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 SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2017 improved 0.5 points when compared to 2016 (Tables 2 -3).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.
•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, which contributed $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.
The 2016 and 2018 FHLB Loans are fully secured by a pledge of specific investment securities of State Auto P&C.
•Level 1 includes observable inputs which reflect quoted prices for identical assets or liabilities in active markets at the measurement date.
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, 2018 and 2017.
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 8b). 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, 2018 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.
The Company recorded favorable development related to prior years’ loss and loss expense reserves in 2018 of $80.2 million, compared to favorable development of $46.6 million in 2017 and adverse development of $27.0 million in 2016. Favorable development of prior years' unallocated loss adjustment expenses was $7.1 million of the 2018 development. Partially offsetting the favorable development was $3.5 million of adverse development in catastrophe reserves. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves was due to $79.7 million of favorable development in the personal and commercial insurance segments. In the personal insurance segment, personal auto contributed $24.4 million of favorable development primarily driven by lower than anticipated severity emerging from accident years 2016 and 2017, and homeowners contributed favorable development of $7.3 million, spread across several accident years. In the commercial insurance segment, workers' compensation, middle market commercial, small commercial package, and commercial auto contributed $13.3 million, $12.2 million, $9.6 million, and $8.4 million, respectively, of favorable development. Slightly offsetting the favorable development was adverse development in the specialty insurance segment of $3.1 million, primarily driven by E&S casualty and programs with adverse development of $2.7 million and $1.2 million, respectively. The E&S casualty adverse development for prior accident years was due primarily to development within our healthcare and umbrella books of business. The programs adverse development for prior accident years was driven by increased ultimate loss estimates for commercial auto liability and contractors liability coverages.
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 8a 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.
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 2015. The Company has no current U.S. federal or state and local income tax examinations on-going at this time.
The postretirement plan’s gross benefit payments for 2018 were $2.4 million, including the prescription drug benefits. The postretirement plan’s subsidy related to Medicare Prescription Drug Improvement and Modernization Act of 2003 was $0.1 million for 2018 and estimates future annual subsidies to be approximately $0.3 million.
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.
The following table sets forth information pertaining to the total options outstanding and exercisable at December 31, 2018:
The following table sets forth financial information regarding the Company’s reportable segments at December 31, 2018 and 2017: