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Pension and Postretirement Benefit Plans
 12 Months Ended
Dec. 31, 2018
Defined Benefit Plan [Abstract]  
Pension and Postretirement Benefit Plans 11. Pension and Postretirement Benefit Plans
The Company, through the employees of State Auto P&C, provides management and operation services under management agreements for all insurance and non-insurance affiliates. The Company provides eligible employees and retirees pension and postretirement benefits and records the funded status of these plans on its balance sheet while the annual net periodic costs are allocated to affiliated companies based on allocations pursuant to intercompany management agreements including the Pooling Arrangement for insurance subsidiaries and affiliates party to this agreement.
The Company provides a defined benefit pension plan for eligible employees hired prior to January 1,2010 at which time the plan was closed to new participants. All Company employees participating in the plan are vested. The Company’s policy is to fund pension costs in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Benefits are determined by applying factors specified in the plan to a participant’s defined average annual compensation.
The defined benefit pension and postretirement benefit plans are referred to herein as “the benefit plans.”
The following table sets forth information regarding the pension and postretirement benefit plans’ change in benefit obligation, plan assets and funded status at December 31, 2018 and 2017:
($ millions)PensionPostretirement
2018201720182017
Change in benefit obligation:
Benefit obligation at beginning of year$468.0 $437.6 $28.3 $28.9 
Service cost7.7 8.7 — — 
Interest cost16.0 17.1 0.9 1.1 
Actuarial (gain) loss(43.6)26.1 (1.3)1.0 
Benefits paid(20.0)(21.5)(2.4)(2.7)
Benefit obligation at end of year428.1 468.0 25.5 28.3 
Change in plan assets available for plan benefits:
Fair value of plan assets available for plan benefits at beginning of year407.7 362.7 — — 
Employer contribution15.0 15.0 — — 
Actual return on plan assets(21.1)51.5 — — 
Benefits paid(20.0)(21.5)— — 
Fair value of plan assets at end of year$381.6 $407.7 $— $— 
Supplemental executive retirement plan(11.0)(10.7)— — 
Funded status at end of year$(57.5)$(71.0)$(25.5)$(28.3)
Accumulated benefit obligation end of year$406.5 $442.9 
No assets are expected to be returned during the fiscal year ending December 31, 2019. 
The following table sets forth the amounts included in accumulated other comprehensive (loss) income that has not been recognized in net periodic cost at December 31, 2018 and 2017:
($ millions)20182017
Prior service benefit$(49.7)$(56.1)
Net actuarial loss160.8 169.7 
Total$111.1 $113.6 
The following table sets forth the Company’s share of amortization expected to be recognized as a component of net periodic cost for the year ending December 31, 2019:
($ millions)2019
Prior service benefit$(5.5)
Net actuarial loss6.0 
Total$0.5 
The following table sets forth information regarding the Company’s share of pension and postretirement benefit plans’ components of net periodic cost for the years ended December 31, 2018, 2017 and 2016:
($ millions)PensionPostretirement
201820172016201820172016
Components of net periodic cost:
Service cost$5.1 $5.7 $6.2 $— $— $— 
Interest cost10.7 11.4 11.9 0.6 0.8 0.9 
Expected return on plan assets(18.0)(16.7)(15.1)— — — 
Amortization of:
Prior service benefit— — — (5.5)(5.5)(5.5)
Net actuarial loss8.2 7.8 9.2 0.3 0.2 0.2 
Net periodic cost (benefit)$6.0 $8.2 $12.2 $(4.6)$(4.5)$(4.4)
The following table sets forth the benefit payments, which reflect expected future service, expected to be paid:
($ millions)PensionPostretirement
2019$17.7 $2.3 
202018.3 2.2 
202118.9 2.1 
202219.7 2.0 
202320.8 1.9 
2024-2028120.3 8.9 
The postretirement plan’s gross benefit payments for 2018 were $2.4 million, including the prescription drug benefits. The postretirement plan’s subsidy related to Medicare Prescription Drug Improvement and Modernization Act of 2003 was $0.1 million for 2018 and estimates future annual subsidies to be approximately $0.3 million.
The following table sets forth the weighted average assumptions used to determine the benefit plans’ obligations at December 31, 2018 and 2017:
 PensionPostretirement
  
2018201720182017
Benefit obligations weighted-average assumptions:
Discount rate4.12 %3.50 %4.12 %3.50 %
Rates of increase in compensation levels3.25  3.25  —  —  
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:
 Pension Postretirement
  
201820172016 201820172016
Weighted-average assumptions:
Discount rate3.50 %4.00 %4.20 %3.50 %4.00 %4.20 %
Expected long-term rate of return on assets7.00  7.00  7.00    —  —  —  
Rates of increase in compensation levels3.25  3.50  3.50    —  —  —  
The benefit plans’ obligations are long-term in nature and consequently the investment strategies have a long-term time horizon. In establishing the long-term rate of return assumption on plan assets, management, along with its pension consulting actuary, reviews the historical performance of the plan assets and the stability in the mix of the investment portfolio. The expected inflation rate and expected real rates of return of applicable asset classes are then determined to assist in setting appropriate assumptions.
The following table sets forth the assumed health care cost trend rates used for the years ended December 31, 2018, 2017 and 2016:
 Postretirement
  
201820172016
Assumed health care cost trend rates:
Health care cost trend rate assumed for the next year5.50 %6.00 %6.50 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)3.80 %3.80 %3.90 %
Year that the rate reaches the ultimate trend rate207520752075
The assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement plan. The following table sets forth the effects of a one percentage point change in assumed health care cost trend rates for the year ended December 31, 2018:
($ millions)Postretirement
  
Increase(Decrease)
One percentage point change:
Effect on total service and interest cost$0.1 $(0.1)
Effect on accumulated postretirement benefit obligation2.2 (1.9)
The pension plan’s investment policy objective is to preserve the investment principal while generating income and appreciation in fair value to meet the pension plan’s obligations. The pension plan’s investment strategy and risk tolerance is balanced between meeting cash obligation requirements and a long-term relatively high risk tolerance takes into account the predictable cash requirements, nature of the plan’s liabilities and the plan’s long term time horizon. Since the nature and timing of the benefit plans’ liabilities and cash requirements are predictable, the liquidity requirements are somewhat moderate. One of the goals of diversifying the benefit plans’ portfolio among different asset classes is the elimination of concentration of risk in one asset class. Management also has investment policy guidelines with respect to limiting the ownership in any single debt or equity issuer. The international fund investments are also composed of numerous securities to reduce our exposure to a single issuer. The following table sets forth the asset allocation targets, as a percentage of total fair value, which are used as a guide by management when allocating funds as they become available.
  
Asset
allocation
target
(0 to 100%)
Asset Category:
Fixed maturity52.0 %
U.S. large-cap equity24.2  
U.S. small-cap equity10.3  
International equity9.4  
Emerging market equity4.1  
Total100.0 %
  
Effective January 1, 2014, the Investment Committee approved a change to a liability driven investment (LDI) for the pension plan assets.  The primary goal of the LDI strategy is to shift the asset allocation to more closely align with the plan liability, thereby reducing the volatility of the funded status.  The implementation of the LDI strategy will occur over a period of time and the actual asset allocation at any point in time is dependent upon the funded status and the level of interest rates.  This glide path helps to balance interest rate risk, curve steepness risk, and credit spread risk, as incremental changes are made to the allocation over time. The new allocation strategy reduces exposure to equity holdings and increases exposure to long duration fixed maturity holdings. This change will result in lower volatility for the plan assets.  By moving more of the plan’s assets to long duration fixed income, the duration of the assets will increase to more closely match the duration of the plan’s liabilities.
See Note 4 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, 2018 and 2017.
Included in the pension plan’s investments is two international funds (“the funds”) that invests in equity securities of foreign issuers and are managed by third party investment managers. The funds had a fair value of $32.7 million and $41.0 million at December 31, 2018 and 2017, respectively, which was determined using the funds' net asset value. In accordance with Accounting Standard Codification 820-10, since these investments are measured at fair value using the net asset value per share practical expedient they have not been classified in the table below.
The following tables set forth the plan’s investments within the fair value hierarchy at December 31, 2018 and 2017:
($ millions)Total
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
December 31, 2018
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$90.6 $— $90.6 
Corporate securities121.4 — 121.4 
U.S. government agencies mortgage-backed securities5.2 — 5.2 
Total fixed maturities217.2 — 217.2 
Equity securities:
Large-cap securities82.3 82.3 — 
Mutual and exchange traded funds43.4 43.4 — 
Total equity securities125.7 125.7 — 
Total pension plan investments$342.9 $125.7 $217.2 

($ millions)Total
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
December 31, 2017
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$107.9 $— $107.9 
Corporate securities93.4 — 93.4 
U.S. government agencies mortgage-backed securities6.7 — 6.7 
Total fixed maturities208.0 — 208.0 
Equity securities:
Large-cap securities110.1 110.1 — 
Small-cap securities38.6 38.6 — 
Total equity securities148.7 148.7 — 
Total pension plan investments$356.7 $148.7 $208.0 
The actuarially prepared funding amount to the pension plan ranges from the minimum amount the Company would be required to contribute to the maximum amount that would be deductible for tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible for tax purposes. The Company 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.