Share-Based Compensation

12 Months Ended

Dec. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

15. Share-Based Compensation

The Company maintains share-based compensation plans for key employees and outside, or non-employee, directors. Effective May 4, 2017, the share-based compensation plan for key employees is the State Auto Financial Corporation 2017 Long-Term Incentive Plan (the “2017 LTIP”). The 2017 LTIP replaced the State Auto Financial Corporation 2009 Equity Compensation Plan (the “2009 Equity Plan”). The stock-based compensation plan for outside directors is the Outside Directors Restricted Share Unit Plan (the “RSU Plan”).

The Company’s share-based compensation plans authorize the granting of various equity-based incentives including performance stock awards, performance unit awards, restricted stock, and other stock based awards to employees and non-employee directors and agents. The expense for these equity-based incentives is based on their fair value at the date of grant and amortized over their vesting period.

The Company has reserved 2.4 million common shares under the 2017 LTIP. As of December 31, 2018, a total of 1.9 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 and (ii) the maximum number of common shares subject to awards of performance stock and performance units that may be granted in any calendar year to any one individual is 250,000 shares. The 2017 LTIP automatically terminates on May 4, 2027.

Restricted Stock and Performance Unit Awards

Service-based restricted stock awards granted to employees are subject to a vesting schedule based on the employee’s continued employment (“Restriction Period”), for which vesting is generally on the third anniversary after the date of grant. The Company recognizes compensation expense based on the number of restricted shares granted at the then grant date fair value over the Restriction Period.

Awards with both service and performance conditions granted to employees are subject to (i) the Restriction Period, and (ii) the achievement of predetermined performance goals within specified time periods. All performance-based awards include a specified number of units that will vest. The number of performance based awards that are ultimately earned for each grant is dependent upon meeting specified target and performance goals that range from 0% to 500% of the target number of performance units awarded based on the extent to which the Company achieves the performance goals for the performance measures as set forth in a performance matrix established by the Compensation Committee.

Generally, service-based and performance-based equity awards are expensed pro-rata over their respective vesting periods based on the market value of the awards at the time of grant. Performance-based equity awards that contain variable vesting criteria are expensed based on management’s expectation of the percentage of the award that will ultimately be earned. These estimates can change periodically throughout the measurement period.

The following table sets forth the Company’s total activity and related information for performance unit award activity for the years ended December 31, 2018, 2017 and 2016:


	2018				2017
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Outstanding, beginning of year	147,869	$	27.20	—	$	—
Granted	224,449	27.65		171,617	27.20
Vested	—	—		—	—
Forfeited	(15,918)	27.37		(23,748)	27.20
Outstanding, end of year	356,400	$	27.47	147,869	$	27.20

As of December 31, 2018, there was $6.4 million of total unrecognized compensation cost related to performance unit awards. The remaining cost is expected to be recognized over a period of 1.57 years.

The following table sets forth the Company’s total activity and related information for service-based restricted stock award activity for the years ended December 31, 2018, 2017 and 2016:


	2018				2017					2016
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Outstanding, beginning of year	71,578	$	22.44	107,297	$	22.04	111,084	$	22.19
Granted	97,049	27.65		6,229	27.20		45,252	21.55
Vested	(37,644)	22.88		(26,271)	21.39		(33,414)	21.93
Forfeited	(4,037)	24.82		(15,677)	23.45		(15,625)	21.91
Outstanding, end of year	126,946	$	26.21	71,578	$	22.44	107,297	$	22.04

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.

Stock Options

In accordance with the terms of the 2009 Equity Plan, stock options were granted at an option price not less than the fair market value of the common shares at the date of grant and that nonqualified stock options may be granted at any price determined by the Compensation Committee of the Board of Directors. Options granted generally vest over a three-year period, with one-third of the options vesting on each anniversary of the grant date, and must be exercised no later than ten years from the date of grant.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes closed-form pricing model. The pricing model requires assumptions such as the expected life of the option and expected volatility of the Company’s stock over the expected life of the option, which significantly impacts the assumed fair value. The Company uses historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future periods.

The following tables present the weighted-average assumptions used in the option pricing model for options granted to employees during 2016. The expected life of the options for employees represents the period of time the options are expected to be outstanding and is based on historical trends. For non-employees the expected life of the option approximates the remaining contractual term of the option. The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life and the expected dividend yield is based on the Company’s most recent period’s dividend payout. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and has a term approximating the expected life of the option.

The fair value of share-based awards granted to employees was estimated at the date of grant using the Black-Scholes option-pricing model. The following table sets forth the weighted average fair values and related assumptions for options granted for the year ended December 31, 2016:


	2016
Fair value per share	$	6.75
Expected dividend yield	1.87		%
Risk free interest rate	1.30		%
Expected volatility factor	36.27		%
Expected life in years	5.3

The following table sets forth the Company’s stock option activity and related information for the years ended December 31, 2018, 2017 and 2016:


(millions, except per share amounts)	2018				2017					2016
	Options	Weighted- Average Exercise Price		Options	Weighted- Average Exercise Price		Options	Weighted- Average Exercise Price
Outstanding, beginning of year	1.7	$	19.22	2.5	$	20.63	3.1	$	21.45
Granted	—	—		—	—		0.2	21.55
Exercised	(0.7)	20.08		(0.4)	19.38		(0.4)	17.18
Canceled	—	25.17		(0.4)	28.96		(0.4)	30.70
Outstanding, end of year	1.0	$	18.50	1.7	$	19.22	2.5	$	20.63

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 following table sets forth information pertaining to the total options outstanding and exercisable at December 31, 2018:


(Options in millions)	Options Outstanding							Options Exercisable
	Number	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number	Weighted- Average Exercise Price
Range of Exercise Prices:
$10.01 – $20.00	0.6	3.0	$	16.31	0.6	$	16.31
$20.01 – $30.00	0.4	5.9	22.0		0.3	22.01

Total	1.0	4.1	$	18.50	1.0	$	18.36

Aggregate intrinsic value for total options outstanding at December 31, 2018 was $15.8 million. Aggregate intrinsic value for total options exercisable at December 31, 2018 was $15.2 million.

Employee Stock Purchase Plan

The Company also has a broad-based employee stock purchase plan under which employees of the Company may choose, at two different specified time intervals each year, to have up to 6% of their annual base earnings withheld to purchase the Company’s common shares. The purchase price of the common shares is 85% of the lower of its beginning-of-interval or end-of-interval market price. The Company has reserved 3.7 million common shares under this plan. As of December 31, 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.

Outside Directors Plan

The RSU Plan is an unfunded deferred compensation plan which currently provides each outside director with an award of 1,400 restricted share units (the “RSU award”) following each annual meeting of shareholders. The amount of the award may change from year to year, based on the provision described below. The RSU awards are fully vested six months after the date of grant. RSU awards are not common shares of the Company and, as such, no participant has any rights as a holder of common shares under the RSU Plan. RSU awards represent the right to receive an amount, payable in cash or common shares of the Company, as previously elected by the outside director, equal to the value of a specified number of common shares of the Company at the end of the restricted period. Such election may be changed within the constraints set forth in the RSU Plan. The restricted period for the RSU awards begins on the date of grant and expires on the date the outside director retires from or otherwise terminates service as a director of the Company. During the restricted period, outside directors are credited with dividends, equivalent in value to those declared and paid on the Company’s common shares, on all RSU awards granted to them. At the end of the restricted period, outside directors receive cash or common share distributions of their RSU awards either (i) in a single lump sum payment, or (ii) in annual installment payments over a 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.

During 2018 and 2017, common shares valued at approximately $110,256 and $106,581, respectively, were distributed by the Company under the RSU Plan.

Share-based compensation expense recognized during 2018, 2017 and 2016 was $11.1 million, $4.2 million and $3.7 million, respectively. Share-based compensation is recognized as a component of loss and loss adjustment expense and acquisition and operating expense in a manner consistent with other employee compensation. As of December 31, 2018, there was $5.3 million of total unrecognized compensation cost related to compensation arrangements granted under the plans. The remaining cost is expected to be recognized over a period of 1.43 years.