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. As described in more detail below, we have exited our specialty business, which will result in the elimination of our specialty insurance segment and its related underwriting results from the State Auto Group. See “Personal and Commercial Insurance” and “Specialty Insurance” in Item 1 of this Form 10-K for more information about our insurance segments.
In 2018 an important milestone in our journey was achieved with our combined personal and commercial insurance segments reporting 12.5% net written premium growth and a SAP combined ratio of 98.6, along with 7.1 points of improvement in our GAAP combined ratio over 2017. These achievements were the result of significant, sustained efforts to return the Company to underwriting profitability. Our results in 2018 were an important step forward and provide us with a positive outlook for 2019.
We made significant progress during 2018 in addressing concerns that have impacted our underwriting results since 2012. We are more competitive thanks to our new digital platform and new products, which has allowed us to increase the number and type of distribution partners, including those who specialize in online and digital distribution. These new distribution partners now account for a growing part of our new business and, with our long standing independent agency partners, give us a strong distribution force. As a result, we believe we are now better positioned to consistently deliver an underwriting profit.
Our Claims and Risk Engineering ("CARE") associates continue to identify and implement improvements to our claim handling capabilities. We are increasingly utilizing technology to streamline and improve the claim process. At the same time, we recognize that personal interactions remain important and are focused on improving all aspects of the claim experience for customers.
As of January 2019, we completed the rollout of our digital quote and issue platform for personal lines, small commercial and commercial auto. We are now an exclusively digital insurance company for new customers for these products. The new platform, which includes new products and rates, and incorporates advanced data analytics provides us the ability to more efficiently match rate to risk. We intend to introduce farm and ranch insurance on the new technology platform in 2019, followed by middle market commercial and workers’ compensation.
Our focus in 2019 will be on operational excellence which means getting better at everything we do, every day. Technology, data and analytics will empower and drive our success, and will continue to be the areas in which we invest. We will improve our digital technology platform with ongoing updates and enhancements that address issues or market needs. We believe we are very well positioned to take advantage of growing disruption within the P&C market, and deliver sustained, consistent profitable growth.
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 2018.
The following table sets forth certain key performance indicators we use to monitor our operations for the years ended December 31, 2018, 2017 and 2016:
Our 2018 net income was $12.8 million compared to a net loss of $17.8 million and net income of $19.2 million in 2017 and 2016, respectively. Our 2018 net income reflected improved underwriting results, driven by our personal and commercial segments and our exit of specialty business. Improved underwriting results were offset by a net investment loss of $49.7 million, primarily due to the adoption of ASU 2016-01 effective January 1, 2018 (see further discussion below). Our 2017 results included a provisional net charge of $43.5 million resulting from revaluing our deferred tax assets and liabilities as a result of the enactment of the TCJA.
•Earned premiums in 2018 were $1,238.0 million compared to $1,276.1 million and $1,291.1 million in 2017 and 2016, respectively. Earned premiums declined in 2018 compared to 2017 due to our exit of specialty business, partially offset by growth in the personal insurance segment. 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 exit of program business in 2016.
•The SAP cat loss and ALAE ratio for 2018 was 5.8% compared to 9.7% and 6.3% for 2017 and 2016, respectively. The 2018 cat loss ratio improved when compared to the same 2017 and 2016 periods primarily due to less severe weather events in 2018. The 2017 cat loss ratio increased when compared to 2016 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 SAP non-catastrophe loss and ALAE ratio for 2018 was 52.7% compared to 56.7% and 60.9% for 2017 and 2016, respectively. The 2018 loss ratio improvement of 4.0 points compared to 2017 was attributable to 6.2 points, or $76.6 million, of favorable development of prior accident year losses and loss adjustment expenses in 2018 compared to 3.2 points, or $41.4 million, of favorable development in 2017. Favorable development in 2018 included $79.7 million of favorable development in the personal and commercial insurance segments due primarily to lower than anticipated severity emerging from multiple accident years with the majority of favorable development from the 2016 and 2017 accident years. The 2017 favorable development included $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 the 2014 to 2017 accident years. In addition, the 2018 non-catastrophe loss and ALAE ratio was impacted by 1.0 point of improvement from the current accident year when compared to 2017. The 2017 loss ratio improved 4.2 points compared to 2016, primarily due to favorable development in 2017 compared to 1.9 points, or $24.7 million, of adverse development in 2016.
During the first quarter of 2018, management identified an error in the inputs for its calculations of deferred acquisition costs ("DAC") in prior years, which resulted in an overstatement of our reported DAC asset. Additionally, management revised previously disclosed financial information related to accounting for its pension and postretirement benefits. We had been pooling the net liabilities and the unrecognized actuarial gains and losses along with prior service costs recorded in accumulated other comprehensive income for pension and postretirement benefits to affiliated companies pursuant to a quota share reinsurance agreement or pooling agreement. However, management has determined that such pooling is not appropriate for these items. Amounts recognized as pension expense continue to be appropriately pooled in each period presented. As a result, our balance sheet has been revised to reverse the impact of pooling these items by increasing the reported pension and postretirement benefits liability and reducing reported stockholders' equity by recording additional unrecognized actuarial losses and prior service costs within accumulated other comprehensive income at each reported balance sheet date. For additional information, see Note 2 of our condensed consolidated financial statements included in Item 8 of this Form 10-K.
The following table sets forth certain key performance indicators for our insurance segments for the years ended December 31, 2018, 2017 and 2016:
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, 2018, 2017 and 2016:
Net written premiums for the year ended December 31, 2018 increased 19.1% compared to 2017 (Tables 1 - 2). Premium growth was driven by personal auto rate increases as well as new business growth for both personal auto and homeowners resulting in higher levels of policies in force for both personal auto and homeowners for the year ended December 31, 2018 compared to 2017. We did experience a decline in retention, which was impacted by cumulative rate actions taken in personal auto.
Net written premiums for the year ended December 31, 2017 increased 5.7% compared to 2016 (Tables 2 - 3) 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.
The personal auto SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2018 improved 9.5 points when compared to 2017 (Tables 1 - 2). Favorable development of prior accident year losses improved the 2018 loss ratio by 6.1 points compared to 1.3 points in 2017. The 2018 prior accident year favorable development related primarily to the 2016 and 2017 accident years. The 2018 current accident year loss and ALAE ratio improved 4.7 points compared to 2017, primarily due to cumulative rate and underwriting actions, as well as improved claim handling efficiency.
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, 2018, 2017 and 2016:
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 completed the rollout of State Auto Connect for commercial auto, and in January 2019 we finished the rollout of State Auto Connect in our remaining state for small commercial package. We anticipate launching our farm and ranch product in State Auto Connect during the first half of 2019 and plan to expand the product offering to include middle market commercial and workers’ compensation.
Net written premiums for the year ended December 31, 2018 increased 3.6% compared to 2017 (Tables 4 - 5), due to rate increases and new business growth in commercial auto and middle market commercial, and rate increases in farm & ranch. Partially offsetting the increase in net written premiums was a decline in new business for small commercial package.
Net written premiums for the year ended December 31, 2017 decreased 1.3% compared to 2016 (Tables 5 - 6), 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 2017, 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.
The commercial auto SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2018 improved 6.8 points when compared to 2017 (Tables 4 - 5) primarily due to 7.3 points of improvement in the current accident year ratio attributable to fewer large losses compared to 2017. The non-catastrophe loss and ALAE ratio for 2018 was impacted by less favorable development of prior accident year losses of 11.2 points compared to favorable development of 11.7 points in 2017. The 2017 commercial auto ratio improved 20.8 points compared to 2016 (Tables 5 - 6) 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 specialty insurance segment SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2018 was 73.9% compared to 65.2% and 72.3% in 2017 and 2016, respectively (Tables 7 - 9). The 2018 non-cat loss and ALAE ratio was impacted by 3.1 points of adverse development from prior accident years compared to 1.7 points and 8.7 points in 2017 and 2016, respectively. The 2018 adverse development was due to (i) adverse development in E&S casualty within our healthcare and umbrella books of business and (ii) adverse development in programs driven by increased ultimate loss estimates for commercial auto liability and contractors liability coverages. 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 was 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 commercial insurance segment non-catastrophe loss and ALAE reserves contributed $46.9 million of favorable development, driven by workers’ compensation, middle market commercial, small commercial package, and commercial auto, which contributed $13.3 million, $12.2 million, $9.6 million and $8.4 million, respectively. Favorable development in these lines was driven by lower than anticipated severity emerging from multiple accident years.
•ULAE was $7.1 million lower than anticipated in the reserves at December 31, 2017.
•The specialty insurance segment non-catastrophe loss and ALAE reserves accounted for $3.1 million of adverse development, which was driven by E&S casualty and programs with adverse development of $2.7 million and $1.2 million, respectively. E&S casualty adverse development was primarily due to higher ultimate loss estimates for healthcare and umbrella product lines, with the development being spread across accident years 2014 through 2017. For programs, adverse development was due primarily to higher ultimate loss estimates for certain programs with auto liability and contractors liability exposure. Slightly offsetting the adverse development was $0.8 million of favorable development in E&S property.
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:
•ULAE was $3.2 million lower than anticipated in the reserves at December 31, 2016.
•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.
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.
•ULAE was $3.7 million higher than anticipated in the reserves at December 31, 2015.
The following table sets forth loss and loss expenses payable by major line of business at 2018 and 2017:
The loss and loss expenses payable at December 31, 2018 decreased $111.2 million from the loss and loss expenses payable at December 31, 2017, primarily due to the settlement of claims from Hurricanes Harvey and Irma in E&S property and the run-off of programs business.
Our GAAP acquisition and operating expenses were $449.8 million in 2018 compared to $455.2 million and $430.1 million in 2017 and 2016, respectively. Acquisition and operating expenses for 2018 decreased when compared to 2017 primarily due to our exit of specialty business, partially offset by (i) an increase in agent and associate incentive compensation, (ii) an increase in report ordering costs and (iii) the impact of our technology investments, including amortization and system and infrastructure support. Acquisition and operating expenses for 2017 increased compared to 2016, primarily due to (i) the impact of our technology investments, including amortization and system and infrastructure support and (ii) an increase in agent incentive compensation.
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2016-01 which, among other things requires unrealized gains and losses for equity securities and other invested assets previously identified as available-for-sale to be recognized in net income. Previously, the unrealized gains and losses for these securities were recognized in other comprehensive income. Accordingly, changes in the fair value of equity securities and other invested assets are reported in "net investment (loss) gain" in the condensed consolidated statements of income for the year ended December 31, 2018.
The following table sets forth the composition of our investment portfolio at carrying value at December 31, 2018 and 2017:
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at December 31, 2018:
We believe our Muni Portfolio is well diversified by issuer and state. We have 5.8% 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 13.0% 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 58.8% of our Muni Portfolio and state and local government general obligation bonds make up 21.7% of our Muni Portfolio. Our credit research is an important part of our investment management process, and we continually monitor all holdings for any signs of deterioration. We believe that our municipal holdings will maintain their high credit quality and that the issuers will be able to make all principal and interest payments as they come due.
At December 31, 2018, we have one international fund which is included in other invested assets. 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, 2018:
Our investment operations revenue for the year ended December 31, 2018 was primarily impacted by an increase in dividend income when compared to the same 2017 and 2016 periods. The dividend income increase was due to higher dividends from our MLP holdings.
The following table sets forth the realized losses related to OTTI on our investment portfolio recognized for the years ended December 31, 2017 and 2016:
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, 2018 and 2017, and the change in unrealized holding gains, net of deferred tax, for the year ended December 31, 2018:
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 4, “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, 2018.
See “Critical Accounting Policies - Income Taxes” included in this Item 7. See Note 10, “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, 2018, 2017 and 2016.
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 2018, 2017 or 2016.
Net cash used in investing activities was $16.0 million, $20.5 million and $127.6 million in 2018, 2017 and 2016, respectively. The change from 2018 compared to 2017 and 2016 was primarily driven by declines in (i) fixed maturities sales resulting from rising interest rates, and (ii) purchases and sales of equity securities because we are comfortable with the position of the current portfolio.
Net cash used in financing activities was $2.3 million and $7.0 million in 2018 and 2017, respectively, compared to net cash provided by financing activities of $7.1 million in 2016. The change was primarily driven by an increase in stock option exercises due to a higher stock price in 2018 compared to 2017 and 2016.
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, 2018. Under this reinsurance agreement, we retain the first $75.0 million of catastrophe loss, each occurrence, with a 5.0% co-participation on the next $125.0 million of covered loss, each occurrence. The reinsurers are responsible for 95.0% of the catastrophe losses excess of $75.0 million up to $200.0 million, each occurrence. The State Auto Group is responsible for catastrophe losses above $200.0 million.
As of July 1, 2018, the State Auto Group renewed the property per risk excess of loss reinsurance agreement. This reinsurance agreement provides individual property risk coverage for the State Auto Group for losses exceeding $4.0 million. Claims arising from named storms and earthquake for E&S property (currently in runoff) are excluded from this treaty. The reinsurers are responsible for 100.0% of the loss excess of the $4.0 million retention for property business up to $20.0 million of covered loss.
As of July 1, 2018, the State Auto Group terminated its reinsurance coverage for E&S casualty and program casualty risks on a run-off basis, meaning treaty coverage remains in place only for those E&S casualty and program casualty policies with effective dates prior to July 1, 2018, until the expiration of these policies.
The liability of the reinsurers under the Oil & Gas Quota Share will not exceed any of the following: $4.0 million as to any one occurrence with respect to property and auto physical damage losses (increased from $3.0 million effective July 1, 2018), $1.0 million as to any occurrence with respect to auto liability losses, and $1.0 million any occurrence or $2.0 million any aggregate with respect to general liability losses.
The following table sets forth our significant contractual obligations at December 31, 2018:
At December 31, 2018, 2017 and 2016, each of our insurance subsidiaries was in compliance with statutory requirements relating to capital adequacy.
Our insurance subsidiaries are subject to risk-based capital (“RBC”) requirements that have been adopted by individual states. These requirements subject insurers having statutory capital less than that required by the RBC calculation to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC formulas specify various weighting factors to be applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital to authorized control level RBC. Generally no remedial action is required by an insurance company if its adjusted statutory surplus exceeds 200% of the authorized level RBC. At December 31, 2018, the ratio of total adjusted statutory capital to authorized control level of State Auto Financial’s insurance subsidiaries ranged from 437% to 27,977%.
Our fixed maturity investments are classified as available-for-sale and carried at fair value. The unrealized holding gains or losses, net of applicable deferred taxes, are shown as a separate component of stockholders’ equity in accumulated other comprehensive income (loss), and as such are not included in the determination of net income. Investment income is recognized when earned, and capital gains and losses are recognized when investments are sold.
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2016-01 that, among other things requires unrealized gains and losses for equity securities and other invested assets previously identified as available-for-sale to be recognized in net income. Previously, the unrealized gains and losses for these securities were recognized in other comprehensive income. Accordingly, changes in the fair value of equity securities and other invested assets are reported in "net investment (loss) gain" in the condensed consolidated statements of income for the year ended December 31, 2018.
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 most common reserving methods and strengths and weaknesses of each are described below.
Incurred Loss Development Method: The Incurred Loss Development Method is probably the most common actuarial method used in projecting indicated IBNR reserves. This method uses paid loss experience as well as the outstanding estimates (formula and case reserves) for claims that have been reported and are still open. With this method, a pattern of reported losses is estimated to project ultimate incurred values for each accident year. An important assumption underlying the Incurred Loss Development Method is that case reserve adequacy remains consistent over time. This method’s advantage is its responsiveness to changes in reported losses, which is particularly valuable in the less mature accident years. The disadvantage of the Incurred Loss Development Method is that case reserve adequacy changes can distort the projections.
Paid 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.
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. Reserves consider the expected variation to establish an appropriate position within a range. At December 31, 2018, loss and loss expenses payable are $1,141.3 million, within an estimated range of $994.2 million to $1,181.3 million.
The potential impact of the loss reserve variability on net income can be illustrated using the range end points and carried reserve amounts listed above. For example, if ultimate losses reach a level corresponding to the high point of the range, $1,181.3 million, the reserve increase of $40.0 million corresponds to an after-tax decrease of $31.6 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, $994.2 million, the $147.1 million reserve decrease would add $116.2 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.
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, 2018 and 2017. The STFC Pooled Companies net additional share of transactions assumed from State Auto Mutual through the Pooling Arrangement for the years ended December 31, 2018 and 2017, respectively, has been reflected in the table below as assumed by STFC Pooled Companies.
Asbestos reserves were $1.2 million, and environmental reserves were $16.7 million, for a total of $17.9 million, or 1.6% of net losses and loss expenses payable. Relative to December 31, 2017, asbestos reserves were unchanged and environmental reserves decreased $0.4 million.
For the December 31, 2018 and 2017 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.
To calculate the State Auto Group’s December 31, 2018 benefit obligation for each of the benefit plans, we used a discount rate of 4.12% 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, 2018 and net periodic benefit cost for the year ended December 31, 2019, a discount rate of 4.12% 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 $5.0 million for the year ended December 31, 2018 and increased $1.1 million for the year ended December 31, 2017.
The following table sets forth an illustration of variability with respect to the discount rate on the December 31, 2018 benefit obligation and expected net periodic benefit cost for the year ending December 31, 2019, along with the variability of the expected return on plan assets to the expected net periodic benefit cost for the year ending December 31, 2019. Holding all other assumptions constant, sensitivity to changes in any one of our key assumptions are as follows:
The unfunded status on the pension plan and supplemental executive retirement plan decreased from $71.0 million at December 31, 2017, to $57.5 million at December 31, 2018. 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.
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 2032 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, 2018, 2017 and 2016:
We have audited the accompanying consolidated balance sheets of State Auto Financial Corporation and subsidiaries (the Company) as of December 31, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 March 15, 2019 expressed an unqualified opinion thereon.
We have audited State Auto Financial Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2018, 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, 2018, 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, 2018 and 2017, 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, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated March 15, 2019, expressed an unqualified opinion thereon.
practices that would be considered a prescribed statutory accounting practice that differs from NAIC statutory accounting practices.
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2016-01 which, among other things requires unrealized gains and losses for equity securities and other invested assets previously identified as available-for-sale to be recognized in net income. Previously, the unrealized gains and losses for these securities were recognized in other comprehensive income. Accordingly, changes in the fair value of equity securities and other invested assets are reported in "net investment (loss) gain" in the condensed consolidated statements of income for the year ended December 31, 2018.
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 $24.8 million and $25.5 million at December 31, 2018 and 2017, 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 5). 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.
As a result of the Pooling Arrangement, the Company has an off-balance sheet credit risk related to the balances due to State Auto Mutual from insureds, agents and reinsurers, which are offset by the unearned premiums from the respective policies. When settling the intercompany balances, State Auto Mutual provides the STFC Pooled Companies with full credit for the premiums written and net losses paid during the quarter and retains all receivable amounts from insureds and agents and reinsurance recoverable on paid losses from unaffiliated reinsurers. Any amounts deemed uncollectible by State Auto Mutual and allocated to the STFC Pooled Companies are included in the other expenses line item in the accompanying consolidated statements of income. Based on historical data, this credit risk exposure is not considered to be material to our financial position or results of operations
Comprehensive income (loss) is defined as all changes in an enterprise’s equity during a period other than those resulting from investments by owners and distributions to owners. Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes all other non-owner related changes to equity and includes net unrealized gains and losses on available-for-sale investments and unrecognized benefit plan obligations, adjusted for deferred federal income taxes.
In February 2018, the FASB issued ASU 2018-02 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 adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the TCJA from AOCI to retained earnings as of January 1, 2018. This reclassification resulted in an increase in retained earnings of $3.1 million as of January 1, 2018 and a decrease in AOCI by the same amount.
In May 2014, the FASB issued ASU 2014-09 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 or services. Insurance contracts do not fall within the scope of this new guidance. The guidance was effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this guidance effective January 1, 2018. The adoption of the guidance did not impact how the Company recognizes revenue; thus, there was no impact to its results of operations or consolidated financial position.
In August 2016, the FASB issued 2016-15 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. The Company adopted this guidance effective January 1, 2018 and it did not impact the Company's cash flows.
In February 2016, the FASB issued ASU 2016-02 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. The Company has completed its’ evaluation of the new guidance and has concluded that STFC is not a party to any material leases as a lessee or lessor as defined by the guidance. As a result, adoption of the guidance will not have a material impact on the Company’s results of operations, consolidated financial position or cash flows.
During the first quarter of 2018, management identified an error in the inputs for its calculations of deferred acquisition costs ("DAC") in prior years, which resulted in an overstatement of the Company’s reported DAC asset of $7.5 million at December 31, 2017. The overstated amount represented the cumulative impact to the Company’s previously reported results for 2012 through 2017. Management assessed the materiality of the cumulative impact of the error, as well as the impact of other immaterial adjustments not previously recorded relating to the same time periods, to reported results for each of the respective years.
Management revised previously disclosed financial information related to accounting for its pension and postretirement benefits. The Company had been pooling the net liabilities and the unrecognized actuarial gains and losses along with prior service costs recorded in accumulated other comprehensive income for pension and postretirement benefits to affiliated companies pursuant to its Pooling Arrangement as described in Note 8a. However, management determined that such pooling was not appropriate for these items. Amounts recognized as pension expense continue to be appropriately pooled in each period presented.
The effect of the revisions on the Company's previously issued financial statements is provided in the tables below. Amounts throughout the consolidated financial statements and notes thereto have been adjusted to incorporate the revised amounts, where applicable. The following tables reconcile selected lines from the Company’s year-end 2017 and 2016 consolidated statements of income (loss), condensed consolidated statements of comprehensive income and condensed consolidated statements of shareholders' equity from the previously reported amounts to the revised amounts.
The following table reconciles selected lines from the company’s Consolidated Balance Sheets for fiscal years 2017 and 2016 from the previously reported amounts to the revised amounts:
The following table reconciles selected lines from the company’s fiscal years of 2017 and 2016 Consolidated Statements of Cash Flows from the previously reported amounts to the revised amounts:
The following tables set forth the cost or amortized cost and fair value of investments by lot at December 31, 2018 and 2017:
The Company reviewed its investments at December 31, 2018, and determined that no additional other-than-temporary impairment exists in the gross unrealized holding losses. The following table sets forth the realized losses related to other-than-temporary impairments on the Company’s investment portfolio recognized for the years ended December 31, 2017 and 2016:
Proceeds on sales of investments in 2018, 2017 and 2016 were $197.0 million, $438.6 million and $365.4 million, respectively.
The Company utilizes a nationally recognized pricing service to estimate the majority of its investment portfolio’s fair value. The Company obtains one price per security. The Company’s processes and control procedures are designed to ensure the price is accurately recorded on an unadjusted basis. Through discussions with the pricing service, the Company obtains an understanding of the methodologies used to price the different types of securities, that the data and the valuation methods utilized are appropriate and consistently applied, and that the assumptions are reasonable and representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service, the Company compares the valuations received to other fair value pricing from other independent pricing sources. At December 31, 2018 and 2017, the Company did not adjust any of the prices received from the pricing service.
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 $38.5 million and $45.2 million at December 31, 2018 and 2017, respectively, which was determined using the fund’s net asset value. The Company employs procedures to assess the reasonableness of the fair value of the fund including obtaining and reviewing the fund’s audited financial statements. There is no unfunded commitment related to the fund. The Company may not sell its investment in the fund; however, the Company may redeem all or a portion of its investment in the fund at net asset value per share with the appropriate prior written notice. In accordance with Accounting Standard Codification 820-10, this investment is measured at fair value using the net asset value per share practical expedient and has not been classified in the fair value hierarchy. Fair values presented here are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
•the 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
The personal insurance segment generally consists of only 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 development method projections of incurred losses, paid losses, claim counts and claim severities. Each of these methods is described in the "Losses and Loss Expenses Payable" section of "Critical Accounting Policies" included in Item 7 of this Form 10-K. Separate projections are made for catastrophes that are in the very early stages of development based on specific information known through the reporting date.
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 8a for additional information regarding the Pooling Arrangement).
The change in incurred losses and loss adjustment expenses for prior accident years was due to lower than expected emergence, primarily in the personal auto product. The unanticipated emergence in the personal auto product was driven by lower than expected severity, primarily attributable to accident years 2016 and 2017.
The change in incurred losses and loss adjustment expenses for prior accident years was due to lower than expected emergence 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, primarily attributable to (i) accident years 2016 and 2017 in commercial auto, (ii) accident years 2013 to 2016 in small commercial package and (iii) accident years 2013 to 2017 in middle market commercial.
The following table sets forth the effect of the Company’s external reinsurance on its balance sheets at December 31, 2018 and 2017, prior to the reinsurance transaction with State Auto Mutual under the Pooling Arrangement, as discussed in Note 8a:
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, 2018, 2017 and 2016:
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.
State Auto Financial’s subsidiary, State Auto P&C, is a member of the Federal Home Loan Bank of Cincinnati (the “FHLB”). On May 17, 2018, State Auto P&C refinanced its $85.0 million loan (the "2013 FHLB loan") for a period of fifteen years at a fixed rate of 3.96%. The new loan (the "2018 FHLB loan") provides for interest-only payments during its term, with principal due in full at maturity. The 2018 FHLB loan is fully secured by a pledge of specific investment securities of State Auto P&C. Prepayment of the 2018 FHLB Loan would require a prepayment fee. State Auto P&C incurred a $0.4 million prepayment fee which is included in interest expense in the condensed consolidated statements of income for the year ended December 31, 2018. State Auto P&C has a term loan with the FHLB in the principal amount of $21.5 million (the “2016 FHLB Loan”). The 2016 FHLB Loan is a five-year term loan and may be prepaid after three years with no prepayment penalty. The 2016 FHLB Loan provides for interest-only payments during its term, with principal due in full at maturity. The interest rate is fixed over the term of the loan at 1.73%. The 2016 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C.
On March 30, 2018, State Auto P&C terminated its credit facility (the “SPC Credit Facility”) with a syndicate of lenders. The SPC Credit Facility, which was maturing in July 2018, provided State Auto P&C with a $100.0 million revolving credit facility. The SPC Credit Facility was available for general corporate purposes and provided for interest-only payments during its term, with principal and interest due in full at maturity. Interest was based on LIBOR or a base rate plus a calculated margin amount. All advances under the SPC Credit Facility were to be fully secured by a pledge of specific investment securities of State Auto P&C. Prior to its termination, State Auto P&C had not made any borrowings under the SPC Credit Facility.
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, 2018, 2017 and 2016:
During 2018, the Internal Revenue Service (IRS) released proposed regulations addressing the mechanics of the reserve discounting. Under those regulations and a related Revenue Procedure 2019-06 ("Rev. Proc. 2019-06"), the interest rate term was not to exceed seventeen and one-half years. The provisional amount was based on twenty years. After discounting the January 1, 2018 reserves using the Rev. Proc. 2019-06 published factors, the impact was $47.5 million on a pretax basis down from the initial estimate of $50.9 million for a tax-effected change of $0.7 million in the impact of the transitional amount.
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, 2018 and 2017:
The Company, through the employees of State Auto P&C, provides management and operation services under management agreements for all insurance and non-insurance affiliates. The Company provides eligible employees and retirees pension and postretirement benefits and records the funded status of these plans on its balance sheet while the annual net periodic costs are allocated to affiliated companies based on allocations pursuant to intercompany management agreements including the Pooling Arrangement for insurance subsidiaries and affiliates party to this agreement.
The Company provides a defined benefit pension plan for eligible employees hired prior to January 1,2010 at which time the plan was closed to new participants. All Company employees participating in the plan are vested. The Company’s policy is to fund pension costs in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Benefits are determined by applying factors specified in the plan to a participant’s defined average annual compensation.
The following table sets forth the weighted average assumptions used to determine the benefit plans’ net periodic cost for the years ended December 31, 2018, 2017 and 2016:
The following table sets forth the assumed health care cost trend rates used for the years ended December 31, 2018, 2017 and 2016:
The actuarially prepared funding amount to the pension plan ranges from the minimum amount the Company would be required to contribute to the maximum amount that would be deductible for tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible for tax purposes. The Company expects to contribute up to $15.0 million to the pension plan during 2019.
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 $5.6 million, $6.4 million and $6.3 million for 2018, 2017 and 2016, respectively.
The following tables set forth the reclassifications out of accumulated other comprehensive (loss) income, by component, to the Company’s consolidated statement of income for the years ended December 31, 2018, 2017 and 2016:
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 $87.2 million is available for payment to State Auto Financial from its insurance subsidiaries in 2019 without prior approval. State Auto Financial received dividends from its insurance subsidiaries in the amount of $10.0 million, $15.0 million and $10.0 million in 2018, 2017 and 2016, 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, 2018, each of the Company’s insurance subsidiaries maintained adjusted statutory surplus in excess of 400% of the authorized control level RBC.
As of December 31, 2018, there was $1.6 million of total unrecognized compensation cost related to service-based restricted stock awards. The remaining cost is expected to be recognized over a period of 1.03 years.
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, 2018, 2017 and 2016, the total intrinsic value of stock options exercised was $7.2 million, $3.0 million and $2.2 million, respectively. The tax benefit for tax deductions from share-based awards totaled $1.4 million for the year ended December 31, 2016. 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 10 for additional information.
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, 2018, a total of 3.6 million common shares have been purchased under this plan. This plan remains in effect until terminated by the Board of Directors.
The RSU Plan is an unfunded deferred compensation plan which currently provides each outside director with an award of 1,400 restricted share units (the “RSU award”) following each annual meeting of shareholders. The amount of the award may change from year to year, based on the provision described below. The RSU awards are fully vested six months after the date of grant. RSU awards are not common shares of the Company and, as such, no participant has any rights as a holder of common shares under the RSU Plan. RSU awards represent the right to receive an amount, payable in cash or common shares of the Company, as previously elected by the outside director, equal to the value of a specified number of common shares of the Company at the end of the restricted period. Such election may be changed within the constraints set forth in the RSU Plan. The restricted period for the RSU awards begins on the date of grant and expires on the date the outside director retires from or otherwise terminates service as a director of the Company. During the restricted period, outside directors are credited with dividends, equivalent in value to those declared and paid on the Company’s common shares, on all RSU awards granted to them. At the end of the restricted period, outside directors receive cash or common share distributions of their RSU awards either (i) in a single lump sum payment, or (ii) in annual installment payments over a 5- or 10-year period, as previously elected by the outside director. The administrative committee for the RSU Plan (currently the Company’s Compensation Committee) retains the right to increase the annual number of RSU awards granted to each outside director to as many as 10,000 or to decrease such annual number to not less than 500, without seeking shareholder approval, if such increase or decrease is deemed appropriate by the administrative committee to maintain director compensation at appropriate levels. The RSU Plan automatically terminates on May 31, 2026. The Company accounts for the RSU Plan as a liability plan. There were 23,080 RSUs, 26,323 RSUs, and 22,832 RSUs granted in 2018, 2017 and 2016, respectively.
The following table sets forth the compilation of basic and diluted net earnings (loss) per common share for the years ended December 31, 2018, 2017 and 2016:
The following table sets forth the options to purchase shares of common stock and the restricted share units (“RSU award”) provided to each outside director of the Company, that were not included in the computation of diluted earnings per common share because the exercise price of the options, or awards, was greater than the average market price or their inclusion would have been antidilutive for the years ended December 31, 2018, 2017 and 2016:
•Commercial Insurance Segment - commercial auto, small commercial package, middle market commercial, workers’ compensation and other commercial
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 exit 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.
The following table sets forth financial information regarding the Company’s reportable segments for the years ended December 31, 2018, 2017 and 2016:
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.