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.
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.
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.
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.
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:
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,
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.
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 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:
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.
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 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:
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 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 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.
The following table sets forth certain key performance indicators for our specialty insurance segment for the years ended December 31, 2017, 2016 and 2015:
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
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.
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.
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.
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.
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.
The following table sets forth a tabular presentation of the favorable development by accident year for the year ended December 31, 2015:
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.
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.
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.
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.
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 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.
The following table sets forth the composition of our investment portfolio at carrying value at December 31, 2017 and 2016:
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:
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:
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.
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
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:
The following table sets forth the components of net investment income for the years ended December 31, 2017, 2016 and 2015:
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:
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.
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:
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:
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.
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 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.
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%.
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.
The following table sets forth our notes payable at December 31, 2017:
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.
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.
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.
At December 31, 2017, 2016 and 2015, each of our insurance subsidiaries was in compliance with statutory requirements relating to capital adequacy.
The following table sets forth the statutory leverage ratios for our insurance subsidiaries at December 31, 2017, 2016 and 2015:
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%.
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).
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.
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
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
The following table sets forth net deferred acquisition costs for the years ended December 31, 2017, 2016 and 2015:
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.
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.
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.
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.
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.
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:
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:
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.
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.
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:
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.
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.
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.
The following tables set forth the Company’s available-for-sale investments within the fair value hierarchy at December 31, 2017 and 2016:
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.
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.
undiscounted, incurred and paid claims and allocated claim adjustment expenses by accident year, on a net basis after 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 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.
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 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:
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:
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.
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.
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.
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:
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.
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.
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:
No assets are expected to be returned during the fiscal year ending December 31, 2018.
The following table sets forth the Company’s share of amortization expected to be recognized for the year ending December 31, 2018:
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:
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:
The following table sets forth the assumed health care cost trend rates used for the years ended December 31, 2017, 2016 and 2015:
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.
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.
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 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.
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.
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.
The following table sets forth information pertaining to the total options outstanding and exercisable at December 31, 2017:
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.
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.
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:
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:
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 Company evaluates the performance of its insurance segments using industry financial measurements based on SAP, which include loss and loss adjustment expense ratios, underwriting expense ratios, combined ratios, statutory underwriting gain (loss), net premiums earned and net written premiums. One of the most significant differences between SAP and GAAP is that SAP requires all underwriting expenses to be expensed immediately and not deferred and amortized over the same period the premium is earned.
The investment operations segment, managed by Stateco, provides investment services and is evaluated based on investment returns of assets. Asset information by segment is not reported for the insurance segments because the Company does not produce such information internally.
The following table sets forth financial information regarding the Company’s reportable segments for the years ended December 31, 2017, 2016 and 2015:
The following table sets forth financial information regarding the Company’s reportable segments at December 31, 2017 and 2016: