State Auto Financial Corporation (NASDAQ:STFC) today announced that its second quarter 2011 financial results will include a non-cash charge of approximately $115 million to establish a valuation allowance against its net deferred tax asset.

Deferred income tax assets and liabilities represent the tax effect of the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. In accordance with the Financial Accounting Standards Board’s Accounting Standards Codification 740, Income Taxes (ASC 740), STFC periodically evaluates its deferred tax assets, which requires significant judgment, to determine if they are realizable weighing all available evidence, both positive and negative, including historical and anticipated future taxable income. In making such judgments, significant weight is given to evidence that can be objectively verified. Given the significance of STFC’s previously announced catastrophe losses for the second quarter, STFC considered both positive and negative evidence and concluded a valuation allowance should be established as of June 30, 2011.

“The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the company from using its loss carryforwards or realizing other deferred tax assets in the future,” said STFC President, Chairman and CEO Bob Restrepo.

“It’s also important to note that the establishment of a valuation allowance does not reflect a change in our long-term financial outlook,” Restrepo added. “We will continue to implement initiatives to strengthen our underwriting profitability and financial strength and preserve our terrific reputation. At the same time, we will continue to build upon our long-standing and profitable agency relationships, develop and deploy products and technology that make us an even more responsive partner, and ensure the quality claim and customer service operations that will continue to distinguish State Auto as a superior regional agency company.”

The valuation allowance against net deferred tax assets will reverse when, in STFC’s judgment, available positive evidence outweighs negative evidence. However, given the inherent uncertainty in predicting future performance, which is impacted by such things as severity and frequency of catastrophe losses, current and projected pricing actions, investment market conditions, and planned loss ratio and expense control initiatives, it is uncertain as to when that might occur.

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