Agreement is hereby acknowledged by State Auto to be reasonable and will be liquidated damages, and Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Executive hereunder or otherwise. State Auto shall not be entitled to set off or counterclaim against amounts payable hereunder with respect to any claim, debt or obligation of Executive.
2.4    Specified Employee Delay. In the event Executive is a “specified employee” as defined in Code Section 409A, any payments under this Agreement due to a separation from service and subject to Code Section 409A shall be delayed until a date that is six (6) months after the date of separation from service (or, if earlier, the date of death of Executive). Payments to which a “specified employee” would otherwise be entitled during the first six (6) months following the date of separation shall be accumulated and paid as of the first date of the seventh month following the date of separation from service. Interest shall be paid on any such delayed payment at the applicable federal rate under Code Section 7872(f)(2)(A).
Article III     Executive's Rights Under Certain Plans.





Any references to specific employee benefits arrangements in this Agreement are not intended to exclude Executive from participation in other benefits available to executive personnel generally or to preclude Executive’s right to other compensation or benefits as may be authorized by the Boards at any time; provided that such other compensation or benefits are not severance benefits payable upon a Change in Control. The provisions of this Agreement and any payments provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish Executive’s existing rights, or rights which would accrue solely as the result of the passage of time under any compensation plan, benefit plan, incentive plan, stock option plan, employment agreement or other contract, plan or arrangement except as may be specified in such contract, plan or arrangement. Notwithstanding anything contained herein, State Auto agrees that the severance benefits provided to Executive herein are in addition to any rights and privileges to which Executive may be entitled as an employee of State Auto under any retirement, pension, insurance, hospitalization or other plan which may now or hereafter be in effect, it being understood that, except to the extent currently provided in such plans, Executive shall have the same rights and privileges to participate in such plans or benefits as any other employee of State Auto.
Article IV    Confidential Information; Forfeiture Events.
4.1    Confidential Information. Executive agrees to receive Confidential Information of State Auto in confidence, and not to disclose to others, assist others in the application of, or use for Executive’s own personal gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of such other or others by legal and equitable means and other than as a result of disclosure by Executive. Executive further agrees that, upon termination of Executive’s employment with State Auto, all documents, records, notebooks and similar repositories (including electronic formats) containing Confidential Information, including copies thereof, then in Executive's possession, whether prepared by Executive or others, will be left with and/or returned to State Auto. Executive further agrees that the obligation to maintain confidentiality created by this Article IV shall continue in effect for the duration of this Agreement and following the termination of Executive’s employment with State Auto for any reason.
4.2    Forfeiture Events; Clawback Rights.
(a)
The Board may, in its sole discretion, require Executive to repay to State Auto all or any portion of the amounts paid as Severance Benefits if:
(i)
Executive violates any non-competition, non-solicitation or confidentiality covenant applicable to the Executive and for the benefit of State Auto, including such covenants included in this Agreement;
(ii)
It is later discovered that Executive engaged in conduct detrimental to State Auto during the Executive’s employment with State Auto which has a material adverse effect on State Auto as determined by the Board of Directors of State Auto Mutual, in its sole discretion, acting in good faith; or
(iii)
(A)    The amount of any of the Severance Benefits was calculated based upon the achievement of certain financial results of State Auto that were subsequently the subject of a financial statement restatement by State Auto;
(B)    Executive engaged in conduct detrimental to State Auto that caused or substantially contributed to the need for the financial statement restatement by State Auto; and
(C)    The amount of Executive’s Severance Benefits would have been lower than the amount actually awarded to Executive had the financial results been properly reported.
Notwithstanding the foregoing, if the Boards determine in their sole discretion that Executive engaged in fraudulent conduct, then the Boards will seek repayment of the Severance Benefits. This provision shall not be the exclusive remedy of State Auto with respect to such matters.
(b)
The terms of any compensation recovery or recoupment policy heretofore or hereafter adopted by the Boards, including any and all amendments thereto (a “clawback policy”), are hereby incorporated into this Agreement by reference. In addition to the terms and conditions set forth in this Agreement, Executive agrees that any amounts payable or paid to Executive under this Agreement shall be subject to the terms of any clawback policy of the Boards.
Article V    Successors; Binding Agreement.





5.1    As to State Auto. This Agreement shall inure to the benefit of and be binding upon State Auto, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire voting control of State Auto Financial or all or substantially all of its assets and business, or which may be a party to any consolidation, merger or other transaction that results in a Change of Control of State Auto Financial or State Auto Mutual. State Auto will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of State Auto (or of any division or Subsidiary thereof employing Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that State Auto would be required to perform it if no such succession had taken place. Failure of State Auto to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from State Auto in the same amount and on the same terms to which Executive would be entitled hereunder if Executive terminated employment for Good Reason following a Change of Control.
5.2    As to Executive. This Agreement shall also inure to the benefit of and be binding on Executive, Executive’s heirs, successors and legal representatives. This Agreement shall be enforceable by Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Executive’s rights and benefits under this Agreement may not be assigned, except that if Executive dies while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid to the beneficiary indicated on the Beneficiary Designation attached as Exhibit A or, if there is no such beneficiary, to Executive’s estate. Such payments, if any, shall be made in the same form and at the same time, as such payment would have been made to Executive.

Article VI    COBRA Continuation Coverage.
Notwithstanding any provision of this Agreement to the contrary, in the event of any “qualifying event,” as defined in Code Section 4980B(f), Executive and Executive’s qualifying beneficiaries shall be entitled to continuation of health care coverage, as provided under Code Section 4980B(f). The foregoing is intended as a statement of Executive's continuation coverage rights and is in no way intended to limit any greater rights of Executive or Executive’s qualified beneficiaries.
Article VII    Indemnification; Enforcement Costs; Interest.
7.1    Indemnification. State Auto, as provided for in its Amended and Restated Articles of Incorporation and its Amended and Restated Bylaws, shall indemnify Executive to the full extent of the general laws of the State of Ohio, now or hereafter in force, including the advance of expenses under procedures provided by such laws. From the date of a Change of Control, State Auto shall (a) for a period of five (5) years after such Change of Control, provide Executive (including Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at State Auto's expense, and (b) indemnify and hold harmless Executive, to the fullest extent permitted or authorized by the law of the State of Ohio as it may from time to time be amended, if Executive is (whether before or after the Change of Control) made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Executive is or was a director, officer or employee of State Auto or any Subsidiary, or is or was serving at the request of State Auto or any Subsidiary, as a director, trustee, officer or employee of an insurance company, corporation, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 7.1 shall not be deemed exclusive of any other rights to which Executive may be entitled under the charter or bylaws of State Auto or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in Executive’s official capacity and as to action in another capacity while holding such office, and shall continue as to Executive after Executive has ceased to be a director, trustee, officer or employee and shall inure to the benefit of the heirs, executors and administrators of Executive.
7.2    Enforcement Cost. State Auto is aware that, upon the occurrence of a Change of Control, the Board or a shareholder or policyholder of State Auto, as the case may be, may then cause or attempt to cause State Auto to refuse to comply with their obligations under this Agreement, or may cause or attempt to cause State Auto to institute, or may institute, litigation, arbitration or other legal action seeking to have this Agreement declared unenforceable, or may take, or attempt to take, other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of State Auto that Executive not be required to incur the expenses associated with the enforcement of Executive’s rights under this Agreement by litigation, arbitration or other legal action nor be bound to negotiate any settlement of Executive’s rights hereunder under threat of incurring such expenses because the cost and expense thereof would substantially detract from the benefits intended to be extended to Executive under this Agreement. Accordingly, if following a Change of Control it should appear to Executive that State Auto has failed to comply with any of their obligations under this Agreement, or in the event that State Auto or any other person takes any action to declare this Agreement void or unenforceable, or institute any litigation or other legal action designed to deny, diminish or to recover from Executive, the benefits intended to be provided to Executive hereunder, State Auto irrevocably authorizes Executive from time to time to retain counsel (legal and accounting) of Executive’s choice at





the expense of State Auto as provided in this Section 7.2 to represent Executive in connection with the calculation of the Code Section 280G reduction, or the initiation or defense of any litigation or other legal action, whether by or against State Auto or any director, officer, stockholder or other person affiliated with State Auto. Notwithstanding any existing or prior attorney-client relationship between State Auto and such counsel, State Auto irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection State Auto and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by Executive as provided in this Section 7.2 shall be paid or reimbursed to Executive by State Auto on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with their customary practices.
7.3    Interest. In any action involving this Agreement, Executive shall be entitled to prejudgment interest on any amounts found to be due him from the date such amounts would have been payable to Executive pursuant to this Agreement at an annual rate of interest equal to the prime commercial rate in effect at the corporation’s principal bank or their successor from time to time during the prejudgment period plus four percent.
Article VIII    Cooperation with Regard to Litigation.
Executive agrees to cooperate with State Auto for a period of two (2) years following Executive’s termination of employment by being reasonably available to testify on behalf of State Auto in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to assist State Auto in any such action, suit or proceeding by providing information and meeting and consulting with the Boards or their counsel or counsel to State Auto as reasonably requested by the Boards or such counsel. Executive shall be reimbursed by State Auto for any expenses (including, but not limited to, legal fees) reasonably incurred by Executive in connection with the Executive’s compliance with the foregoing covenant.
Article IX    Payment of Taxes and Timing.
9.1    Excess Severance Payment. If any Severance Benefit or other benefit paid or provided under Section 2.1, or the acceleration of stock option vesting, would be subject to excise tax pursuant to Code Section 4999 (or any similar federal or state excise tax), but would not be so subject if the total of such payments would be reduced by ten percent (10%) or less, then such payment shall be reduced by the minimum amount necessary so as not to cause State Auto to have paid an Excess Severance Payment as defined in Code Section 280G(b)(1) and so Executive will not be subject to Excise Tax pursuant to Code Section 4999. The calculation of the Code Section 280G reduction shall be approved by State Auto’s independent certified public accounting firm engaged by State Auto immediately prior to the Change of Control and the calculation shall be provided to Executive in writing. Executive shall then be given fifteen (15) days, or such longer period as Executive reasonably requests and to which State Auto agrees, such agreement not to be unreasonably withheld, to accept or reject the calculation of the Code Section 280G reduction. If Executive rejects the Code Section 280G reduction calculation and the parties are thereafter unable to agree within an additional forty-five (45) days, the arbitration provisions of Section 10.1 shall control. State Auto shall reimburse Executive for all reasonable legal and accounting fees incurred with respect to the calculation of the Code Section 280G reduction and any disputes related thereto. Any payments owed to Executive under this Section 9.1, which are subject to the rules under Code Section 409A and related regulations, shall be made to Executive no later than the end of the calendar year following the calendar year in which the taxes are remitted to the taxing authority. In the event that the amount of any Severance Benefit that would be payable to or for the benefit of Executive under this Agreement must be modified or reduced to comply with this provision, it shall be modified or reduced on a pro-rata basis. In no event shall the total payments be reduced by more than ten percent (10%) in order to avoid treatment as an Excess Severance Payment.
9.2    Withholding of Taxes. State Auto may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as required by law; provided, however, that such payment may not exceed the amount of such taxes due as a result of the payments due under this Agreement.
In accordance with Code Section 409A and the regulations issued thereunder, this Agreement shall permit the payment of amounts necessary to (a) satisfy the employment tax withholding obligations that arise under this Agreement prior to the date that payment may otherwise be made under this Agreement and/or (b) satisfy the excise tax or underpayment penalties owed under Code Section 409A in the event of a violation of Code Section 409A under this Agreement.
9.3    Delayed Payments. In the event of a genuine dispute between State Auto or any Subsidiary and Executive regarding the amount or timing of benefits under this Agreement, a delay in the payment of amounts under this Agreement shall not cause Executive to violate Code Section 409A to the extent that such delay satisfies the conditions set forth in Code Section 409A and applicable regulations thereunder.





9.4    Savings Clause. If any payments otherwise payable to Executive under this Agreement are prohibited or limited by any statute or regulation in effect at the time the payments would otherwise be payable (any such limiting statute or regulation a “Limiting Rule”):
(a)
State Auto will use its best efforts to obtain the consent of the appropriate governmental agency to the payment by State Auto to Executive of the maximum amount that is permitted (up to the amounts that would be due to Executive absent the Limiting Rule); and
(b)
Executive will be entitled to elect to have apply, and therefore to receive benefits directly under, either (i) this Agreement (as limited by the Limiting Rule) or (ii) any generally applicable State Auto severance, separation pay and/or salary continuation plan that may be in effect at the time of Executive’s termination.
Following any such election, Executive will be entitled to receive benefits under this Agreement or plan elected only if and to the extent the Agreement or plan is applicable and subject to its specific terms.
Article X    Arbitration.
10.1    Arbitration. The method for resolving any dispute arising out of this Agreement shall be binding arbitration in accordance with this Section 10.1. Except as provided otherwise in this Section 10.1, arbitration pursuant to this Section 10.1 shall be governed by the Employment Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a description of the issue to be arbitrated. Within fifteen (15) calendar days after either party demands arbitration, State Auto and Executive shall each appoint an arbitrator. The fees and expenses of these arbitrators shall be paid by the party that selected such arbitrator. Within fifteen (15) additional calendar days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within this fifteen (15) calendar day period, then the third arbitrator shall be selected promptly pursuant to the rules of the American Arbitration Association for Employment Arbitration. The arbitration panel shall hold a hearing in Columbus, Ohio, within ninety (90) calendar days after the appointment of the third arbitrator. The fees and expenses of the third arbitrator, and any American Arbitration Association fees, shall be paid equally by the parties. Both State Auto and Executive may be represented by counsel (legal and accounting) and may present testimony and other evidence at the hearing. Each party shall be responsible for the legal fees and other expenses incurred by each party. Within ninety (90) calendar days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall be binding on the parties. Executive shall be entitled to seek specific performance of Executive’s rights under this Agreement during the period of time that any dispute or controversy arising under or in connection with this Agreement is pending.
Article XI    General Provisions.
11.1    Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the impact of a Change of Control on Executive, and completely supersedes any prior verbal or written agreements or arrangements between the parties hereto, if any, related to a Change of Control. The parties hereto agree that this Agreement cannot be hereafter amended, modified or supplemented in any respect, except by a subsequent written agreement signed by both parties hereto. The parties also agree that this Agreement shall be amended and/or modified as necessary to comply with Code Section 409A or regulations issued thereunder as well as requirements or regulations issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as applicable.
11.2    Applicable Law. This Agreement shall be governed in all respects by the laws of the State of Ohio, without giving effect to any of its conflict of law provisions.
11.3    Notices. All notices under this Agreement shall be in writing and will be duly given if sent by United States registered or certified mail, return receipt requested, to the respective parties to the addresses set forth below or such other addresses as the parties may hereafter designate in writing for such purpose:
(a)
If to either State Auto Financial, State Auto P&C or State Auto Mutual, to 518 East Broad Street, Columbus, Ohio 43215, Attention: Corporate Secretary; and
(b)    If to Executive, to the address set forth in the attached Exhibit A.
If the parties by mutual agreement supply each other with email addresses for the purposes of providing notice by email, such notice shall also be proper notice under this Agreement. Notice sent by certified or registered mail shall be effective two (2) days after deposit by delivery to the U.S. Post Office.





11.4    Assignment. Except as expressly provided herein, neither this Agreement nor any rights, benefits or obligations hereunder may be assigned by Executive without the prior written consent of State Auto Mutual and State Auto Financial.
11.5    Capacity.
(a)
State Auto Financial, State Auto P&C and State Auto Mutual represent and warrant to Executive that they have the capacity and right to enter into this Agreement and perform all of their obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
(b)
Executive represents and warrants to State Auto Financial, State Auto P&C and State Auto Mutual that he has the capacity and right to enter into this Agreement and perform all of Executive’s services and other obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
11.6    Waiver. The failure by a party to exercise or enforce any of the terms or conditions of this Agreement will not constitute or be deemed a waiver of that party's rights hereunder to enforce each and every term of this Agreement. The failure by a party to insist upon strict performance of any of the terms and provisions herein will not be deemed a waiver of any subsequent default in the terms or provisions herein.
11.7    Rights and Remedies Cumulative. All rights and remedies of the parties hereunder are cumulative.
11.8    Divisibility. The provisions of this Agreement are divisible. If any such provision shall be deemed invalid or unenforceable, it shall not affect the applicability or validity of any other provision of this Agreement, and if any such provision shall be deemed invalid or unenforceable as to any periods of time, territory or business activities, such provision shall be deemed limited to the extent necessary to render it valid and enforceable.
11.9    Captions and Titles. Captions and titles have been used in this Agreement only for convenience and in no way define, limit or describe the meaning of any Article or any part thereof.
11.10    Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
11.11    Code Section 409A Compliance. It is the intention of both Executive and State Auto that the benefits and rights to which Executive could be entitled to under this Agreement be exempt from or, to the extent that the requirements of Code Section 409A apply, comply with Code Section 409A and the Treasury Regulations thereunder, and the provisions of this Agreement shall be construed in a manner consistent with that intention. If Executive or State Auto believes, at any time, that any such benefit or right that is subject to Code Section 409A does not so comply, it shall promptly advise the other and shall negotiate reasonably and in good faith to amend the terms of such benefits and rights so that they comply with Code Section 409A (with the most limited possible economic effect on Executive and State Auto).

SIGNATURES APPEAR ON NEXT PAGE






IN WITNESS WHEREOF, the parties have signed this Agreement which is effective as of the Effective Date.
 
 
State Auto Financial Corporation
 
 
 
 
By
/s/ Robert E. Baker
 
 
Robert E. Baker, Chair of the State Auto Financial Corporation Compensation Committee
 
 
 
 
 
State Auto Property and Casualty Insurance Company
 
 
 
 
By
/s/ Robert E. Baker
 
 
Robert E. Baker, Chair of the State Auto Financial Corporation Compensation Committee
 
 
 
 
 
State Automobile Mutual Insurance Company
 
 
 
 
By
/s/ Robert E. Baker
 
 
Robert E. Baker, Chair of the State Auto Financial Corporation Compensation Committee
 
 
 
 
 
Executive
 
 
 
 
By
/s/ Michael E. LaRocco
 
 
Michael E. LaRocco








Exhibit A
Beneficiary Designation and Notice Form
Beneficiary Designation
In the event of my death, I direct that any amounts due me under this Agreement to which this Beneficiary Designation is attached shall be distributed to the person designated below. If no beneficiary shall be living to receive such assets they shall be paid to the administrator or executor of my estate.
Beneficiary:
Ann LaRocco
 
 
 
 
 
 
Relationship to Executive:
Wife
 
 
 
 
 
 
 
 
 
 
Date:
11/28/2017
 
EXECUTIVE
 
 
 
 
 
 
 
/s/ Michael E. LaRocco
 
 
 
Michael E. LaRocco







EXHIBIT 10.46
EXECUTIVE CHANGE OF CONTROL AGREEMENT
This Executive Change of Control Agreement (this “Agreement”) is made as of October 26, 2017 (the “Effective Date”), by and among State Auto Financial Corporation, an Ohio corporation (“State Auto Financial”), State Auto Property and Casualty Insurance Company, an Iowa-domiciled insurance company (“State Auto P&C”), State Automobile Mutual Insurance Company, an Ohio-domiciled mutual insurance company (“State Auto Mutual”), and Kim B. Garland (“Executive”). State Auto Financial, State Auto P&C, State Auto Mutual and each of their respective insurer subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “State Auto.”
Background Information
A.
State Auto P&C is the principal operating subsidiary of State Auto Financial and the employer of record of all employees of State Auto. State Auto Financial is a majority- owned, publicly-traded holding company subsidiary of State Auto Mutual. State Auto Mutual is the ultimate controlling entity in the State Auto holding company system.
B.
State Auto desires to establish and maintain a sound and vital management team as an important part of State Auto’s overall corporate strategy and as an essential means of protecting and enhancing the interests of State Auto, the Boards of State Auto Financial and State Auto Mutual (collectively, the “Boards”), and their shareholders and policyholders, respectively. As part of this corporate strategy, State Auto desires to act in the best interests of State Auto to address Executive’s continued service to State Auto and available benefits in the event of an actual or threatened Change of Control (as defined herein) of State Auto Financial or State Auto Mutual.
Statement of Agreement
The parties hereby acknowledge the accuracy of the foregoing Background Information and hereby agree as follows:
Article I         Definitions.
As used in this Agreement, the following defined terms shall have the meanings set forth below:
1.1
Annual Base Salary means the greater of (a) the highest annual rate of base salary in effect for Executive during the 12-month period immediately prior to a Change of Control, or (b) the annual rate of base salary in effect on the date Executive’s employment is terminated.
1.2
Average Annual Award means the average of the annual aggregate bonus under the Short Term Incentive Plans (or its successors) earned by Executive in each of the three (3) calendar years immediately preceding the calendar year in which the Change of Control occurs.
1.3
Cause means any of the following:
(a)
the willful and continued failure of Executive to perform Executive’s duties with State Auto (other than any such failure resulting from incapacity due to a Disability), after a written demand for performance is delivered to Executive by the Boards, or their designee, which specifically identifies the manner in which the Boards believe, in their sole discretion, that Executive has not performed Executive’s duties; or
(b)
the willful engaging by Executive in illegal conduct or gross misconduct which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(c)
the breach of any provision of Article IV hereof which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(d)
the willful failure to comply with any State Auto code of conduct or code of ethics applicable to Executive, as determined by the Boards in their sole discretion; or
(e)
the willful failure and refusal to cooperate with or assist State Auto in responding to governmental or regulatory inquiries, investigations or related activities, as determined by the Boards in their sole discretion.





For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of State Auto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Boards or upon the advice of counsel for State Auto, shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of State Auto.
1.4
Change of Control means the occurrence of any of the following:
(a)
any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), Directly or Indirectly, of securities of State Auto Financial representing thirty percent (30%) or more of the combined voting power of State Auto Financial’s then outstanding securities, excluding (i) any acquisition by State Auto Financial or any Subsidiary; (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by State Auto Financial, a Subsidiary or State Auto Mutual; or (iii) any acquisition by State Auto Mutual; or
(b)
a majority of the Board of Directors of State Auto Financial at any time is comprised of other than Continuing Directors; or
(c)
any event or transaction State Auto Financial would be required to report in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; or
(d)
any of the following occurs:
(i)
a merger or consolidation of State Auto Financial, other than a merger or consolidation in which the voting securities of State Auto Financial immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) more than fifty percent (50%) of the combined voting power of State Auto Financial or surviving entity immediately after the merger or consolidation with another entity;
(ii)
a sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of State Auto Financial which shall include, without limitation, the sale of assets or earning power aggregating more than fifty percent (50%) of the assets or earning power of State Auto Financial on a consolidated basis;
(iii)
a reorganization, reverse stock split, or recapitalization of State Auto Financial which would result in any of the foregoing; or
(iv)
a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.
(e)
With respect to State Auto Mutual, any of the following occurs:
(i)
State Auto Mutual affiliates with or is merged into or consolidated with a third party and as a result, a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors; or
(ii)
State Auto Mutual completes a conversion to a stock insurance company and as a result of which a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors.
Notwithstanding the foregoing, for purposes of this Change of Control definition, the percentage of securities ownership listed under subsection (a) above (i.e., 30%) shall increase or decrease, as the case may be, such that the percentage of securities ownership is consistent with any future changes to the percentage of securities ownership represented in the Change of Control definition in the State Auto Financial Corporation 2017 Long Term Incentive Plan, as amended from time to time.
1.5
Code means the Internal Revenue Code of 1986, as amended.





1.6
Confidential Information means information disclosed to Executive or known by State Auto, which is not generally known in the business in which State Auto is or may become engaged, including, but not limited to, information about State Auto's services, trade secrets, financial information, customer lists, books, records, memoranda and other proprietary information of State Auto. For purposes of this Agreement, “Confidential Information” shall also mean any information that could be considered a trade secret, as defined by applicable law.
1.7
Continuing Director of State Auto Financial or State Auto Mutual, as the case may be, means a director who was either:
(a)
first elected or appointed as a director on or prior to the Effective Date; or
(b)
subsequent to the Effective Date was elected or appointed as a director if such director was nominated by the Nominating and Governance Committee of State Auto Financial or the Nominating and Governance Committee of State Auto Mutual, as the case may be, or appointed by at least two-thirds of the total number of the then Continuing Directors of State Auto Financial or State Auto Mutual, as the case may be.
1.8
Directly or Indirectly means on Executive’s own behalf, or as an officer, director, shareholder, member, partner, owner, agent, consultant, advisor, coach or employee of any corporation, partnership, limited liability company or other entity.
1.9
Disability means illness or other incapacity as determined under State Auto’s group long-term disability benefit plan.
1.10
Employee Benefits means the benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital, or other insurance (whether funded by actual insurance or self-insured by State Auto), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist (and as may be modified from time to time) or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter (and as may be modified from time to time), providing benefits at least as great in a monetary equivalent as are payable thereunder prior to a Change of Control.
1.11
Good Reason means the occurrence of any one or more of the following:
(a)
The assignment to Executive of duties which are materially and adversely different from or inconsistent with the duties, responsibilities and status of Executive’s position at any time during the 12-month period prior to a Change of Control, or which result in a significant reduction in Executive’s authority and responsibility as a senior executive officer of State Auto;
(b)
A reduction by State Auto in Executive’s Annual Base Salary in place as of the day immediately prior to a Change of Control, or after a Change of Control the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of State Auto, or a reduction of Executive’s most recent Average Annual Award prior to a Change of Control;
(c)
After a Change of Control, a demand by State Auto that Executive relocate to a location in excess of 35 miles from the location where Executive is based as of the day immediately prior to a Change of Control, or in the event of any such relocation with Executive’s express written consent, the failure of State Auto or a Subsidiary to pay (or reimburse Executive for) all reasonable moving expenses incurred by Executive relating to a change of principal residence in connection with such relocation and to indemnify Executive against any loss in the sale of Executive’s principal residence in connection with any such change of residence and any expenses incurred by Executive that are directly attributable to such sale (for purposes of this provision, “loss” is understood to mean a sale of such principal residence at a price less than the adjusted basis in such residence);
(d)
The failure of State Auto to obtain a satisfactory agreement from any successor to State Auto to assume and agree to perform this Agreement, as contemplated in Section 5.1 of this Agreement;
(e)
The failure of State Auto to provide Executive with substantially the same Employee Benefits that were provided to him immediately prior to the Change of Control, or with a package of Employee Benefits that, though one or more of such benefits may vary from those in effect immediately prior to a Change of Control, is substantially comparable in all material respects to such Employee Benefits taken as a whole; or





(f)
Any material reduction in Executive’s compensation or benefits or a material adverse change in Executive’s location or duties, if such material reduction or material adverse change occurs at any time after the commencement of any discussion with a third party relating to a possible Change of Control of State Auto involving such third party, if such material reduction or material adverse change is in contemplation of such possible Change of Control and such Change of Control is actually consummated within twelve (12) months after the date of such material reduction or material adverse change.
The existence of Good Reason shall not be affected by Executive’s subsequent incapacity due to physical or mental illness. Executive’s continued employment shall not constitute a waiver of Executive’s rights with respect to any circumstance constituting Good Reason under this Agreement. Executive shall provide State Auto with written notice of the Executive’s intent to terminate with Good Reason within a period not to exceed ninety (90) calendar days of the initial existence of the condition constituting Good Reason. State Auto shall have a period of thirty (30) calendar days in which it may remedy the condition and prevent Executive’s termination for Good Reason.
1.12    OTIP means the State Auto Financial Corporation One Team Incentive Plan.
1.13
Severance Benefits means the benefits described in Section 2.1 of this Agreement, as adjusted by the applicable provisions of Section 9.1 of this Agreement.
1.14
Short Term Incentive Plans means OTIP and any other short term incentive compensation plan of State Auto.
1.15
Subsidiary means any corporation, insurance company or other entity with a majority of the voting control of which is directly or indirectly owned or controlled at the time by State Auto Financial.
1.16
Term means the time period commencing on the Effective Date of this Agreement and ending on November 30, 2020, both dates inclusive, however, that if a Change of Control occurs during the Term of this Agreement, the Term of this Agreement will be extended for thirty-six (36) months beyond the end of the month in which any such Change of Control occurs. Notwithstanding the foregoing, this Agreement shall terminate upon Executive’s termination of employment with State Auto for any other reason; provided, however, that Sections 2.3 and 2.4, Articles IV, VI through X, and Sections 11.3, 11.6 and 11.8 of the Agreement shall survive Executive’s termination of employment.
Article II    Change of Control.
2.1    Severance Benefits. In the event that State Auto shall undergo a Change of Control, and if Executive then becomes entitled to receive Severance Benefits, State Auto or its respective successor, shall pay or provide to Executive the following Severance Benefits, adjusted by the applicable provisions of Section 9.1:
(a)
Annual Base Salary. In addition to any accrued compensation payable as of Executive’s termination of employment, a lump sum cash amount equal to Executive’s Annual Base Salary multiplied by two.
(b)
Annual Incentive Compensation. In addition to any compensation otherwise payable pursuant to Executive’s bonus arrangements, a lump sum cash amount equal to Executive’s Average Annual Award multiplied by two. In addition, Executive shall be entitled to receive a prorated annual incentive payment for the year in which the Change of Control occurred, if otherwise eligible for such annual incentive. Such prorated annual incentive amount, if any, will be determined based on the target award levels established for the year in which the Change of Control occurred.
(c)
Stock Options and Other Equity Awards. Stock options and any other types of equity awards (e.g., restricted shares, performance shares, performance units, etc.) held by Executive become exercisable upon a Change of Control according to the terms of the applicable stock option or equity plan and related agreement (if any) under which such stock options or other equity awards were granted.
(d)
Outplacement. State Auto shall pay all fees for outplacement services incurred by Executive up to a maximum equal to fifteen percent (15%) of Executive’s Annual Base Salary, plus provide a travel expense account of up to $5,000 to reimburse job search travel. Such expenses and reimbursements shall be limited to those expenses incurred within the two (2) calendar years following the calendar year of Executive’s separation from service. Such expenses shall be paid no later than December 31st of the calendar year following the applicable calendar year in which such reimbursable expense was incurred.





(e)
Health Insurance Reimbursement. State Auto shall pay Executive an amount equal to State Auto’s then current monthly per employee cost of providing State Auto’s health insurance benefit multiplied by 24.
In computing and determining Severance Benefits under subsections (a) and (b), above, a decrease in Executive’s salary or incentive bonus potential shall be disregarded if such decrease occurs within six (6) months before a Change of Control, is in contemplation of such Change of Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change of Control. In such event, the salary and incentive bonus potential used to determine Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this Section 2.1.
The Severance Benefits provided in subsections (a), (b) and (e) above shall be paid on the 60th business day following the date Executive’s employment terminates, provided that Executive has executed a general release and waiver of any claims against State Auto or its successors and the period of time during which Executive may revoke the general release and waiver has expired on or before the 60th day following Executive’s separation from service. Notwithstanding the foregoing, if Executive is a “specified employee” as defined in Code Section 409A, such payment shall be subject to and paid according to the provisions of Section 2.4, as described below.
Executive acknowledges and agrees that the Severance Benefits provided in this Section 2.1 shall be the sole severance benefits payable to Executive in the event of any “change of control” (under any definition) of State Auto, and Executive hereby waives and relinquishes any and all rights or severance benefits under any other “change of control” provision applicable to Executive with respect to the Executive’s employment by State Auto.
2.2    Eligibility for Severance Benefits. State Auto, or its respective successor, shall pay or provide to Executive the Severance Benefits as defined above, in the event that Executive becomes eligible for such Severance Benefits because, during the Term of this Agreement:
(a)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause, the death or Disability of Executive within twenty-four (24) months after a Change of Control; or
(b)
Executive terminates employment for Good Reason within twenty-four (24) months after a Change of Control; or
(c)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause or the death or Disability of Executive after an agreement has been reached with an unaffiliated third party, the performance of which agreement would result in a Change of Control involving such third party, if such Change of Control is actually consummated within twelve (12) months after the date of such termination.
Executive’s termination of employment for all purposes under this Agreement shall be determined to have occurred in accordance with the “separation from service” requirements of Code Section 409A and applicable Treasury Regulations and guidance issued thereunder.
2.3    Liquidated Damages; Mitigation. State Auto hereby acknowledges that it will be difficult and may be impossible for Executive to find reasonably comparable employment, or to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the Severance Benefits by State Auto to Executive in accordance with the terms of this Agreement is hereby acknowledged by State Auto to be reasonable and will be liquidated damages, and Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Executive hereunder or otherwise. State Auto shall not be entitled to set off or counterclaim against amounts payable hereunder with respect to any claim, debt or obligation of Executive.
2.4    Specified Employee Delay. In the event Executive is a “specified employee” as defined in Code Section 409A, any payments under this Agreement due to a separation from service and subject to Code Section 409A shall be delayed until a date that is six (6) months after the date of separation from service (or, if earlier, the date of death of Executive). Payments to which a “specified employee” would otherwise be entitled during the first six (6) months following the date of separation shall be accumulated and paid as of the first date of the seventh month following the date of separation from service. Interest shall be paid on any such delayed payment at the applicable federal rate under Code Section 7872(f)(2)(A).
Article III     Executive's Rights Under Certain Plans.





Any references to specific employee benefits arrangements in this Agreement are not intended to exclude Executive from participation in other benefits available to executive personnel generally or to preclude Executive’s right to other compensation or benefits as may be authorized by the Boards at any time; provided that such other compensation or benefits are not severance benefits payable upon a Change in Control. The provisions of this Agreement and any payments provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish Executive’s existing rights, or rights which would accrue solely as the result of the passage of time under any compensation plan, benefit plan, incentive plan, stock option plan, employment agreement or other contract, plan or arrangement except as may be specified in such contract, plan or arrangement. Notwithstanding anything contained herein, State Auto agrees that the severance benefits provided to Executive herein are in addition to any rights and privileges to which Executive may be entitled as an employee of State Auto under any retirement, pension, insurance, hospitalization or other plan which may now or hereafter be in effect, it being understood that, except to the extent currently provided in such plans, Executive shall have the same rights and privileges to participate in such plans or benefits as any other employee of State Auto.
Article IV    Confidential Information; Forfeiture Events.
4.1    Confidential Information. Executive agrees to receive Confidential Information of State Auto in confidence, and not to disclose to others, assist others in the application of, or use for Executive’s own personal gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of such other or others by legal and equitable means and other than as a result of disclosure by Executive. Executive further agrees that, upon termination of Executive’s employment with State Auto, all documents, records, notebooks and similar repositories (including electronic formats) containing Confidential Information, including copies thereof, then in Executive's possession, whether prepared by Executive or others, will be left with and/or returned to State Auto. Executive further agrees that the obligation to maintain confidentiality created by this Article IV shall continue in effect for the duration of this Agreement and following the termination of Executive’s employment with State Auto for any reason.
4.2    Forfeiture Events; Clawback Rights.
(a)
The Board may, in its sole discretion, require Executive to repay to State Auto all or any portion of the amounts paid as Severance Benefits if:
(i)
Executive violates any non-competition, non-solicitation or confidentiality covenant applicable to the Executive and for the benefit of State Auto, including such covenants included in this Agreement;
(ii)
It is later discovered that Executive engaged in conduct detrimental to State Auto during the Executive’s employment with State Auto which has a material adverse effect on State Auto as determined by the Board of Directors of State Auto Mutual, in its sole discretion, acting in good faith; or
(iii)
(A)    The amount of any of the Severance Benefits was calculated based upon the achievement of certain financial results of State Auto that were subsequently the subject of a financial statement restatement by State Auto;
(B)    Executive engaged in conduct detrimental to State Auto that caused or substantially contributed to the need for the financial statement restatement by State Auto; and
(C)    The amount of Executive’s Severance Benefits would have been lower than the amount actually awarded to Executive had the financial results been properly reported.
Notwithstanding the foregoing, if the Boards determine in their sole discretion that Executive engaged in fraudulent conduct, then the Boards will seek repayment of the Severance Benefits. This provision shall not be the exclusive remedy of State Auto with respect to such matters.
(b)
The terms of any compensation recovery or recoupment policy heretofore or hereafter adopted by the Boards, including any and all amendments thereto (a “clawback policy”), are hereby incorporated into this Agreement by reference. In addition to the terms and conditions set forth in this Agreement, Executive agrees that any amounts payable or paid to Executive under this Agreement shall be subject to the terms of any clawback policy of the Boards.
Article V    Successors; Binding Agreement.





5.1    As to State Auto. This Agreement shall inure to the benefit of and be binding upon State Auto, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire voting control of State Auto Financial or all or substantially all of its assets and business, or which may be a party to any consolidation, merger or other transaction that results in a Change of Control of State Auto Financial or State Auto Mutual. State Auto will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of State Auto (or of any division or Subsidiary thereof employing Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that State Auto would be required to perform it if no such succession had taken place. Failure of State Auto to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from State Auto in the same amount and on the same terms to which Executive would be entitled hereunder if Executive terminated employment for Good Reason following a Change of Control.
5.2    As to Executive. This Agreement shall also inure to the benefit of and be binding on Executive, Executive’s heirs, successors and legal representatives. This Agreement shall be enforceable by Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Executive’s rights and benefits under this Agreement may not be assigned, except that if Executive dies while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid to the beneficiary indicated on the Beneficiary Designation attached as Exhibit A or, if there is no such beneficiary, to Executive’s estate. Such payments, if any, shall be made in the same form and at the same time, as such payment would have been made to Executive.

Article VI    COBRA Continuation Coverage.
Notwithstanding any provision of this Agreement to the contrary, in the event of any “qualifying event,” as defined in Code Section 4980B(f), Executive and Executive’s qualifying beneficiaries shall be entitled to continuation of health care coverage, as provided under Code Section 4980B(f). The foregoing is intended as a statement of Executive's continuation coverage rights and is in no way intended to limit any greater rights of Executive or Executive’s qualified beneficiaries.
Article VII    Indemnification; Enforcement Costs; Interest.
7.1    Indemnification. State Auto, as provided for in its Amended and Restated Articles of Incorporation and its Amended and Restated Bylaws, shall indemnify Executive to the full extent of the general laws of the State of Ohio, now or hereafter in force, including the advance of expenses under procedures provided by such laws. From the date of a Change of Control, State Auto shall (a) for a period of five (5) years after such Change of Control, provide Executive (including Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at State Auto's expense, and (b) indemnify and hold harmless Executive, to the fullest extent permitted or authorized by the law of the State of Ohio as it may from time to time be amended, if Executive is (whether before or after the Change of Control) made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Executive is or was a director, officer or employee of State Auto or any Subsidiary, or is or was serving at the request of State Auto or any Subsidiary, as a director, trustee, officer or employee of an insurance company, corporation, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 7.1 shall not be deemed exclusive of any other rights to which Executive may be entitled under the charter or bylaws of State Auto or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in Executive’s official capacity and as to action in another capacity while holding such office, and shall continue as to Executive after Executive has ceased to be a director, trustee, officer or employee and shall inure to the benefit of the heirs, executors and administrators of Executive.
7.2    Enforcement Cost. State Auto is aware that, upon the occurrence of a Change of Control, the Board or a shareholder or policyholder of State Auto, as the case may be, may then cause or attempt to cause State Auto to refuse to comply with their obligations under this Agreement, or may cause or attempt to cause State Auto to institute, or may institute, litigation, arbitration or other legal action seeking to have this Agreement declared unenforceable, or may take, or attempt to take, other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of State Auto that Executive not be required to incur the expenses associated with the enforcement of Executive’s rights under this Agreement by litigation, arbitration or other legal action nor be bound to negotiate any settlement of Executive’s rights hereunder under threat of incurring such expenses because the cost and expense thereof would substantially detract from the benefits intended to be extended to Executive under this Agreement. Accordingly, if following a Change of Control it should appear to Executive that State Auto has failed to comply with any of their obligations under this Agreement, or in the event that State Auto or any other person takes any action to declare this Agreement void or unenforceable, or institute any litigation or other legal action designed to deny, diminish or to recover from Executive, the benefits intended to be provided to Executive hereunder, State Auto irrevocably authorizes Executive from time to time to retain counsel (legal and accounting) of Executive’s choice at





the expense of State Auto as provided in this Section 7.2 to represent Executive in connection with the calculation of the Code Section 280G reduction, or the initiation or defense of any litigation or other legal action, whether by or against State Auto or any director, officer, stockholder or other person affiliated with State Auto. Notwithstanding any existing or prior attorney-client relationship between State Auto and such counsel, State Auto irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection State Auto and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by Executive as provided in this Section 7.2 shall be paid or reimbursed to Executive by State Auto on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with their customary practices.
7.3    Interest. In any action involving this Agreement, Executive shall be entitled to prejudgment interest on any amounts found to be due him from the date such amounts would have been payable to Executive pursuant to this Agreement at an annual rate of interest equal to the prime commercial rate in effect at the corporation’s principal bank or their successor from time to time during the prejudgment period plus four percent.
Article VIII    Cooperation with Regard to Litigation.
Executive agrees to cooperate with State Auto for a period of two (2) years following Executive’s termination of employment by being reasonably available to testify on behalf of State Auto in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to assist State Auto in any such action, suit or proceeding by providing information and meeting and consulting with the Boards or their counsel or counsel to State Auto as reasonably requested by the Boards or such counsel. Executive shall be reimbursed by State Auto for any expenses (including, but not limited to, legal fees) reasonably incurred by Executive in connection with the Executive’s compliance with the foregoing covenant.
Article IX    Payment of Taxes and Timing.
9.1    Excess Severance Payment. If any Severance Benefit or other benefit paid or provided under Section 2.1, or the acceleration of stock option vesting, would be subject to excise tax pursuant to Code Section 4999 (or any similar federal or state excise tax), but would not be so subject if the total of such payments would be reduced by ten percent (10%) or less, then such payment shall be reduced by the minimum amount necessary so as not to cause State Auto to have paid an Excess Severance Payment as defined in Code Section 280G(b)(1) and so Executive will not be subject to Excise Tax pursuant to Code Section 4999. The calculation of the Code Section 280G reduction shall be approved by State Auto’s independent certified public accounting firm engaged by State Auto immediately prior to the Change of Control and the calculation shall be provided to Executive in writing. Executive shall then be given fifteen (15) days, or such longer period as Executive reasonably requests and to which State Auto agrees, such agreement not to be unreasonably withheld, to accept or reject the calculation of the Code Section 280G reduction. If Executive rejects the Code Section 280G reduction calculation and the parties are thereafter unable to agree within an additional forty-five (45) days, the arbitration provisions of Section 10.1 shall control. State Auto shall reimburse Executive for all reasonable legal and accounting fees incurred with respect to the calculation of the Code Section 280G reduction and any disputes related thereto. Any payments owed to Executive under this Section 9.1, which are subject to the rules under Code Section 409A and related regulations, shall be made to Executive no later than the end of the calendar year following the calendar year in which the taxes are remitted to the taxing authority. In the event that the amount of any Severance Benefit that would be payable to or for the benefit of Executive under this Agreement must be modified or reduced to comply with this provision, it shall be modified or reduced on a pro-rata basis. In no event shall the total payments be reduced by more than ten percent (10%) in order to avoid treatment as an Excess Severance Payment.
9.2    Withholding of Taxes. State Auto may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as required by law; provided, however, that such payment may not exceed the amount of such taxes due as a result of the payments due under this Agreement.
In accordance with Code Section 409A and the regulations issued thereunder, this Agreement shall permit the payment of amounts necessary to (a) satisfy the employment tax withholding obligations that arise under this Agreement prior to the date that payment may otherwise be made under this Agreement and/or (b) satisfy the excise tax or underpayment penalties owed under Code Section 409A in the event of a violation of Code Section 409A under this Agreement.
9.3    Delayed Payments. In the event of a genuine dispute between State Auto or any Subsidiary and Executive regarding the amount or timing of benefits under this Agreement, a delay in the payment of amounts under this Agreement shall not cause Executive to violate Code Section 409A to the extent that such delay satisfies the conditions set forth in Code Section 409A and applicable regulations thereunder.





9.4    Savings Clause. If any payments otherwise payable to Executive under this Agreement are prohibited or limited by any statute or regulation in effect at the time the payments would otherwise be payable (any such limiting statute or regulation a “Limiting Rule”):
(a)
State Auto will use its best efforts to obtain the consent of the appropriate governmental agency to the payment by State Auto to Executive of the maximum amount that is permitted (up to the amounts that would be due to Executive absent the Limiting Rule); and
(b)
Executive will be entitled to elect to have apply, and therefore to receive benefits directly under, either (i) this Agreement (as limited by the Limiting Rule) or (ii) any generally applicable State Auto severance, separation pay and/or salary continuation plan that may be in effect at the time of Executive’s termination.
Following any such election, Executive will be entitled to receive benefits under this Agreement or plan elected only if and to the extent the Agreement or plan is applicable and subject to its specific terms.
Article X    Arbitration.
10.1    Arbitration. The method for resolving any dispute arising out of this Agreement shall be binding arbitration in accordance with this Section 10.1. Except as provided otherwise in this Section 10.1, arbitration pursuant to this Section 10.1 shall be governed by the Employment Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a description of the issue to be arbitrated. Within fifteen (15) calendar days after either party demands arbitration, State Auto and Executive shall each appoint an arbitrator. The fees and expenses of these arbitrators shall be paid by the party that selected such arbitrator. Within fifteen (15) additional calendar days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within this fifteen (15) calendar day period, then the third arbitrator shall be selected promptly pursuant to the rules of the American Arbitration Association for Employment Arbitration. The arbitration panel shall hold a hearing in Columbus, Ohio, within ninety (90) calendar days after the appointment of the third arbitrator. The fees and expenses of the third arbitrator, and any American Arbitration Association fees, shall be paid equally by the parties. Both State Auto and Executive may be represented by counsel (legal and accounting) and may present testimony and other evidence at the hearing. Each party shall be responsible for the legal fees and other expenses incurred by each party. Within ninety (90) calendar days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall be binding on the parties. Executive shall be entitled to seek specific performance of Executive’s rights under this Agreement during the period of time that any dispute or controversy arising under or in connection with this Agreement is pending.
Article XI    General Provisions.
11.1    Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the impact of a Change of Control on Executive, and completely supersedes any prior verbal or written agreements or arrangements between the parties hereto, if any, related to a Change of Control. The parties hereto agree that this Agreement cannot be hereafter amended, modified or supplemented in any respect, except by a subsequent written agreement signed by both parties hereto. The parties also agree that this Agreement shall be amended and/or modified as necessary to comply with Code Section 409A or regulations issued thereunder as well as requirements or regulations issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as applicable.
11.2    Applicable Law. This Agreement shall be governed in all respects by the laws of the State of Ohio, without giving effect to any of its conflict of law provisions.
11.3    Notices. All notices under this Agreement shall be in writing and will be duly given if sent by United States registered or certified mail, return receipt requested, to the respective parties to the addresses set forth below or such other addresses as the parties may hereafter designate in writing for such purpose:
(a)
If to either State Auto Financial, State Auto P&C or State Auto Mutual, to 518 East Broad Street, Columbus, Ohio 43215, Attention: Corporate Secretary; and
(b)    If to Executive, to the address set forth in the attached Exhibit A.
If the parties by mutual agreement supply each other with email addresses for the purposes of providing notice by email, such notice shall also be proper notice under this Agreement. Notice sent by certified or registered mail shall be effective two (2) days after deposit by delivery to the U.S. Post Office.





11.4    Assignment. Except as expressly provided herein, neither this Agreement nor any rights, benefits or obligations hereunder may be assigned by Executive without the prior written consent of State Auto Mutual and State Auto Financial.
11.5    Capacity.
(a)
State Auto Financial, State Auto P&C and State Auto Mutual represent and warrant to Executive that they have the capacity and right to enter into this Agreement and perform all of their obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
(b)
Executive represents and warrants to State Auto Financial, State Auto P&C and State Auto Mutual that he has the capacity and right to enter into this Agreement and perform all of Executive’s services and other obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
11.6    Waiver. The failure by a party to exercise or enforce any of the terms or conditions of this Agreement will not constitute or be deemed a waiver of that party's rights hereunder to enforce each and every term of this Agreement. The failure by a party to insist upon strict performance of any of the terms and provisions herein will not be deemed a waiver of any subsequent default in the terms or provisions herein.
11.7    Rights and Remedies Cumulative. All rights and remedies of the parties hereunder are cumulative.
11.8    Divisibility. The provisions of this Agreement are divisible. If any such provision shall be deemed invalid or unenforceable, it shall not affect the applicability or validity of any other provision of this Agreement, and if any such provision shall be deemed invalid or unenforceable as to any periods of time, territory or business activities, such provision shall be deemed limited to the extent necessary to render it valid and enforceable.
11.9    Captions and Titles. Captions and titles have been used in this Agreement only for convenience and in no way define, limit or describe the meaning of any Article or any part thereof.
11.10    Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
11.11    Code Section 409A Compliance. It is the intention of both Executive and State Auto that the benefits and rights to which Executive could be entitled to under this Agreement be exempt from or, to the extent that the requirements of Code Section 409A apply, comply with Code Section 409A and the Treasury Regulations thereunder, and the provisions of this Agreement shall be construed in a manner consistent with that intention. If Executive or State Auto believes, at any time, that any such benefit or right that is subject to Code Section 409A does not so comply, it shall promptly advise the other and shall negotiate reasonably and in good faith to amend the terms of such benefits and rights so that they comply with Code Section 409A (with the most limited possible economic effect on Executive and State Auto).
STATE AUTO FINANCIAL CORPORATION
 
 
By: /s/ Michael E. LaRocco
 
By: /s/ Kim B. Garland
Michael E. LaRocco
Chairman, President and CEO
 
Kim B. Garland

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
 
 
By: /s/ Michael E. LaRocco
 
 
Michael E. LaRocco
President and CEO
 
 
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
 
 
By: /s/ Michael E. LaRocco
 
 
Michael E. LaRocco
Chairman, President and CEO
 
 






Exhibit A
Beneficiary Designation and Notice Form
Beneficiary Designation
In the event of my death, I direct that any amounts due me under this Agreement to which this Beneficiary Designation is attached shall be distributed to the person designated below. If no beneficiary shall be living to receive such assets they shall be paid to the administrator or executor of my estate.
Notice
Until notified otherwise, pursuant to Section 11.3 of this Agreement, notices should be sent to me at the following address:
107 245th Place SE
Sammamish, WA 98074
 
Date: 10/12/2017


 
/s/ Kim B. Garland
 
Signature of Executive
 
 
 
Kim B. Garland
 
Print Name of Executive
 
 
 
Diane Garland
 
Beneficiary Name
 
 
 
Spouse
 
Relationship to Executive









EXHIBIT 10.47
EXECUTIVE CHANGE OF CONTROL AGREEMENT
This Executive Change of Control Agreement (this “Agreement”) is made as of October 26, 2017 (the “Effective Date”), by and among State Auto Financial Corporation, an Ohio corporation (“State Auto Financial”), State Auto Property and Casualty Insurance Company, an Iowa-domiciled insurance company (“State Auto P&C”), State Automobile Mutual Insurance Company, an Ohio-domiciled mutual insurance company (“State Auto Mutual”), and Paul M. Stachura (“Executive”). State Auto Financial, State Auto P&C, State Auto Mutual and each of their respective insurer subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “State Auto.”
Background Information
A.
State Auto P&C is the principal operating subsidiary of State Auto Financial and the employer of record of all employees of State Auto. State Auto Financial is a majority- owned, publicly-traded holding company subsidiary of State Auto Mutual. State Auto Mutual is the ultimate controlling entity in the State Auto holding company system.
B.
State Auto desires to establish and maintain a sound and vital management team as an important part of State Auto’s overall corporate strategy and as an essential means of protecting and enhancing the interests of State Auto, the Boards of State Auto Financial and State Auto Mutual (collectively, the “Boards”), and their shareholders and policyholders, respectively. As part of this corporate strategy, State Auto desires to act in the best interests of State Auto to address Executive’s continued service to State Auto and available benefits in the event of an actual or threatened Change of Control (as defined herein) of State Auto Financial or State Auto Mutual.
Statement of Agreement
The parties hereby acknowledge the accuracy of the foregoing Background Information and hereby agree as follows:
Article I         Definitions.
As used in this Agreement, the following defined terms shall have the meanings set forth below:
1.1
Annual Base Salary means the greater of (a) the highest annual rate of base salary in effect for Executive during the 12-month period immediately prior to a Change of Control, or (b) the annual rate of base salary in effect on the date Executive’s employment is terminated.
1.2
Average Annual Award means the average of the annual aggregate bonus under the Short Term Incentive Plans (or its successors) earned by Executive in each of the three (3) calendar years immediately preceding the calendar year in which the Change of Control occurs.
1.3
Cause means any of the following:
(a)
the willful and continued failure of Executive to perform Executive’s duties with State Auto (other than any such failure resulting from incapacity due to a Disability), after a written demand for performance is delivered to Executive by the Boards, or their designee, which specifically identifies the manner in which the Boards believe, in their sole discretion, that Executive has not performed Executive’s duties; or
(b)
the willful engaging by Executive in illegal conduct or gross misconduct which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(c)
the breach of any provision of Article IV hereof which has a material adverse effect on State Auto, as determined by the Boards in their sole discretion; or
(d)
the willful failure to comply with any State Auto code of conduct or code of ethics applicable to Executive, as determined by the Boards in their sole discretion; or
(e)
the willful failure and refusal to cooperate with or assist State Auto in responding to governmental or regulatory inquiries, investigations or related activities, as determined by the Boards in their sole discretion.





For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of State Auto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Boards or upon the advice of counsel for State Auto, shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of State Auto.
1.4
Change of Control means the occurrence of any of the following:
(a)
any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), Directly or Indirectly, of securities of State Auto Financial representing thirty percent (30%) or more of the combined voting power of State Auto Financial’s then outstanding securities, excluding (i) any acquisition by State Auto Financial or any Subsidiary; (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by State Auto Financial, a Subsidiary or State Auto Mutual; or (iii) any acquisition by State Auto Mutual; or
(b)
a majority of the Board of Directors of State Auto Financial at any time is comprised of other than Continuing Directors; or
(c)
any event or transaction State Auto Financial would be required to report in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; or
(d)
any of the following occurs:
(i)
a merger or consolidation of State Auto Financial, other than a merger or consolidation in which the voting securities of State Auto Financial immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) more than fifty percent (50%) of the combined voting power of State Auto Financial or surviving entity immediately after the merger or consolidation with another entity;
(ii)
a sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of State Auto Financial which shall include, without limitation, the sale of assets or earning power aggregating more than fifty percent (50%) of the assets or earning power of State Auto Financial on a consolidated basis;
(iii)
a reorganization, reverse stock split, or recapitalization of State Auto Financial which would result in any of the foregoing; or
(iv)
a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.
(e)
With respect to State Auto Mutual, any of the following occurs:
(i)
State Auto Mutual affiliates with or is merged into or consolidated with a third party and as a result, a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors; or
(ii)
State Auto Mutual completes a conversion to a stock insurance company and as a result of which a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors.
Notwithstanding the foregoing, for purposes of this Change of Control definition, the percentage of securities ownership listed under subsection (a) above (i.e., 30%) shall increase or decrease, as the case may be, such that the percentage of securities ownership is consistent with any future changes to the percentage of securities ownership represented in the Change of Control definition in the State Auto Financial Corporation 2017 Long Term Incentive Plan, as amended from time to time.
1.5
Code means the Internal Revenue Code of 1986, as amended.





1.6
Confidential Information means information disclosed to Executive or known by State Auto, which is not generally known in the business in which State Auto is or may become engaged, including, but not limited to, information about State Auto's services, trade secrets, financial information, customer lists, books, records, memoranda and other proprietary information of State Auto. For purposes of this Agreement, “Confidential Information” shall also mean any information that could be considered a trade secret, as defined by applicable law.
1.7
Continuing Director of State Auto Financial or State Auto Mutual, as the case may be, means a director who was either:
(a)
first elected or appointed as a director on or prior to the Effective Date; or
(b)
subsequent to the Effective Date was elected or appointed as a director if such director was nominated by the Nominating and Governance Committee of State Auto Financial or the Nominating and Governance Committee of State Auto Mutual, as the case may be, or appointed by at least two-thirds of the total number of the then Continuing Directors of State Auto Financial or State Auto Mutual, as the case may be.
1.8
Directly or Indirectly means on Executive’s own behalf, or as an officer, director, shareholder, member, partner, owner, agent, consultant, advisor, coach or employee of any corporation, partnership, limited liability company or other entity.
1.9
Disability means illness or other incapacity as determined under State Auto’s group long-term disability benefit plan.
1.10
Employee Benefits means the benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital, or other insurance (whether funded by actual insurance or self-insured by State Auto), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist (and as may be modified from time to time) or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter (and as may be modified from time to time), providing benefits at least as great in a monetary equivalent as are payable thereunder prior to a Change of Control.
1.11
Good Reason means the occurrence of any one or more of the following:
(a)
The assignment to Executive of duties which are materially and adversely different from or inconsistent with the duties, responsibilities and status of Executive’s position at any time during the 12-month period prior to a Change of Control, or which result in a significant reduction in Executive’s authority and responsibility as a senior executive officer of State Auto;
(b)
A reduction by State Auto in Executive’s Annual Base Salary in place as of the day immediately prior to a Change of Control, or after a Change of Control the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of State Auto, or a reduction of Executive’s most recent Average Annual Award prior to a Change of Control;
(c)
After a Change of Control, a demand by State Auto that Executive relocate to a location in excess of 35 miles from the location where Executive is based as of the day immediately prior to a Change of Control, or in the event of any such relocation with Executive’s express written consent, the failure of State Auto or a Subsidiary to pay (or reimburse Executive for) all reasonable moving expenses incurred by Executive relating to a change of principal residence in connection with such relocation and to indemnify Executive against any loss in the sale of Executive’s principal residence in connection with any such change of residence and any expenses incurred by Executive that are directly attributable to such sale (for purposes of this provision, “loss” is understood to mean a sale of such principal residence at a price less than the adjusted basis in such residence);
(d)
The failure of State Auto to obtain a satisfactory agreement from any successor to State Auto to assume and agree to perform this Agreement, as contemplated in Section 5.1 of this Agreement;
(e)
The failure of State Auto to provide Executive with substantially the same Employee Benefits that were provided to him immediately prior to the Change of Control, or with a package of Employee Benefits that, though one or more of such benefits may vary from those in effect immediately prior to a Change of Control, is substantially comparable in all material respects to such Employee Benefits taken as a whole; or





(f)
Any material reduction in Executive’s compensation or benefits or a material adverse change in Executive’s location or duties, if such material reduction or material adverse change occurs at any time after the commencement of any discussion with a third party relating to a possible Change of Control of State Auto involving such third party, if such material reduction or material adverse change is in contemplation of such possible Change of Control and such Change of Control is actually consummated within twelve (12) months after the date of such material reduction or material adverse change.
The existence of Good Reason shall not be affected by Executive’s subsequent incapacity due to physical or mental illness. Executive’s continued employment shall not constitute a waiver of Executive’s rights with respect to any circumstance constituting Good Reason under this Agreement. Executive shall provide State Auto with written notice of the Executive’s intent to terminate with Good Reason within a period not to exceed ninety (90) calendar days of the initial existence of the condition constituting Good Reason. State Auto shall have a period of thirty (30) calendar days in which it may remedy the condition and prevent Executive’s termination for Good Reason.
1.12    OTIP means the State Auto Financial Corporation One Team Incentive Plan.
1.13
Severance Benefits means the benefits described in Section 2.1 of this Agreement, as adjusted by the applicable provisions of Section 9.1 of this Agreement.
1.14
Short Term Incentive Plans means OTIP and any other short term incentive compensation plan of State Auto.
1.15
Subsidiary means any corporation, insurance company or other entity with a majority of the voting control of which is directly or indirectly owned or controlled at the time by State Auto Financial.
1.16
Term means the time period commencing on the Effective Date of this Agreement and ending on November 30, 2020, both dates inclusive, however, that if a Change of Control occurs during the Term of this Agreement, the Term of this Agreement will be extended for thirty-six (36) months beyond the end of the month in which any such Change of Control occurs. Notwithstanding the foregoing, this Agreement shall terminate upon Executive’s termination of employment with State Auto for any other reason; provided, however, that Sections 2.3 and 2.4, Articles IV, VI through X, and Sections 11.3, 11.6 and 11.8 of the Agreement shall survive Executive’s termination of employment.
Article II    Change of Control.
2.1    Severance Benefits. In the event that State Auto shall undergo a Change of Control, and if Executive then becomes entitled to receive Severance Benefits, State Auto or its respective successor, shall pay or provide to Executive the following Severance Benefits, adjusted by the applicable provisions of Section 9.1:
(a)
Annual Base Salary. In addition to any accrued compensation payable as of Executive’s termination of employment, a lump sum cash amount equal to Executive’s Annual Base Salary multiplied by two.
(b)
Annual Incentive Compensation. In addition to any compensation otherwise payable pursuant to Executive’s bonus arrangements, a lump sum cash amount equal to Executive’s Average Annual Award multiplied by two. In addition, Executive shall be entitled to receive a prorated annual incentive payment for the year in which the Change of Control occurred, if otherwise eligible for such annual incentive. Such prorated annual incentive amount, if any, will be determined based on the target award levels established for the year in which the Change of Control occurred.
(c)
Stock Options and Other Equity Awards. Stock options and any other types of equity awards (e.g., restricted shares, performance shares, performance units, etc.) held by Executive become exercisable upon a Change of Control according to the terms of the applicable stock option or equity plan and related agreement (if any) under which such stock options or other equity awards were granted.
(d)
Outplacement. State Auto shall pay all fees for outplacement services incurred by Executive up to a maximum equal to fifteen percent (15%) of Executive’s Annual Base Salary, plus provide a travel expense account of up to $5,000 to reimburse job search travel. Such expenses and reimbursements shall be limited to those expenses incurred within the two (2) calendar years following the calendar year of Executive’s separation from service. Such expenses shall be paid no later than December 31st of the calendar year following the applicable calendar year in which such reimbursable expense was incurred.





(e)
Health Insurance Reimbursement. State Auto shall pay Executive an amount equal to State Auto’s then current monthly per employee cost of providing State Auto’s health insurance benefit multiplied by 24.
In computing and determining Severance Benefits under subsections (a) and (b), above, a decrease in Executive’s salary or incentive bonus potential shall be disregarded if such decrease occurs within six (6) months before a Change of Control, is in contemplation of such Change of Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change of Control. In such event, the salary and incentive bonus potential used to determine Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this Section 2.1.
The Severance Benefits provided in subsections (a), (b) and (e) above shall be paid on the 60th business day following the date Executive’s employment terminates, provided that Executive has executed a general release and waiver of any claims against State Auto or its successors and the period of time during which Executive may revoke the general release and waiver has expired on or before the 60th day following Executive’s separation from service. Notwithstanding the foregoing, if Executive is a “specified employee” as defined in Code Section 409A, such payment shall be subject to and paid according to the provisions of Section 2.4, as described below.
Executive acknowledges and agrees that the Severance Benefits provided in this Section 2.1 shall be the sole severance benefits payable to Executive in the event of any “change of control” (under any definition) of State Auto, and Executive hereby waives and relinquishes any and all rights or severance benefits under any other “change of control” provision applicable to Executive with respect to the Executive’s employment by State Auto.
2.2    Eligibility for Severance Benefits. State Auto, or its respective successor, shall pay or provide to Executive the Severance Benefits as defined above, in the event that Executive becomes eligible for such Severance Benefits because, during the Term of this Agreement:
(a)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause, the death or Disability of Executive within twenty-four (24) months after a Change of Control; or
(b)
Executive terminates employment for Good Reason within twenty-four (24) months after a Change of Control; or
(c)
the Executive’s employment is terminated from all State Auto companies for any reason other than for Cause or the death or Disability of Executive after an agreement has been reached with an unaffiliated third party, the performance of which agreement would result in a Change of Control involving such third party, if such Change of Control is actually consummated within twelve (12) months after the date of such termination.
Executive’s termination of employment for all purposes under this Agreement shall be determined to have occurred in accordance with the “separation from service” requirements of Code Section 409A and applicable Treasury Regulations and guidance issued thereunder.
2.3    Liquidated Damages; Mitigation. State Auto hereby acknowledges that it will be difficult and may be impossible for Executive to find reasonably comparable employment, or to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the Severance Benefits by State Auto to Executive in accordance with the terms of this Agreement is hereby acknowledged by State Auto to be reasonable and will be liquidated damages, and Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Executive hereunder or otherwise. State Auto shall not be entitled to set off or counterclaim against amounts payable hereunder with respect to any claim, debt or obligation of Executive.
2.4    Specified Employee Delay. In the event Executive is a “specified employee” as defined in Code Section 409A, any payments under this Agreement due to a separation from service and subject to Code Section 409A shall be delayed until a date that is six (6) months after the date of separation from service (or, if earlier, the date of death of Executive). Payments to which a “specified employee” would otherwise be entitled during the first six (6) months following the date of separation shall be accumulated and paid as of the first date of the seventh month following the date of separation from service. Interest shall be paid on any such delayed payment at the applicable federal rate under Code Section 7872(f)(2)(A).
Article III     Executive's Rights Under Certain Plans.





Any references to specific employee benefits arrangements in this Agreement are not intended to exclude Executive from participation in other benefits available to executive personnel generally or to preclude Executive’s right to other compensation or benefits as may be authorized by the Boards at any time; provided that such other compensation or benefits are not severance benefits payable upon a Change in Control. The provisions of this Agreement and any payments provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish Executive’s existing rights, or rights which would accrue solely as the result of the passage of time under any compensation plan, benefit plan, incentive plan, stock option plan, employment agreement or other contract, plan or arrangement except as may be specified in such contract, plan or arrangement. Notwithstanding anything contained herein, State Auto agrees that the severance benefits provided to Executive herein are in addition to any rights and privileges to which Executive may be entitled as an employee of State Auto under any retirement, pension, insurance, hospitalization or other plan which may now or hereafter be in effect, it being understood that, except to the extent currently provided in such plans, Executive shall have the same rights and privileges to participate in such plans or benefits as any other employee of State Auto.
Article IV    Confidential Information; Forfeiture Events.
4.1    Confidential Information. Executive agrees to receive Confidential Information of State Auto in confidence, and not to disclose to others, assist others in the application of, or use for Executive’s own personal gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of such other or others by legal and equitable means and other than as a result of disclosure by Executive. Executive further agrees that, upon termination of Executive’s employment with State Auto, all documents, records, notebooks and similar repositories (including electronic formats) containing Confidential Information, including copies thereof, then in Executive's possession, whether prepared by Executive or others, will be left with and/or returned to State Auto. Executive further agrees that the obligation to maintain confidentiality created by this Article IV shall continue in effect for the duration of this Agreement and following the termination of Executive’s employment with State Auto for any reason.
4.2    Forfeiture Events; Clawback Rights.
(a)
The Board may, in its sole discretion, require Executive to repay to State Auto all or any portion of the amounts paid as Severance Benefits if:
(i)
Executive violates any non-competition, non-solicitation or confidentiality covenant applicable to the Executive and for the benefit of State Auto, including such covenants included in this Agreement;
(ii)
It is later discovered that Executive engaged in conduct detrimental to State Auto during the Executive’s employment with State Auto which has a material adverse effect on State Auto as determined by the Board of Directors of State Auto Mutual, in its sole discretion, acting in good faith; or
(iii)
(A)    The amount of any of the Severance Benefits was calculated based upon the achievement of certain financial results of State Auto that were subsequently the subject of a financial statement restatement by State Auto;
(B)    Executive engaged in conduct detrimental to State Auto that caused or substantially contributed to the need for the financial statement restatement by State Auto; and
(C)    The amount of Executive’s Severance Benefits would have been lower than the amount actually awarded to Executive had the financial results been properly reported.
Notwithstanding the foregoing, if the Boards determine in their sole discretion that Executive engaged in fraudulent conduct, then the Boards will seek repayment of the Severance Benefits. This provision shall not be the exclusive remedy of State Auto with respect to such matters.
(b)
The terms of any compensation recovery or recoupment policy heretofore or hereafter adopted by the Boards, including any and all amendments thereto (a “clawback policy”), are hereby incorporated into this Agreement by reference. In addition to the terms and conditions set forth in this Agreement, Executive agrees that any amounts payable or paid to Executive under this Agreement shall be subject to the terms of any clawback policy of the Boards.
Article V    Successors; Binding Agreement.





5.1    As to State Auto. This Agreement shall inure to the benefit of and be binding upon State Auto, its successors and assigns, including without limitation, any person, partnership or corporation which may acquire voting control of State Auto Financial or all or substantially all of its assets and business, or which may be a party to any consolidation, merger or other transaction that results in a Change of Control of State Auto Financial or State Auto Mutual. State Auto will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of State Auto (or of any division or Subsidiary thereof employing Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that State Auto would be required to perform it if no such succession had taken place. Failure of State Auto to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from State Auto in the same amount and on the same terms to which Executive would be entitled hereunder if Executive terminated employment for Good Reason following a Change of Control.
5.2    As to Executive. This Agreement shall also inure to the benefit of and be binding on Executive, Executive’s heirs, successors and legal representatives. This Agreement shall be enforceable by Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Executive’s rights and benefits under this Agreement may not be assigned, except that if Executive dies while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid to the beneficiary indicated on the Beneficiary Designation attached as Exhibit A or, if there is no such beneficiary, to Executive’s estate. Such payments, if any, shall be made in the same form and at the same time, as such payment would have been made to Executive.

Article VI    COBRA Continuation Coverage.
Notwithstanding any provision of this Agreement to the contrary, in the event of any “qualifying event,” as defined in Code Section 4980B(f), Executive and Executive’s qualifying beneficiaries shall be entitled to continuation of health care coverage, as provided under Code Section 4980B(f). The foregoing is intended as a statement of Executive's continuation coverage rights and is in no way intended to limit any greater rights of Executive or Executive’s qualified beneficiaries.
Article VII    Indemnification; Enforcement Costs; Interest.
7.1    Indemnification. State Auto, as provided for in its Amended and Restated Articles of Incorporation and its Amended and Restated Bylaws, shall indemnify Executive to the full extent of the general laws of the State of Ohio, now or hereafter in force, including the advance of expenses under procedures provided by such laws. From the date of a Change of Control, State Auto shall (a) for a period of five (5) years after such Change of Control, provide Executive (including Executive’s heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at State Auto's expense, and (b) indemnify and hold harmless Executive, to the fullest extent permitted or authorized by the law of the State of Ohio as it may from time to time be amended, if Executive is (whether before or after the Change of Control) made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Executive is or was a director, officer or employee of State Auto or any Subsidiary, or is or was serving at the request of State Auto or any Subsidiary, as a director, trustee, officer or employee of an insurance company, corporation, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 7.1 shall not be deemed exclusive of any other rights to which Executive may be entitled under the charter or bylaws of State Auto or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in Executive’s official capacity and as to action in another capacity while holding such office, and shall continue as to Executive after Executive has ceased to be a director, trustee, officer or employee and shall inure to the benefit of the heirs, executors and administrators of Executive.
7.2    Enforcement Cost. State Auto is aware that, upon the occurrence of a Change of Control, the Board or a shareholder or policyholder of State Auto, as the case may be, may then cause or attempt to cause State Auto to refuse to comply with their obligations under this Agreement, or may cause or attempt to cause State Auto to institute, or may institute, litigation, arbitration or other legal action seeking to have this Agreement declared unenforceable, or may take, or attempt to take, other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of State Auto that Executive not be required to incur the expenses associated with the enforcement of Executive’s rights under this Agreement by litigation, arbitration or other legal action nor be bound to negotiate any settlement of Executive’s rights hereunder under threat of incurring such expenses because the cost and expense thereof would substantially detract from the benefits intended to be extended to Executive under this Agreement. Accordingly, if following a Change of Control it should appear to Executive that State Auto has failed to comply with any of their obligations under this Agreement, or in the event that State Auto or any other person takes any action to declare this Agreement void or unenforceable, or institute any litigation or other legal action designed to deny, diminish or to recover from Executive, the benefits intended to be provided to Executive hereunder, State Auto irrevocably authorizes Executive from time to time to retain counsel (legal and accounting) of Executive’s choice at





the expense of State Auto as provided in this Section 7.2 to represent Executive in connection with the calculation of the Code Section 280G reduction, or the initiation or defense of any litigation or other legal action, whether by or against State Auto or any director, officer, stockholder or other person affiliated with State Auto. Notwithstanding any existing or prior attorney-client relationship between State Auto and such counsel, State Auto irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection State Auto and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by Executive as provided in this Section 7.2 shall be paid or reimbursed to Executive by State Auto on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with their customary practices.
7.3    Interest. In any action involving this Agreement, Executive shall be entitled to prejudgment interest on any amounts found to be due him from the date such amounts would have been payable to Executive pursuant to this Agreement at an annual rate of interest equal to the prime commercial rate in effect at the corporation’s principal bank or their successor from time to time during the prejudgment period plus four percent.
Article VIII    Cooperation with Regard to Litigation.
Executive agrees to cooperate with State Auto for a period of two (2) years following Executive’s termination of employment by being reasonably available to testify on behalf of State Auto in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to assist State Auto in any such action, suit or proceeding by providing information and meeting and consulting with the Boards or their counsel or counsel to State Auto as reasonably requested by the Boards or such counsel. Executive shall be reimbursed by State Auto for any expenses (including, but not limited to, legal fees) reasonably incurred by Executive in connection with the Executive’s compliance with the foregoing covenant.
Article IX    Payment of Taxes and Timing.
9.1    Excess Severance Payment. If any Severance Benefit or other benefit paid or provided under Section 2.1, or the acceleration of stock option vesting, would be subject to excise tax pursuant to Code Section 4999 (or any similar federal or state excise tax), but would not be so subject if the total of such payments would be reduced by ten percent (10%) or less, then such payment shall be reduced by the minimum amount necessary so as not to cause State Auto to have paid an Excess Severance Payment as defined in Code Section 280G(b)(1) and so Executive will not be subject to Excise Tax pursuant to Code Section 4999. The calculation of the Code Section 280G reduction shall be approved by State Auto’s independent certified public accounting firm engaged by State Auto immediately prior to the Change of Control and the calculation shall be provided to Executive in writing. Executive shall then be given fifteen (15) days, or such longer period as Executive reasonably requests and to which State Auto agrees, such agreement not to be unreasonably withheld, to accept or reject the calculation of the Code Section 280G reduction. If Executive rejects the Code Section 280G reduction calculation and the parties are thereafter unable to agree within an additional forty-five (45) days, the arbitration provisions of Section 10.1 shall control. State Auto shall reimburse Executive for all reasonable legal and accounting fees incurred with respect to the calculation of the Code Section 280G reduction and any disputes related thereto. Any payments owed to Executive under this Section 9.1, which are subject to the rules under Code Section 409A and related regulations, shall be made to Executive no later than the end of the calendar year following the calendar year in which the taxes are remitted to the taxing authority. In the event that the amount of any Severance Benefit that would be payable to or for the benefit of Executive under this Agreement must be modified or reduced to comply with this provision, it shall be modified or reduced on a pro-rata basis. In no event shall the total payments be reduced by more than ten percent (10%) in order to avoid treatment as an Excess Severance Payment.
9.2    Withholding of Taxes. State Auto may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as required by law; provided, however, that such payment may not exceed the amount of such taxes due as a result of the payments due under this Agreement.
In accordance with Code Section 409A and the regulations issued thereunder, this Agreement shall permit the payment of amounts necessary to (a) satisfy the employment tax withholding obligations that arise under this Agreement prior to the date that payment may otherwise be made under this Agreement and/or (b) satisfy the excise tax or underpayment penalties owed under Code Section 409A in the event of a violation of Code Section 409A under this Agreement.
9.3    Delayed Payments. In the event of a genuine dispute between State Auto or any Subsidiary and Executive regarding the amount or timing of benefits under this Agreement, a delay in the payment of amounts under this Agreement shall not cause Executive to violate Code Section 409A to the extent that such delay satisfies the conditions set forth in Code Section 409A and applicable regulations thereunder.





9.4    Savings Clause. If any payments otherwise payable to Executive under this Agreement are prohibited or limited by any statute or regulation in effect at the time the payments would otherwise be payable (any such limiting statute or regulation a “Limiting Rule”):
(a)
State Auto will use its best efforts to obtain the consent of the appropriate governmental agency to the payment by State Auto to Executive of the maximum amount that is permitted (up to the amounts that would be due to Executive absent the Limiting Rule); and
(b)
Executive will be entitled to elect to have apply, and therefore to receive benefits directly under, either (i) this Agreement (as limited by the Limiting Rule) or (ii) any generally applicable State Auto severance, separation pay and/or salary continuation plan that may be in effect at the time of Executive’s termination.
Following any such election, Executive will be entitled to receive benefits under this Agreement or plan elected only if and to the extent the Agreement or plan is applicable and subject to its specific terms.
Article X    Arbitration.
10.1    Arbitration. The method for resolving any dispute arising out of this Agreement shall be binding arbitration in accordance with this Section 10.1. Except as provided otherwise in this Section 10.1, arbitration pursuant to this Section 10.1 shall be governed by the Employment Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a description of the issue to be arbitrated. Within fifteen (15) calendar days after either party demands arbitration, State Auto and Executive shall each appoint an arbitrator. The fees and expenses of these arbitrators shall be paid by the party that selected such arbitrator. Within fifteen (15) additional calendar days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within this fifteen (15) calendar day period, then the third arbitrator shall be selected promptly pursuant to the rules of the American Arbitration Association for Employment Arbitration. The arbitration panel shall hold a hearing in Columbus, Ohio, within ninety (90) calendar days after the appointment of the third arbitrator. The fees and expenses of the third arbitrator, and any American Arbitration Association fees, shall be paid equally by the parties. Both State Auto and Executive may be represented by counsel (legal and accounting) and may present testimony and other evidence at the hearing. Each party shall be responsible for the legal fees and other expenses incurred by each party. Within ninety (90) calendar days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall be binding on the parties. Executive shall be entitled to seek specific performance of Executive’s rights under this Agreement during the period of time that any dispute or controversy arising under or in connection with this Agreement is pending.
Article XI    General Provisions.
11.1    Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the impact of a Change of Control on Executive, and completely supersedes any prior verbal or written agreements or arrangements between the parties hereto, if any, related to a Change of Control. The parties hereto agree that this Agreement cannot be hereafter amended, modified or supplemented in any respect, except by a subsequent written agreement signed by both parties hereto. The parties also agree that this Agreement shall be amended and/or modified as necessary to comply with Code Section 409A or regulations issued thereunder as well as requirements or regulations issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as applicable.
11.2    Applicable Law. This Agreement shall be governed in all respects by the laws of the State of Ohio, without giving effect to any of its conflict of law provisions.
11.3    Notices. All notices under this Agreement shall be in writing and will be duly given if sent by United States registered or certified mail, return receipt requested, to the respective parties to the addresses set forth below or such other addresses as the parties may hereafter designate in writing for such purpose:
(a)
If to either State Auto Financial, State Auto P&C or State Auto Mutual, to 518 East Broad Street, Columbus, Ohio 43215, Attention: Corporate Secretary; and
(b)    If to Executive, to the address set forth in the attached Exhibit A.
If the parties by mutual agreement supply each other with email addresses for the purposes of providing notice by email, such notice shall also be proper notice under this Agreement. Notice sent by certified or registered mail shall be effective two (2) days after deposit by delivery to the U.S. Post Office.





11.4    Assignment. Except as expressly provided herein, neither this Agreement nor any rights, benefits or obligations hereunder may be assigned by Executive without the prior written consent of State Auto Mutual and State Auto Financial.
11.5    Capacity.
(a)
State Auto Financial, State Auto P&C and State Auto Mutual represent and warrant to Executive that they have the capacity and right to enter into this Agreement and perform all of their obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
(b)
Executive represents and warrants to State Auto Financial, State Auto P&C and State Auto Mutual that he has the capacity and right to enter into this Agreement and perform all of Executive’s services and other obligations under this Agreement without any restriction by any agreement, document, restrictive covenant or otherwise.
11.6    Waiver. The failure by a party to exercise or enforce any of the terms or conditions of this Agreement will not constitute or be deemed a waiver of that party's rights hereunder to enforce each and every term of this Agreement. The failure by a party to insist upon strict performance of any of the terms and provisions herein will not be deemed a waiver of any subsequent default in the terms or provisions herein.
11.7    Rights and Remedies Cumulative. All rights and remedies of the parties hereunder are cumulative.
11.8    Divisibility. The provisions of this Agreement are divisible. If any such provision shall be deemed invalid or unenforceable, it shall not affect the applicability or validity of any other provision of this Agreement, and if any such provision shall be deemed invalid or unenforceable as to any periods of time, territory or business activities, such provision shall be deemed limited to the extent necessary to render it valid and enforceable.
11.9    Captions and Titles. Captions and titles have been used in this Agreement only for convenience and in no way define, limit or describe the meaning of any Article or any part thereof.
11.10    Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
11.11    Code Section 409A Compliance. It is the intention of both Executive and State Auto that the benefits and rights to which Executive could be entitled to under this Agreement be exempt from or, to the extent that the requirements of Code Section 409A apply, comply with Code Section 409A and the Treasury Regulations thereunder, and the provisions of this Agreement shall be construed in a manner consistent with that intention. If Executive or State Auto believes, at any time, that any such benefit or right that is subject to Code Section 409A does not so comply, it shall promptly advise the other and shall negotiate reasonably and in good faith to amend the terms of such benefits and rights so that they comply with Code Section 409A (with the most limited possible economic effect on Executive and State Auto).
STATE AUTO FINANCIAL CORPORATION
 
 
By: /s/ Michael E. LaRocco
 
By: /s/ Paul M. Stachura
Michael E. LaRocco
Chairman, President and CEO
 
Paul M. Stachura
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
 
 
By: /s/ Michael E. LaRocco
 
 
Michael E. LaRocco
President and CEO
 
 
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
 
 
By: /s/ Michael E. LaRocco
 
 
Michael E. LaRocco
Chairman, President and CEO
 
 






Exhibit A
Beneficiary Designation and Notice Form
Beneficiary Designation
In the event of my death, I direct that any amounts due me under this Agreement to which this Beneficiary Designation is attached shall be distributed to the person designated below. If no beneficiary shall be living to receive such assets they shall be paid to the administrator or executor of my estate.
Notice
Until notified otherwise, pursuant to Section 11.3 of this Agreement, notices should be sent to me at the following address:
5834 Vandeleur Place
Dublin, OH 43016
 
Date: 10/12/2017


 
/s/ Paul M. Stachura
 
Signature of Executive
 
 
 
Paul M. Stachura
 
Print Name of Executive
 
 
 
Joy Stachura
 
Beneficiary Name
 
 
 
Spouse
 
Relationship to Executive





EXHIBIT 10.50

STATE AUTO FINANCIAL CORPORATION
2017 LONG-TERM INCENTIVE PLAN

PAU AWARD AGREEMENT

State Auto Financial Corporation, an Ohio corporation (the “Company”), hereby grants to the undersigned employee of the Company (the “Participant”) the following PAU Award (the “PAU’s”) pursuant to the terms and conditions of the State Auto Financial Corporation 2017 Long-Term Incentive Plan (the “Plan”), and this PAU Award Agreement (this “Award Agreement”).

1. Name of Participant:
               [ • ]               
2. Grant Date:
      [ • ]      , 20[ • ] (the “Grant Date”)
3. Performance Period:
Three-year period commencing on January 1, 20[ • ]and ending on December 31, 20[ • ](the “Performance Period”)
4. PAU’s Granted:
      [ • ]      
5. Vesting:
Except as otherwise provided in this Award Agreement, the PAU’s will vest as of the last day of the Performance Period only if and to the extent that (a) the Participant is employed by the Company or an Affiliate on the last day of the Performance Period; and (b) the Compensation Committee determines that the Performance Goals set forth in Section 6 of this Award Agreement (the “Performance Goals”) have been satisfied.
6. Performance Goals:
The Performance Goals applicable to the PAU’s granted to the Participant pursuant to this Award Agreement shall be (a) compound annual premium growth, and (b) combined ratio, during the Performance Period, as determined by the multiple (the “Performance Multiple”) under the matrix attached to this Award Agreement as Exhibit A (the “Performance Matrix”).
At the end of the Performance Period, if the Performance Matrix does not yield a Performance Multiple, the PAU’s awarded under this Award Agreement shall be forfeited and no longer considered outstanding or to be held by the Participant as of the close of business on the date on which the Compensation Committee certifies that the Performance Matrix does not yield a Performance Multiple. If the Performance Matrix yields a Performance Multiple, the PAU’s awarded under this Award Agreement shall remain outstanding and held by the Participant.






7. Determination of
     Award Value:
Except as otherwise provided in this Award Agreement, if the PAU’s awarded under this Award Agreement remain outstanding as of the last day of the Performance Period under the provisions of Section 6 of this Award Agreement, the value of such PAU’s (the “Award Value”) will be determined as of the last day of the Performance Period pursuant to the following formula:
a × ( b × $1), where
a = The number of PAU’s granted under this Award Agreement; and
b = The Performance Multiple determined by the Compensation Committee pursuant to the provisions of Section 6 of this Award Agreement.
8. Settlement:
Except as otherwise provided in this Award Agreement, at the time that the Award Value is determined pursuant to Section 7 or any other section of this Award Agreement, the Participant (or, in the event of the Participant’s death, the Participant’s beneficiary) will receive a cash payment equal to the Award Value. PAU’s settled under this Award Agreement are intended to be exempt from Section 409A under the exemption for short term deferrals. Accordingly, PAU’s will be settled in cash no later than the 15th day of the third month following the end of the fiscal year of the Company (or if later the calendar year) in which the PAU’s vest.
9. Death or Disability:
If the Participant’s employment with the Company or any Affiliate terminates by reason of the Participant’s death or Disability before the end of the Performance Period, then, notwithstanding any provision contained in this Award Agreement, the PAU’s granted under this Award Agreement shall become vested as of the date of the Participant’s death or Disability. The Award Value of such PAU’s will be determined as of the date of the Participant’s death or Disability pursuant to the following formula:
[a × (b × $1)] × c/d, where
a = The number of PAU’s granted under this Award Agreement;
b = A Performance Multiple equal to 1.0;
c = The number of days that the Participant was employed during the Performance Period; and
d = The total number of days in the Performance Period.
Upon the determination of the Award Value pursuant to this Section 9 of this Award Agreement, such PAU’s will be settled in the manner described in Section 8 of this Award Agreement; provided, that, the PAU’s will be settled in cash no later than the 15th day of the third month following the end of the calendar year in which the Participant’s death or Disability occurs.





10. Retirement or Reduction in Force:
If the Participant’s employment with the Company or any Affiliate is terminated by reason of the Participant’s Retirement before the end of the Performance Period or is terminated before the end of the Performance Period through a reduction in force (as determined in the sole discretion of the Compensation Committee), then, notwithstanding any provision contained in this Award Agreement, the PAU’s granted under this Award Agreement shall become vested in accordance with the provisions of Sections 5 and 6 of this Award Agreement; provided, that, for this purpose, the Participant will be deemed to have been employed by the Company or an Affiliate on the last day of the Performance Period. The Award Value of such PAU’s, if any, will be determined in accordance with the provisions of Section 7 of this Award Agreement; provided, that, for purposes of this Section 10 of this Award Agreement, the Award Value determined pursuant to the provisions of Section 7 of this Award Agreement shall be multiplied by a fraction, the numerator of which is the number of days that the Participant was employed during the Performance Period, and the denominator of which is the total number of days in the Performance Period. Upon the determination of the Award Value of the PAU’s pursuant to this Section 10 of this Award Agreement, such PAU’s will be settled at the time and in the manner described in Section 8 of this Award Agreement.
11. Termination of Employment for any Reason other than Retirement, Death, Disability or Reduction in Force:
If the Participant’s employment with the Company or any Affiliate terminates for any reason other than the Participant’s Retirement, death, Disability or a reduction in force before the last day of the Performance Period, then all PAU’s granted under this Award Agreement will be forfeited as of the date of the Participant’s termination of employment.
12. Effect of Plan:
The PAU’s are subject in all cases to the terms and conditions set forth in the Plan, which are incorporated into and made a part of this Award Agreement. In the event of a conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan will govern. All capitalized terms that are used in this Award Agreement but are not defined in this Award Agreement shall have the meanings ascribed to such terms in the Plan.
13. Acknowledgment:
By receipt of this Award, the Participant acknowledges and agrees that the PAU’s are subject to all of the terms and conditions of the Plan and this Award Agreement.
14. Forfeiture:
Notwithstanding any other provision of this Award Agreement, the PAU’s granted hereunder shall be subject to (a) the Forfeiture for Cause provisions contained in Section 4.7 of the Plan; and (b) any clawback or similar policy that may be implemented by the Company which is applicable to the PAU’s.
15. Effect on Other Agreements:
The parties acknowledge and agree that the provisions of this Award Agreement shall supersede any and all other agreements and rights that the Participant has under any agreements or arrangements between the Participant and the Company, whether in writing or otherwise, with respect to the matters set forth herein.













EXHIBIT A

Long-Term Incentive Plan (LTIP) Matrix












Premium
Growth
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
 
__%
__%
__%
__%
__%
__%
__%
__%
__%
__%
__%
__%
__%
Combined Ratio





EXHIBIT 10.51
STATE AUTO FINANCIAL CORPORATION
2017 LONG-TERM INCENTIVE PLAN

PERFORMANCE UNIT AWARD AGREEMENT

State Auto Financial Corporation, an Ohio corporation (the “Company”), hereby grants to the undersigned employee of the Company (the “Participant”) the following Performance Units Award (“Performance Units”) pursuant to the terms and conditions of the State Auto Financial Corporation 2017 Long-Term Incentive Plan (the “Plan”), and this Performance Unit Award Agreement (this “Award Agreement”).

1. Name of Participant:
               [ • ]               
2. Grant Date:
      [ • ]      , 20[ • ] (the “Grant Date”)
3. Performance Period:
Three-year period commencing on January 1, 20[ • ]and ending on December 31, 20[ • ](the “Performance Period”)
4. Performance Units Granted:
      [ • ]      
5. Vesting:
Except as otherwise provided in this Award Agreement, the Performance Units will vest as of the last day of the Performance Period only if and to the extent that (a) the Participant is employed by the Company or an Affiliate on the last day of the Performance Period; and (b) the Compensation Committee determines that the Performance Goals set forth in Section 6 of this Award Agreement (the “Performance Goals”) have been satisfied.
6. Performance Goals:
The Performance Goals applicable to the Performance Units granted to the Participant pursuant to this Award Agreement shall be (a) compound annual premium growth, and (b) combined ratio, during the Performance Period, as determined by the multiple (the “Performance Multiple”) under the matrix attached to this Award Agreement as Exhibit A (the “Performance Matrix”).
At the end of the Performance Period, if the Performance Matrix does not yield a Performance Multiple, the Performance Units awarded under this Award Agreement shall be forfeited and no longer considered outstanding or to be held by the Participant as of the close of business on the date on which the Compensation Committee certifies that the Performance Matrix does not yield a Performance Multiple. If the Performance Matrix yields a Performance Multiple, the Performance Units awarded under this Award Agreement shall remain outstanding and held by the Participant.





7. Determination of
      Award Value:
Except as otherwise provided in this Award Agreement, if the Performance Units awarded under this Award Agreement remain outstanding as of the last day of the Performance Period under the provisions of Section 6 of this Award Agreement, the value of such Performance Units (the “Award Value”) will be determined as of the last day of the Performance Period pursuant to the following formula:
(a × b) × c, where
a = The number of Performance Units granted under this Award Agreement
b= The Performance Multiple determined by the Compensation Committee pursuant to the provisions of Section 6 of this Award Agreement; and
c = The Fair Market Value of a share of Stock on the last day of the Performance Period.
8. Settlement:
Except as otherwise provided in this Award Agreement, at the time that the Award Value is determined pursuant to Section 7 or any other section of this Award Agreement, such Award Value will be paid to the Participant (or in the event of the Participant’s death, the Participant’s beneficiary) in cash, shares of Stock or a combination of cash and shares of Stock, as determined by the Committee. To the extent that any portion of the Award Value is to be paid in shares of Stock, a quotient shall be determined by dividing the Award Value (or portion thereof to be paid in shares of Stock) by the Fair Market Value of a share of Stock on the last day of the Performance Period, and rounding down to the next whole number. The quotient resulting from the calculation under the preceding sentence of this Section 8 of this Award Agreement will determine the Participant’s “Award Units” under this Award Agreement. Upon determination of the Participant’s Award Units, the Participant (or, in the event of the Participant’s death, the Participant’s beneficiary) will receive one (1) share of Stock for each Award Unit. Performance Units settled under this Award Agreement are intended to be exempt from Section 409A under the exemption for short term deferrals. Accordingly, Performance Units will be settled in cash, shares of Stock or a combination of cash and shares of Stock no later than the 15th day of the third month following the end of the fiscal year of the Company (or if later the calendar year) in which the Performance Units vest.






9. Death or Disability:
If the Participant’s employment with the Company or any Affiliate terminates by reason of the Participant’s death or Disability before the end of the Performance Period, then, notwithstanding any provision contained in this Award Agreement, the Performance Units granted under this Award Agreement shall become vested as of the date of the Participant’s death or Disability. The Award Value of such Performance Units will be determined as of the date of the Participant’s death or Disability pursuant to the following formula:
(a × b) × c, where
a = The number of Performance Units granted under this Award Agreement;
b = A Performance Multiple equal to 1.0; and
c = The Fair Market Value of a share of Stock on the date of the Participant’s death or Disability.
Upon the determination of the Award Value pursuant to this Section 9 of this Award Agreement, such Performance Units will be settled in the manner described in Section 8 of this Award Agreement; provided, that, (i) in determining the Participant’s Award Units under Section 8, the Fair Market Value of a share of Stock on the date of the Participant’s death or Disability will be substituted for the Fair Market Value of a share of Stock on the last day of the Performance Period; and (ii) the Performance Units will be settled in cash, shares of Stock or a combination of cash and shares of Stock no later than the 15th day of the third month following the end of the calendar year in which the Participant’s death or Disability occurs.
10. Retirement:
If the Participant’s employment with the Company or any Affiliate terminates by reason of the Participant’s Retirement before the end of the Performance Period, then, notwithstanding any provision contained in this Award Agreement, the Performance Units granted under this Award Agreement shall become vested in accordance with the provisions of Sections 5 and 6 of this Award Agreement; provided, that, for this purpose, the Participant will be deemed to have been employed by the Company or an Affiliate on the last day of the Performance Period. The Award Value of such Performance Units, if any, will be determined in accordance with the provisions of Section 7 of this Award Agreement and settled at the time and in the manner described in Section 8 of this Award.





11. Reduction in Force:
If the Participant’s employment with the Company or any Affiliate is terminated before the end of the Performance Period through a reduction in force (as determined in the sole discretion of the Compensation Committee), then, notwithstanding any provision contained in this Award Agreement, the Performance Units granted under this Award Agreement shall become vested in accordance with the provisions of Sections 5 and 6 of this Award Agreement; provided, that, for this purpose, the Participant will be deemed to have been employed by the Company or an Affiliate on the last day of the Performance Period. The Award Value of such Performance Units, if any, will be determined in accordance with the provisions of Section 7 of this Award Agreement; provided, that, for purposes of this Section 11 of this Award Agreement, the Award Value determined pursuant to the provisions of Section 7 of this Award Agreement shall be multiplied by a fraction, the numerator of which is the number of days that the Participant was employed during the Performance Period, and the denominator of which is the total number of days in the Performance Period. Upon the determination of the Award Value of the Performance Units pursuant to this Section 11 of this Award Agreement, such Performance Units will be settled at the time and in the manner described in Section 8 of this Award Agreement.
12. Termination of Employment for any Reason other than Retirement, Death, Disability or Reduction in Force:
If the Participant’s employment with the Company or any Affiliate terminates for any reason other than the Participant’s Retirement, death, Disability or a reduction in force before the last day of the Performance Period, then all Performance Units granted under this Award Agreement will be forfeited as of the date of the Participant’s termination of employment.
13. Conditions:
In the event the Committee determines to settle all or a portion of the Award Value in shares of Stock, the Company’s obligation to deliver shares of Stock is subject to the satisfaction of the following conditions: (a) the Participant is not, at the time of settlement, in material breach of any of his or her obligations under this Award Agreement, or under any other agreement with the Company or any Affiliate; (b) no preliminary or permanent injunction or other order against the delivery of the shares of Stock issued by a federal or state court of competent jurisdiction in the United States shall be in effect; (c) there shall not be in effect any federal or state law, rule or regulation which prevents or delays delivery of the shares of Stock or payment, as appropriate; and (d) the Participant shall confirm any factual matters reasonably requested by the Compensation Committee, the Company or counsel for the Company.
14. Shareholder Rights:
The Participant shall have none of the rights of a shareholder with respect to the shares of Stock underlying the Performance Units, until the Participant becomes the recordholder of the shares of Stock underlying the Performance Units.
15. Effect of Plan:
The Performance Units are subject in all cases to the terms and conditions set forth in the Plan, which are incorporated into and made a part of this Award Agreement. In the event of a conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan will govern. All capitalized terms that are used in this Award Agreement but are not defined in this Award Agreement shall have the meanings ascribed to such terms in the Plan.





16. Acknowledgment:
By receipt of this Award, the Participant acknowledges and agrees that the Performance Units are subject to all of the terms and conditions of the Plan and this Award Agreement.
17. Forfeiture:
Notwithstanding any other provision of this Award Agreement, the Performance Units granted hereunder shall be subject to (a) the Forfeiture for Cause provisions contained in Section 4.7 of the Plan; and (b) any clawback or similar policy that may be implemented by the Company which is applicable to the Performance Units.
18. Effect on Other Agreements:
The parties acknowledge and agree that the provisions of this Award Agreement shall supersede any and all other agreements and rights that the Participant has under any agreements or arrangements between the Participant and the Company, whether in writing or otherwise, with respect to the matters set forth herein.

EXHIBIT A
Long-Term Incentive Plan (LTIP) Matrix












Premium
Growth
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
__%
0
0
0
0
0
0
0
0
0
0
0
0
0
 
__%
__%
__%
__%
__%
__%
__%
__%
__%
__%
__%
__%
__%
Combined Ratio





EXHIBIT 10.52
STATE AUTO FINANCIAL CORPORATION
2017 LONG-TERM INCENTIVE PLAN
TIME BASED
RESTRICTED STOCK AWARD AGREEMENT

State Auto Financial Corporation, an Ohio corporation (the “Company”), hereby grants to the employee of the Company named herein (the “Participant”) the following Restricted Stock Award (“Restricted Stock”) pursuant to the terms and conditions of the State Auto Financial Corporation 2017 Long-Term Incentive Plan (the “Plan”), and this Time Based Restricted Stock Award Agreement (this “Award Agreement”).

1. Name of Participant:
               [ • ]               
2. Grant Date:
      [ • ]      , 20[ • ] (the “Grant Date”)
3. Number of Shares of Restricted Stock Granted:
      [ • ]      
4. Vesting:
Except as otherwise provided in this Award Agreement, the shares of Restricted Stock will vest in accordance with the following schedule; provided that the Participant’s employment with the Company or any Affiliate has not terminated prior to the applicable vesting date:


Vesting Date
Number of Shares of Restricted Stock as to Which Participant is Vested
_______________, 20__
_______________
_______________, 20__
_______________
_______________, 20__
_______________
_______________, 20__
_______________
5. Death, Disability
or Retirement:
Notwithstanding the provisions of Section 4 of this Award Agreement, if the Participant’s employment with the Company or any Affiliate terminates by reason of the Participant’s death, Disability or Retirement before an applicable vesting date, then any then unvested Restricted Stock granted under this Award Agreement will vest on the date of the Participant’s termination of employment due to death, Disability or Retirement.





6. Change in Control:
Notwithstanding the provisions of Section 4 of this Award Agreement, in the event of a Change in Control prior to an applicable vesting date, all Restricted Stock granted under this Award Agreement will vest on the date of such Change in Control if the successor entity to the Company does not, as part of the Change in Control, assume the Award of Restricted Stock under this Award Agreement. In the event that the successor entity to the Company assumes the Award of Restricted Stock under this Award Agreement as part of the Change in Control, the Restricted Stock granted under this Award Agreement will vest upon the earlier of (a) the date or dates provided under Section 4 of this Award Agreement; or (b) on the date of the Participant’s termination of employment for any reason, with respect to the total number of then unvested Restricted Stock granted under this Award Agreement.
7. Settlement:
Subject to the provisions of Section 9 of this Award Agreement, at the time that the Participant becomes vested in any shares of Restricted Stock pursuant to any section of this Award Agreement, the Company shall cause such vested shares of Stock to be settled in a brokerage account for the Participant, and such shares of Stock shall be transferable by the Participant.
8. Dividend Equivalent Payments:
If, during the period beginning on the Grant Date and ending on the date on which any shares of Restricted Stock are to be settled pursuant to Section 7 of this Award Agreement (the “Applicable Dividend Period”), the Company pays any dividends in cash with respect to the outstanding shares of Stock (a “Cash Dividend”), then upon the settlement of vested Restricted Stock, the Participant shall also be entitled to receive a cash payment in an amount equal to the product of (a) the number of shares of Stock to be settled in the brokerage account upon such settlement of the Restricted Stock; and (b) the aggregate amount of the Cash Dividends paid per share of Stock during the Applicable Dividend Period (the “Dividend Equivalents”). Such Dividend Equivalents will be payable by the Company at the same time as the Restricted Stock to which they relate are settled pursuant to Section 7 of this Award Agreement.
If, during the Applicable Dividend Period, the Company pays any dividends in shares of Stock with respect to the outstanding shares of Stock, then, the Company will increase the number of shares of Restricted Stock granted hereunder by an amount equal to the product of (a) the number of shares of Restricted Stock; and (b) the number of shares of Stock paid by the Company per share of Stock (collectively, the “Additional Restricted Stock”). Each share of Additional Restricted Stock will be subject to the same terms and conditions applicable to the Restricted Stock for which such share of Additional Restricted Stock was awarded and will be settled pursuant to Section 7 of this Award Agreement at the same time and on the same basis as such Restricted Stock.





9. Conditions:
The Company’s obligation to settle shares of Stock in a brokerage account upon the settlement of vested Restricted Stock is subject to the satisfaction of the following conditions: (a) the Participant is not, at the time of settlement, in material breach of any of the Participant’s obligations under this Award Agreement, or under any other agreement with the Company or any Affiliate; (b) no preliminary or permanent injunction or other order against the settlement of shares of Stock issued by a federal or state court of competent jurisdiction in the United States shall be in effect; (c) there shall not be in effect any federal or state law, rule or regulation which prevents or delays the settlement of shares of Stock; and (d) the Participant shall confirm any factual matters reasonably requested by the Committee, the Company or counsel for the Company.
10. Shareholder Rights:
The Company shall cause its books and records to reflect entries evidencing the shares of Restricted Stock or rights to acquire Additional Restricted Stock (as described in Section 8 of this Award Agreement) to be recorded in the Participant’s name. Prior to the settlement of the Restricted Stock, such book entries shall reflect a restrictive legend to the effect that ownership of such shares of Restricted Stock (and any Additional Restricted Stock), and the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms, and conditions provided in the Plan and this Award Agreement. The Participant shall have the right to vote the Restricted Stock awarded to the Participant and to exercise all other rights, powers and privileges of a holder of Stock, with respect to such Restricted Stock, with the exception that (a) the Participant shall not be entitled to settlement of such Restricted Stock until they vest in accordance with Section 4, Section 5 or Section 6 of this Award Agreement; (b) the Company shall retain custody of all Dividend Equivalents and Additional Restricted Stock made or declared with respect to the Restricted Stock (and such Dividend Equivalents and Additional Restricted Stock shall be subject to the same restrictions, terms and conditions as are applicable to the Restricted Stock) until such time, if ever, as the Restricted Stock with respect to which such Dividend Equivalents and Additional Restricted Stock shall have been made, paid, or declared shall have become vested, and such Dividend Equivalents and Additional Restricted Stock shall not bear interest or be segregated in separate accounts and (c) the Participant may not sell, assign, transfer, pledge, exchange, encumber, or dispose of the Restricted Stock or any Additional Restricted Stock prior to the vesting of such Restricted Stock.






11. Effect of Plan:
The Restricted Stock is subject in all cases to the terms and conditions set forth in the Plan, which are incorporated into and made a part of this Award Agreement. In the event of a conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan will govern. All capitalized terms that are used in this Award Agreement but are not defined in this Award Agreement shall have the meanings ascribed to such terms in the Plan.
12. Non-Solicitation:
The Company and the Participant agree that, as consideration for this Award of Restricted Stock, the Participant, for the period of the Participant’s employment with the Company or any Affiliate and for one year thereafter, shall not directly or indirectly induce or solicit or attempt to induce or solicit any customer, prospective customer, insured, officer, or employee of the Company, any Affiliate or subsidiary (collectively, “State Auto”), to (a) do business with any other insurance company, insurance agency or any other person instead of State Auto, (b) cease or limit employment with or doing business with State Auto, or (c) cease or limit the insured’s and/or account’s business or insurance relationship with State Auto. For purposes of this Section 12 of this Award Agreement, a “prospective customer” shall mean a potential insured with whom a business or insurance quote from State Auto is outstanding as of the last day of employment of the Participant by the Company or any Affiliate.
13. Acknowledgment:
By receipt of this Award, the Participant acknowledges and agrees that the Restricted Stock is subject to all of the terms and conditions of the Plan and this Award Agreement.
14. Forfeiture:
Notwithstanding any other provision of this Agreement, the Restricted Stock granted hereunder shall be subject to forfeiture by the Participant under the Forfeiture for Cause provisions contained in Section 4.7 of the Plan or for any violation of the provisions of Section 12 of this Award Agreement.
15. Effect on Other Agreements:
The Company and the Participant acknowledge and agree that the provisions of this Award Agreement shall supersede any and all other agreements and rights that the Participant has under any agreements or arrangements between the Participant and the Company, whether in writing or otherwise, with respect to the matters set forth herein.





EXHIBIT 10.53
STATE AUTO FINANCIAL CORPORATION
2017 LONG-TERM INCENTIVE PLAN
TIME BASED
DEFERRED STOCK UNIT AWARD AGREEMENT

State Auto Financial Corporation, an Ohio corporation (the “Company”), hereby grants to the employee of the Company named herein (the “Participant”) the following Deferred Stock Unit Award (“Deferred Stock Units”) pursuant to the terms and conditions of the State Auto Financial Corporation 2017 Long-Term Incentive Plan (the “Plan”), and this Time Based Deferred Stock Unit Award Agreement (this “Award Agreement”).

1. Name of Participant:
          [•]          
2. Grant Date:
     [•]     , 20[•] (the “Grant Date”)
3. Deferred Stock Units Granted:
     [•]     
4. Vesting:
Except as otherwise provided in this Award Agreement, the Deferred Stock Units will vest in accordance with the following schedule; provided that the Participant’s employment with the Company or any Affiliate has not terminated prior to the applicable vesting date:
Vesting Date
Number of Deferred
Stock Units as to
Which Employee is Vested
___________, 20__
_____
___________, 20__
_____
___________, 20__
_____

5. Death, Disability
     or Retirement:
Notwithstanding the provisions of Section 4 of this Award Agreement, if the Participant’s employment with the Company or any Affiliate terminates by reason of the Participant’s death, Disability or Retirement before an applicable vesting date, then any then unvested Deferred Stock Units granted under this Award Agreement will vest on the date of the Participant’s termination of employment due to death, Disability or Retirement.
6. Change in Control:
Notwithstanding the provisions of Section 4 of this Award Agreement, in the event of a Change in Control prior to an applicable vesting date, all Deferred Stock Units granted under this Award Agreement will vest on the date of such Change in Control if the successor entity to the Company does not, as part of the Change in Control, assume the Award of Deferred Stock Units under this Award Agreement. In the event that the successor entity to the Company assumes the Award of Deferred Stock Units under this Award Agreement as part of the Change in Control, the Deferred Stock Units granted under this Award Agreement will vest upon the earlier of (a) the date or dates provided under Section 4 of this Award Agreement; or (b) on the date of the Participant’s termination of employment for any reason, with respect to the total number of then unvested Deferred Stock Units granted under this Award Agreement.
7. Settlement:
At the time that any of the Deferred Stock Units vest pursuant to Section 4 or any other section of this Award Agreement, the Participant will receive one (1) share of Stock for each Deferred Stock Unit that vests. Deferred Stock Units settled under this Award Agreement are intended to be exempt from Section 409A under the exemption for short term deferrals. Accordingly, Deferred Stock Units will be settled in shares of Stock no later than the 15th day of the third month following the end of the fiscal year of the Company (or if later the calendar year) in which the Deferred Stock Units vest.





8. Dividend Equivalent
     Payments:
If, during the period beginning on the Grant Date and ending on the date on which any Deferred Stock Units are to be settled pursuant to the applicable provisions of this Award Agreement (the “Applicable Dividend Period”), the Company pays any dividends in cash with respect to the outstanding shares of Stock (a “Cash Dividend”), then, upon the settlement of vested Deferred Stock Units, the Participant shall also be entitled to receive a cash payment in an amount equal to the product of (a) the number of shares of Stock to be issued upon such settlement of the Deferred Stock Units; and (b) the aggregate amount of the Cash Dividends paid per share of Stock during the Applicable Dividend Period (the “Dividend Equivalents”). Such Dividend Equivalents will be payable by the Company at the same time as the Deferred Stock Units to which they relate are settled pursuant to the applicable provisions of this Award Agreement.
If during the Applicable Dividend Period the Company pays any dividends in shares of Stock with respect to the outstanding shares of Stock, then, the Company will increase the number of Deferred Stock Units granted hereunder by an amount equal to the product of (a) the number of shares of Stock to be issued in exchange for the then outstanding Deferred Stock Units; and (b) the number of shares of Stock paid by the Company per share of Stock (collectively, the “Stock Dividend Deferred Stock Units”). Each Stock Dividend Deferred Stock Unit will be subject to the same terms and conditions applicable to the Deferred Stock Unit for which such Stock Dividend Deferred Stock Unit was awarded and will be settled pursuant to the applicable provisions of this Award Agreement at the same time and on the same basis as such Deferred Stock Unit.
9. Conditions:
The Company’s obligation to deliver shares of Stock upon the settlement of a vested Deferred Stock Unit is subject to the satisfaction of the following conditions: (a) the Participant is not, at the time of settlement, in material breach of any of his or her obligations under this Award Agreement, or under any other agreement with the Company or any Affiliate; (b) no preliminary or permanent injunction or other order against the delivery of the shares of Stock issued by a federal or state court of competent jurisdiction in the United States shall be in effect; (c) there shall not be in effect any federal or state law, rule or regulation which prevents or delays delivery of the shares of Stock or payment, as appropriate; and (d) the Participant shall confirm any factual matters reasonably requested by the Committee, the Company or counsel for the Company.
10. Shareholder Rights:
Except as otherwise provided in this Award Agreement, the Participant shall have none of the rights of a shareholder with respect to the shares of Stock underlying the Deferred Stock Units, until the Participant becomes the recordholder of the shares of Stock underlying the Deferred Stock Units.
11. Effect of Plan:
The Deferred Stock Units are subject in all cases to the terms and conditions set forth in the Plan, which are incorporated into and made a part of this Award Agreement. In the event of a conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan will govern. All capitalized terms that are used in this Award Agreement but are not defined in this Award Agreement shall have the meanings ascribed to such terms in the Plan.
12. Counterparts:
This Award Agreement may be signed in counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.
13. Forfeiture:
Notwithstanding any other provision of this Award Agreement, the Deferred Stock Units granted hereunder shall be subject to (a) the Forfeiture for Cause provisions contained in Section 4.7 of the Plan; and (b) any clawback or similar policy that may be implemented by the Company which is applicable to the Deferred Stock Units.





14. Effect on Other Agreements:
The parties acknowledge and agree that the provisions of this Award Agreement shall supersede any and all other agreements and rights that the Participant has under any agreements or arrangements between the Participant and the Company, whether in writing or otherwise, with respect to the matters set forth herein.

In Witness Whereof, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and the Participant has executed this Agreement, effective as of the Grant Date.

STATE AUTO FINANCIAL CORPORATION
By: ____________________________________
Name:
Title:
PARTICIPANT:
    
Name:





EXHIBIT 10.54
STATE AUTO FINANCIAL CORPORATION
2017 LONG-TERM INCENTIVE PLAN
PERFORMANCE BASED
DEFERRED STOCK UNIT AWARD AGREEMENT

State Auto Financial Corporation, an Ohio corporation (the “Company”), hereby grants to the employee of the Company named herein (the “Participant”) the following Deferred Stock Unit Award (“Deferred Stock Units”) pursuant to the terms and conditions of the State Auto Financial Corporation 2017 Long-Term Incentive Plan (the “Plan”), and this Performance Based Deferred Stock Unit Award Agreement (this “Award Agreement”).


1. Name of Participant:
          [•]          
2. Grant Date:
     [•]     , 20[•] (the “Grant Date”)
3. Combined Ratio
     Performance Period:
The period commencing on      [•]     , 20[•] and ending on      [•]     , 20[•] (the “CR Performance Period”).
4. Stock Price
     Performance Period:
The period commencing on the Grant Date and ending on      [•]     , 20[•] (the “Stock Performance Period”).
5. Deferred Stock Units Granted:
     [•]     
6. Vesting:
Except as otherwise provided in this Award Agreement, the Deferred Stock Units will vest only if and to the extent that: (a) the Compensation Committee determines that the initial performance goal set forth in Section 7 of this Award Agreement (the “Initial Performance Goal”) and/or the supplemental performance goal set forth in Section 8 of this Award Agreement (the “Supplemental Performance Goal”) have been satisfied; and (b) the Participant is employed with the Company or any Affiliate on the last day of the Stock Performance Period.
7. Initial Performance
     Goal:
The Initial Performance Goal applicable to the Deferred Stock Units granted to the Participant pursuant to this Award Agreement shall be the Company’s combined ratio (the “Combined Ratio”).
At the end of the CR Performance Period, if the average Combined Ratio, during any four (4) consecutive quarters during the CR Performance Period, was never equal to or lower than   [•]   then none of the Deferred Stock Units will vest pursuant to this Section 7 of this Award Agreement. If, at the end of the CR Performance Period, the average Combined Ratio, during any four (4) consecutive quarters during the CR Performance Period, was equal to or lower than   [•]  , then the Deferred Stock Units will vest in accordance with the following schedule using the average Combined Ratio of the four (4) consecutive quarters during the CR Performance Period with the lowest Combined Ratio:






Four (4) Consecutive Quarter Average Combined Ratio
___
___
___
___
___
Number of Deferred Stock Units as to which Participant is Vested
______
______
______
______
______
For Combined Ratio results between the levels designated in the schedule contained in this Section 7 of this Award Agreement, the Deferred Stock Units will vest on a prorated basis between such levels.

8. Supplemental
     Performance Goal:
The Supplemental Performance Goal, the compound annual growth rate of the Company’s Stock price during the Stock Performance Period (the “CAGR”), will only be applicable if any Deferred Stock Units remain unvested after the Compensation Committee applies the provisions of Section 7 of this Award Agreement. To the extent that the Supplemental Performance Goal is applicable, the Deferred Stock Units will vest in accordance with the following schedule, based on the CAGR, comparing (a) the closing price of the Company Stock on the Grant Date to (b) the closing price of the Company Stock for the ten (10) consecutive trading days during the last calendar month of the Stock Performance Period which yields the highest closing price:
CAGR

   %
   %
   %
   %
Number of Deferred Stock Units as to which Participant is Vested (not to exceed Deferred Stock Units Granted)
_____
_____
_____
_____





For CAGR between the levels designated in the schedule contained in this Section 8 of this Award Agreement, the Deferred Stock Units will vest on a prorated basis between such levels.
Notwithstanding any provision contained herein, after applying the provisions of Section 7 of this Award Agreement and the provisions of this Section 8 of this Award Agreement, (a) the number of Deferred Stock Units that vest under the provisions of this Section 8 will represent the minimum number of Deferred Stock Units that will become vested under this Award Agreement; and (b) the Participant may not vest in more than the total number of Deferred Stock Units granted under this Award Agreement.
9. Death or Disability:
If the Participant’s employment with the Company or any Affiliate terminates by reason of the Participant’s death or Disability before the end of the Stock Performance Period, then, notwithstanding any provision contained in this Award Agreement, the Deferred Stock Units granted under this Award Agreement shall become vested as of the date of the Participant’s death or Disability. Such vested Deferred Stock Units will be settled in the manner described in Section 13 of this Award Agreement; provided, that, the Deferred Stock Units will be settled no later than the 15th day of the third month following the end of the calendar year in which the Participant’s death or Disability occurs.
10. Retirement:
If the Participant’s employment with the Company or any Affiliate is terminated by reason of the Participant’s Retirement before the end of the Stock Performance Period, then, notwithstanding any provision contained in this Award Agreement, the Deferred Stock Units granted under this Award Agreement shall become vested in accordance with the provisions of Sections 6, 7 and 8 of this Award Agreement; provided, that, for this purpose, the Participant will be deemed to have been employed by the Company or an Affiliate on the last day of the Stock Performance Period. Such Deferred Stock Units will be settled at the time and in the manner described in Section 13 of this Award Agreement.
11. Termination of
Employment for any
Reason Other than
Retirement, Death or
Disability:
If the Participant’s employment with the Company or any Affiliate terminates for any reason other than the Participant’s Retirement, death or Disability before the last day of the Stock Performance Period, then all Deferred Stock Units granted under this Award Agreement will be forfeited as of the date of the Participant’s termination of employment.
12. Change in Control:
Notwithstanding the provisions of Section 6 of this Award Agreement, in the event of a Change in Control prior to the end of the Stock Performance Period, all Deferred Stock Units granted under this Award Agreement will vest on the date of such Change in Control if the successor entity to the Company does not, as part of the Change in Control, assume the Award of Deferred Stock Units under this Award Agreement. In the event that the successor entity to the Company assumes the Award of Deferred Stock Units under this Award Agreement as part of the Change in Control, the Deferred Stock Units granted under this Award Agreement will vest upon the earlier of (a) the date provided under Section 6 of this Award Agreement to the extent determined pursuant to the provisions of Sections 7 and 8 of this Award Agreement; or (b) on the date of the Participant’s termination of employment for any reason, with respect to the total number of Deferred Stock Units granted under this Award Agreement.
13. Settlement:
At the time that any of the Deferred Stock Units vest pursuant to either Section 6 or any other section of this Award Agreement, the Participant will receive one (1) share of Stock for each Deferred Stock Unit that vests. Deferred Stock Units settled under this Award Agreement are intended to be exempt from Section 409A under the exemption for short term deferrals. Accordingly, Deferred Stock Units will be settled in shares of Stock no later than the 15th day of the third month following the end of the fiscal year of the Company (or if later the calendar year) in which the Deferred Stock Units vest.





14. Dividend Equivalent
       Payments:
If, during the period beginning on the Grant Date and ending on the date on which any Deferred Stock Units are to be settled pursuant to the applicable provisions of this Award Agreement (the “Applicable Dividend Period”), the Company pays any dividends in cash with respect to the outstanding shares of Stock (a “Cash Dividend”), then, upon the settlement of vested Deferred Stock Units, the Participant shall also be entitled to receive a cash payment in an amount equal to the product of (a) the number of shares of Stock to be issued upon such settlement of the Deferred Stock Units; and (b) the aggregate amount of the Cash Dividends paid per share of Stock during the Applicable Dividend Period (the “Dividend Equivalents”). Such Dividend Equivalents will be payable by the Company at the same time as the Deferred Stock Units to which they relate are settled pursuant to the applicable provisions of this Award Agreement.
If during the Applicable Dividend Period the Company pays any dividends in shares of Stock with respect to the outstanding shares of Stock, then, the Company will increase the number of Deferred Stock Units granted hereunder by an amount equal to the product of (a) the number of shares of Stock to be issued in exchange for the then outstanding Deferred Stock Units; and (b) the number of shares of Stock paid by the Company per share of Stock (collectively, the “Stock Dividend Deferred Stock Units”). Each Stock Dividend Deferred Stock Unit will be subject to the same terms and conditions applicable to the Deferred Stock Unit for which such Stock Dividend Deferred Stock Unit was awarded and will be settled pursuant to the applicable provisions of this Award Agreement at the same time and on the same basis as such Deferred Stock Unit.
15. Conditions:
The Company’s obligation to deliver shares of Stock upon the settlement of a vested Deferred Stock Unit is subject to the satisfaction of the following conditions: (a) the Participant is not, at the time of settlement, in material breach of any of his or her obligations under this Award Agreement, or under any other agreement with the Company or any Affiliate; (b) no preliminary or permanent injunction or other order against the delivery of the shares of Stock issued by a federal or state court of competent jurisdiction in the United States shall be in effect; (c) there shall not be in effect any federal or state law, rule or regulation which prevents or delays delivery of the shares of Stock or payment, as appropriate; and (d) the Participant shall confirm any factual matters reasonably requested by the Committee, the Company or counsel for the Company.
16. Shareholder Rights:
Except as otherwise provided in this Award Agreement, the Participant shall have none of the rights of a shareholder with respect to the shares of Stock underlying the Deferred Stock Units, until the Participant becomes the recordholder of the shares of Stock underlying the Deferred Stock Units.
17. Effect of Plan:
The Deferred Stock Units are subject in all cases to the terms and conditions set forth in the Plan, which are incorporated into and made a part of this Award Agreement. In the event of a conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan will govern. All capitalized terms that are used in this Award Agreement but are not defined in this Award Agreement shall have the meanings ascribed to such terms in the Plan.
18. Counterparts:
This Award Agreement may be signed in counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.
19. Forfeiture:
Notwithstanding any other provision of this Award Agreement, the Deferred Stock Units granted hereunder shall be subject to (a) the Forfeiture for Cause provisions contained in Section 4.7 of the Plan; and (b) any clawback or similar policy that may be implemented by the Company which is applicable to the Deferred Stock Units.





20. Effect on Other Agreements:
The parties acknowledge and agree that the provisions of this Award Agreement shall supersede any and all other agreements and rights that the Participant has under any agreements or arrangements between the Participant and the Company, whether in writing or otherwise, with respect to the matters set forth herein.

In Witness Whereof, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and the Participant has executed this Agreement, effective as of the Grant Date.

STATE AUTO FINANCIAL CORPORATION
By: ____________________________________
Name:
Title:
PARTICIPANT:
    
Name:





EXHIBIT 10.55
STATE AUTO FINANCIAL CORPORATION
2017 LONG-TERM INCENTIVE PLAN
PERFORMANCE BASED
RESTRICTED STOCK AWARD AGREEMENT

State Auto Financial Corporation, an Ohio corporation (the “Company”), hereby grants to the employee of the Company named herein (the “Participant”) the following Restricted Stock Award (“Restricted Stock”) pursuant to the terms and conditions of the State Auto Financial Corporation 2017 Long-Term Incentive Plan (the “Plan”), and this Performance Based Restricted Stock Award Agreement (this “Award Agreement”).
1. Name of Participant:
               [ • ]               
2. Grant Date:
      [ • ]      , 20[ • ] (the “Grant Date”)
3. Performance Period:
The period commencing on the Grant Date and ending on       [ • ]      , 20[] (the “Performance Period”)
4. Number of Shares of Restricted Stock Granted:
      [ • ]      
5. Vesting:
Except as otherwise provided in this Award Agreement, the Restricted Stock will vest in accordance with the applicable provisions of Section 6 of this Award Agreement on each of the following vesting dates during the Performance Period; provided that the Participant’s employment with the Company or any Affiliate has not terminated prior to the applicable vesting date:
(a)       [ • ]      , 20[ • ]
(b)       [ • ]      , 20[ • ]
(c)       [ • ]      , 20[ • ]
(d)       [ • ]      , 20[ • ]
6. Determination of
     Vested Restricted Stock:
As of each vesting date described in Section 5 of this Award Agreement, the number of shares of Restricted Stock that will vest will be determined pursuant to the formula (i) * (ii), where (i) equals one-fourth (1/4) of the number of shares of Restricted Stock granted under Section 4 of this Award Agreement; and (ii) equals the multiple achieved by the Company during the calendar year preceding the applicable vesting date under the matrix used for awards granted under the One Team Incentive Plan for the calendar year ending immediately before the applicable vesting date. Notwithstanding any provision contained herein, the number of shares of Restricted Stock that may vest on each applicable vesting date may not exceed one-fourth (1/4) of the number of shares of Restricted Stock granted under Section 4 of this Award Agreement. Any shares of Restricted Stock that may vest on an applicable vesting date pursuant to the provisions of this Section 6 of this Award Agreement, but do not vest after the application of the formula contained herein will be forfeited as of such applicable vesting date.
7. Death or Disability:
Notwithstanding the provisions of Sections 5 and 6 of this Award Agreement, if the Participant’s employment with the Company or any Affiliate terminates by reason of the Participant’s death or Disability before an applicable vesting date, then any then unvested Restricted Stock granted under this Award Agreement will vest on the date of the Participant’s termination of employment due to death or Disability.
8. Retirement:
Notwithstanding the provisions of Sections 5 and 6 of this Award Agreement, if the Participant’s employment with the Company or any Affiliate terminates by reason of the Participant’s Retirement before an applicable vesting date, then one-fourth (1/4) of the number of shares of Restricted Stock granted under Section 4 of this Award Agreement that may have become vested on the next applicable vesting date following the Participant’s Retirement will vest on the date of the Participant’s termination of employment due to Retirement. Any remaining unvested Restricted Stock after application of the provisions of this Section 8 of this Award Agreement will be forfeited.





9. Change in Control:
Notwithstanding the provisions of Sections 5 and 6 of this Award Agreement, in the event of a Change in Control prior to an applicable vesting date, all Restricted Stock granted under this Award Agreement will vest on the date of such Change in Control if the successor entity to the Company does not, as part of the Change in Control, assume the Award of Restricted Stock under this Award Agreement. In the event that the successor entity to the Company assumes the Award of Restricted Stock under this Award Agreement as part of the Change in Control, the Restricted Stock granted under this Award Agreement will vest upon the earlier of (a) the date or dates in accordance with the provisions of Sections 5 and 6 of this Award Agreement; or (b) on the date of the Participant’s termination of employment for any reason, with respect to the total number of then unvested Restricted Stock granted under this Award Agreement.

10. Settlement:
Subject to the provisions of Section 12 of this Award Agreement, at the time that the Participant becomes vested in any shares of Restricted Stock pursuant to any section of this Award Agreement, the Company shall cause such vested shares of Stock to be settled in a brokerage account for the Participant, and such shares of Stock shall be transferable by the Participant.
11. Dividend Equivalent Payments:
If, during the period beginning on the Grant Date and ending on the date on which any shares of Restricted Stock are to be settled pursuant to Section 10 of this Award Agreement (the “Applicable Dividend Period”), the Company pays any dividends in cash with respect to the outstanding shares of Stock (a “Cash Dividend”), then upon the settlement of vested Restricted Stock, the Participant shall also be entitled to receive a cash payment in an amount equal to the product of (a) the number of shares of Stock to be settled in the brokerage account upon such settlement of the Restricted Stock; and (b) the aggregate amount of the Cash Dividends paid per share of Stock during the Applicable Dividend Period (the “Dividend Equivalents”). Such Dividend Equivalents will be payable by the Company at the same time as the Restricted Stock to which they relate are settled pursuant to Section 10 of this Award Agreement.
If, during the Applicable Dividend Period, the Company pays any dividends in shares of Stock with respect to the outstanding shares of Stock, then, the Company will increase the number of shares of Restricted Stock granted hereunder by an amount equal to the product of (a) the number of shares of Restricted Stock; and (b) the number of shares of Stock paid by the Company per share of Stock (collectively, the “Additional Restricted Stock”). Each share of Additional Restricted Stock will be subject to the same terms and conditions applicable to the Restricted Stock for which such share of Additional Restricted Stock was awarded and will be settled pursuant to Section 10 of this Award Agreement at the same time and on the same basis as such Restricted Stock.
12. Conditions:
The Company’s obligation to settle shares of Stock in a brokerage account upon the settlement of vested Restricted Stock is subject to the satisfaction of the following conditions: (a) the Participant is not, at the time of settlement, in material breach of any of the Participant’s obligations under this Award Agreement, or under any other agreement with the Company or any Affiliate; (b) no preliminary or permanent injunction or other order against the settlement of shares of Stock issued by a federal or state court of competent jurisdiction in the United States shall be in effect; (c) there shall not be in effect any federal or state law, rule or regulation which prevents or delays the settlement of shares of Stock; and (d) the Participant shall confirm any factual matters reasonably requested by the Committee, the Company or counsel for the Company.





13. Shareholder Rights:
The Company shall cause its books and records to reflect entries evidencing the shares of Restricted Stock or rights to acquire Additional Restricted Stock (as described in Section 11 of this Award Agreement) to be recorded in the Participant’s name. Prior to the settlement of the Restricted Stock, such book entries shall reflect a restrictive legend to the effect that ownership of such shares of Restricted Stock (and any Additional Restricted Stock), and the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms, and conditions provided in the Plan and this Award Agreement. The Participant shall have the right to vote the Restricted Stock awarded to the Participant and to exercise all other rights, powers and privileges of a holder of Stock, with respect to such Restricted Stock, with the exception that (a) the Participant shall not be entitled to settlement of such Restricted Stock until they vest in accordance with any section of this Award Agreement; (b) the Company shall retain custody of all Dividend Equivalents and Additional Restricted Stock made or declared with respect to the Restricted Stock (and such Dividend Equivalents and Additional Restricted Stock shall be subject to the same restrictions, terms and conditions as are applicable to the Restricted Stock) until such time, if ever, as the Restricted Stock with respect to which such Dividend Equivalents and Additional Restricted Stock shall have been made, paid, or declared shall have become vested, and such Dividend Equivalents and Additional Restricted Stock shall not bear interest or be segregated in separate accounts and (c) the Participant may not sell, assign, transfer, pledge, exchange, encumber, or dispose of the Restricted Stock or any Additional Restricted Stock prior to the vesting of such Restricted Stock.
14. Effect of Plan:
The Restricted Stock is subject in all cases to the terms and conditions set forth in the Plan, which are incorporated into and made a part of this Award Agreement. In the event of a conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan will govern. All capitalized terms that are used in this Award Agreement but are not defined in this Award Agreement shall have the meanings ascribed to such terms in the Plan.

15. Non-Solicitation:
The Company and the Participant agree that, as consideration for this Award of Restricted Stock, the Participant, for the period of the Participant’s employment with the Company or any Affiliate and for one year thereafter, shall not directly or indirectly induce or solicit or attempt to induce or solicit any customer, prospective customer, insured, officer, or employee of the Company, any Affiliate or subsidiary (collectively, “State Auto”), to (a) do business with any other insurance company, insurance agency or any other person instead of State Auto, (b) cease or limit employment with or doing business with State Auto, or (c) cease or limit the insured’s and/or account’s business or insurance relationship with State Auto. For purposes of this Section 15 of this Award Agreement, a “prospective customer” shall mean a potential insured with whom a business or insurance quote from State Auto is outstanding as of the last day of employment of the Participant by the Company or any Affiliate.
16. Acknowledgment:
By receipt of this Award, the Participant acknowledges and agrees that the Restricted Stock is subject to all of the terms and conditions of the Plan and this Award Agreement.
17. Forfeiture:
Notwithstanding any other provision of this Agreement, the Restricted Stock granted hereunder shall be subject to forfeiture by the Participant under the Forfeiture for Cause provisions contained in Section 4.7 of the Plan or for any violation of the provisions of Section 15 of this Award Agreement.
18. Effect on Other Agreements:
The Company and the Participant acknowledge and agree that the provisions of this Award Agreement shall supersede any and all other agreements and rights that the Participant has under any agreements or arrangements between the Participant and the Company, whether in writing or otherwise, with respect to the matters set forth herein.













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 the1991 Directors’ Stock Option Plan

(3)
Registration Statement (Form S-8, No. 33-41423, 333-05755, 333-147333, and 333-206148) pertaining to the 1991 Employee Stock Purchase and Dividend Reinvestment Plan

(4)
Registration Statement (Form S-8, No. 333-56336) pertaining to the State Auto Insurance Companies Retirement Savings Plan

(5)
Registration Statement (Form S-8, No. 333-43882) pertaining to the 2000 Directors’ Stock Option Plan

(6)
Registration Statement (Form S-8, No. 333-43880) pertaining to the 2000 Stock Option Plan

(7)
Registration Statement (Form S-3, No. 333-41849 and 333-209878) pertaining to the Monthly Stock Purchase Plan for Independent Agents

(8)
Registration Statement (Form S-3, No. 333-90529) pertaining to the 1998 State Auto Agents’ Stock Option Plan

(9)
Registration Statement (Form S-8, No. 333-127172) pertaining to the 2005 Outside Directors Restricted Share Unit Plan

(10)
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

(11)
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

(12)
Registration Statement (Form S-8, No. 333-170564) pertaining to the State Auto Property & Casualty Insurance Company Amended and Restated Directors Deferred Compensation Plan, and

(13)
Registration Statement (Form S-8, No. 333-214471) pertaining to the Outside Directors Restricted Share Unit Plan of State Auto Financial Corporation;

of our reports dated February 28, 2018, 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, 2017.


/s/ Ernst & Young LLP
 
 
Grandview Heights, Ohio
 
 
February 28, 2018
 
 
 
 
 


 










POWER OF ATTORNEY FOR SETAREH POURAGHABAGHER

Know all by these presents that I, Setareh Pouraghabagher, do hereby appoint MELISSA A. CENTERS, my true and lawful attorney-in-fact to:

(1)
Prepare, execute in my name and on my behalf, and submit to the U.S. Securities and Exchange Commission (the “SEC”) a Form ID, including amendments thereto, and any other documents necessary or appropriate to obtain codes and passwords enabling me to make electronic filings with the SEC of reports required by Section 16(a) of the Securities Act of 1934 or any rule or regulation of the SEC;

(2)
Execute for me and on my behalf, in my capacity as an officer and/or director of State Auto Financial Corporation (the "Company"), Forms 3, 4, and 5 in accordance with Section 16(a) of the Securities Exchange Act of 1934 and the rules thereunder;

(3)
Do and perform any and all acts for me and on my behalf which may be necessary or desirable to complete and execute any such Form 3, 4, or 5, complete and execute any amendment or amendments thereto, and file such form with the SEC and any stock exchange or similar authority; and

(4)
Take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required by, me,it being understood that the documents executed by such attorney-in-fact on my behalf pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion.

I hereby grant to each such attorney-in-fact full power and authority to do and perform any and every act and thing whatsoever requisite, necessary, or proper to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as I might or could do if personally present, with full power of substitution or revocation, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this power of attorney and the rights and powers herein granted. I acknowledge that the foregoing attorney-in-fact, in serving in such capacity at my request, is not assuming, nor is the Company assuming, any of my responsibilities to comply with Section 16 of the Securities Exchange Act of 1934.

This Power of Attorney shall remain in full force and effect until I am no longer required to file Forms 3, 4, and 5 with respect to my holdings of and transactions in securities issued by the Company, unless earlier revoked by the undersigned in a signed writing delivered to the foregoing attorney-in-fact.

IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 30 day of June , 20 17 .


Signature: /s/ Setareh Pouraghabagher

Print Name: Setareh Pouraghabagher





EXHIBIT 31.01
CERTIFICATION
I, Michael E. LaRocco, certify that:
1.
I have reviewed this Form 10-K of State Auto Financial Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2018
 
 
/s/ Michael E. LaRocco
 
Michael E. LaRocco, Chief Executive Officer
 
Chief Executive Officer
(Principal Executive Officer)






EXHIBIT 31.02
CERTIFICATION
I, Steven E. English, certify that:
1.
I have reviewed this Form 10-K of State Auto Financial Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2018
 
 
/s/ Steven E. English
 
Steven E. English,
 
Chief Financial Officer
(Principal Financial Officer)





EXHIBIT 32.01
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of State Auto Financial Corporation (the “Company”) on Form 10-K for the period ended December 31, 2017, 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 28, 2018

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.





EXHIBIT 32.02
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of State Auto Financial Corporation (the “Company”) on Form 10-K for the period ended December 31, 2017, 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 28, 2018

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.