UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September 30, 2020~~March 31, 2021


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 000-19289

STATE AUTO FINANCIAL CORPORATION

(Exact name of Registrant as specified in its charter)


Ohio			31-1324304
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

518 East Broad Street	Columbus	Ohio	43215-3976
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (614) 464-5000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common shares, without par value	STFC	The NASDAQ Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	x
Non-accelerated filer	☐	Smaller reporting company	☐
(Do not check if a smaller reporting company)		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ý

On ~~October~~April 30, ~~2020,~~2021, the Registrant had ~~43,837,768~~44,051,645 Common Shares outstanding.

Table of Contents

Index to Form 10-Q Quarterly Report for the three ~~and nine~~ month periods ended ~~September 30, 2020~~March 31, 2021


	Part I. Financial Information

Item 1.	Financial Statements (Unaudited)
	Condensed consolidated balance sheets – ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020	1
	Condensed consolidated statements of income – Three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	2
	~~Condensed consolidated statements of income – Nine months ended September 30, 2020 and 2019~~	3
	Condensed consolidated statements of comprehensive income – Three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	43
	~~Condensed consolidated statements of comprehensive income – Nine months ended September 30, 2020 and 2019~~	5
	Condensed consolidated statements of stockholders’ equity - Three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	64
	~~Condensed consolidated statements of stockholders’ equity - Nine months ended September 30, 2020 and 2019~~	7
	Condensed consolidated statements of cash flows – ~~Nine~~Three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	85
	Notes to condensed consolidated financial statements	96
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2820
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5941
Item 4.	Controls and Procedures	6042

	Part II. Other Information
Item 1.	Legal Proceedings	61
~~Item 1A.~~	~~Risk Factors~~	6143
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6243
Item 4.	Mine Safety Disclosures	6243
Item 5.	Other Information	6243
Item 6.	Exhibits	6344
	Signatures	6445

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

PART I – FINANCIAL STATEMENTS

Item 1. Condensed Consolidated Balance Sheets


($ and shares in millions, except per share amounts)	($ and shares in millions, except per share amounts)	September 30, 2020		December 31, 2019		($ and shares in millions, except per share amounts)	March 31, 2021		December 31, 2020
(unaudited)	(unaudited)					(unaudited)
Assets	Assets					Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $2,047.1 and $2,080.0, respectively)		$	2,166.3	$	2,127.9
Fixed maturities, available-for-sale, at fair value (amortized cost $2,147.5 and $2,117.0, respectively)						Fixed maturities, available-for-sale, at fair value (amortized cost $2,147.5 and $2,117.0, respectively)	$	2,209.0	$	2,237.2
Equity securities	Equity securities	339.5		395.2		Equity securities	399.6		389.7
Other invested assets	Other invested assets	62.5		69.7		Other invested assets	76.4		71.1
Other invested assets, at cost	Other invested assets, at cost	12.5		6.5		Other invested assets, at cost	11.8		12.1
Notes receivable from affiliate	Notes receivable from affiliate	70.0		70.0		Notes receivable from affiliate	70.0		70.0
Total investments	Total investments	2,650.8		2,669.3		Total investments	2,766.8		2,780.1
Cash and cash equivalents	Cash and cash equivalents	131.4		78.0		Cash and cash equivalents	59.1		90.7
Accrued investment income and other assets	Accrued investment income and other assets	31.1		31.7		Accrued investment income and other assets	31.0		29.7
Premiums receivable	Premiums receivable	14.1		13.6		Premiums receivable	12.3		14.0
Deferred policy acquisition costs (affiliated net assumed $27.6 and $20.2, respectively)		123.7		111.1
Deferred policy acquisition costs (affiliated net assumed $32.5 and $30.1, respectively)						Deferred policy acquisition costs (affiliated net assumed $32.5 and $30.1, respectively)	121.2		122.2
Reinsurance recoverable on losses and loss expenses payable	Reinsurance recoverable on losses and loss expenses payable	35.2		13.6		Reinsurance recoverable on losses and loss expenses payable	23.6		24.3
Prepaid reinsurance premiums	Prepaid reinsurance premiums	8.4		7.5		Prepaid reinsurance premiums	8.5		8.3
Due from affiliate		18.3		7.9

Current federal income taxes	Current federal income taxes	6.7		6.3		Current federal income taxes	1.7		1.7
Net deferred federal income taxes	Net deferred federal income taxes	44.6		42.2		Net deferred federal income taxes	37.1		27.3
Property and equipment, held for sale		4.2		4.2
Property and equipment, at cost (net of accumulated depreciation of $3.5 and $3.5, respectively)						Property and equipment, at cost (net of accumulated depreciation of $3.5 and $3.5, respectively)	4.2		4.2
Total assets	Total assets	$	3,068.5	$	2,985.4	Total assets	$	3,065.5	$	3,102.5
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliated net assumed $450.9 and $500.8, respectively)		$	1,091.3	$	1,066.5
Unearned premiums (affiliated net assumed $450.8 and $415.8, respectively)		731.0		649.2
Notes payable (affiliates $15.2 and $15.2, respectively)		122.0		122.0
Losses and loss expenses payable (affiliated net assumed $454.6 and $438.8, respectively)						Losses and loss expenses payable (affiliated net assumed $454.6 and $438.8, respectively)	$	1,066.3	$	1,050.4
Unearned premiums (affiliated net assumed $466.2 and $452.4, respectively)						Unearned premiums (affiliated net assumed $466.2 and $452.4, respectively)	726.7		723.4
Notes payable (affiliates $15.3 and $15.3, respectively)						Notes payable (affiliates $15.3 and $15.3, respectively)	122.1		122.1
Pension and postretirement benefits	Pension and postretirement benefits	54.0		72.9		Pension and postretirement benefits	59.2		66.2
Due to affiliate						Due to affiliate	22.1		11.2

Other liabilities (affiliated net assumed $17.3 and $22.4, respectively)						Other liabilities (affiliated net assumed $17.3 and $22.4, respectively)	97.1		119.2
Total liabilities						Total liabilities	2,093.5		2,092.5
Stockholders’ equity:						Stockholders’ equity:

Other liabilities (affiliated net assumed $18.5 and $19.5, respectively)		126.1		114.9
Total liabilities		2,124.4		2,025.5
Stockholders’ equity:
Class A Preferred stock (nonvoting), without par value. Authorized 2.5 shares; none issued		0		0
Class B Preferred stock, without par value. Authorized 2.5 shares; none issued		0		0
Common stock, without par value. Authorized 100.0 shares; 50.7 and 50.4 shares issued, respectively, at stated value of $2.50 per share		126.7		125.9
Common stock, without par value. Authorized 100.0 shares; 50.9 and 50.7 shares issued, respectively, at stated value of $2.50 per share						Common stock, without par value. Authorized 100.0 shares; 50.9 and 50.7 shares issued, respectively, at stated value of $2.50 per share	127.4		126.8
Treasury stock, 6.9 and 6.9 shares, respectively, at cost	Treasury stock, 6.9 and 6.9 shares, respectively, at cost	(118.4)		(117.5)		Treasury stock, 6.9 and 6.9 shares, respectively, at cost	(118.9)		(118.4)
Additional paid-in capital	Additional paid-in capital	212.1		206.7		Additional paid-in capital	220.1		213.3
Accumulated other comprehensive income (loss)		23.3		(37.9)
Accumulated other comprehensive (loss) income						Accumulated other comprehensive (loss) income	(30.1)		13.9
Retained earnings	Retained earnings	700.4		782.7		Retained earnings	773.5		774.4
Total stockholders’ equity	Total stockholders’ equity	944.1		959.9		Total stockholders’ equity	972.0		1,010.0
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	3,068.5	$	2,985.4	Total liabilities and stockholders’ equity	$	3,065.5	$	3,102.5

See accompanying notes to condensed consolidated financial statements.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Condensed Consolidated Statements of Income


($ in millions, except per share amounts)	($ in millions, except per share amounts)	Three months ended September 30				($ in millions, except per share amounts)	Three months ended March 31
(unaudited)	(unaudited)	2020		2019		(unaudited)	2021		2020
Earned premiums (affiliated net assumed $69.3 and $55.7, respectively)		$	353.2	$	319.6
Earned premiums (affiliated net assumed $78.0 and $58.3, respectively)						Earned premiums (affiliated net assumed $78.0 and $58.3, respectively)	$	355.9	$	330.5
Net investment income (affiliates $0.7 and $0.7, respectively)	Net investment income (affiliates $0.7 and $0.7, respectively)	17.9		19.3		Net investment income (affiliates $0.7 and $0.7, respectively)	17.6		18.9
Net investment gain (loss)	Net investment gain (loss)	20.0		(5.0)		Net investment gain (loss)	38.2		(135.2)
Other income from affiliates	Other income from affiliates	0.5		0.6		Other income from affiliates	0.5		0.6
Total revenues	Total revenues	391.6		334.5		Total revenues	412.2		214.8

Losses and loss expenses (affiliated net assumed $48.7 and $24.2, respectively)		251.6		208.4
Acquisition and operating expenses (affiliated net assumed $24.2 and $17.6, respectively)		123.0		109.7
Interest expense (affiliates $0.1 and $0.2, respectively)		1.1		1.2
Losses and loss expenses (affiliated net assumed $113.7 and $10.9, respectively)						Losses and loss expenses (affiliated net assumed $113.7 and $10.9, respectively)	280.8		239.4
Acquisition and operating expenses (affiliated net assumed $37.1 and $20.9, respectively)						Acquisition and operating expenses (affiliated net assumed $37.1 and $20.9, respectively)	121.0		114.9
Interest expense (affiliates $0.2 and $0.2, respectively)						Interest expense (affiliates $0.2 and $0.2, respectively)	1.1		1.2
Other expenses	Other expenses	1.1		2.5		Other expenses	3.7		3.3
Total expenses	Total expenses	376.8		321.8		Total expenses	406.6		358.8
Income before federal income taxes		14.8		12.7
Federal income tax expense:
Income (loss) before federal income taxes						Income (loss) before federal income taxes	5.6		(144.0)
Federal income tax expense (benefit):						Federal income tax expense (benefit):

Deferred	Deferred	3.2		1.2		Deferred	2.0		(29.4)
Total federal income tax expense		3.2		1.2
Net income		$	11.6	$	11.5
Earnings per common share:
Total federal income tax expense (benefit)						Total federal income tax expense (benefit)	2.0		(29.4)
Net income (loss)						Net income (loss)	$	3.6	$	(114.6)
Earnings (loss) per common share:						Earnings (loss) per common share:
Basic	Basic	$	0.26	$	0.26	Basic	$	0.08	$	(2.62)
Diluted	Diluted	$	0.26	$	0.25	Diluted	$	0.08	$	(2.62)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

~~Condensed~~ Consolidated Statements of ~~Income~~Comprehensive Loss

($ in millions, except per share amounts) Nine months ended September 30
(unaudited) 2020 2019
Earned premiums (affiliated net assumed $189.2 and $168.5, respectively) $ 1,024.4 $ 930.0
Net investment income (affiliates $2.1 and $2.3, respectively) 54.5 60.4
Net investment (loss) gain (39.3) 50.2
Other income from affiliates 1.6 1.6
Total revenues 1,041.2 1,042.2
Losses and loss expenses (affiliated net assumed $132.8 and $125.1, respectively) 762.2 637.6
Acquisition and operating expenses (affiliated net assumed $65.9 and $54.5, respectively) 357.4 325.2
Interest expense (affiliates $0.6 and $0.7, respectively) 3.6 3.7
Other expenses 5.6 9.0
Total expenses 1,128.8 975.5
(Loss) income before federal income taxes (87.6) 66.7
Federal income tax (benefit) expense:
Current (0.4) (0.4)
Deferred (18.5) 12.4
Total federal income tax (benefit) expense (18.9) 12.0
Net (loss) income $ (68.7) $ 54.7
(Loss) earnings per common share:
Basic $ (1.57) $ 1.26
Diluted $ (1.57) $ 1.25


($ in millions, except per share amounts)	Three months ended March 31
(unaudited)	2021		2020
Net income (loss)	$	3.6	$	(114.6)
Other comprehensive (loss) income, net of tax:
Net unrealized holding gains on available-for-sale investments:
Unrealized holding (losses) gains	(57.2)		31.0
Reclassification adjustments for gains realized in net income	(1.5)		(2.4)
Income tax benefit (expense)	12.4		(6.0)
Total net unrealized holding (losses) gains on available-for-sale investments	(46.3)		22.6
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost	(1.6)		(1.6)
Net actuarial loss	4.5		3.7
Income tax expense	(0.6)		(0.5)
Total net unrecognized benefit plan obligations	2.3		1.6
Other comprehensive (loss) income	(44.0)		24.2
Comprehensive loss	$	(40.4)	$	(90.4)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Condensed Consolidated Statements of ~~Comprehensive Income~~Stockholders’ Equity

($ in millions, except per share amounts) Three months ended September 30
(unaudited) 2020 2019
Net income $ 11.6 $ 11.5
Other comprehensive income, net of tax:
Net unrealized holding gains on available-for-sale investments:
Unrealized holding gains 4.6 22.6
Reclassification adjustments for losses (gains) realized in net income 0.2 (1.2)
Income tax expense (1.1) (4.5)
Total net unrealized holding gains on available-for-sale investments 3.7 16.9
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost (1.6) (1.6)
Net actuarial loss 3.7 2.4
Income tax expense (0.4) (0.2)
Total net unrecognized benefit plan obligations 1.7 0.6
Other comprehensive income 5.4 17.5
Comprehensive income $ 17.0 $ 29.0


(in millions)	Three months ended March 31
	2021		2020
Common shares:
Balance at beginning of period	50.7		50.4
Issuance of shares	0.2		0.2
Balance at March 31	50.9		50.6
Treasury shares:
Balance at beginning of period	(6.9)		(6.9)

Balance at March 31	(6.9)		(6.9)
Common stock:
Balance at beginning of period	$	126.8	$	125.9
Issuance of shares	0.6		0.6
Balance at March 31	$	127.4	$	126.5
Treasury stock:
Balance at beginning of period	$	(118.4)	$	(117.5)
Shares acquired on stock award exercises and vested restricted shares	(0.5)		(0.9)
Balance at March 31	$	(118.9)	$	(118.4)
Additional paid-in capital:
Balance at beginning of period	$	213.3	$	206.7
Issuance of common stock	0.6		1.3

Stock awards granted	6.2		1.1
Balance at March 31	$	220.1	$	209.1
Accumulated other comprehensive loss:
Balance at beginning of period	$	13.9	$	(37.9)

Change in net unrealized holding (losses) gains on available-for-sale investments	(46.3)		22.6
Change in net unrecognized benefit plan obligations	2.3		1.6
Balance at March 31	$	(30.1)	$	(13.7)
Retained earnings:
Balance at beginning of period	$	774.4	$	782.7
Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020	0		(0.5)
Net income (loss)	3.6		(114.6)
Dividends declared, $0.10 and $0.10 per share (affiliates $2.6 and $2.6, respectively)	$	(4.5)	$	(4.4)
Balance at March 31	773.5		663.2
Total stockholders’ equity at March 31	$	972.0	$	866.7

See accompanying notes to condensed consolidated financial statements.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Condensed Consolidated Statements of ~~Comprehensive (Loss) Income~~Cash Flows

($ in millions, except per share amounts) Nine months ended September 30
(unaudited) 2020 2019
Net (loss) income $ (68.7) $ 54.7
Other comprehensive income, net of tax:
Net unrealized holding gains on fixed available-for-sale investments:
Unrealized holding gains 74.5 91.8
Reclassification adjustments for gains realized in net income (3.2) (2.8)
Income tax expense (15.0) (18.7)
Total net unrealized holding gains on available-for-sale investments 56.3 70.3
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost (4.8) (4.8)
Net actuarial loss 11.0 7.2
Income tax expense (1.3) (0.5)
Total net unrecognized benefit plan obligations 4.9 1.9
Other comprehensive income 61.2 72.2
Comprehensive (loss) income $ (7.5) $ 126.9


($ in millions)	Three months ended March 31
(unaudited)	2021		2020
Cash flows from operating activities:
Net income (loss)	$	3.6	$	(114.6)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization, net	1.8		1.6
Share-based compensation	6.7		0.5
Net investment (gain) loss	(38.2)		135.2
Changes in operating assets and liabilities:
Deferred policy acquisition costs	1.0		(2.2)
Accrued investment income and other assets	(1.3)		(1.5)
Premiums receivables	1.7		(1.4)
Postretirement and pension benefits	(6.4)		(0.9)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums	0.5		(26.5)
Other liabilities and due to/from affiliates, net	(9.5)		(24.8)
Losses and loss expenses payable	15.9		19.5
Unearned premiums	3.3		16.5
Deferred tax on share-based awards	(0.4)		(0.2)
Federal income taxes	2.4		(29.2)
Net cash used in operating activities	(18.9)		(28.0)
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale	(239.7)		(122.4)
Purchases of equity securities	(9.4)		(16.1)
Purchases of other invested assets	(0.1)		(6.6)
Maturities, calls and pay downs of fixed maturities available-for-sale	102.8		67.9
Sales of fixed maturities available-for-sale	106.0		83.5
Sales of equity securities	31.1		13.2
Sales of other invested assets	0.3		0.4
Disposals of property and equipment	0		0.2
Net cash (used in) provided by investing activities	(9.0)		20.1
Cash flows from financing activities:
Proceeds from issuance of common stock	1.2		1.8
Payments to acquire treasury stock	(0.4)		(0.9)
Payment of dividends	(4.5)		(4.4)
Proceeds from short-term debt	0		60.0



Net cash (used in) provided by financing activities	(3.7)		56.5
Net (decrease) increase in cash and cash equivalents	(31.6)		48.6
Cash and cash equivalents at beginning of period	90.7		78.0
Cash and cash equivalents at end of period	$	59.1	$	126.6
Supplemental disclosures:
Interest paid (affiliates $0.2 and $0.2, respectively)	$	1.1	$	1.2

See accompanying notes to condensed consolidated financial statements.

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Condensed Consolidated Statements of Stockholders’ Equity~~

(in millions) Three months ended September 30
2020 2019
Common shares:
Balance at beginning of period 50.7 50.3
Balance at September 30 50.7 50.3
Treasury shares:
Balance at beginning of period (6.9) (6.8)
Balance at September 30 (6.9) (6.8)
Common stock:
Balance at beginning of period $ 126.7 $ 125.7
Issuance of shares 0 0.1
Balance at September 30 $ 126.7 $ 125.8
Treasury stock:
Balance at beginning of period $ (118.4) $ (117.5)
Balance at September 30 $ (118.4) $ (117.5)
Additional paid-in capital:
Balance at beginning of period $ 211.1 $ 202.5
Issuance of common stock (0.2) 0.7
Stock awards granted 1.2 2.0
Balance at September 30 $ 212.1 $ 205.2
Accumulated other comprehensive income (loss):
Balance at beginning of period $ 17.9 $ (41.7)
Change in net unrealized holding gains on available-for-sale investments 3.7 16.9
Total net unrecognized benefit plan obligations 1.7 0.6
Balance at September 30 $ 23.3 $ (24.2)
Retained earnings:
Balance at beginning of period $ 693.2 $ 747.2
Net income 11.6 11.5
Dividends declared, $0.10 and $0.10 per share (affiliates $2.6 and $2.6, respectively) $ (4.4) $ (4.3)
Balance at September 30 700.4 754.4
Total stockholders’ equity at September 30 $ 944.1 $ 943.7

~~See accompanying notes to condensed consolidated financial statements.~~

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Condensed Consolidated Statements of Stockholders’ Equity~~

(in millions) Nine months ended September 30
2020 2019
Common shares:
Balance at beginning of year 50.4 50.0
Issuance of shares 0.3 0.3
Balance at September 30 50.7 50.3
Treasury shares:
Balance at beginning of year (6.9) (6.8)
Balance at September 30 (6.9) (6.8)
Common stock:
Balance at beginning of year $ 125.9 $ 125.0
Issuance of shares 0.8 0.8
Balance at September 30 $ 126.7 $ 125.8
Treasury stock:
Balance at beginning of year $ (117.5) $ (117.0)
Shares acquired on stock award exercises and vested restricted shares (0.9) (0.5)
Balance at September 30 $ (118.4) $ (117.5)
Additional paid-in capital:
Balance at beginning of year $ 206.7 $ 194.2
Issuance of common stock 2.0 4.0
Stock awards granted 3.4 7.0
Balance at September 30 $ 212.1 $ 205.2
Accumulated other comprehensive income (loss):
Balance at beginning of year $ (37.9) $ (96.4)
Change in net unrealized holding gains on available-for-sale investments 56.3 70.3
Change in unrecognized benefit plan obligations, net of tax 4.9 1.9
Balance at September 30 $ 23.3 $ (24.2)
Retained earnings:
Balance at beginning of year $ 782.7 $ 712.7
Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020 (0.5) 0
Net (loss) income (68.7) 54.7
Dividends declared, $0.30 and $0.30 per share (affiliates $7.8 and $7.8, respectively) $ (13.1) $ (13.0)
Balance at September 30 700.4 754.4
Total stockholders’ equity at September 30 $ 944.1 $ 943.7

~~See accompanying notes to condensed consolidated financial statements.~~

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Condensed Consolidated Statements of Cash Flows~~

($ in millions) Nine months ended September 30
(unaudited) 2020 2019
Cash flows from operating activities:
Net (loss) income $ (68.7) $ 54.7
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
Depreciation and amortization, net 7.6 6.2
Share-based compensation 0 7.0
Net investment loss (gain) 39.3 (50.2)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (12.6) (12.4)
Accrued investment income and other assets 0.6 (2.3)
Premiums receivables (0.5) (3.2)
Postretirement and pension benefits (17.0) (12.2)
Other liabilities and due to/from affiliates, net 8.5 (51.8)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums (22.5) (2.6)
Losses and loss expenses payable 24.2 (54.1)
Unearned premiums 81.8 65.0
Deferred tax on share-based awards (0.1) (0.7)
Federal income taxes (18.8) 12.7
Net cash provided by (used in) operating activities 21.8 (43.9)
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale (462.6) (459.9)
Purchases of equity securities (65.6) (48.9)
Purchases of other invested assets (7.3) (12.9)
Maturities, calls and pay downs of fixed maturities available-for-sale 274.9 267.1
Sales of fixed maturities available-for-sale 216.1 248.7
Sales of equity securities 86.2 34.4
Sales of other invested assets 0.9 1.0
Disposals of property and equipment 0.2 1.6
Net cash provided by investing activities 42.8 31.1
Cash flows from financing activities:
Proceeds from issuance of common stock 2.8 4.8
Payments to acquire treasury stock (0.9) (0.5)
Payment of dividends (13.1) (13.0)
Proceeds from short-term debt 60.0 0
Repayment of short-term debt (60.0) 0
Proceeds from long-term debt 21.5 0
Repayment of long-term debt (21.5) 0
Net cash used in financing activities (11.2) (8.7)
Net increase (decrease) in cash and cash equivalents 53.4 (21.5)
Cash and cash equivalents at beginning of period 78.0 59.8
Cash and cash equivalents at end of period $ 131.4 $ 38.3
Supplemental disclosures:
Interest paid (affiliates $0.6 and $0.7, respectively) $ 3.5 $ 3.5

~~See accompanying notes to condensed consolidated financial statements.~~

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of State Auto Financial Corporation and Subsidiaries (“State Auto Financial” or the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair statement have been included. Operating results for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021. The balance sheet at December 31, ~~2019,~~2020, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 Form 10-K”). Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the ~~2019~~2020 Form 10-K.

The COVID-19 pandemic has caused an economic downturn on a global scale, as well as significant market disruption and volatility. The scope, duration and magnitude of the effects of COVID-19 continue to evolve rapidly and in ways that are difficult or impossible to anticipate. The Company cannot, at this time, predict the impact the pandemic will have on its future consolidated financial position, cash flows or results of operations, however, the impact could be material. The Company's future financial results and operations depend in part on the duration and severity of the pandemic and what actions are taken to mitigate the outbreak.

~~Adoption of Recent Accounting Pronouncements~~

~~Measurement of Credit Losses on Financial Instruments~~

On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. This includes the Company's direct third party reinsurance recoverables, and the Company's share of the State Auto Group's third party reinsurance recoverables assumed via the Pooling Arrangement (as defined in Note 7). In addition, ASC 326 made changes to the accounting for available-for-sale fixed maturities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale fixed maturities management does not intend to sell or believes that it is more likely than not they will not be required to sell.

The adoption of this guidance reduced retained earnings by $0.5 million, net of tax, and established an allowance for estimated uncollectible reinsurance as of January 1, 2020. Adoption of ASC 326 for available-for-sale fixed maturities was prospective, and therefore there was no adjustment to retained earnings as of January 1, 2020. Changes to the Company's accounting policy resulting from the adoption of the guidance are discussed below.

~~Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement~~

In August 2018, the FASB issued ASU 2018-13 which changes the fair value measurement disclosure requirements of ASC 820 by adding, eliminating and modifying disclosures. The new guidance eliminates (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the entity's policy for the timing of transfers between levels, and (iii) the entity's valuation process for Level 3 fair value measurements. Additionally, the guidance now requires the disclosure of (i) the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements, and (ii) the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated for Level 3 fair value measurements. Finally, the guidance requires entities to provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future. The guidance became effective for annual reporting periods after December 15, 2019 and it did not have a material impact on the Company's results of operations, consolidated financial position or cash flows.

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)~~

~~Pending~~ Adoption of Recent Accounting Pronouncements

Income Taxes - Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12 which updated guidance for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The guidance became effective ~~date of ASU 2019-12 is~~ for annual and interim ~~and annual~~reporting periods ~~beginning~~ after December 15, ~~2020. Early adoption is permitted. The ASU has~~2020 and did not ~~yet been adopted; however, it is not expected to~~ have a material impact on the ~~Company’s~~Company's results of operations, consolidated financial position or cash flows.

Pending Adoption of Recent Accounting Pronouncements

For information regarding other accounting pronouncements that the Company has not yet adopted, see the “Pending Adoption of Recent Accounting Pronouncements” section of Note 1 of the Notes to Consolidated Financial Statements in the ~~2019~~2020 Form 10-K.

~~Significant Accounting Policy Updates~~

The following accounting policies have been updated to reflect the Company's adoption of ASU 2016-13 Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments~~as described above.~~

~~Investments~~

Investments in fixed maturities are classified as available-for-sale and are carried at fair value. For fixed maturities in an unrealized loss position, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded in the "net investment gain (loss)" line item on the condensed consolidated statement of income. Losses are charged against the allowance when management believes the uncollectibility of a fixed maturity is confirmed or when either of the criteria regarding intent or requirement to sell is met. Description and disclosure of credit losses on fixed maturities are disclosed in Note 3 of the Notes to Condensed Consolidated Financial Statements.

The Company excludes accrued interest receivable from both the estimated fair value and the amortized cost basis of available-for-sale fixed maturities and includes such amounts within "accrued investment income and other assets" on the Company's condensed consolidated balance sheets. Any uncollectible accrued interest receivable is written off in the period it is deemed uncollectible.

~~Reinsurance Recoverables~~

Management assesses expected credit losses on third party reinsurance recoverables for the entire State Auto Pool and, pursuant to the Pooling Arrangement (as defined in Note 7), the Company is responsible for its share of the estimated uncollectible reinsurance for the entire pool. Management uses A.M. Best’s Financial Strength ratings or equivalent such as S&P, Moody’s, or Fitch when an A.M. Best Financial Strength rating is not available to assess the credit risk of the reinsurance recoverables. The estimate of expected credit losses considers historical credit loss information as well as current conditions and reasonable and supportable forecasts. Description and disclosure of credit losses on reinsurance recoverables are disclosed in Note 8 of the Notes to Condensed Consolidated Financial Statements.

~~Premiums~~

~~Premiums are recognized as earned pro rata over the policy period. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage.~~

Under the terms of the Pooling Arrangement, each period State Auto Mutual collects all premiums from policyholders and pays all losses and expenses associated with the insurance business produced by the STFC Pooled Companies and the other pool participants, and then it settles the intercompany balances generated by these transactions with the pool participants within 60 days following each quarter end. When settling the intercompany balances, State Auto Mutual provides the pool participants with full credit for their share of the Pooled Companies net premiums written during the quarter.

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)~~

Management utilizes an aging schedule to estimate an allowance for uncollectible amounts relating to the State Auto Group’s premiums receivable balance. Current and historical collection experience along with reasonable and supportable forecasts are used to estimate the percentage of the premiums receivable balance that will be uncollectible. Credit risk is partially mitigated by the State Auto Group's ability to cancel the policy if the policyholder does not pay the premium. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums receivable is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. This is included in "other expenses" on the condensed consolidated statements of income and reflected in “due to/from affiliates” on the Company's condensed consolidated balance sheets. The Company’s share of the premium balances due to State Auto Mutual from agents and insureds at September 30, 2020 and December 31, 2019 is approximately $404.8 million and $371.0 million, respectively, net of the allowance for uncollectible premiums receivable of $7.0 million and $4.3 million, respectively.

2. ~~Correction of Misstatement in Prior Period Financial Statements~~

The Company has corrected the presentation of premiums receivable on its condensed consolidated balance sheet for the period ended December 31, 2019 to appropriately reflect outstanding balances for premiums billed and due on premiums written directly by the STFC Pooled Companies. Based on the Pooling Arrangement (as defined in Note 7), this has no impact on the underwriting operations of the STFC Pooled Companies given the role of State Auto Mutual as agent for the State Auto Group.

The Company's balance sheet has been revised to include "premiums receivable", which represents the billed and due premium from its policyholders, with an offsetting adjustment to "due to/from affiliates". This adjustment was not material to the Company’s previously issued financial statements.

The effect of the revisions on the Company's previously issued financial statements are provided in the tables below. Amounts throughout the consolidated financial statements and notes thereto have been adjusted to incorporate the revised amounts, where applicable. The following tables reconcile selected lines from the Company’s year-end 2019 consolidated balance sheet and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 from the previously reported amounts to the revised amounts. There were no changes to the condensed consolidated statements of income, condensed consolidated statements of comprehensive income, and condensed consolidated statements of stockholders' equity.

Revised Consolidated Balance Sheets
($ in millions) Year Ended December 31, 2019
As Reported Adjustment As Revised
Assets
Premiums receivable $ 0 $ 13.6 $ 13.6
Due from affiliate 21.5 (13.6) 7.9
Total Assets $ 2,985.4 $ 0 $ 2,985.4

Revised Consolidated Statement of Cash Flows
($ in millions) Nine months ended September 30, 2019
As Reported Adjustment As Revised
Cash flows from operating activities:
Changes in operating assets and liabilities:
Premiums receivable $ 0 $ (3.2) $ (3.2)
Other liabilities and due to/from affiliates, net (55.0) 3.2 (51.8)
Net cash used in operating activities $ (43.9) $ 0 $ (43.9)

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)~~

3. Investments

The following tables set forth the amortized cost and fair value of investments by investment category at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


($ millions)	($ millions)	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value		($ millions)	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
September 30, 2020
March 31, 2021										March 31, 2021	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
Available-for-sale fixed maturities:	Available-for-sale fixed maturities:									Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	U.S. treasury securities and obligations of U.S. government agencies	$	510.9	$	48.1	$	0	$	559.0	U.S. treasury securities and obligations of U.S. government agencies	$	448.4	$	23.0	$	(0.4)	$	471.0
Obligations of states and political subdivisions	Obligations of states and political subdivisions	527.5		26.7		(1.5)		552.7		Obligations of states and political subdivisions	480.4		22.0		(1.9)		500.5
Corporate securities	Corporate securities	451.7		21.9		0		473.6		Corporate securities	488.4		17.0		(2.2)		503.2
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	557.0		25.3		(1.3)		581.0		U.S. government agencies mortgage-backed securities	730.3		15.4		(11.4)		734.3
Total available-for-sale fixed maturities	Total available-for-sale fixed maturities	$	2,047.1	$	122.0	$	(2.8)	$	2,166.3	Total available-for-sale fixed maturities	$	2,147.5	$	77.4	$	(15.9)	$	2,209.0

($ millions)	($ millions)	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value		($ millions)	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
December 31, 2019
December 31, 2020										December 31, 2020	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
Available-for-sale fixed maturities:	Available-for-sale fixed maturities:									Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	U.S. treasury securities and obligations of U.S. government agencies	$	569.2	$	12.3	$	(3.3)	$	578.2	U.S. treasury securities and obligations of U.S. government agencies	$	506.5	$	45.2	$	0	$	551.7
Obligations of states and political subdivisions	Obligations of states and political subdivisions	404.3		21.1		0		425.4		Obligations of states and political subdivisions	511.3		30.4		(0.2)		541.5
Corporate securities	Corporate securities	460.5		11.7		(0.4)		471.8		Corporate securities	459.9		23.4		0		483.3
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	646.0		11.1		(4.6)		652.5		U.S. government agencies mortgage-backed securities	639.3		22.9		(1.5)		660.7
Total available-for-sale fixed maturities	Total available-for-sale fixed maturities	$	2,080.0	$	56.2	$	(8.3)	$	2,127.9	Total available-for-sale fixed maturities	$	2,117.0	$	121.9	$	(1.7)	$	2,237.2

126

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

The following tables set forth the Company’s gross unrealized losses and fair value on its investments by lot, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position for which an allowance for credit losses has not been recorded at ~~September 30,~~March 31, 2021 and December 31, 2020:


($ millions, except # of positions)	($ millions, except # of positions)	Less than 12 months					12 months or more					Total					($ millions, except # of positions)	Less than 12 months					12 months or more					Total
		Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions		Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions
September 30, 2020
March 31, 2021																	March 31, 2021	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions
Fixed maturities:	Fixed maturities:																Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	U.S. treasury securities and obligations of U.S. government agencies	$	0.7	$	0	1	$	0	$	0	0	$	0.7	$	0	1	U.S. treasury securities and obligations of U.S. government agencies	$	51.6	$	(0.4)	7	$	0	$	0	0	$	51.6	$	(0.4)	7
Obligations of states and political subdivisions	Obligations of states and political subdivisions	94.3		(1.5)		18	0		0		0	94.3		(1.5)		18	Obligations of states and political subdivisions	111.7		(1.9)		18	0		0		0	111.7		(1.9)		18
Corporate securities	Corporate securities	15.1		0		4	0		0		0	15.1		0		4	Corporate securities	110.9		(2.2)		21	0		0		0	110.9		(2.2)		21
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	76.1		(1.1)		22	9.4		(0.2)		4	85.5		(1.3)		26	U.S. government agencies mortgage-backed securities	354.8		(11.3)		74	10.9		(0.1)		5	365.7		(11.4)		79
Total temporarily impaired securities	Total temporarily impaired securities	$	186.2	$	(2.6)	45	$	9.4	$	(0.2)	4	$	195.6	$	(2.8)	49	Total temporarily impaired securities	$	629.0	$	(15.8)	120	$	10.9	$	(0.1)	5	$	639.9	$	(15.9)	125


($ millions, except # of positions)	($ millions, except # of positions)	Less than 12 months					12 months or more					Total					($ millions, except # of positions)	Less than 12 months					12 months or more					Total
		Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions		Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions
December 31, 2019
December 31, 2020																	December 31, 2020	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions
Fixed maturities:	Fixed maturities:																Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	U.S. treasury securities and obligations of U.S. government agencies	$	136.0	$	(2.5)	17	$	157.6	$	(0.8)	11	$	293.6	$	(3.3)	28	U.S. treasury securities and obligations of U.S. government agencies	$	9.6	$	0	4	$	0	$	0	0	$	9.6	$	0	4

Obligations of states and political subdivisions																	Obligations of states and political subdivisions	19.5		(0.2)		5	0		0		0	19.5		(0.2)		5
Corporate securities	Corporate securities	0		0		0	40.8		(0.4)		7	40.8		(0.4)		7	Corporate securities	1.5		0		2	0		0		0	1.5		0		2
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	126.6		(1.5)		15	137.9		(3.1)		32	264.5		(4.6)		47	U.S. government agencies mortgage-backed securities	136.1		(1.4)		35	7.0		(0.1)		3	143.1		(1.5)		38
Total temporarily impaired securities	Total temporarily impaired securities	$	262.6	$	(4.0)	32	$	336.3	$	(4.3)	50	$	598.9	$	(8.3)	82	Total temporarily impaired securities	$	166.7	$	(1.6)	46	$	7.0	$	(0.1)	3	$	173.7	$	(1.7)	49

The Company reviewed its available-for-sale fixed maturities at ~~September 30, 2020,~~March 31, 2021, and determined that no credit impairment existed in the gross unrealized holding losses, due to the reasons discussed below:

•~~Obligations~~U.S. treasury securities and obligations of U.S. government agencies: These securities were issued by the U.S. Treasury Department or Federal government-sponsored entities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.

•Corporate securities: Corporations in various industries issued these securities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company reviewed the issuers of these securities to identify any significant adverse change in financial condition, a change in the quality of credit enhancement (if any), a ratings decrease, or negative outlook assignment from a major credit rating agency, and any failure to make interest or principal payments. After these reviews, the Company determined that the decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.

•U.S. government agencies mortgage-backed securities: Federal government-sponsored entities issued these securities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.

The Company regularly monitors its available-for-sale fixed maturities that have fair values less than cost or amortized cost for signs of impairment, an assessment that requires significant management judgment regarding the evidence known. Such

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. When a fixed maturity has been determined to have an impairment, the impairment charge representing the credit loss is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)~~

through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive income.

The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at ~~September 30, 2020:~~March 31, 2021:


($ millions)	($ millions)	Amortized cost		Fair value		($ millions)	Amortized cost		Fair value
Due in 1 year or less	Due in 1 year or less	$	119.8	$	120.9	Due in 1 year or less	$	158.5	$	159.7
Due after 1 year through 5 years	Due after 1 year through 5 years	519.9		548.0		Due after 1 year through 5 years	536.7		562.2
Due after 5 years through 10 years	Due after 5 years through 10 years	168.0		178.9		Due after 5 years through 10 years	165.9		170.5
Due after 10 years	Due after 10 years	682.4		737.5		Due after 10 years	556.1		582.3
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	557.0		581.0		U.S. government agencies mortgage-backed securities	730.3		734.3
Total	Total	$	2,047.1	$	2,166.3	Total	$	2,147.5	$	2,209.0

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligations with or without call or prepayment penalties.

At ~~September 30, 2020,~~March 31, 2021, State Auto P&C had U.S. government agencies mortgage-backed fixed maturity securities, with a carrying value of approximately $106.5 million pledged as collateral for loans from the Federal Home Loan Bank of Cincinnati ("FHLB")~~, which loans are further described in Note 9.~~. In accordance with the terms of the FHLB Loans, State Auto P&C retains all rights regarding these pledged securities.

At ~~September 30, 2020,~~March 31, 2021, State Auto P&C had fixed maturities with fair values of approximately ~~$31.7~~$30.2 million pledged as collateral for the performance obligations under its reinsurance agreement with Home State County Mutual Insurance Company. In accordance with the terms of the trust agreement, State Auto P&C retains all rights regarding these securities, which are included in the “U.S. treasury securities and obligations of U.S. government agencies” classification of the Company’s fixed maturity securities portfolio.

Fixed maturities with fair values of ~~$9.6~~$9.4 million and ~~$9.3~~$9.7 million were on deposit with insurance regulators as required by law at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively. The Company retains all rights regarding these securities.

The following table sets forth the components of net investment income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions)	($ millions)	Three months ended September 30				Nine Months Ended September 30				($ millions)	Three months ended March 31
		2020		2019		2020		2019			2021		2020
Fixed maturities	Fixed maturities	$	15.0	$	15.3	$	44.6	$	47.7	Fixed maturities	$	15.4	$	15.1
Equity securities	Equity securities	2.1		3.0		7.8		8.9		Equity securities	1.6		3.1
Cash and cash equivalents, and other	Cash and cash equivalents, and other	0.9		1.1		2.7		4.2		Cash and cash equivalents, and other	0.9		1.0
Investment income	Investment income	18.0		19.4		55.1		60.8		Investment income	17.9		19.2
Investment expenses	Investment expenses	0.1		0.1		0.6		0.4		Investment expenses	0.3		0.3
Net investment income	Net investment income	$	17.9	$	19.3	$	54.5	$	60.4	Net investment income	$	17.6	$	18.9

The Company’s current investment strategy does not rely on the use of derivative financial instruments.

Proceeds on sales of investments were ~~$303.2~~$137.4 million and ~~$284.1~~$97.1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2021, and 2020, ~~and 2019,~~ respectively.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

The following table sets forth the realized and unrealized holding gains (losses) on the Company’s investment portfolio for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020:


($ millions)	Three months ended March 31
	2021		2020
Investment gain (loss), net:
Fixed maturities:
Realized gains on sales of securities	$	3.0	$	3.6
Realized losses on sales of securities	(1.5)		(1.2)
Net gain on fixed securities	1.5		2.4
Net gain (loss) on equity securities	31.5		(122.4)
Net gain (loss) on other invested assets	5.2		(15.4)
Other net realized gain (loss)	0		0.2
Net gain (loss) on investments	$	38.2	$	(135.2)

Change in net unrealized holding (losses) gains, net of tax
Fixed maturities	$	(58.7)	$	28.6
Deferred federal income tax benefit (liability)	12.4		(6.0)
Change in net unrealized holding (losses) gains, net of tax	$	(46.3)	$	22.6

The unrealized holding gains recognized for the three months ended March 31, 2021 on equity securities still held was $27.8 million while unrealized holding losses recognized for the three months ended March 31, 2020 ~~and 2019:~~

($ millions) Three months ended September 30 Nine Months Ended September 30
2020 2019 2020 2019
Investment gain (loss), net:
Fixed maturities:
Realized gains on sales of securities $ 1.3 $ 1.2 $ 6.8 $ 2.8
Realized losses on sales of securities (1.5) 0 (3.6) 0
Net (loss) gain on fixed securities (0.2) 1.2 3.2 2.8
Equity securities:
Realized losses on sales of securities, net (42.3) (1.8) (50.9) (2.5)
Unrealized gain (loss) on securities still held, net 60.5 (4.1) 15.8 46.4
Net gain (loss) on equity securities 18.2 (5.9) (35.1) 43.9
Other invested assets:
Unrealized gain (loss) on securities still held, net 2.0 (0.3) (7.6) 4.8
Net gain (loss) on other invested assets 2.0 (0.3) (7.6) 4.8
Other net realized gain (loss) 0 0 0.2 (1.3)
Net gain (loss) on investments $ 20.0 $ (5.0) $ (39.3) $ 50.2
Change in net unrealized holding gains, net of tax
Fixed maturities $ 4.8 $ 21.4 $ 71.3 $ 89.0
Deferred federal income tax liability (1.1) (4.5) (15.0) (18.7)
Change in net unrealized holding gains, net of tax $ 3.7 $ 16.9 $ 56.3 $ 70.3
on equity securities still held was $123.3 million. The unrealized holding gains recognized for the three months ended March 31, 2021 on other invested assets still held was $5.2 million while the unrealized holding losses recognized for the three months ended March 31, 2020 on other invested assets still held was $15.4 million.

4.3. Fair Value of Financial Instruments

Below is the fair value hierarchy that categorizes into three levels the inputs to valuation techniques that are used to measure fair value:

•Level 1 includes observable inputs which reflect quoted prices for identical assets or liabilities in active markets at the measurement date.

•Level 2 includes observable inputs for assets or liabilities other than quoted prices included in Level 1, and it includes valuation techniques which use prices for similar assets and liabilities.

•Level 3 includes unobservable inputs which reflect the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

The Company utilizes a nationally recognized third party pricing service to estimate the majority of its investment portfolio’s fair value. The Company obtains one price per security and the processes and control procedures employed by the Company are designed to ensure the value is accurately recorded on an unadjusted basis. Through discussions with the pricing service, the Company gains 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 to fair value pricing information gathered from other independent pricing sources. At ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, the Company did not adjust any of the prices received from the pricing service.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

Fixed Maturities

The Company utilizes a nationally recognized third party pricing service to estimate fair value measurements for the majority of its fixed maturities. The fair value estimate of the Company’s fixed maturity investments are determined by evaluations that are based on observable market information rather than market quotes. Inputs to the evaluations include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, and other market-observable information. The fixed maturity portfolio pricing obtained from the pricing service is reviewed for reasonableness. The Company regularly selects a sample of security prices which are compared to one or more alternative pricing sources for reasonableness. Any significant discrepancies with the pricing are returned to the pricing service for further explanation and, if necessary, adjustments are made. To date, the Company has not identified any significant discrepancies in the pricing provided by its third party pricing service. Investments valued using these inputs include U.S. treasury securities and obligations of U.S. government agencies, obligations of states and political subdivisions, corporate securities (except for a security discussed below), and U.S. government agencies' mortgage-backed securities. All unadjusted estimates of fair value for fixed maturities priced by the pricing service are included in the amounts disclosed in Level 2 of the hierarchy. If market inputs are unavailable, then no fair value is provided by the pricing service. For these securities, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote; or the Company internally determines the fair values by employing widely accepted pricing valuation models, and depending on the level of observable market inputs, renders the fair value estimate as Level 2 or Level 3.

Equities

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.

Other Invested Assets

Included in other invested assets is 1 international fund (“the fund”) that invests in equity securities of foreign issuers and is managed by a third party investment manager. The fund had a fair value of ~~$48.5~~$60.6 million and ~~$56.4~~$55.8 million at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, 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 are no unfunded commitments related to the fund. The Company may not sell its investment in the fund; however, the Company may redeem all or a portion of its investment in the fund at net asset value per share with the appropriate prior written notice. In accordance with ASC 820-10, this investment is measured at fair value using the net asset value per share practical expedient and has not been classified in the fair value hierarchy. Fair values presented here are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.

The remainder of the Company’s other invested assets consist primarily of holdings in publicly-traded mutual funds. The Company believes that its prices for these publicly-traded mutual funds based on an observable market price for an identical asset in an active market reflect their fair values and consequently these securities have been disclosed in Level 1.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

The following tables set forth the Company’s investments within the fair value hierarchy at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


($ millions)	($ millions)	Total		Level 1		Level 2		($ millions)	Total		Level 1		Level 2
September 30, 2020
March 31, 2021								March 31, 2021	Total		Level 1		Level 2
Available-for-sale fixed maturities:	Available-for-sale fixed maturities:							Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	U.S. treasury securities and obligations of U.S. government agencies	$	559.0	$	0	$	559.0	U.S. treasury securities and obligations of U.S. government agencies	$	471.0	$	0	$	471.0
Obligations of states and political subdivisions	Obligations of states and political subdivisions	552.7		0		552.7		Obligations of states and political subdivisions	500.5		0		500.5
Corporate securities	Corporate securities	473.6		0		473.6		Corporate securities	503.2		0		503.2
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	581.0		0		581.0		U.S. government agencies mortgage-backed securities	734.3		0		734.3
Total available-for-sale fixed maturities	Total available-for-sale fixed maturities	2,166.3		0		2,166.3		Total available-for-sale fixed maturities	2,209.0		0		2,209.0
Equity securities:	Equity securities:							Equity securities:
Large-cap securities	Large-cap securities	120.0		120.0		0		Large-cap securities	149.2		149.2		0

Mutual and exchange traded funds	Mutual and exchange traded funds	219.5		219.5		0		Mutual and exchange traded funds	250.4		250.4		0
Total equity securities	Total equity securities	339.5		339.5		0		Total equity securities	399.6		399.6		0
Other invested assets	Other invested assets	14.0		14.0		0		Other invested assets	15.8		15.8		0
Total investments	Total investments	$	2,519.8	$	353.5	$	2,166.3	Total investments	$	2,624.4	$	415.4	$	2,209.0

($ millions)	($ millions)	Total		Level 1		Level 2		($ millions)	Total		Level 1		Level 2
December 31, 2019
December 31, 2020								December 31, 2020	Total		Level 1		Level 2
Available-for-sale fixed maturities:	Available-for-sale fixed maturities:							Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	U.S. treasury securities and obligations of U.S. government agencies	$	578.2	$	0	$	578.2	U.S. treasury securities and obligations of U.S. government agencies	$	551.7	$	0	$	551.7
Obligations of states and political subdivisions	Obligations of states and political subdivisions	425.4		0		425.4		Obligations of states and political subdivisions	541.5		0		541.5
Corporate securities	Corporate securities	471.8		0		471.8		Corporate securities	483.3		0		483.3
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	652.5		0		652.5		U.S. government agencies mortgage-backed securities	660.7		0		660.7
Total available-for-sale fixed maturities	Total available-for-sale fixed maturities	2,127.9		0		2,127.9		Total available-for-sale fixed maturities	2,237.2		0		2,237.2
Equity securities:	Equity securities:							Equity securities:
Large-cap securities	Large-cap securities	104.4		104.4		0		Large-cap securities	134.2		134.2		0

Mutual and exchange traded funds	Mutual and exchange traded funds	290.8		290.8		0		Mutual and exchange traded funds	255.5		255.5		0
Total equity securities	Total equity securities	395.2		395.2		0		Total equity securities	389.7		389.7		0
Other invested assets	Other invested assets	13.3		13.3		0		Other invested assets	15.3		15.3		0
Total investments	Total investments	$	2,536.4	$	408.5	$	2,127.9	Total investments	$	2,642.2	$	405.0	$	2,237.2

The following sections describe the valuation methods used by the Company for each type of financial instrument it holds that is not measured at fair value but for which fair value is disclosed:

Financial Instruments Disclosed, But Not Carried, At Fair Value

Other Invested Assets, at Cost

Included in other invested assets, at cost are common stock of the FHLB and the Trust Securities. The Trust Securities and FHLB common stock are carried at cost, which approximates fair value. The fair value of the FHLB common stock at ~~September 30, 2020,~~March 31, 2021, was ~~$12.0~~$11.3 million and the fair value of the Trust Securities was $0.5 million. The investments have been placed in Level 3 of the fair value hierarchy.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

Notes Receivable from Affiliate

~~In May 2009, the~~The Company ~~entered into~~has 2 separate credit agreements with State Automobile Mutual Insurance Company (“State Auto Mutual") pursuant to which it loaned State Auto Mutual a total of $70.0 million ~~at an interest rate of 7.00%. In May 2019, the Company refinanced the 2 credit agreements with State Auto Mutual~~ at an interest rate of 4.05%, with principal payable in May 2029. The Company estimates the fair value of the notes receivable from affiliate using market quotations for U.S. treasury securities with similar maturity dates and applies an appropriate credit spread. Consequently this has been placed in Level 2 of the fair value hierarchy.


($ millions, except interest rates)	($ millions, except interest rates)	September 30, 2020						December 31, 2019						($ millions, except interest rates)	March 31, 2021						December 31, 2020
		Carrying value		Fair value		Interest rate		Carrying value		Fair value		Interest rate			Carrying value		Fair value		Interest rate		Carrying value		Fair value		Interest rate
Notes receivable from affiliate, issued May 2019	Notes receivable from affiliate, issued May 2019	$	70.0	$	82.4	4.05	%	$	70.0	$	74.6	4.05	%	Notes receivable from affiliate, issued May 2019	$	70.0	$	76.6	4.05	%	$	70.0	$	80.4	4.05	%

Notes Payable

Included in notes payable are the FHLB Loans and Subordinated Debentures. The Company estimates the fair value of the FHLB Loans by discounting cash flows using a borrowing rate currently available to the Company for loans with similar terms. The FHLB Loans have been placed in Level 3 of the fair value hierarchy. The carrying amount of the Subordinated Debentures approximates its fair value as the interest rate adjusts quarterly and has been disclosed in Level 3.


($ millions, except interest rates)	($ millions, except interest rates)	September 30, 2020						December 31, 2019						($ millions, except interest rates)	March 31, 2021						December 31, 2020
		Carrying value		Fair Value		Interest rate		Carrying value		Fair value		Interest rate			Carrying value		Fair Value		Interest rate		Carrying value		Fair value		Interest rate
FHLB Loan due 2021: issued $21.5, September 2016 with fixed interest		$	0	$	0	0	%	$	21.5	$	21.5	1.73	%

FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest	FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest	21.5		21.8		1.37	%	0		0		0	%	FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest	21.5		20.2		1.37	%	21.5		21.6		1.37	%
FHLB Loan due 2033: issued $85.0, May 2018 with fixed interest	FHLB Loan due 2033: issued $85.0, May 2018 with fixed interest	85.3		108.6		3.96	%	85.3		97.8		3.96	%	FHLB Loan due 2033: issued $85.0, May 2018 with fixed interest	85.3		101.2		3.96	%	85.3		107.1		3.96	%
Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest	Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest	15.2		15.2		4.44	%	15.2		15.2		6.11	%	Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest	15.3		15.3		4.39	%	15.3		15.3		4.43	%
Total notes payable	Total notes payable	$	122.0	$	145.6			$	122.0	$	134.5			Total notes payable	$	122.1	$	136.7			$	122.1	$	144.0

5.4. Deferred Acquisition Costs

The following table sets forth net deferred acquisition costs for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions)	($ millions)	2020		2019		($ millions)	2021		2020
Beginning balance at July 1		$	120.0	$	109.1
Acquisition costs deferred		98.4		94.6
Acquisition costs amortized to expense		(94.7)		(89.4)
Ending balance at September 30		$	123.7	$	114.3

Beginning balance at January 1	Beginning balance at January 1	$	111.1	$	101.9	Beginning balance at January 1	$	122.2	$	111.1
Acquisition costs deferred	Acquisition costs deferred	289.8		270.6		Acquisition costs deferred	60.6		91.1
Acquisition costs amortized to expense	Acquisition costs amortized to expense	(277.2)		(258.2)		Acquisition costs amortized to expense	(61.6)		(88.9)
Ending balance at September 30		$	123.7	$	114.3
Ending balance at March 31						Ending balance at March 31	$	121.2	$	113.3

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

6.5. Losses and Loss Expenses Payable

The following table sets forth the activity in the liability for losses and loss expenses for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions)	($ millions)	2020		2019		($ millions)	2021		2020
Losses and loss expenses payable, at beginning of period	Losses and loss expenses payable, at beginning of period	$	1,066.5	$	1,146.8	Losses and loss expenses payable, at beginning of period	$	1,050.4	$	1,066.5
Less: reinsurance recoverable on losses and loss expenses payable	Less: reinsurance recoverable on losses and loss expenses payable	13.6		5.5		Less: reinsurance recoverable on losses and loss expenses payable	24.3		13.6
Net balance at beginning of period	Net balance at beginning of period	1,052.9		1,141.3		Net balance at beginning of period	1,026.1		1,052.9
Incurred related to:	Incurred related to:					Incurred related to:
Current year	Current year	779.8		692.7		Current year	311.3		246.9
Prior years	Prior years	(17.6)		(55.1)		Prior years	(30.5)		(7.5)
Total incurred	Total incurred	762.2		637.6		Total incurred	280.8		239.4
Paid related to:	Paid related to:					Paid related to:
Current year	Current year	420.8		366.4		Current year	105.7		74.1
Prior years	Prior years	338.2		327.0		Prior years	158.5		171.3
Total paid	Total paid	759.0		693.4		Total paid	264.2		245.4
Net balance at end of period	Net balance at end of period	1,056.1		1,085.5		Net balance at end of period	1,042.7		1,046.9
Plus: reinsurance recoverable on losses and loss expenses payable	Plus: reinsurance recoverable on losses and loss expenses payable	35.2		7.2		Plus: reinsurance recoverable on losses and loss expenses payable	23.6		39.7
Losses and loss expenses payable, at end of period	Losses and loss expenses payable, at end of period	$	1,091.3	$	1,092.7	Losses and loss expenses payable, at end of period	$	1,066.3	$	1,086.6

The Company recorded ~~less~~more favorable development related to prior years’ loss and loss expense reserves for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, of ~~$17.6~~$30.5 million compared to ~~$55.1~~$7.5 million for the same ~~2019~~2020 period. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 was $24.6 million, due to favorable development of $21.8 million and $2.9 million in the commercial and personal insurance segments, respectively. In the commercial insurance segment, all products developed favorably, with workers' compensation and middle market commercial contributing $8.5 million and $8.1 million, respectively. In the personal insurance segment, the favorable development was primarily driven by homeowners, which contributed $2.1 million of favorable development. For the three months ended March 31, 2021, the prior accident years' catastrophe loss and ALAE reserves contributed $3.8 million of favorable development.

For the three months ended March 31, 2020, favorable development of prior accident year's non-catastrophe loss and ALAE reserves was ~~$31.8~~$10.5 million, due to favorable development in the commercial insurance segment. In the commercial insurance segment, all ~~products developed favorably,~~lines contributed favorable development, with small commercial package, ~~workers' compensation, and~~ middle market commercial, and workers' compensation contributing ~~$16.5~~$5.4 million, ~~$16.1~~$5.1 million, and ~~$14.3~~$4.0 million respectively. ~~Partially~~Somewhat offsetting the favorable development was adverse development in the personal insurance segment ~~and specialty run-off, which contributed $20.2~~of $6.4 million, ~~and $5.2 million, respectively. The adverse development in the personal insurance segment was primarily~~ driven by personal auto and homeowners which contributed ~~$19.1~~$5.2 million of adverse development. The personal auto adverse development was driven by higher than expected severity of bodily injury claims from multiple accident years. The specialty run-off adverse development primarily related to an adverse court decision relating to an E&S casualty claim from 2016. Partially offsetting the favorable development of prior years' non-catastrophe loss and ~~ALAE reserves was adverse development in catastrophe loss and ALAE reserves driven by $12.4~~$2.2 million of adverse development, ~~in E&S property related to Hurricane Irma.~~

For the nine months ended September 30, 2019, favorable development of prior accident year's non-catastrophe loss and ALAE reserves was $54.1 million. In the personal insurance segment, personal auto contributed $11.0 million of favorable development. In the commercial insurance segment, all lines contributed favorable development, with workers' compensation, small commercial package, and middle market commercial contributing $13.4 million, $11.8 million, and $7.2 million, respectively.respectively

7.6. Reinsurance

The insurance subsidiaries of State Auto Financial, referred to as the STFC Pooled Companies, participate in a quota share reinsurance pooling arrangement (“the Pooling Arrangement”) with the Mutual Pooled Companies.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

The following table sets forth a summary of the Company’s external reinsurance transactions, as well as reinsurance transactions with State Auto Mutual under the Pooling Arrangement, for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions)	($ millions)	Three months ended September 30				Nine months ended September 30				($ millions)	Three months ended March 31
		2020		2019		2020		2019			2021		2020
Premiums earned:	Premiums earned:									Premiums earned:
Assumed from external insurers and reinsurers	Assumed from external insurers and reinsurers	$	21.7	$	21.0	$	63.0	$	59.3	Assumed from external insurers and reinsurers	$	21.8	$	20.6
Assumed under Pooling Arrangement	Assumed under Pooling Arrangement	353.2		319.6		1,024.4		930.0		Assumed under Pooling Arrangement	355.9		330.5
Ceded to external insurers and reinsurers	Ceded to external insurers and reinsurers	(7.7)		(6.6)		(25.4)		(18.8)		Ceded to external insurers and reinsurers	(9.0)		(10.6)
Ceded under Pooling Arrangement	Ceded under Pooling Arrangement	(283.9)		(263.9)		(835.2)		(761.5)		Ceded under Pooling Arrangement	(277.9)		(272.2)
Net assumed premiums earned	Net assumed premiums earned	$	83.3	$	70.1	$	226.8	$	209.0	Net assumed premiums earned	$	90.8	$	68.3
Losses and loss expenses incurred:	Losses and loss expenses incurred:									Losses and loss expenses incurred:
Assumed from external insurers and reinsurers	Assumed from external insurers and reinsurers	$	14.1	$	14.6	$	41.3	$	45.6	Assumed from external insurers and reinsurers	$	14.5	$	11.7
Assumed under Pooling Arrangement	Assumed under Pooling Arrangement	251.6		209.3		762.2		639.4		Assumed under Pooling Arrangement	280.8		239.4
Ceded to external insurers and reinsurers	Ceded to external insurers and reinsurers	(9.9)		(0.6)		(55.9)		(6.2)		Ceded to external insurers and reinsurers	(3.3)		(33.5)
Ceded under Pooling Arrangement	Ceded under Pooling Arrangement	(202.9)		(185.1)		(629.4)		(514.3)		Ceded under Pooling Arrangement	(167.1)		(228.5)
Net assumed losses and loss expenses incurred	Net assumed losses and loss expenses incurred	$	52.9	$	38.2	$	118.2	$	164.5	Net assumed losses and loss expenses incurred	$	124.9	$	(10.9)

~~8. Current Expected Credit Losses~~

The Company is exposed to third-party credit risk both directly through its cessions to reinsurers and indirectly through its participation in the Pooling Arrangement. In addition to exposure to credit risk on reinsurance recoverables, the Company is also exposed to credit risk on amounts due from insureds and agents through the Pooling Arrangement. When settling the intercompany balances, State Auto Mutual provides the STFC Pooled Companies with full credit for the net premiums written and net losses paid during the quarter and retains all receivable amounts from insureds and agents and reinsurance recoverable on paid losses from unaffiliated reinsurers.

At September 30, 2020, the determination of the allowance for credit losses for premiums receivable and reinsurance recoverables included considerations for the potential impacts of the COVID-19 pandemic on the Company's ability to collect balances due from its insureds, agents, and reinsurers.

~~Reinsurance recoverables~~

The State Auto Group monitors the credit quality of its reinsurance recoverables through the use of A.M. Best’s Financial Strength rating ("FSR"), or in the absence of an FSR consideration of credit ratings issued by approved rating agencies such as S&P, Moody’s, or Fitch. At September 30, 2020, the determination of the allowance for credit losses on reinsurance recoverables included analysis of (i) reinsurance recoverable balances by reinsurer FSR, (ii) estimated payment patterns associated with the claims underlying the reinsurance balances and (iii) historical default rates by reinsurer FSR as published by A.M. Best. In addition to the quantitative analysis, qualitative factors considered include but are not limited to (i) global reinsurer capital level, (ii) reinsurance market trends, (iii) the low interest rate environment and (iv) the stressed global economy, including the impact of COVID-19. The allowance for credit losses is included in the "reinsurance recoverables on losses and loss expenses payable" and "losses and loss expenses payable" line items in the Company's condensed consolidated balance sheets. The Company’s allowance for credit losses for reinsurance recoverables at September 30, 2020 is $0.8 million.

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)~~

~~The following table sets forth the amortized cost of the Company's direct third-party reinsurance recoverables by FSR, net of the allowance for credit losses, at September 30, 2020:~~


~~($ millions)~~	~~Amortized Cost~~
~~Financial strength rating:~~
~~A++~~	$	~~1.2~~
A+	~~15.3~~
A	~~18.7~~





~~Reinsurance recoverable on losses and loss expenses payable, net of allowance for credit losses~~	$	~~35.2~~

~~Premiums Receivables~~

Management utilizes an aging schedule to estimate an allowance for uncollectible amounts relating to the State Auto Pool premiums receivable balance including the Company's billed and due premium from its policyholders. In addition to reliance upon recent and historical collection trends, determination of the allowance for uncollectible premiums receivable at September 30, 2020 included consideration of other factors, including macro-economic conditions and trends, in particular the estimated impact of COVID-19. Credit risk is partially mitigated by the State Auto Group's ability to cancel a policy if the policyholder does not pay the premium due. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums receivable is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. Bad debt expense is included in "other expenses" on the condensed consolidated statements of income and reflected in “due to/from affiliates” on the Company's condensed consolidated balance sheets.

~~The following table sets forth the changes in the Company's share of the allowance for uncollectible premiums receivable for the three and nine months ended September 30, 2020:~~


~~($ millions)~~	~~Allowance for credit losses~~
~~Beginning balance at July 1, 2020~~	$	~~7.0~~
~~Current period provision~~	~~1.1~~
~~Writeoffs~~	~~(1.1)~~

~~Ending balance at September 30, 2020~~	$	~~7.0~~

~~Beginning balance at January 1, 2020~~	$	~~4.3~~
~~Current period provision~~	~~6.7~~
~~Writeoffs~~	~~(4.0)~~

~~Ending balance at September 30, 2020~~	$	~~7.0~~

~~9. Notes Payable and Open Line of Credit~~

~~FHLB Loans~~

~~On September 2, 2020 State Auto P&C retired its~~ ~~five-year term loan with the FHLB in the amount of $21.5 million and maturing September 2, 2021 and replaced it with a new~~ ~~ten~~-year term loan with the FHLB in the amount of $21.5 million (the "2020 FHLB Loan"). The 2020 FHLB Loan is at a fixed rate of interest of 1.37%, provides for interest-only payments during its term, with principal due in full at maturity, and may be prepaid without penalty after five years and each of the succeeding six months thereafter. The 2020 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C.

~~State Auto P&C has an Open Line of Credit Commitment (the "OLC") with the FHLB that provides State Auto P&C with a $100.0 million~~ ~~one~~-year open line of credit available for general corporate purposes. The OLC matures in April 2021. Draws under the OLC are to be funded with a daily variable rate advance with a term of no more than 180 days with interest payable monthly. All advances under the OLC are fully secured by a pledge of specific investment securities of State Auto P&C. As of September 30, 2020, no advances had been made under the OLC.

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)~~

On March 19, 2020, State Auto P&C entered into a short-term loan arrangement with the FHLB in the principal amount of $60.0 million. This loan arrangement, known as REPO based advances, was for general corporate purposes and was intended to provide additional liquidity to State Auto P&C. The REPO based advances were repaid in full on September 22, 2020, and this loan arrangement was terminated.

State Auto P&C also has a fifteen-year term loan with the FHLB that is more fully disclosed in Note 8 of the Notes to Consolidated Financial Statements in the 2019 Form 10-K. The foregoing OLC and term loans from the FHLB are collectively referred to as the "FHLB Loans."

~~10.~~7. Income Taxes

~~Interim Period Tax Expense~~

Due to an increase in the frequency and severity of catastrophic events in 2020 and the uncertainty regarding the total impact of COVID-19 on the Company's future results of operations and financial condition, the Company's normal approach of using an estimated full-year effective income tax rate to determine interim period tax expense (benefit) produces an income tax benefit for the current year to date period that would have exceeded the tax benefit the Company expects to realize for the full year. Accordingly, the Company calculated a year to date tax benefit based on the year to date loss before federal income taxes using the U.S. Federal statutory tax rate and adjusted for the estimated impact of permanent differences and discrete items. The tax expense for the three months ended September 30, 2020 is the tax benefit for the nine months September 30, 2020 less the tax benefit recognized at June 30, 2020.

The Company has foreign tax credit carryforwards of $0.5 million which will expire in 2021 and 2022. The Company believes it is more likely than not that the benefit from these foreign tax credit carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $0.5 million on the deferred tax assets related to these foreign tax credit carryforwards. The valuation allowance is included in the "other, net" line item in the table below.

The following table sets forth the reconciliation between actual federal income tax expense and the amount computed at the indicated statutory rate for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions)	($ millions)	Three months ended September 30								Nine months ended September 30								($ millions)	Three months ended March 31
		2020				2019				2020				2019					2021				2020
Amount at statutory rate	Amount at statutory rate	$	3.1	21.0	%	$	2.7	21.0	%	$	(18.4)	21.0	%	$	14.0	21.0	%	Amount at statutory rate	$	1.2	21.0	%	$	(30.2)	21.0	%
Tax-exempt interest and dividends received deduction	Tax-exempt interest and dividends received deduction	(0.6)		(4.1)		(0.7)		(5.3)		(1.7)		1.9		(2.1)		(3.1)		Tax-exempt interest and dividends received deduction	(0.6)		(11.3)		(0.7)		0.5
Other, net	Other, net	0.7		4.5		(0.8)		(6.3)		1.2		(1.4)		0.1		0		Other, net	1.4		26.6		1.5		(1.1)
Federal income tax expense (benefit)	Federal income tax expense (benefit)	3.2		21.4	%	1.2		9.4	%	(18.9)		21.5	%	$	12.0	17.9	%	Federal income tax expense (benefit)	2.0		36.3	%	(29.4)		20.4	%

~~11.~~8. Pension and Postretirement Benefit Plans

The following table sets forth information regarding the Company’s share of pension and postretirement benefit plans’

components of net periodic cost for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions)	($ millions)	Pension				Postretirement				Pension				Postretirement				($ millions)	Pension				Postretirement
		Three months ended September 30								Nine months ended September 30									Three months ended March 31
		2020		2019		2020		2019		2020		2019		2020		2019			2021		2020		2021		2020
Service cost	Service cost	$	1.2	$	0.8	$	0	$	0	$	3.6	$	2.8	$	0	$	0	Service cost	$	1.3	$	1.2	$	0	$	0
Interest cost	Interest cost	2.4		2.9		0.2		0.2		7.2		8.6		0.4		0.5		Interest cost	2.1		2.4		0		0.1
Expected return on plan assets	Expected return on plan assets	(4.4)		(4.2)		0		0		(13.1)		(12.5)		0		0		Expected return on plan assets	(4.3)		(4.4)		0		0
Amortization of:	Amortization of:																	Amortization of:
Negative prior service cost	Negative prior service cost	0		0		(1.4)		(1.4)		0		0		(4.1)		(4.1)		Negative prior service cost	0		0		(1.4)		(1.4)
Net actuarial loss	Net actuarial loss	2.3		1.5		0.1		0.1		6.9		4.5		0.2		0.2		Net actuarial loss	3.5		2.3		0		0.1
Net periodic cost (benefit)	Net periodic cost (benefit)	$	1.5	$	1.0	$	(1.1)	$	(1.1)	$	4.6	$	3.4	$	(3.5)	$	(3.4)	Net periodic cost (benefit)	$	2.6	$	1.5	$	(1.4)	$	(1.2)

The Company contributed ~~$15.0~~$5.0 million to its pension plan for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021 and expects to contribute an additional $10.0 million to its pension plan during 2021.

2214

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

~~12.~~9. Other Comprehensive (Loss) Income ~~(Loss)~~ and Accumulated Other Comprehensive (Loss) Income ~~(Loss)~~

The following tables set forth the changes in the Company’s accumulated other comprehensive (loss) income ~~(loss)~~ ("~~AOCI(L)"~~AOC(L)I"), net of tax, for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

($ millions)

Unrealized Gains
and Losses on
Available-for-Sale
Securities Benefit Plan Items Total
Beginning balance at July 1, 2020 $ 93.0 $ (75.1) $ 17.9
Other comprehensive income before reclassifications 3.5 0 3.5
Amounts reclassified from AOCI (a)
0.2 1.7 1.9
Net current period other comprehensive income 3.7 1.7 5.4
Ending balance at September 30, 2020 $ 96.7 $ (73.4) $ 23.3
Beginning balance at July 1, 2019 $ 33.2 $ (74.9) $ (41.7)
Other comprehensive income before reclassifications 17.8 0 17.8
Amounts reclassified from AOCI (a)
(0.9) 0.6 (0.3)
Net current period other comprehensive income 16.9 0.6 17.5
Ending balance at September 30, 2019 $ 50.1 $ (74.3) $ (24.2)
(a) See separate table below for details about these reclassifications


($ millions)	($ millions)		Unrealized Gains and Losses on Available-for-Sale Securities			Benefit Plan Items		Total		($ millions)		Unrealized Gains and Losses on Available-for-Sale Securities		Benefit Plan Items		Total
Beginning balance at January 1, 2021										Beginning balance at January 1, 2021		$	97.5	$	(83.6)	$	13.9
Other comprehensive loss before reclassifications										Other comprehensive loss before reclassifications		(45.1)		0		(45.1)
Amounts reclassified from AOCI (a)										Amounts reclassified from AOCI (a)		(1.2)		2.3		1.1
Net current period other comprehensive (loss) income										Net current period other comprehensive (loss) income		(46.3)		2.3		(44.0)
Ending balance at March 31, 2021										Ending balance at March 31, 2021		$	51.2	$	(81.3)	$	(30.1)

Beginning balance at January 1, 2020	Beginning balance at January 1, 2020		$	40.4		$	(78.3)	$	(37.9)	Beginning balance at January 1, 2020		$	40.4	$	(78.3)	$	(37.9)
Other comprehensive income before reclassifications	Other comprehensive income before reclassifications		58.8			0		58.8		Other comprehensive income before reclassifications		24.5		0		24.5
Amounts reclassified from AOCI (a)	Amounts reclassified from AOCI (a)		(2.5)			4.9		2.4		Amounts reclassified from AOCI (a)		(1.9)		1.6		(0.3)
Net current period other comprehensive income	Net current period other comprehensive income		56.3			4.9		61.2		Net current period other comprehensive income		22.6		1.6		24.2
Ending balance at September 30, 2020			$	96.7		$	(73.4)	$	23.3

Beginning balance at January 1, 2019			$	(20.2)	(a)	$	(76.2)	$	(96.4)

Other comprehensive loss before reclassifications			72.5			0		72.5
Amounts reclassified from AOCI (a)			(2.2)			1.9		(0.3)
Net current period other comprehensive income			70.3			1.9		72.2
Ending balance at September 30, 2019			$	50.1		$	(74.3)	$	(24.2)
Ending balance at March 31, 2020										Ending balance at March 31, 2020		$	63.0	$	(76.7)	$	(13.7)

(a)	(a)	See separate table below for details about these reclassifications								(a)	See separate table below for details about these reclassifications

2315

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

The following tables set forth the reclassifications out of accumulated other comprehensive (loss) income, by component, to the Company’s condensed consolidated statement of income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

($ millions)
Details about Accumulated Other Three months ended September 30 Affected line item in the Condensed
Comprehensive Income Components Consolidated Statements of Income
2020 2019
Unrealized gains on available-for-sale fixed maturity investments $ (0.2) $ 1.2 Realized gain on sale of securities
(0.2) 1.2 Total before tax
0 (0.3) Tax expense
(0.2) 0.9 Net of tax
Amortization of benefit plan items
Negative prior service cost 1.6 1.6 (b)
Net actuarial loss (3.7) (2.4) (b)
(2.1) (0.8) Total before tax
0.4 0.2 Tax benefit
(1.7) (0.6) Net of tax
Total reclassifications for the period $ (1.9) $ 0.3
(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see pension and postretirement benefit plans footnote for additional details).
($ millions)
Details about Accumulated Other Nine months ended September 30 Affected line item in the Condensed
Comprehensive Income Components Consolidated Statements of Income
2020 2019
Unrealized gains on available-for-sale fixed maturity investments $ 3.2 $ 2.8 Realized gains on sale of securities
3.2 2.8 Total before tax
(0.7) (0.6) Tax expense
2.5 2.2 Net of tax
Amortization of benefit plan items
Negative prior service cost 4.8 4.8 (b)
Net actuarial loss (11.0) (7.2) (b)
(6.2) (2.4) Total before tax
1.3 0.5 Tax benefit
(4.9) (1.9) Net of tax
Total reclassifications for the period $ (2.4) $ 0.3
(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see pension and postretirement benefit plans footnote for additional details).


($ millions)
Details about Accumulated Other		Three months ended March 31				Affected line item in the Condensed
Comprehensive Income Components						Consolidated Statements of Income
		2021		2020
Unrealized gains on available-for-sale fixed maturity investments		$	1.5	$	2.4	Realized gain on sale of securities
		1.5		2.4		Total before tax
		(0.3)		(0.5)		Tax expense
		1.2		1.9		Net of tax
Amortization of benefit plan items
Negative prior service cost		1.6		1.6		(b)
Net actuarial loss		(4.5)		(3.7)		(b)
		(2.9)		(2.1)		Total before tax
		0.6		0.5		Tax benefit
		(2.3)		(1.6)		Net of tax
Total reclassifications for the period		$	(1.1)	$	0.3

(b)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see pension and postretirement benefit plans footnote for additional details).

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)~~

~~13.~~10. Net Earnings (Loss) per Common Share

The following table sets forth the compilation of basic and diluted earnings (loss) per common share for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ and shares in millions, except per share amounts)	($ and shares in millions, except per share amounts)	Three months ended September 30				Nine months ended September 30				($ and shares in millions, except per share amounts)	Three months ended March 31
		2020		2019		2020		2019			2021		2020
Numerator:	Numerator:									Numerator:
Net income (loss) for basic earnings (loss) per common share	Net income (loss) for basic earnings (loss) per common share	$	11.6	$	11.5	$	(68.7)	$	54.7	Net income (loss) for basic earnings (loss) per common share	$	3.6	$	(114.6)

Denominator:	Denominator:									Denominator:
Weighted average shares for basic earnings (loss) per common share	Weighted average shares for basic earnings (loss) per common share	43.8		43.5		43.7		43.4		Weighted average shares for basic earnings (loss) per common share	43.9		43.7
Effect of dilutive share-based awards	Effect of dilutive share-based awards	0.5		0.5		0		0.6		Effect of dilutive share-based awards	0.7		0
Adjusted weighted average shares for diluted earnings (loss) per common share	Adjusted weighted average shares for diluted earnings (loss) per common share	44.3		44.0		43.7		44.0		Adjusted weighted average shares for diluted earnings (loss) per common share	44.6		43.7

Basic net earnings (loss) per common share	Basic net earnings (loss) per common share	$	0.26	$	0.26	$	(1.57)	$	1.26	Basic net earnings (loss) per common share	$	0.08	$	(2.62)
Diluted net earnings (loss) per common share	Diluted net earnings (loss) per common share	$	0.26	$	0.25	$	(1.57)	$	1.25	Diluted net earnings (loss) per common share	$	0.08	$	(2.62)

The following table sets forth stock awards and restricted share units ("RSU award") of the Company that were not included in the computation of diluted earnings (loss) per common share because the exercise price of the awards was greater than the average market price or their inclusion would have been antidilutive for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020:


(shares in millions)	Three months ended March 31
		2021	2020
Total number of antidilutive awards		0	0.5

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

~~(shares in millions)~~

~~Nine months ended September 30~~

~~2020~~

~~Total number of antidilutive awards~~

~~0.6~~

~~14.~~11. Segment Information

The Company's reportable segments are: personal insurance, commercial insurance, and investment operations. The reportable insurance segments are business units managed separately because of the differences in the type of customers they serve, the products they provide or services they offer. The insurance segments market a broad line of property and casualty insurance products throughout the United States through independent insurance agencies, which include retail agents and wholesale brokers. The investment operations segment, managed by Stateco, provides investment services.

The Company evaluates the performance of its insurance segments using industry financial measurements based on Statutory Accounting Practices (“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 is evaluated based on investment returns of assets managed by Stateco. Asset information by segment is not reported for the insurance segments because the Company does not produce such information internally.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

The following table sets forth financial information regarding the Company’s reportable segments and specialty run-off (for the previously exited specialty insurance business) for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions)	($ millions)	Three months ended September 30				Nine months ended September 30				($ millions)	Three months ended March 31
		2020		2019		2020		2019			2021		2020
Revenue from external sources:	Revenue from external sources:									Revenue from external sources:
Insurance operations	Insurance operations									Insurance operations
Personal insurance	Personal insurance	$	208.8	$	192.7	$	609.7	$	562.5	Personal insurance	$	207.8	$	198.1
Commercial insurance	Commercial insurance	144.4		127.0		414.7		361.4		Commercial insurance	148.7		132.4
Specialty run-off	Specialty run-off	0		(0.1)		0		6.1		Specialty run-off	(0.6)		0
Total insurance operations	Total insurance operations	353.2		319.6		1,024.4		930.0		Total insurance operations	355.9		330.5
Investment operations	Investment operations									Investment operations
Net investment income	Net investment income	17.9		19.3		54.5		60.4		Net investment income	17.6		18.9
Net investment gain (loss)	Net investment gain (loss)	20.0		(5.0)		(39.3)		50.2		Net investment gain (loss)	38.2		(135.2)
Total investment operations	Total investment operations	37.9		14.3		15.2		110.6		Total investment operations	55.8		(116.3)
All other	All other	0.5		0.6		1.6		1.6		All other	0.5		0.6
Total revenue from external sources	Total revenue from external sources	391.6		334.5		1,041.2		1,042.2		Total revenue from external sources	412.2		214.8
Intersegment revenue	Intersegment revenue	1.5		1.7		4.6		4.9		Intersegment revenue	1.6		1.6
Total revenue	Total revenue	393.1		336.2		1,045.8		1,047.1		Total revenue	413.8		216.4
Reconciling items:	Reconciling items:									Reconciling items:
Eliminate intersegment revenue	Eliminate intersegment revenue	(1.5)		(1.7)		(4.6)		(4.9)		Eliminate intersegment revenue	(1.6)		(1.6)
Total consolidated revenues	Total consolidated revenues	$	391.6	$	334.5	$	1,041.2	$	1,042.2	Total consolidated revenues	$	412.2	$	214.8
Segment income (loss) before federal income tax:	Segment income (loss) before federal income tax:									Segment income (loss) before federal income tax:
Insurance operations SAP underwriting (loss) gain	Insurance operations SAP underwriting (loss) gain									Insurance operations SAP underwriting (loss) gain
Personal insurance	Personal insurance	$	(30.7)	$	(6.3)	$	(70.8)	$	(32.0)	Personal insurance	$	(49.4)	$	0.3
Commercial insurance	Commercial insurance	14.4		1.2		(28.0)		(17.1)		Commercial insurance	3.0		(30.0)
Specialty run-off	Specialty run-off	(10.4)		(0.6)		(17.1)		(1.3)		Specialty run-off	1.6		(0.4)
Total insurance operations	Total insurance operations	(26.7)		(5.7)		(115.9)		(50.4)		Total insurance operations	(44.8)		(30.1)
Investment operations	Investment operations									Investment operations
Net investment income	Net investment income	17.9		19.3		54.5		60.4		Net investment income	17.6		18.9
Net investment gain (loss)	Net investment gain (loss)	20.0		(5.0)		(39.3)		50.2		Net investment gain (loss)	38.2		(135.2)

Total investment operations	Total investment operations	37.9		14.3		15.2		110.6		Total investment operations	55.8		(116.3)
All other	All other	0		0		0.1		0.2		All other	0		0.1
Total segment income (loss) before reconciling items	Total segment income (loss) before reconciling items	11.2		8.6		(100.6)		60.4		Total segment income (loss) before reconciling items	11.0		(146.3)
Reconciling items:	Reconciling items:									Reconciling items:
GAAP expense adjustments	GAAP expense adjustments	5.6		7.2		20.2		17.3		GAAP expense adjustments	(1.3)		5.9
Interest expense on corporate debt	Interest expense on corporate debt	(1.1)		(1.2)		(3.6)		(3.7)		Interest expense on corporate debt	(1.1)		(1.2)
Corporate expenses	Corporate expenses	(0.9)		(1.9)		(3.6)		(7.3)		Corporate expenses	(3.0)		(2.4)
Total reconciling items	Total reconciling items	3.6		4.1		13.0		6.3		Total reconciling items	(5.4)		2.3
Total consolidated income (loss) before federal income tax	Total consolidated income (loss) before federal income tax	$	14.8	$	12.7	$	(87.6)	$	66.7	Total consolidated income (loss) before federal income tax	$	5.6	$	(144.0)

Investable assets attributable to the Company’s investment operations segment totaled ~~$2,782.2~~$2,825.9 million and ~~$2,747.3~~$2,870.8 million at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively.

12. Contingencies and Litigation

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

~~15. Contingencies and Litigation~~

In accordance with the Contingencies Topic of the FASB's Accounting Standards Codification, the Company accrues for a litigation-related liability when it is probable that such a liability has been incurred and the amount can be reasonably estimated. The Company reviews all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, the Company cannot reasonably estimate a loss or a range of loss, if any, particularly for proceedings that are in their early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated. If the loss contingency in question is not both probable and reasonably estimable, the Company does not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. Based on currently available information known to the Company, it believes that its reserves for litigation-related liabilities are reasonable. However, in the event that a legal proceeding results in a substantial judgment against, or settlement by, the Company, there can be no assurance that any resulting liability or financial commitment would not have a material adverse effect on the financial condition, results of operations or cash flows of the consolidated financial statements of the Company.

The Company is involved in lawsuits in the ordinary course of its business arising out of or otherwise related to its insurance policies. Additionally, from time to time the Company may be involved in lawsuits, including class actions, in the ordinary course of business but not arising out of or otherwise related to its insurance policies. Recently, these proceedings have included claims and lawsuits seeking coverage under commercial property policies for pure economic losses related to ~~COVID-19, which our policies were not intended to cover.~~COVID-19. These lawsuits ~~which seek to extend coverage beyond the terms and conditions of those policies,~~ are in various stages of development, in various jurisdictions, and the Company intends to vigorously contest these matters. Based on currently available information, the Company does not believe that any such lawsuits will have a material adverse effect on its consolidated financial position, results of operations, or cash flows. However, the Company cannot provide assurance that it will not be negatively impacted by adverse legislation or adverse judicial rulings in some of these matters. Future court decisions and interpretations, as well as future changes, if any, in legislation could create uncertainties and additional liabilities may arise which could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

Additionally, the Company may be impacted by adverse regulatory actions and adverse court decisions where insurance coverages are expanded beyond the scope originally contemplated in its insurance policies. The Company believes that the effects, if any, of such regulatory actions and published court decisions are not likely to have a material adverse effect on its consolidated financial position, results of operations or cash flows.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The term “State Auto Financial” as used below refers only to State Auto Financial Corporation and the terms “our Company,” “we,” “us,” and “our” as used below refer to State Auto Financial Corporation and its consolidated subsidiaries. The term ~~“third~~“first quarter” as used below refers to the three months ended ~~September 30~~March 31 for the time period then ended. For a glossary of terms for State Auto Financial Corporation and its subsidiaries and affiliates and a glossary of selected insurance and accounting terms, see the section entitled “Important Defined Terms Used in this Form 10-K” included in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 Form 10-K”).

The discussion and analysis presented below relates to the material changes in financial condition and results of operations for our consolidated balance sheets as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, and for the consolidated statements of income for the three ~~and nine~~ month periods ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. This discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ~~included~~ in Item 7 of the ~~2019~~2020 Form 10-K, and in particular the discussions in those sections thereof entitled “Overview,” “Executive Summary,” and “Critical Accounting Policies.” Readers are encouraged to review the entire ~~2019~~2020 Form 10-K, as it includes information regarding our Company not discussed in this Form 10-Q. This information will assist in your understanding of the discussion of our current period financial results.

The discussion and analysis presented below includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. Forward-looking statements speak only as of the date the statements were made available. Although we believe that the expectations reflected in forward-looking statements have a reasonable basis, we can give no assurance that these expectations will prove to be correct. Forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. For a discussion of the most significant risks and uncertainties that could cause our actual results to differ materially from those projected, see “Risk Factors” in Item 1A of the ~~2019~~2020 Form 10-K, updated by Part II, Item 1A of this Form 10-Q. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

We have three reportable segments: personal insurance, commercial insurance, and investment operations. The reportable 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 insurance segments market a broad line of property and casualty insurance products throughout the United States through independent insurance agencies, which include retail agents and wholesale brokers. The investment operations segment, managed by Stateco, provides investment services. See “Personal and Commercial Insurance” in Item 1 of the ~~2019~~2020 Form 10-K for more information about our insurance segments. The results from our previously exited specialty insurance business are disclosed as "specialty run-off." Financial information about our reportable segments for ~~2020~~2021 is set forth in Note 14 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.

~~COVID-19~~

The impact of COVID-19 on our future results of operations and financial condition are highly uncertain at this time and outside of our control. The scope, duration and magnitude of the effects of the on-going COVID-19 pandemic continue to evolve rapidly and in ways that are difficult or impossible to anticipate. For discussions on how COVID-19 affected our operations, see the "Results of Operations" included in this Item 2. For a discussion of the most significant risks and uncertainties that could impact our results of operations, financial position, liquidity or cash flows as a result of the COVID-19 pandemic, see “Part II-Item 1A-Risk Factors” included in this Form 10-Q.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

POOLING ARRANGEMENT

The STFC Pooled Companies and the Mutual Pooled Companies participate in a quota share reinsurance pooling arrangement referred to as the “Pooling Arrangement." Under the Pooling Arrangement, State Auto Mutual assumes premiums, losses and expenses from each of the Pooled Companies and in turn cedes to each of the Pooled Companies a specified portion of premiums, losses and expenses based on each of the Pooled Companies’ respective pooling percentages. State Auto Mutual then retains the balance of the pooled business.

The following table sets forth the participants and their participation percentages in the Pooling Arrangement:


STFC Pooled Companies:
State Auto P&C	51.0	%
Milbank	14.0
SA Ohio	—
Total STFC Pooled Companies	65.0	%
State Auto Mutual Pooled Companies:
State Auto Mutual	34.5	%
SA Wisconsin	—
Meridian Security	—
Patrons Mutual	0.5
RIC	—
Plaza	—
American Compensation	—
Bloomington Compensation	—
Total State Auto Mutual Pooled Companies	35.0	%

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

RESULTS OF OPERATIONS

The following table sets forth certain key performance indicators we use to monitor our operations for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions, except per share amounts)	($ millions, except per share amounts)	Three months ended September 30						Nine months ended September 30						($ millions, except per share amounts)	Three months ended March 31
		2020			2019			2020			2019				2021			2020
GAAP Basis:	GAAP Basis:													GAAP Basis:
Total revenues	Total revenues	$	391.6		$	334.5		$	1,041.2		$	1,042.2		Total revenues	$	412.2		$	214.8
Income (loss) before federal income taxes	Income (loss) before federal income taxes	$	14.8		$	12.7		$	(87.6)		$	66.7		Income (loss) before federal income taxes	$	5.6		$	(144.0)
Net income (loss)	Net income (loss)	$	11.6		$	11.5		$	(68.7)		$	54.7		Net income (loss)	$	3.6		$	(114.6)
Basic earnings (loss) per share	Basic earnings (loss) per share	$	0.26		$	0.26		$	(1.57)		$	1.26		Basic earnings (loss) per share	$	0.08		$	(2.62)
Diluted earnings (loss) per share	Diluted earnings (loss) per share	$	0.26		$	0.25		$	(1.57)		$	1.25		Diluted earnings (loss) per share	$	0.08		$	(2.62)
Stockholders’ equity	Stockholders’ equity							$	944.1		$	943.7		Stockholders’ equity	$	972.0		$	866.7
Return on average equity (LTM)	Return on average equity (LTM)							(3.8)		%	3.4		%	Return on average equity (LTM)	14.3		%	(8.7)		%
Book value per share	Book value per share							$	21.57		$	21.68		Book value per share	$	22.07		$	19.83
Debt to capital ratio	Debt to capital ratio							11.4		%	11.4		%	Debt to capital ratio	11.2		%	17.4		%
Cat loss and ALAE ratio	Cat loss and ALAE ratio	16.6		%	3.3		%	18.6		%	8.1		%	Cat loss and ALAE ratio	20.1		%	12.7		%
Non-cat loss and LAE ratio	Non-cat loss and LAE ratio	54.6		%	61.9		%	55.8		%	60.5		%	Non-cat loss and LAE ratio	58.8		%	59.7		%
Loss and LAE ratio	Loss and LAE ratio	71.2		%	65.2		%	74.4		%	68.6		%	Loss and LAE ratio	78.9		%	72.4		%
Expense ratio	Expense ratio	34.8		%	34.3		%	34.9		%	35.0		%	Expense ratio	34.0		%	34.8		%
Combined ratio	Combined ratio	106.0		%	99.5		%	109.3		%	103.6		%	Combined ratio	112.9		%	107.2		%
Premium written growth	Premium written growth	9.3		%	11.0		%	11.3		%	9.0		%	Premium written growth	3.5		%	13.2		%
Investment yield	Investment yield	2.8		%	2.9		%	2.9		%	3.0		%	Investment yield	2.8		%	2.9		%

SAP Basis:	SAP Basis:													SAP Basis:
Cat loss and ALAE ratio	Cat loss and ALAE ratio	16.6		%	3.3		%	18.6		%	8.1		%	Cat loss and ALAE ratio	20.1		%	12.7		%
Non-cat loss and ALAE ratio	Non-cat loss and ALAE ratio	49.5		%	56.1		%	49.9		%	54.3		%	Non-cat loss and ALAE ratio	51.5		%	53.6		%
ULAE ratio	ULAE ratio	5.2		%	6.0		%	6.0		%	6.3		%	ULAE ratio	7.2		%	6.2		%
Loss and LAE ratio	Loss and LAE ratio	71.3		%	65.4		%	74.5		%	68.7		%	Loss and LAE ratio	78.8		%	72.5		%
Expense ratio	Expense ratio	33.8		%	33.6		%	34.1		%	34.3		%	Expense ratio	33.5		%	34.9		%
Combined ratio	Combined ratio	105.1		%	99.0		%	108.6		%	103.0		%	Combined ratio	112.3		%	107.4		%

Twelve months ended September 30
2020 2019
Net premiums written to surplus 1.7 1.5


	Twelve months ended March 31
	2021	2020
Net premiums written to surplus	1.6	1.8

~~Third~~First Quarter ~~and Year to Date 2020~~2021 Overview:

~~COVID-19~~

~~Beginning in March 2020, the global COVID-19 pandemic has impacted our results of operations. For the 2020 third quarter and year to date, our results were impacted as follows:~~

•For the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, net investment gain was ~~$20.0~~$38.2 million, ~~and net investment loss was $39.3 million, respectively,~~ which included ~~$42.3~~$31.5 million ~~and $50.9 million, respectively,~~ of ~~realized losses~~gains recognized on equity securities. ~~During the third quarter, we completed the exit of our investments in the Master Limited Partnership Exchange Traded Funds ("MLP ETF's") equity security asset class~~

•The SAP catastrophe loss and ~~realized losses of $45.9 million and $56.5 million, respectively,~~ALAE ratio for the three ~~and nine~~ months ended ~~September 30, 2020.~~March 31, 2021 was 20.1%, or $71.6 million. The ~~decline~~2021 first quarter was impacted by winter storms Uri and Viola in Texas, which added 17.0 points to the ~~fair value~~first quarter loss and ALAE ratio. Approximately 75% of the ~~investments in~~first quarter 2021 catastrophe losses occurred within homeowners.

•The SAP non-cat loss and ALAE ratio for the ~~MLP ETFs during 2020~~three months ended March 31, 2021 was ~~due~~51.5%, or $183.1 million. Non-catastrophe losses and ALAE included 6.9 points of favorable development relating to prior years, or $24.6 million. For the ~~market volatility caused~~2021 first quarter, the commercial insurance segment and personal insurance segment contributed

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

~~by the COVID-19 pandemic. Net investment gain (loss) for the 2020 third quarter and year to date included $62.5~~$21.8 million and ~~$8.2~~$2.9 million, respectively, of ~~unrealized gains from~~favorable development. The current accident year non-cat loss and ALAE ratio was impacted by (i) non-cat weather losses, primarily wind and hail, and (ii) fire losses.

First Quarter 2020 Overview:

•For the three months ended March 31, 2020, net investment losses were $135.2 million which included $137.8 million of net losses recognized on equity securities and other invested assets. The fair ~~values~~value of our equity securities and other invested assets ~~still held in our investment portfolio have mostly recovered from~~was adversely affected by the disruption in global financial markets ~~caused by the COVID-19 pandemic.~~

•~~The impact on the non-cat loss and ALAE current accident year included:~~

◦~~A decline in claim frequency in personal auto and commercial auto due to a reduction in miles driven~~ as a result of ~~people working remotely and staying at home more because of~~the COVID-19 ~~concerns,~~pandemic.

◦~~A decline in claim frequency in small commercial package, middle market commercial and workers' compensation due to reduced business and employment activity,~~

◦~~Increased workers' compensation claims for businesses in the medical field such as nursing homes and hospitals, due to employees being exposed to COVID-19 in the course of their employment, and~~

◦~~Increased legal defense costs in small commercial package and middle market commercial due to litigation involving business interruption insurance claims.~~

~~Other Factors~~

•The SAP catastrophe loss and ALAE ~~ratios for the three and nine months ended September 30,~~ratio was 12.7%, or $41.9 million. First quarter 2020 ~~were 16.6% and 18.6%, respectively, or $58.7 million and $191.0 million, respectively. The 2020 third quarter and year to date were~~was impacted by the Midwest derecho in August, with approximately 75% of the losses occurring in Iowa, as well as widespread wind and hail events. Approximately 50% of the catastrophe losses for the quarter were in our homeowners line of business. The 2020 third quarter and year to date were also impacted by adverse development of prior accident year losses of $12.4 million in E&S property related to hurricane Irma. The 2020 year to date was also impacted by (i) a ~~first quarter~~severe wind and hail storm, including tornadoes in Tennessee, that ~~primarily impacted~~contributed 8.3 points to the first quarter loss and ALAE ratio. Approximately 70% of the catastrophe losses for the quarter occurred within middle market ~~line of business, and (ii) widespread second quarter wind and hail events in the South and Midwest that primarily impacted the homeowners line of business.~~commercial.

•The SAP non-cat loss and ALAE ~~ratios for the three and nine months ended September 30, 2020 were 49.5% and 49.9%~~ratio was 53.6%, or ~~$175.0 million and $510.6 million, respectively.~~

◦~~The 2020 third quarter and year to date current accident year non-cat loss~~$177.1 million. Non-catastrophe losses and ALAE ~~ratios were impacted~~included 3.2 points of favorable development relating to prior years, or $10.5 million, primarily from the commercial insurance segment, which contributed $16.8 million, partially offset by ~~(i)~~$6.4 million of adverse development from the ~~COVID-19 pandemic discussed above, and (ii) non-cat weather losses, primarily wind and hail.~~personal insurance segment. The ~~2020 year to date~~ current accident year non-cat loss and ALAE ratio was ~~also~~ impacted by ~~an elevated level of~~(i) large losses, including ~~fires.~~

◦~~The 2020 third~~fires, and (ii) a lower level of claims attributable to fewer miles driven later in the quarter ~~and year to date non-catastrophe losses and ALAE included 5.5 points and 3.1 points, respectively,~~as a result of favorable development relating to prior years, or $19.3 million and $31.8 million, respectively. For the 2020 third quarter and year to date, the commercial insurance segment contributed $26.5 million and $57.2 million, respectively, of favorable development, which was partially offset by $8.1 million and $20.2 million, respectively, of adverse development from the personal insurance segment. The 2020 year to date was also impacted by $5.2 million of adverse development from specialty run-off primarily due to an adverse court decision relating to an E&S casualty claim from 2016.

~~Third Quarter and Year to Date 2019 Overview~~:

•For the three and nine months ended September 30, 2019, net investment losses were $5.0 million and net investment gains were $50.2 million, respectively, which included $4.4 million of unrealized losses and $51.2 million of unrealized gains, respectively, from equity securitiescompliance with shelter-in-place orders and other ~~invested assets.~~

•~~The catastrophe loss and ALAE ratios for~~actions taken in response to the three and nine months ended September 30, 2019 were 3.3% and 8.1%, respectively, or $10.6 million and $75.7 million, respectively. The 2019 third quarter and year to date were impacted by severe storms in the South and Midwest. Approximately 50 percent of the year to date catastrophe losses occurred in Texas.

•~~The SAP non-cat loss and ALAE ratios for the three and nine months ended September 30, 2019 were 56.1% and 54.3%, respectively or $179.0 million and $504.4 million, respectively.~~

◦~~The 2019 third quarter and year to date current accident year non-cat loss and ALAE ratios were impacted by non-cat weather losses, primarily wind and hail.~~COVID-19 pandemic.

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

◦The 2019 third quarter and year to date non-catastrophe losses and ALAE included 5.1 points and 5.8 points, respectively, of favorable development relating to prior years, or $16.1 million and $54.1 million, respectively. For three and nine months ended September 30, 2019, the personal and commercial insurance segments contributed 4.8 points and 5.6 points, respectively, or $15.2 million and $51.7 million, respectively, of favorable development.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Insurance Segments

We measure our top-line growth for our insurance segments based on net written premiums, which provides us with an indication of how well we are doing in terms of revenue growth before it is actually earned. Our policies provide a fixed amount of coverage for a stated period of time, often referred to as the “policy term.” As such, our net written premiums are recognized as earned ratably over the policy term. The unearned portion of written premiums, called unearned premiums, is reflected on our balance sheet as a liability and represents our obligation to provide coverage for the unexpired term of the policies.

Insurance industry regulators require our insurance subsidiaries to report their financial condition and results of operations using SAP. We use SAP financial results, along with industry standard financial measures determined on a SAP basis and certain measures determined on a GAAP basis, to internally monitor the performance of our insurance segments and reward our employees.

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 “Critical Accounting Policies – Deferred Acquisition Costs” section included in Item 7 of ~~our 2019~~the 2020 Form 10-K.

The accounting for pension benefits also contributes to the difference between our GAAP loss and expense ratios and our SAP loss and expense ratios. For a discussion of our pension and postretirement benefit obligations, see the “Critical Accounting Policies – Pension and Postretirement Benefit Obligations” section included in Item 7 of ~~our 2019~~the 2020 Form 10-K.

All references to financial measures or components thereof in this discussion are calculated on a GAAP basis, unless otherwise noted.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

The following tables set forth certain key performance indicators based on SAP for our insurance segments for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ in millions)	($ in millions)									($ in millions)	2021			2020			2021			2020
Three months ended September 30, 2020		Personal & Commercial			Specialty run-off		Total
Three months ended March 31										Three months ended March 31	Personal & Commercial			Personal & Commercial			Total(1)			Total(1)

Net written premiums	Net written premiums	$	379.0		$	0.1	$	379.1		Net written premiums	$	359.4		$	346.6		$	358.7		$	346.5
Net earned premiums	Net earned premiums	353.2			—		353.2			Net earned premiums	356.5			330.5			355.9			330.5
Losses and LAE incurred:	Losses and LAE incurred:									Losses and LAE incurred:
Cat loss and ALAE	Cat loss and ALAE	46.4			12.3		58.7			Cat loss and ALAE	74.1			41.8			71.6			41.9
Non-cat loss and ALAE	Non-cat loss and ALAE									Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	Prior accident years non-cat loss and ALAE	(18.4)			(0.9)		(19.3)			Prior accident years non-cat loss and ALAE	(24.7)			(10.4)			(24.6)			(10.5)
Current accident year non-cat loss and ALAE	Current accident year non-cat loss and ALAE	194.1			0.2		194.3			Current accident year non-cat loss and ALAE	207.6			187.5			207.7			187.6
Total non-cat loss and ALAE	Total non-cat loss and ALAE	175.7			(0.7)		175.0			Total non-cat loss and ALAE	182.9			177.1			183.1			177.1
Total Loss and ALAE	Total Loss and ALAE	222.1			11.6		233.7			Total Loss and ALAE	257.0			218.9			254.7			219.0
ULAE	ULAE	19.6			(1.3)		18.3			ULAE	25.7			20.6			25.7			20.6
Total Loss and LAE	Total Loss and LAE	241.7			10.3		252.0			Total Loss and LAE	282.7			239.5			280.4			239.6
Underwriting expenses	Underwriting expenses	127.8			0.1		127.9			Underwriting expenses	120.2			120.7			120.3			121.0
Net underwriting loss	Net underwriting loss	$	(16.3)		$	(10.4)	$	(26.7)		Net underwriting loss	$	(46.4)		$	(29.7)		$	(44.8)		$	(30.1)

Cat loss and ALAE ratio	Cat loss and ALAE ratio	13.1		%	N/M(1)		16.6		%	Cat loss and ALAE ratio	20.8		%	12.7		%	20.1		%	12.7		%
Non-cat loss and ALAE ratio	Non-cat loss and ALAE ratio									Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	Prior accident years non-cat loss and ALAE ratio	(5.2)		%	N/M		(5.5)		%	Prior accident years non-cat loss and ALAE ratio	(6.9)		%	(3.2)		%	(6.9)		%	(3.2)		%
Current accident year non-cat loss and ALAE ratio	Current accident year non-cat loss and ALAE ratio	55.1		%	N/M		55.0		%	Current accident year non-cat loss and ALAE ratio	58.2		%	56.8		%	58.4		%	56.8		%
Total non-cat loss and ALAE ratio	Total non-cat loss and ALAE ratio	49.9		%	N/M		49.5		%	Total non-cat loss and ALAE ratio	51.3		%	53.6		%	51.5		%	53.6		%
Total Loss and ALAE ratio	Total Loss and ALAE ratio	63.0		%	N/M		66.1		%	Total Loss and ALAE ratio	72.1		%	66.3		%	71.6		%	66.3		%
ULAE ratio	ULAE ratio	5.5		%	N/M		5.2		%	ULAE ratio	7.2		%	6.2		%	7.2		%	6.2		%
Total Loss and LAE ratio	Total Loss and LAE ratio	68.5		%	N/M		71.3		%	Total Loss and LAE ratio	79.3		%	72.5		%	78.8		%	72.5		%
Expense ratio	Expense ratio	33.7		%	N/M		33.8		%	Expense ratio	33.5		%	34.8		%	33.5		%	34.9		%
Combined ratio	Combined ratio	102.2		%	N/M		105.1		%	Combined ratio	112.8		%	107.3		%	112.3		%	107.4		%

(1) N/M = Not Meaningful
(1)Includes specialty run-off										(1)Includes specialty run-off

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

($ in millions)
Three months ended September 30, 2019 Personal & Commercial Specialty run-off Total
Net written premiums $ 347.2 $ (0.4) $ 346.8
Net earned premiums 319.7 (0.1) 319.6
Losses and LAE incurred:
Cat loss and ALAE 10.3 0.3 10.6
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (15.2) (0.9) (16.1)
Current accident year non-cat loss and ALAE 195.0 0.1 195.1
Total non-cat loss and ALAE 179.8 (0.8) 179.0
Total Loss and ALAE 190.1 (0.5) 189.6
ULAE 19.2 (0.1) 19.1
Total Loss and LAE 209.3 (0.6) 208.7
Underwriting expenses 115.5 1.1 116.6
Net underwriting loss $ (5.1) $ (0.6) $ (5.7)
Cat loss and ALAE ratio 3.2 %
N/M(1)
3.3 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (4.8) % N/M (5.1) %
Current accident year non-cat loss and ALAE ratio 61.0 % N/M 61.2 %
Total non-cat loss and ALAE ratio 56.2 % N/M 56.1 %
Total Loss and ALAE ratio 59.4 % N/M 59.4 %
ULAE ratio 6.0 % N/M 6.0 %
Total Loss and LAE ratio 65.4 % N/M 65.4 %
Expense ratio 33.3 % N/M 33.6 %
Combined ratio 98.7 % N/M 99.0 %
(1) N/M = Not Meaningful

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

($ in millions)
Nine months ended September 30, 2020 Personal & Commercial Specialty run-off Total
Net written premiums $ 1,107.3 $ (0.1) $ 1,107.2
Net earned premiums 1,024.4 — 1,024.4
Losses and LAE incurred:
Cat loss and ALAE 178.6 12.4 191.0
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (37.0) 5.2 (31.8)
Current accident year non-cat loss and ALAE 542.1 0.3 542.4
Total non-cat loss and ALAE 505.1 5.5 510.6
Total Loss and ALAE 683.7 17.9 701.6
ULAE 62.9 (1.3) 61.6
Total Loss and LAE 746.6 16.6 763.2
Underwriting expenses 376.6 0.5 377.1
Net underwriting loss $ (98.8) $ (17.1) $ (115.9)
Cat loss and ALAE ratio 17.4 %
N/M(1)
18.6 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (3.6) % N/M (3.1) %
Current accident year non-cat loss and ALAE ratio 53.0 % N/M 53.0 %
Total non-cat loss and ALAE ratio 49.4 % N/M 49.9 %
Total Loss and ALAE ratio 66.8 % N/M 68.5 %
ULAE ratio 6.1 % N/M 6.0 %
Total Loss and LAE ratio 72.9 % N/M 74.5 %
Expense ratio 34.0 % N/M 34.1 %
Combined ratio 106.9 % N/M 108.6 %
(1) N/M = Not Meaningful

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

($ in millions)
Nine months ended September 30, 2019 Personal & Commercial Specialty run-off Total
Net written premiums $ 994.0 $ 0.5 $ 994.5
Net earned premiums 923.9 6.1 930.0
Losses and LAE incurred:
Cat loss and ALAE 71.7 4.0 75.7
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (51.7) (2.4) (54.1)
Current accident year non-cat loss and ALAE 553.6 4.9 558.5
Total non-cat loss and ALAE 501.9 2.5 504.4
Total Loss and ALAE 573.6 6.5 580.1
ULAE 59.6 (0.8) 58.8
Total Loss and LAE 633.2 5.7 638.9
Underwriting expenses 339.8 1.7 341.5
Net underwriting loss $ (49.1) $ (1.3) $ (50.4)
Cat loss and ALAE ratio 7.8 %
N/M(1)
8.1 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (5.6) % N/M (5.8) %
Current accident year non-cat loss and ALAE ratio 59.9 % N/M 60.1 %
Total non-cat loss and ALAE ratio 54.3 % N/M 54.3 %
Total Loss and ALAE ratio 62.1 % N/M 62.4 %
ULAE ratio 6.4 % N/M 6.3 %
Total Loss and LAE ratio 68.5 % N/M 68.7 %
Expense ratio 34.2 % N/M 34.3 %
Combined ratio 102.7 % N/M 103.0 %
(1) N/M = Not Meaningful

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Personal Insurance Segment

The following tables set forth certain key performance indicators based on SAP by major product line for our personal insurance segment for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Table 1


($ in millions)	($ in millions)													($ in millions)
Three months ended September 30, 2020		Personal Auto			Homeowners			Other Personal			Total
Three months ended March 31, 2021														Three months ended March 31, 2021	Personal Auto			Homeowners			Other Personal			Total

Net written premiums	Net written premiums	$	101.4		$	111.4		$	17.4		$	230.2		Net written premiums	$	89.1		$	86.2		$	17.9		$	193.2
Net earned premiums	Net earned premiums	103.0			92.5			13.3			208.8			Net earned premiums	95.7			96.3			15.8			207.8
Losses and LAE incurred:	Losses and LAE incurred:													Losses and LAE incurred:
Cat loss and ALAE	Cat loss and ALAE	1.9			28.1			2.9			32.9			Cat loss and ALAE	0.5			52.4			9.6			62.5
Non-cat loss and ALAE	Non-cat loss and ALAE													Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	Prior accident years non-cat loss and ALAE	8.0			0.7			(0.6)			8.1			Prior accident years non-cat loss and ALAE	(0.8)			(2.1)			—			(2.9)
Current accident year non-cat loss and ALAE	Current accident year non-cat loss and ALAE	58.2			50.7			4.8			113.7			Current accident year non-cat loss and ALAE	56.9			55.1			8.1			120.1
Total non-cat loss and ALAE	Total non-cat loss and ALAE	66.2			51.4			4.2			121.8			Total non-cat loss and ALAE	56.1			53.0			8.1			117.2
Total Loss and ALAE	Total Loss and ALAE	68.1			79.5			7.1			154.7			Total Loss and ALAE	56.6			105.4			17.7			179.7
ULAE	ULAE	7.4			6.8			0.2			14.4			ULAE	8.5			8.7			1.2			18.4
Total Loss and LAE	Total Loss and LAE	75.5			86.3			7.3			169.1			Total Loss and LAE	65.1			114.1			18.9			198.1
Underwriting expenses	Underwriting expenses	32.0			33.2			5.2			70.4			Underwriting expenses	27.5			26.5			5.1			59.1
Net underwriting (loss) gain		$	(4.5)		$	(27.0)		$	0.8		$	(30.7)
Net underwriting gain (loss)														Net underwriting gain (loss)	$	3.1		$	(44.3)		$	(8.2)		$	(49.4)

Cat loss and ALAE ratio	Cat loss and ALAE ratio	1.9		%	30.4		%	21.5		%	15.8		%	Cat loss and ALAE ratio	0.6		%	54.4		%	60.6		%	30.1		%
Non-cat loss and ALAE ratio	Non-cat loss and ALAE ratio													Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	Prior accident years non-cat loss and ALAE ratio	7.8		%	0.7		%	(4.1)		%	3.9		%	Prior accident years non-cat loss and ALAE ratio	(0.9)		%	(2.2)		%	0.2		%	(1.4)		%
Current accident year non-cat loss and ALAE ratio	Current accident year non-cat loss and ALAE ratio	56.4		%	54.9		%	36.2		%	54.4		%	Current accident year non-cat loss and ALAE ratio	59.5		%	57.3		%	51.6		%	57.7		%
Total non-cat loss and ALAE ratio	Total non-cat loss and ALAE ratio	64.2		%	55.6		%	32.1		%	58.3		%	Total non-cat loss and ALAE ratio	58.6		%	55.1		%	51.8		%	56.3		%
Total Loss and ALAE ratio	Total Loss and ALAE ratio	66.1		%	86.0		%	53.6		%	74.1		%	Total Loss and ALAE ratio	59.2		%	109.5		%	112.4		%	86.4		%
ULAE ratio	ULAE ratio	7.2		%	7.3		%	1.6		%	6.9		%	ULAE ratio	8.8		%	9.1		%	7.5		%	8.9		%
Total Loss and LAE ratio	Total Loss and LAE ratio	73.3		%	93.3		%	55.2		%	81.0		%	Total Loss and LAE ratio	68.0		%	118.6		%	119.9		%	95.3		%
Expense ratio	Expense ratio	31.4		%	29.8		%	29.4		%	30.5		%	Expense ratio	30.9		%	30.7		%	28.5		%	30.6		%
Combined ratio	Combined ratio	104.7		%	123.1		%	84.6		%	111.5		%	Combined ratio	98.9		%	149.3		%	148.4		%	125.9		%

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Table 2

($ in millions)
Three months ended September 30, 2019 Personal Auto Homeowners Other Personal Total
Net written premiums $ 107.1 $ 91.5 $ 11.2 $ 209.8
Net earned premiums 108.3 75.6 8.8 192.7
Losses and LAE incurred:
Cat loss and ALAE 0.9 7.0 0.3 8.2
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (1.2) — (0.9) (2.1)
Current accident year non-cat loss and ALAE 73.0 41.2 4.7 118.9
Total non-cat loss and ALAE 71.8 41.2 3.8 116.8
Total Loss and ALAE 72.7 48.2 4.1 125.0
ULAE 7.4 4.4 0.2 12.0
Total Loss and LAE 80.1 52.6 4.3 137.0
Underwriting expenses 30.9 27.8 3.3 62.0
Net underwriting (loss) gain $ (2.7) $ (4.8) $ 1.2 $ (6.3)
Cat loss and ALAE ratio 0.8 % 9.2 % 3.5 % 4.2 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (1.2) % 0.1 % (9.8) % (1.1) %
Current accident year non-cat loss and ALAE ratio 67.4 % 54.5 % 52.5 % 61.7 %
Total non-cat loss and ALAE ratio 66.2 % 54.6 % 42.7 % 60.6 %
Total Loss and ALAE ratio 67.0 % 63.8 % 46.2 % 64.8 %
ULAE ratio 6.9 % 5.8 % 2.0 % 6.2 %
Total Loss and LAE ratio 73.9 % 69.6 % 48.2 % 71.0 %
Expense ratio 28.9 % 30.3 % 29.6 % 29.6 %
Combined ratio 102.8 % 99.9 % 77.8 % 100.6 %

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Table 3~~

($ in millions)
Nine months ended September 30, 2020 Personal Auto Homeowners Other Personal Total
Net written premiums $ 310.3 $ 299.1 $ 45.7 $ 655.1
Net earned premiums 311.0 262.9 35.8 609.7
Losses and LAE incurred:
Cat loss and ALAE 6.5 93.4 12.0 111.9
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE 19.1 2.8 (1.7) 20.2
Current accident year non-cat loss and ALAE 165.7 125.0 13.0 303.7
Total non-cat loss and ALAE 184.8 127.8 11.3 323.9
Total Loss and ALAE 191.3 221.2 23.3 435.8
ULAE 23.0 18.6 1.2 42.8
Total Loss and LAE 214.3 239.8 24.5 478.6
Underwriting expenses 98.5 89.7 13.7 201.9
Net underwriting loss $ (1.8) $ (66.6) $ (2.4) $ (70.8)
Cat loss and ALAE ratio 2.1 % 35.5 % 33.4 % 18.4 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio 6.2 % 1.0 % (4.5) % 3.3 %
Current accident year non-cat loss and ALAE ratio 53.2 % 47.6 % 36.2 % 49.8 %
Total non-cat loss and ALAE ratio 59.4 % 48.6 % 31.7 % 53.1 %
Total Loss and ALAE ratio 61.5 % 84.1 % 65.1 % 71.5 %
ULAE ratio 7.4 % 7.1 % 3.4 % 7.0 %
Total Loss and LAE ratio 68.9 % 91.2 % 68.5 % 78.5 %
Expense ratio 31.7 % 30.0 % 30.0 % 30.8 %
Combined ratio 100.6 % 121.2 % 98.5 % 109.3 %

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Table 4~~


($ in millions)	($ in millions)													($ in millions)
Nine months ended September 30, 2019		Personal Auto			Homeowners			Other Personal			Total
Three months ended March 31, 2020														Three months ended March 31, 2020	Personal Auto			Homeowners			Other Personal			Total

Net written premiums	Net written premiums	$	324.8		$	241.4		$	29.0		$	595.2		Net written premiums	$	104.6		$	81.6		$	13.3		$	199.5
Net earned premiums	Net earned premiums	322.1			216.1			24.3			562.5			Net earned premiums	104.7			82.7			10.7			198.1
Losses and LAE incurred:	Losses and LAE incurred:													Losses and LAE incurred:
Cat loss and ALAE	Cat loss and ALAE	5.4			47.8			4.0			57.2			Cat loss and ALAE	0.5			10.7			1.5			12.7
Non-cat loss and ALAE	Non-cat loss and ALAE													Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	Prior accident years non-cat loss and ALAE	(11.0)			0.5			(1.9)			(12.4)			Prior accident years non-cat loss and ALAE	5.2			2.2			(1.0)			6.4
Current accident year non-cat loss and ALAE	Current accident year non-cat loss and ALAE	207.8			110.4			12.7			330.9			Current accident year non-cat loss and ALAE	62.0			37.6			4.3			103.9
Total non-cat loss and ALAE	Total non-cat loss and ALAE	196.8			110.9			10.8			318.5			Total non-cat loss and ALAE	67.2			39.8			3.3			110.3
Total Loss and ALAE	Total Loss and ALAE	202.2			158.7			14.8			375.7			Total Loss and ALAE	67.7			50.5			4.8			123.0
ULAE	ULAE	22.2			15.1			0.9			38.2			ULAE	7.3			5.3			0.4			13.0
Total Loss and LAE	Total Loss and LAE	224.4			173.8			15.7			413.9			Total Loss and LAE	75.0			55.8			5.2			136.0
Underwriting expenses	Underwriting expenses	96.7			74.8			9.1			180.6			Underwriting expenses	32.8			25.0			4.0			61.8
Net underwriting gain (loss)		$	1.0		$	(32.5)		$	(0.5)		$	(32.0)
Net underwriting (loss) gain														Net underwriting (loss) gain	$	(3.1)		$	1.9		$	1.5		$	0.3

Cat loss and ALAE ratio	Cat loss and ALAE ratio	1.6		%	22.1		%	16.5		%	10.2		%	Cat loss and ALAE ratio	0.4		%	13.0		%	14.0		%	6.4		%
Non-cat loss and ALAE ratio	Non-cat loss and ALAE ratio													Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	Prior accident years non-cat loss and ALAE ratio	(3.4)		%	0.3		%	(7.8)		%	(2.2)		%	Prior accident years non-cat loss and ALAE ratio	5.0		%	2.7		%	(9.2)		%	3.2		%
Current accident year non-cat loss and ALAE ratio	Current accident year non-cat loss and ALAE ratio	64.5		%	51.0		%	52.0		%	58.7		%	Current accident year non-cat loss and ALAE ratio	59.3		%	45.4		%	40.0		%	52.5		%
Total non-cat loss and ALAE ratio	Total non-cat loss and ALAE ratio	61.1		%	51.3		%	44.2		%	56.5		%	Total non-cat loss and ALAE ratio	64.3		%	48.1		%	30.8		%	55.7		%
Total Loss and ALAE ratio	Total Loss and ALAE ratio	62.7		%	73.4		%	60.7		%	66.7		%	Total Loss and ALAE ratio	64.7		%	61.1		%	44.8		%	62.1		%
ULAE ratio	ULAE ratio	6.9		%	7.0		%	3.7		%	6.8		%	ULAE ratio	6.9		%	6.4		%	4.0		%	6.5		%
Total Loss and LAE ratio	Total Loss and LAE ratio	69.6		%	80.4		%	64.4		%	73.5		%	Total Loss and LAE ratio	71.6		%	67.5		%	48.8		%	68.6		%
Expense ratio	Expense ratio	29.8		%	31.0		%	31.5		%	30.4		%	Expense ratio	31.4		%	30.6		%	30.0		%	31.0		%
Combined ratio	Combined ratio	99.4		%	111.4		%	95.9		%	103.9		%	Combined ratio	103.0		%	98.1		%	78.8		%	99.6		%

The personal insurance segment's net written premiums for the three ~~and nine~~ months ended ~~September 30, 2020 increased 9.7% and 10.1%, respectively,~~March 31, 2021 decreased 3.2% when compared to the same ~~2019 periods~~2020 period (Tables 1 - 4)2), ~~primarily~~ driven by new business growth and increased rates in homeowners and other personal. The new business growth resulted in higher levels of policies in force for homeowners for the three and nine months ended September 30, 2020 compared to the same 2019 periods. Partially offsetting the 2020 third quarter and year to date net written premium growth was a decrease in personal auto net written premiums. The decrease in personal auto net written premiums ~~which~~ was driven by a decline in new business, primarily attributable to cumulative rate and underwriting actions taken ~~during the fourth quarter of 2019 and~~ throughout 2020 to address personal auto profitability.

~~In response to~~ Partially offsetting the ~~COVID-19 pandemic~~decrease in the personal insurance segment's net written premiums was net written premium growth in homeowners and ~~its impact on our~~other personal, auto policyholders, in April 2020 we announced our "In This Together" plan that provides a 5% discount at renewal on a personal auto policyholder's entire policy term premium, which will be applied at an upcoming renewal for active personal auto policies in force as of the renewal date. The plan was approvedprimarily driven by ~~26 of our 28 personal lines states with renewal effective dates beginning mid-July.~~increased rates.

The personal insurance segment's SAP catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 increased ~~11.6~~23.7 points ~~and 8.2 points, respectively,~~ when compared to the same ~~2019 periods~~2020 period (Tables 1 - 4)2), ~~driven by an increase~~due to winter storms Uri and Viola, which contributed 24.3 points to the personal lines SAP catastrophe loss and ALAE ratio. Approximately 85% of the losses attributable to winter storms Uri and Viola was in ~~the severity of wind and hail events, which primarily impacted the~~our homeowners line of ~~business. The 2020 third quarter~~business, and year to date cat loss and ALAE ratios were impacted by (i) the Midwest derecho in August that contributed 4.7 points and 1.6 points, respectively, to the loss ratios, and (ii) other wind and hail events in the South and Midwest, with Texas contributing approximately ~~40%~~90% of the ~~reported year to date~~personal lines catastrophe ~~losses.~~losses occurred in Texas.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

The personal insurance segment’s SAP non-catastrophe loss and ALAE ratio for the three ~~and nine~~ months ended ~~September 30, 2020 improved 2.3~~March 31, 2021 increased 0.6 points ~~and 3.4 points, respectively,~~ when compared to the same ~~2019 periods~~2020 period (Tables 1 - 4)2).

The personal auto SAP non-catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 improved ~~2.0~~5.7 points ~~and 1.7 points, respectively,~~ when compared to the same ~~2019 periods. The~~ 2020 ~~third quarter and year to date non-catastrophe loss and ALAE ratios were impacted~~period, driven by ~~(i) a lower level~~favorable development of ~~current~~prior accident year losses ~~attributable~~of 0.9 points compared to ~~fewer miles driven as a result of people working remotely and staying at home more because of COVID-19 concerns during the first nine months of 2020, and (ii)~~ adverse development ~~from prior accident years compared to favorable development~~of 5.0 points in the same ~~2019 periods.~~2020 period. The first quarter 2021 prior accident year favorable development was driven by favorable development on physical damage coverages, primarily from the 2020 ~~third~~accident year. The first quarter ~~and year to date~~2020 prior accident year adverse development was ~~primarily~~ driven by higher than expected severity, primarily from the 2019 accident year, for bodily injury, ~~claims from multiple accident years. The 2019 third quarter and year to date prior accident year favorable development was primarily driven by uninsured motorist~~property damage, and personal injury protection, ~~coverages.~~particularly in Michigan.

The homeowners SAP non-catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 increased ~~1.0 point and improved 2.7~~7.0 points ~~respectively,~~ when compared to the same ~~2019 periods.~~2020 period. The ~~2020 year to date improvement~~2021 increase was primarily driven by ~~lower claim frequency~~higher severity for property claims in the current accident year. Partially offsetting the ~~year to date improvement~~increase was ~~adverse~~favorable development of prior accident year losses compared to adverse development in the same 2020 period. The first quarter 2021 favorable development of prior accident year losses was due to lower than expected loss emergence, primarily from the 2020 accident year. The first quarter 2020 prior accident year adverse development was primarily driven by higher severity on fourth quarter 2019 third-party liability and property ~~claims that emerged during the first quarter of 2020.~~

claims.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Commercial Insurance Segment

The following tables set forth certain key performance indicators based on SAP by major product line for our commercial insurance segment for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Table 53


($ in millions)	($ in millions)																						($ in millions)
Three months ended September 30, 2020		Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Three months ended March 31, 2021																							Three months ended March 31, 2021	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total

Net written premiums	Net written premiums	$	40.0		$	31.4		$	40.0		$	17.4		$	15.0		$	5.0		$	148.8		Net written premiums	$	51.3		$	35.0		$	39.3		$	16.0		$	19.9		$	4.7		$	166.2
Net earned premiums	Net earned premiums	35.6			31.4			40.3			17.5			14.5			5.1			144.4			Net earned premiums	40.9			31.7			39.6			15.2			16.5			4.8			148.7
Losses and LAE incurred:	Losses and LAE incurred:																						Losses and LAE incurred:
Cat loss and ALAE	Cat loss and ALAE	0.1			5.5			4.7			—			3.2			—			13.5			Cat loss and ALAE	0.2			5.2			3.0			—			3.2			—			11.6
Non-cat loss and ALAE	Non-cat loss and ALAE																						Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	Prior accident years non-cat loss and ALAE	(1.2)			(7.5)			(6.3)			(7.3)			(0.6)			(3.6)			(26.5)			Prior accident years non-cat loss and ALAE	(0.6)			(2.2)			(8.1)			(8.5)			(1.4)			(1.0)			(21.8)
Current accident year non-cat loss and ALAE	Current accident year non-cat loss and ALAE	20.8			17.0			20.1			14.4			5.1			3.0			80.4			Current accident year non-cat loss and ALAE	25.4			19.8			25.6			9.3			5.5			1.9			87.5
Total non-cat loss and ALAE	Total non-cat loss and ALAE	19.6			9.5			13.8			7.1			4.5			(0.6)			53.9			Total non-cat loss and ALAE	24.8			17.6			17.5			0.8			4.1			0.9			65.7
Total Loss and ALAE	Total Loss and ALAE	19.7			15.0			18.5			7.1			7.7			(0.6)			67.4			Total Loss and ALAE	25.0			22.8			20.5			0.8			7.3			0.9			77.3
ULAE	ULAE	1.7			0.5			1.3			1.1			0.5			0.1			5.2			ULAE	2.6			2.4			0.8			0.7			0.7			0.1			7.3
Total Loss and LAE	Total Loss and LAE	21.4			15.5			19.8			8.2			8.2			(0.5)			72.6			Total Loss and LAE	27.6			25.2			21.3			1.5			8.0			1.0			84.6
Underwriting expenses	Underwriting expenses	13.7			10.9			16.4			7.8			6.7			1.9			57.4			Underwriting expenses	16.1			11.5			16.2			7.5			8.0			1.8			61.1
Net underwriting gain (loss)		$	0.5		$	5.0		$	4.1		$	1.5		$	(0.4)		$	3.7		$	14.4
Net underwriting (loss) gain																							Net underwriting (loss) gain	$	(2.8)		$	(5.0)		$	2.1		$	6.2		$	0.5		$	2.0		$	3.0

Cat loss and ALAE ratio	Cat loss and ALAE ratio	0.4		%	17.3		%	11.6		%	—		%	22.1		%	—		%	9.3		%	Cat loss and ALAE ratio	0.3		%	16.5		%	7.6		%	—		%	19.7		%	—		%	7.8		%
Non-cat loss and ALAE ratio	Non-cat loss and ALAE ratio																						Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	Prior accident years non-cat loss and ALAE ratio	(3.4)		%	(23.8)		%	(15.5)		%	(41.6)		%	(4.2)		%	(72.6)		%	(18.3)		%	Prior accident years non-cat loss and ALAE ratio	(1.5)		%	(7.0)		%	(20.3)		%	(55.8)		%	(8.3)		%	(20.8)		%	(14.6)		%
Current accident year non-cat loss and ALAE ratio	Current accident year non-cat loss and ALAE ratio	58.3		%	54.3		%	49.7		%	82.2		%	35.0		%	60.4		%	55.7		%	Current accident year non-cat loss and ALAE ratio	62.1		%	62.6		%	64.6		%	60.7		%	33.4		%	38.7		%	58.8		%
Total non-cat loss and ALAE ratio	Total non-cat loss and ALAE ratio	54.9		%	30.5		%	34.2		%	40.6		%	30.8		%	(12.2)		%	37.4		%	Total non-cat loss and ALAE ratio	60.6		%	55.6		%	44.3		%	4.9		%	25.1		%	17.9		%	44.2		%
Total Loss and ALAE ratio	Total Loss and ALAE ratio	55.3		%	47.8		%	45.8		%	40.6		%	52.9		%	(12.2)		%	46.7		%	Total Loss and ALAE ratio	60.9		%	72.1		%	51.9		%	4.9		%	44.8		%	17.9		%	52.0		%
ULAE ratio	ULAE ratio	4.8		%	1.5		%	3.3		%	6.4		%	3.4		%	1.9		%	3.6		%	ULAE ratio	6.3		%	7.4		%	2.0		%	4.9		%	4.1		%	2.8		%	4.9		%
Total Loss and LAE ratio	Total Loss and LAE ratio	60.1		%	49.3		%	49.1		%	47.0		%	56.3		%	(10.3)		%	50.3		%	Total Loss and LAE ratio	67.2		%	79.5		%	53.9		%	9.8		%	48.9		%	20.7		%	56.9		%
Expense ratio	Expense ratio	34.2		%	34.7		%	41.0		%	45.1		%	45.1		%	38.6		%	38.6		%	Expense ratio	31.6		%	32.8		%	41.2		%	46.9		%	39.9		%	39.0		%	36.8		%
Combined ratio	Combined ratio	94.3		%	84.0		%	90.1		%	92.1		%	101.4		%	28.3		%	88.9		%	Combined ratio	98.8		%	112.3		%	95.1		%	56.7		%	88.8		%	59.7		%	93.7		%

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(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Table 64


($ in millions)	($ in millions)																						($ in millions)
Three months ended September 30, 2019		Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Three months ended March 31, 2020																							Three months ended March 31, 2020	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total

Net written premiums	Net written premiums	$	27.7		$	30.0		$	39.8		$	23.9		$	11.4		$	4.6		$	137.4		Net written premiums	$	36.4		$	31.9		$	40.3		$	18.8		$	14.8		$	4.9		$	147.1
Net earned premiums	Net earned premiums	23.8			29.9			34.9			21.7			12.4			4.3			127.0			Net earned premiums	29.0			30.3			36.1			19.7			12.6			4.7			132.4
Losses and LAE incurred:	Losses and LAE incurred:																						Losses and LAE incurred:
Cat loss and ALAE	Cat loss and ALAE	0.1			1.1			0.5			—			0.4			—			2.1			Cat loss and ALAE	0.3			3.6			24.1			—			0.9			0.2			29.1
Non-cat loss and ALAE	Non-cat loss and ALAE																						Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	Prior accident years non-cat loss and ALAE	(1.1)			(4.1)			(1.2)			(4.4)			(0.7)			(1.6)			(13.1)			Prior accident years non-cat loss and ALAE	(0.1)			(5.4)			(5.1)			(4.0)			(0.8)			(1.4)			(16.8)
Current accident year non-cat loss and ALAE	Current accident year non-cat loss and ALAE	15.2			17.9			19.7			13.9			6.2			3.2			76.1			Current accident year non-cat loss and ALAE	16.6			19.1			27.5			13.4			4.0			3.0			83.6
Total non-cat loss and ALAE	Total non-cat loss and ALAE	14.1			13.8			18.5			9.5			5.5			1.6			63.0			Total non-cat loss and ALAE	16.5			13.7			22.4			9.4			3.2			1.6			66.8
Total Loss and ALAE	Total Loss and ALAE	14.2			14.9			19.0			9.5			5.9			1.6			65.1			Total Loss and ALAE	16.8			17.3			46.5			9.4			4.1			1.8			95.9
ULAE	ULAE	1.6			1.3			2.0			1.8			0.4			0.1			7.2			ULAE	1.5			1.6			2.1			1.7			0.5			0.2			7.6
Total Loss and LAE	Total Loss and LAE	15.8			16.2			21.0			11.3			6.3			1.7			72.3			Total Loss and LAE	18.3			18.9			48.6			11.1			4.6			2.0			103.5
Underwriting expenses	Underwriting expenses	11.9			11.7			15.9			7.2			4.7			2.1			53.5			Underwriting expenses	12.7			11.8			16.7			8.9			6.7			2.1			58.9
Net underwriting (loss) gain	Net underwriting (loss) gain	$	(3.9)		$	2.0		$	(2.0)		$	3.2		$	1.4		$	0.5		$	1.2		Net underwriting (loss) gain	$	(2.0)		$	(0.4)		$	(29.2)		$	(0.3)		$	1.3		$	0.6		$	(30.0)

Cat loss and ALAE ratio	Cat loss and ALAE ratio	0.5		%	3.7		%	1.6		%	—		%	3.2		%	—		%	1.7		%	Cat loss and ALAE ratio	1.1		%	12.0		%	66.7		%	—		%	7.3		%	3.8		%	22.0		%
Non-cat loss and ALAE ratio	Non-cat loss and ALAE ratio																						Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	Prior accident years non-cat loss and ALAE ratio	(4.6)		%	(13.7)		%	(3.6)		%	(20.1)		%	(5.7)		%	(37.9)		%	(10.4)		%	Prior accident years non-cat loss and ALAE ratio	(0.3)		%	(17.8)		%	(14.2)		%	(20.5)		%	(6.4)		%	(29.9)		%	(12.7)		%
Current accident year non-cat loss and ALAE ratio	Current accident year non-cat loss and ALAE ratio	63.8		%	60.1		%	56.3		%	64.2		%	50.0		%	75.9		%	60.0		%	Current accident year non-cat loss and ALAE ratio	57.2		%	62.8		%	76.4		%	68.2		%	31.6		%	63.9		%	63.1		%
Total non-cat loss and ALAE ratio	Total non-cat loss and ALAE ratio	59.2		%	46.4		%	52.7		%	44.1		%	44.3		%	38.0		%	49.6		%	Total non-cat loss and ALAE ratio	56.9		%	45.0		%	62.2		%	47.7		%	25.2		%	34.0		%	50.4		%
Total Loss and ALAE ratio	Total Loss and ALAE ratio	59.7		%	50.1		%	54.3		%	44.1		%	47.5		%	38.0		%	51.3		%	Total Loss and ALAE ratio	58.0		%	57.0		%	128.9		%	47.7		%	32.5		%	37.8		%	72.4		%
ULAE ratio	ULAE ratio	6.7		%	4.2		%	5.7		%	8.3		%	3.2		%	4.1		%	5.7		%	ULAE ratio	5.2		%	5.3		%	5.8		%	8.9		%	3.9		%	4.0		%	5.8		%
Total Loss and LAE ratio	Total Loss and LAE ratio	66.4		%	54.3		%	60.0		%	52.4		%	50.7		%	42.1		%	57.0		%	Total Loss and LAE ratio	63.2		%	62.3		%	134.7		%	56.6		%	36.4		%	41.8		%	78.2		%
Expense ratio	Expense ratio	43.0		%	39.1		%	40.0		%	30.0		%	41.7		%	42.2		%	38.9		%	Expense ratio	35.0		%	37.0		%	41.4		%	47.7		%	45.5		%	41.7		%	40.1		%
Combined ratio	Combined ratio	109.4		%	93.4		%	100.0		%	82.4		%	92.4		%	84.3		%	95.9		%	Combined ratio	98.2		%	99.3		%	176.1		%	104.3		%	81.9		%	83.5		%	118.3		%

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Table 7~~

($ in millions)
Nine months ended September 30, 2020 Commercial Auto Small Commercial Package Middle Market Commercial Workers' Comp Farm & Ranch Other Commercial Total
Net written premiums $ 117.8 $ 95.8 $ 126.8 $ 49.2 $ 47.3 $ 15.3 $ 452.2
Net earned premiums 96.2 92.8 116.0 54.4 40.8 14.5 414.7
Losses and LAE incurred:
Cat loss and ALAE 1.1 21.0 35.7 — 8.7 0.2 66.7
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (1.5) (16.5) (14.3) (16.1) (1.7) (7.1) (57.2)
Current accident year non-cat loss and ALAE 52.4 53.3 69.6 40.6 15.2 7.3 238.4
Total non-cat loss and ALAE 50.9 36.8 55.3 24.5 13.5 0.2 181.2
Total Loss and ALAE 52.0 57.8 91.0 24.5 22.2 0.4 247.9
ULAE 4.9 4.2 4.5 4.5 1.6 0.4 20.1
Total Loss and LAE 56.9 62.0 95.5 29.0 23.8 0.8 268.0
Underwriting expenses 40.1 34.0 50.8 22.7 21.1 6.0 174.7
Net underwriting (loss) gain $ (0.8) $ (3.2) $ (30.3) $ 2.7 $ (4.1) $ 7.7 $ (28.0)
Cat loss and ALAE ratio 1.2 % 22.6 % 30.7 % — % 21.3 % 1.2 % 16.1 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (1.5) % (17.8) % (12.3) % (29.6) % (4.1) % (49.3) % (13.8) %
Current accident year non-cat loss and ALAE ratio 54.3 % 57.5 % 60.1 % 74.6 % 37.3 % 50.7 % 57.4 %
Total non-cat loss and
ALAE ratio 52.8 % 39.7 % 47.8 % 45.0 % 33.2 % 1.4 % 43.6 %
Total Loss and ALAE ratio 54.0 % 62.3 % 78.5 % 45.0 % 54.5 % 2.6 % 59.7 %
ULAE ratio 5.1 % 4.5 % 3.9 % 8.4 % 3.9 % 2.6 % 4.9 %
Total Loss and LAE ratio 59.1 % 66.8 % 82.4 % 53.4 % 58.4 % 5.2 % 64.6 %
Expense ratio 34.1 % 35.5 % 40.0 % 46.2 % 44.6 % 39.3 % 38.6 %
Combined ratio 93.2 % 102.3 % 122.4 % 99.6 % 103.0 % 44.5 % 103.2 %

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Table 8~~

($ in millions)
Nine months ended September 30, 2019 Commercial Auto Small Commercial Package Middle Market Commercial Workers' Comp Farm & Ranch Other Commercial Total
Net written premiums $ 81.4 $ 92.0 $ 115.1 $ 58.8 $ 37.4 $ 14.1 $ 398.8
Net earned premiums 65.3 88.9 98.1 60.3 36.2 12.6 361.4
Losses and LAE incurred:
Cat loss and ALAE 0.2 6.1 5.7 — 2.5 — 14.5
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (3.6) (11.8) (7.2) (13.4) (1.9) (1.4) (39.3)
Current accident year non-cat loss and ALAE 41.2 51.3 62.2 42.3 18.0 7.7 222.7
Total non-cat loss and ALAE 37.6 39.5 55.0 28.9 16.1 6.3 183.4
Total Loss and ALAE 37.8 45.6 60.7 28.9 18.6 6.3 197.9
ULAE 4.2 4.8 5.0 5.4 1.5 0.5 21.4
Total Loss and LAE 42.0 50.4 65.7 34.3 20.1 6.8 219.3
Underwriting expenses 33.6 36.0 46.0 20.2 17.4 6.0 159.2
Net underwriting (loss) gain $ (10.3) $ 2.5 $ (13.6) $ 5.8 $ (1.3) $ (0.2) $ (17.1)
Cat loss and ALAE ratio 0.4 % 6.9 % 5.8 % — % 6.8 % — % 4.0 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (5.5) % (13.3) % (7.4) % (22.1) % (5.2) % (11.2) % (10.9) %
Current accident year non-cat loss and ALAE ratio 62.9 % 57.7 % 63.4 % 70.2 % 49.7 % 61.7 % 61.7 %
Total non-cat loss and
ALAE ratio 57.4 % 44.4 % 56.0 % 48.1 % 44.5 % 50.5 % 50.8 %
Total Loss and ALAE ratio 57.8 % 51.3 % 61.8 % 48.1 % 51.3 % 50.5 % 54.8 %
ULAE ratio 6.5 % 5.4 % 5.1 % 8.9 % 4.2 % 4.3 % 5.9 %
Total Loss and LAE ratio 64.3 % 56.7 % 66.9 % 57.0 % 55.5 % 54.8 % 60.7 %
Expense ratio 41.3 % 39.1 % 40.0 % 34.4 % 46.6 % 41.7 % 39.9 %
Combined ratio 105.6 % 95.8 % 106.9 % 91.4 % 102.1 % 96.5 % 100.6 %

~~The~~Commercial auto and small commercial insurance segment's net written premiums for the three and nine months ended September 30, 2020, increased 8.3% and 13.4%, respectively, when compared to the same 2019 periods (Tables 5 - 8), primarily driven by (i)package new business growth and rate increases in commercial auto, (ii) new business growth in farm & ranch, and (iii) rate increases in middle market commercial. The new business growth in farm & ranch was driven by the continued state rollout of thehas been written on State Auto Connect ~~platform~~since 2018. Our farm and ranch product launched on State Auto Connect during the ~~third~~first quarter ~~which~~of 2020 and is now live in 2729 states. ~~Eight~~Nine of the 2729 states are states that we previously were not writing policies for farm & ranch products. ~~The rollout of the~~Our middle market commercial product launched on State Auto Connect ~~platform in farm & ranch's remaining states will continue throughout 2020. Additionally, the State Auto Connect platform was launched for middle market commercial~~ in March 2020 and is currently live in 30 states after completing the launch in the last state in April 2021. Finally, our workers' compensation product launched on State Auto Connect in the fourth quarter of 2020 and is currently live in 16 states as of April 2021 with subsequent state rollouts scheduled throughout 2021.

The commercial insurance segment's net written premiums for the ~~remainder of~~three months ended March 31, 2021, increased 13.0%, when compared to the same 2020 period (Tables 3 - 4), primarily driven by (i) new business growth and ~~the first half of 2021.~~rate increases in commercial auto and small commercial package, and (ii) new business growth in farm & ranch. The net written premium growth was partially offset by a decrease in net written premiums in workers’ compensation due to ~~(i)~~our 2020 decision to not renew and no longer write nursing home business, and a decrease in net written premiums in middle market commercial due to a decline in new ~~business as a result of COVID-19, and (ii) continued intense competition in this market.~~business.

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(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

The commercial insurance segment's SAP catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020 increased 7.6~~March 31, 2021 improved 14.2 points ~~and 12.1 points, respectively,~~ when compared to the same ~~2019 periods~~2020 period (Tables 53 - ~~8), with most~~4). While the number of catastrophe events increased compared to 2020, the ~~third~~2021 catastrophe events were less severe. During the first quarter 2021, winter storms Uri and ~~year~~Viola contributed 6.7 points to ~~date catastrophe losses impacting small commercial package, middle market commercial, and farm & ranch. The 2020 third quarter and year to date cat~~the loss and ALAE ~~ratios were impacted by (i) an increase~~ratio. Approximately 60% of the first quarter 2021 catastrophe losses occurred in Texas. During the ~~severity of weather events when compared to the same 2019 periods and (ii) the Midwest derecho in August which contributed 4.4 points and 1.5 points, respectively, to the cat loss and ALAE ratios.~~first quarter 2020, ~~year to date was also impacted by (i)~~ a ~~severe~~ wind and hail storm, including tornadoes, in Tennessee ~~which~~ contributed ~~5.1~~19.0 points to the ~~year to date cat~~first quarter loss and ALAE ratio, of which ~~3.7~~11.4 points were from three large losses in ~~Nashville, and (ii) property losses resulting from the civil unrest which added 1.5 points to the cat loss and LAE ratios.~~Nashville.

The commercial insurance segment’s SAP non-catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 improved ~~12.2~~6.2 points ~~and 7.2 points, respectively,~~ when compared to the same ~~2019 periods~~2020 period (Tables 53 - 8)4).

The commercial auto SAP non-catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020 improved 4.3~~March 31, 2021 increased 3.7 points ~~and 4.6 points, respectively,~~ when compared to the same ~~2019 periods,~~2020 period, driven by ~~improvement~~an increase in the current accident ~~year.~~year ratio. The ~~2020 third quarter and year to date~~2021 current accident year was impacted by ~~lower~~higher bodily injury and uninsured motorist claims frequency ~~attributable~~when compared to ~~fewer miles driven due to people working remotely and staying at home more because of COVID-19 concerns.~~2020. Partially offsetting the ~~2020 third quarter and year to date improvement~~increase was ~~less~~greater favorable development of prior accident year losses when compared to the same ~~2019 periods.~~2020 period. The ~~2019~~2021 prior accident year favorable development was ~~primarily attributable~~due to lower than anticipated bodily injury and uninsured motorist claims severity from the ~~2017~~2019 accident ~~year.~~year

The small commercial package SAP non-catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020 improved 15.9~~March 31, 2021 increased 10.6 points ~~and 4.7 points, respectively,~~ when compared to the same ~~2019 periods,~~2020 period, primarily due to ~~greater~~less favorable development of prior accident year ~~losses, driven~~losses. The 2021 favorable development was attributable to lower than anticipated bodily injury severity from multiple accident years, partially offset by adverse development on several large property claims from the 2020 accident year. The 2020 favorable development was primarily attributable to lower than expected bodily injury severity from multiple accident years when compared to the same 2019 periods. The 2020 third quarter and year to date current accident year ratios were impacted by (i) a decline in claim frequency as a result of reduced business activity caused by COVID-19, and (ii) increased severity of property losses, primarily related to fire. The 2020 year to date current accident year was also impacted by increased legal defense costs from claims related to COVID-19, which added 2.1 points to the year to date non-cat loss ratio.years.

The middle market commercial SAP non-catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 improved ~~18.5~~17.9 points ~~and 8.2 points, respectively,~~ when compared to the same ~~2019 periods,~~2020 period, primarily due to (i) improvement in the current accident year ratio due to reduced business activity in response to COVID-19, and (ii) greater favorable development of prior accident year losses, primarily driven by favorable development on bodily injury claims from multiple accident years and on large fire claims from the 2020 accident year. The 2020 favorable development of prior accident year losses was primarily attributable to lower than expected bodily injury severity from multiple accident years when compared to the same 2019 periods. The 2020 third quarter and year to date current accident year ratios were impacted by a decline in claim frequency as a result of reduced business activity caused by the COVID-19 pandemic. The 2020 year to date current accident year was also impacted by increased legal defense costs from claims related to COVID-19, which added 0.7 points to the year to date non-cat loss ratio..

The workers' compensation SAP non-catastrophe loss and ALAE ~~ratios~~ratio for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 improved ~~3.5~~42.8 points ~~and 3.1 points, respectively,~~ when compared to the same ~~2019 periods,~~2020 period, primarily due to (i) greater favorable development of prior accident year losses across multiple accident ~~years. The 2020 quarter~~years and year to date current accident year ratios were impacted by increased claims for businesses in the medical field (e.g. nursing homes, hospitals) caused by the COVID-19 pandemic, which added 3.9 points and 6.3 points, respectively, which was partially offset by a decline in claim frequency due to reduced business and employment activity caused by the COVID-19 pandemic. The 2020 third quarter and year to date current accident year ratios were also impacted by a large loss that added 10.0 points and 3.2 points, respectively, to the non-cat loss ratios.

The farm & ranch SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2020 improved 13.5 points and 11.3 points, respectively, when compared to the same 2019 periods, primarily due to(ii) lower claim ~~frequency~~severity in the current accident ~~year.~~year when compared 2020.

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(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Losses and LAE Development

Losses and loss expenses represent the combined estimated ultimate liability for claims occurring in a period, along with any change in the estimated ultimate liability for claims occurring in prior periods.

The following table sets forth a tabular presentation of the development of the prior accident years' ultimate liability by product for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


($ millions)	($ millions)	Three months ended September 30						Nine months ended September 30						($ millions)	Three months ended March 31
		2020		2019		$ Change		2020		2019		$ Change			2021		2020		Change
		(Favorable)/Adverse						(Favorable)/Adverse							(Favorable)/Adverse
Non-cat loss and ALAE:	Non-cat loss and ALAE:													Non-cat loss and ALAE:
Personal Insurance Segment:	Personal Insurance Segment:													Personal Insurance Segment:
Personal Auto	Personal Auto	$	8.0	$	(1.2)	$	9.2	$	19.1	$	(11.0)	$	30.1	Personal Auto	$	(0.8)	$	5.2	$	(6.0)
Homeowners	Homeowners	0.7		—		0.7		2.8		0.5		2.3		Homeowners	(2.1)		2.2		(4.3)
Other Personal	Other Personal	(0.6)		(0.9)		0.3		(1.7)		(1.9)		0.2		Other Personal	—		(1.0)		1.0
Total Personal Insurance Segment	Total Personal Insurance Segment	8.1		(2.1)		10.2		20.2		(12.4)		32.6		Total Personal Insurance Segment	(2.9)		6.4		(9.3)

Commercial Insurance Segment:	Commercial Insurance Segment:													Commercial Insurance Segment:
Commercial Auto	Commercial Auto	(1.2)		(1.1)		(0.1)		(1.5)		(3.6)		2.1		Commercial Auto	(0.6)		(0.1)		(0.5)
Small Commercial Package	Small Commercial Package	(7.5)		(4.1)		(3.4)		(16.5)		(11.8)		(4.7)		Small Commercial Package	(2.2)		(5.4)		3.2
Middle Market Commercial	Middle Market Commercial	(6.3)		(1.2)		(5.1)		(14.3)		(7.2)		(7.1)		Middle Market Commercial	(8.1)		(5.1)		(3.0)
Workers' Compensation	Workers' Compensation	(7.3)		(4.4)		(2.9)		(16.1)		(13.4)		(2.7)		Workers' Compensation	(8.5)		(4.0)		(4.5)
Farm & Ranch	Farm & Ranch	(0.6)		(0.7)		0.1		(1.7)		(1.9)		0.2		Farm & Ranch	(1.4)		(0.8)		(0.6)
Other Commercial	Other Commercial	(3.6)		(1.6)		(2.0)		(7.1)		(1.4)		(5.7)		Other Commercial	(1.0)		(1.4)		0.4
Total Commercial Insurance Segment	Total Commercial Insurance Segment	(26.5)		(13.1)		(13.4)		(57.2)		(39.3)		(17.9)		Total Commercial Insurance Segment	(21.8)		(16.8)		(5.0)

Specialty run-off	Specialty run-off	(0.9)		(0.9)		—		5.2		(2.4)		7.6		Specialty run-off	0.1		(0.1)		0.2
Cat Loss and ALAE	Cat Loss and ALAE	11.6		(1.0)		12.6		12.8		(0.2)		13.0		Cat Loss and ALAE	(3.8)		0.3		(4.1)
ULAE	ULAE	(2.3)		(0.4)		(1.9)		1.4		(0.8)		2.2		ULAE	(2.1)		2.7		(4.8)
Total	Total	$	(10.0)	$	(17.5)	$	7.5	$	(17.6)	$	(55.1)	$	37.5	Total	$	(30.5)	$	(7.5)	$	(23.0)

For further information, see the "Personal Insurance Segment" and "Commercial Insurance Segment" discussions included in this Item 2.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Losses and loss expenses payable

The following table sets forth losses and loss expenses payable by major product at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


($ millions)	($ millions)	September 30, 2020		December 31, 2019		$ Change		($ millions)	March 31, 2021		December 31, 2020		$ Change
Personal Insurance Segment:	Personal Insurance Segment:							Personal Insurance Segment:
Personal Auto	Personal Auto	$	162.4	$	162.9	$	(0.5)	Personal Auto	$	170.5	$	174.4	$	(3.9)
Homeowners	Homeowners	103.7		69.2		34.5		Homeowners	124.2		90.4		33.8
Other Personal	Other Personal	16.5		15.1		1.4		Other Personal	19.8		15.8		4.0
Total Personal Insurance Segment	Total Personal Insurance Segment	282.6		247.2		35.4		Total Personal Insurance Segment	314.5		280.6		33.9
Commercial Insurance Segment:	Commercial Insurance Segment:							Commercial Insurance Segment:
Commercial Auto	Commercial Auto	87.4		76.7		10.7		Commercial Auto	101.7		93.8		7.9
Small Commercial Package	Small Commercial Package	108.6		110.5		(1.9)		Small Commercial Package	100.4		95.9		4.5
Middle Market Commercial	Middle Market Commercial	160.2		152.8		7.4		Middle Market Commercial	162.5		162.2		0.3
Workers’ Compensation	Workers’ Compensation	183.9		187.8		(3.9)		Workers’ Compensation	163.9		176.4		(12.5)
Farm & Ranch	Farm & Ranch	16.3		13.3		3.0		Farm & Ranch	20.2		18.3		1.9
Other Commercial	Other Commercial	30.2		30.9		(0.7)		Other Commercial	26.3		25.6		0.7
Total Commercial Insurance Segment	Total Commercial Insurance Segment	586.6		572.0		14.6		Total Commercial Insurance Segment	575.0		572.2		2.8
Specialty run-off:	Specialty run-off:							Specialty run-off:
E&S Property	E&S Property	29.7		27.8		1.9		E&S Property	17.4		24.3		(6.9)
E&S Casualty	E&S Casualty	117.9		145.9		(28.0)		E&S Casualty	102.2		112.2		(10.0)
Programs	Programs	39.3		60.0		(20.7)		Programs	33.6		36.8		(3.2)
Total Specialty run-off	Total Specialty run-off	186.9		233.7		(46.8)		Total Specialty run-off	153.2		173.3		(20.1)
Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable and allowance for credit losses	Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable and allowance for credit losses	$	1,056.1	$	1,052.9	$	3.2	Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable and allowance for credit losses	$	1,042.7	$	1,026.1	$	16.6

Losses and loss expenses payable increased ~~$3.2~~$16.6 million since December 31, ~~2019~~2020 primarily due to a higher level of catastrophe losses in the ~~commercial and~~ personal insurance ~~segments~~segment discussed above, ~~and growth in the commercial auto line,~~ partially offset by the run-off offrom our previously exited specialty insurance business.

We conduct quarterly reviews of loss development and make judgments in determining the reserves for losses and loss expenses. Several factors are considered by us when estimating ultimate liabilities, including consistency in relative case reserve adequacy, consistency in claims settlement practices, recent legal developments, historical data, actuarial projections, exposure changes, anticipated inflation, current business conditions, catastrophe development, late reported claims, and other reasonableness tests. Our quarterly review also included the potential impact of COVID-19 on our reserves for losses and loss expenses. For a discussion of the most significant risks and uncertainties that could impact our results of operations, financial position, liquidity, and cash flows as a result of the COVID-19 pandemic, see ~~“Part II—Item 1A—Risk Factors” included~~"Risk Factors" in ~~this~~“Item 1A” of the 2020 Form ~~10-Q.~~10-K.

The risks and uncertainties inherent in our estimates include, but are not limited to, actual settlement experience differing from historical data, trends, changes in business and economic conditions, court decisions creating unanticipated liabilities, ongoing interpretation of policy provisions by the courts, inconsistent decisions in lawsuits regarding coverage and additional information discovered before settlement of claims. Our results of operations and financial condition could be impacted, perhaps significantly, in the future if the ultimate payments required for claims settlement vary from the liability currently recorded. For a discussion of our reserving methodologies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Losses and Loss Expenses Payable” in Item 7 of the ~~2019~~2020 Form 10-K.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Acquisition and Operating Expenses

Our GAAP acquisition and operating expenses for the three ~~and nine~~ months ended ~~September 30, 2020 were $123.0~~March 31, 2021 was $121.0 million ~~and $357.4 million, respectively,~~ compared to ~~$109.7~~$114.9 million ~~and $325.2 million, respectively,~~ for the same ~~2019 periods.~~2020 period. The 2020 third quarter and year to date increases were driven by (i) amortization of deferred acquisition costs due to growth, (ii) IT expenses, including electronic data processing equipment and software cost amortization and IT consulting, and (iii) variable agent compensation. The shift to State Auto Connect and our digital journey over the last five years continue to drive the increases in IT expenses. Partially offsetting the third quarter and year to date increasesincrease in acquisition and operating expenses ~~were decreases~~was driven by an increase in (i) estimated variable associate compensation ~~when compared to the same 2019 periods.~~and (ii) amortization of deferred acquisition costs.

Investment Operations Segment

Our investments in fixed maturities, equity securities and certain other invested assets are carried at fair value. The unrealized holding gains or losses of our available-for-sale fixed maturities, net of applicable deferred taxes, are included as a separate component of stockholders’ equity as accumulated other comprehensive income and as such are not included in the determination of net income.

We have investment policy guidelines with respect to purchasing fixed maturity investments for our insurance subsidiaries which preclude investments in bonds that are rated below investment grade by a recognized rating service at the time of purchase. Our fixed maturity portfolio is composed of high quality, investment grade issues, consisting primarily of debt issues rated AAA, AA or A. We obtain investment ratings from major rating services. If there is a split rating, we assign the lowest rating obtained.

For further discussion regarding the management of our investment portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Investment Operations Segment” in Item 7 of the ~~2019~~2020 Form 10-K.

Composition of Investment Portfolio

The following table sets forth the composition of our investment portfolio at carrying value at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


($ millions)	($ millions)	September 30, 2020		% of Total		December 31, 2019		% of Total		($ millions)	March 31, 2021		% of Total		December 31, 2020		% of Total
Cash and cash equivalents	Cash and cash equivalents	$	131.4	4.7	%	$	78.0	2.8	%	Cash and cash equivalents	$	59.1	2.1	%	$	90.7	3.2	%
Fixed maturities, at fair value:	Fixed maturities, at fair value:									Fixed maturities, at fair value:
Fixed maturities	Fixed maturities	2,049.3		73.7	%	1,992.3		72.5	%	Fixed maturities	2,104.3		74.5	%	2,121.0		73.9	%
Treasury inflation-protected securities	Treasury inflation-protected securities	117.0		4.2	%	135.6		5.0	%	Treasury inflation-protected securities	104.7		3.7	%	116.2		4.0	%
Total fixed maturities	Total fixed maturities	2,166.3		77.9	%	2,127.9		77.5	%	Total fixed maturities	2,209.0		78.2	%	2,237.2		77.9	%
Notes receivable from affiliate	Notes receivable from affiliate	70.0		2.5	%	70.0		2.5	%	Notes receivable from affiliate	70.0		2.5	%	70.0		2.4	%
Equity securities:	Equity securities:									Equity securities:
Large-cap securities	Large-cap securities	120.0		4.3	%	104.4		3.8	%	Large-cap securities	149.2		5.2	%	134.2		4.7	%
Mutual and exchange traded funds	Mutual and exchange traded funds	219.5		7.9	%	290.8		10.6	%	Mutual and exchange traded funds	250.4		8.9	%	255.5		8.9	%
Total equity securities	Total equity securities	339.5		12.2	%	395.2		14.4	%	Total equity securities	399.6		14.1	%	389.7		13.6	%
Other invested assets:	Other invested assets:									Other invested assets:
International funds	International funds	48.5		1.7	%	56.4		2.1	%	International funds	60.6		2.1	%	55.8		2.0	%
Other invested assets	Other invested assets	14.0		0.5	%	13.3		0.5	%	Other invested assets	15.8		0.6	%	15.3		0.5	%
Total other invested assets	Total other invested assets	62.5		2.2	%	69.7		2.6	%	Total other invested assets	76.4		2.7	%	71.1		2.5	%
Other invested assets, at cost	Other invested assets, at cost	12.5		0.5	%	6.5		0.2	%	Other invested assets, at cost	11.8		0.4	%	12.1		0.4	%
Total portfolio	Total portfolio	$	2,782.2	100.0	%	$	2,747.3	100.0	%	Total portfolio	$	2,825.9	100.0	%	$	2,870.8	100.0	%

5034

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at ~~September 30, 2020:~~March 31, 2021:


($ millions)	($ millions)	Amortized cost		Fair value		($ millions)	Amortized cost		Fair value
Due in 1 year or less	Due in 1 year or less	$	119.8	$	120.9	Due in 1 year or less	$	158.5	$	159.7
Due after 1 year through 5 years	Due after 1 year through 5 years	519.9		548.0		Due after 1 year through 5 years	536.7		562.2
Due after 5 years through 10 years	Due after 5 years through 10 years	168.0		178.9		Due after 5 years through 10 years	165.9		170.5
Due after 10 years	Due after 10 years	682.4		737.5		Due after 10 years	556.1		582.3
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	557.0		581.0		U.S. government agencies mortgage-backed securities	730.3		734.3
Total	Total	$	2,047.1	$	2,166.3	Total	$	2,147.5	$	2,209.0

Expected maturities may differ from contractual maturities as the issuers may have the right to call or prepay the obligations with or without call or prepayment penalties. The duration of the fixed maturity portfolio was approximately ~~4.80~~4.60 and ~~4.17~~4.72 as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively.

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

Investment Operations Revenue

The following table sets forth the components of net investment income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

($ millions) Three months ended September 30 Nine months ended September 30
2020 2019 2020 2019
Gross investment income:
Fixed maturities $ 15.0 $ 15.3 $ 44.6 $ 47.7
Equity securities 2.1 3.0 7.8 8.9
Other 0.9 1.1 2.7 4.2
Total gross investment income 18.0 19.4 55.1 60.8
Less: Investment expenses 0.1 0.1 0.6 0.4
Net investment income $ 17.9 $ 19.3 $ 54.5 $ 60.4
Average invested assets (at cost) $ 2,512.9 $ 2,638.0 $ 2,537.6 $ 2,648.4
Annualized investment yield 2.8 % 2.9 % 2.9 % 3.0 %
Annualized investment yield, after tax 2.3 % 2.4 % 2.4 % 2.5 %
Net investment income, after tax $ 14.7 $ 16.0 $ 44.8 $ 49.8
Effective tax rate 17.7 % 9.4 % 17.9 % 17.9 %

~~The following table sets forth realized gains (losses) and the proceeds received from the sale of our investment portfolio for the three and nine months ended September 30, 2020 and 2019:~~

($ in millions) Three months ended September 30 Nine months ended September 30
2020 2019 2020 2019
Realized gains (losses) Proceeds received on sale Realized gains (losses) Proceeds received on sale Realized gains (losses) Proceeds received on sale Realized gains (losses) Proceeds received on sale
Realized gains:
Fixed maturities $ 1.3 $ 27.8 $ 1.2 $ 50.0 $ 6.8 $ 192.2 $ 2.8 $ 248.7
Equity securities 4.0 18.9 0.2 4.1 6.3 31.1 1.7 14.3
Total realized gains 5.3 46.7 1.4 54.1 13.1 223.3 4.5 263.0
Realized losses:
Fixed maturities (1.5) — — — (3.6) 23.9 — —
Equity securities (46.3) 37.3 (2.0) 10.0 (57.2) 55.1 (4.2) 20.1
Other invested assets — 0.3 — 0.4 — 0.9 — 1.0
Total realized losses (47.8) 37.6 (2.0) 10.4 (60.8) 79.9 (4.2) 21.1
Net realized (losses) gains on investments $ (42.5) $ 84.3 $ (0.6) $ 64.5 $ (47.7) $ 303.2 $ 0.3 $ 284.1


($ millions)	Three months ended March 31
	2021			2020
Gross investment income:
Fixed maturities	$	15.4		$	15.1
Equity securities	1.6			3.1
Other	0.9			1.0
Total gross investment income	17.9			19.2
Less: Investment expenses	0.3			0.3
Net investment income	$	17.6		$	18.9

Average invested assets (at cost)	$	2,531.3		$	2,623.9
Annualized investment yield	2.8		%	2.9		%
Annualized investment yield, after tax	2.3		%	2.4		%
Net investment income, after tax	$	14.6		$	15.6
Effective tax rate	17.4		%	17.2		%

When a fixed maturity has been determined to have an impairment, the impairment charge representing the credit loss is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive (loss) income. We reviewed our available-for-sale fixed maturities at ~~September 30,~~March 31, 2021 and 2020 and determined that no credit impairment existed in the gross unrealized holding losses. See Note 3, “Investments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional information.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Gross Unrealized Investment Gains and Losses

Based upon our review of our investment portfolio at ~~September 30, 2020,~~March 31, 2021, 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 investment portfolio by investment category at fair value for our gross unrealized holding gains (losses) at ~~September 30, 2020:~~March 31, 2021:


($ millions, except # of positions)		Cost or amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
($ millions)										($ millions)	Cost or amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
Available-for-sale fixed maturities:	Available-for-sale fixed maturities:									Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	U.S. treasury securities and obligations of U.S. government agencies	$	510.9	$	48.1	$	—	$	559.0	U.S. treasury securities and obligations of U.S. government agencies	$	448.4	$	23.0	$	(0.4)	$	471.0
Obligations of states and political subdivisions	Obligations of states and political subdivisions	527.5		26.7		(1.5)		552.7		Obligations of states and political subdivisions	480.4		22.0		(1.9)		500.5
Corporate securities	Corporate securities	451.7		21.9		—		473.6		Corporate securities	488.4		17.0		(2.2)		503.2
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	557.0		25.3		(1.3)		581.0		U.S. government agencies mortgage-backed securities	730.3		15.4		(11.4)		734.3
Total available-for-sale fixed maturities	Total available-for-sale fixed maturities	$	2,047.1	$	122.0	$	(2.8)	$	2,166.3	Total available-for-sale fixed maturities	$	2,147.5	$	77.4	$	(15.9)	$	2,209.0

The following table sets forth our unrealized holding gains for our available-for-sale fixed maturities, net of deferred tax that was included as a component of accumulated other comprehensive loss at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, and the change in unrealized holding gains, net of deferred tax, for the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:


($ millions)	($ millions)	September 30, 2020		December 31, 2019		$ Change		($ millions)	March 31, 2021		December 31, 2020		$ Change
Available-for-sale investments:	Available-for-sale investments:							Available-for-sale investments:
Unrealized holding gains:	Unrealized holding gains:							Unrealized holding gains:
Fixed maturities	Fixed maturities	$	119.2	$	47.9	$	71.3	Fixed maturities	$	61.5	$	120.2	$	(58.7)
Net deferred federal income tax	Net deferred federal income tax	(25.0)		(10.0)		(15.0)		Net deferred federal income tax	(12.9)		(25.3)		12.4
Unrealized gains, net of tax	Unrealized gains, net of tax	$	94.2	$	37.9	$	56.3	Unrealized gains, net of tax	$	48.6	$	94.9	$	(46.3)

At ~~September 30, 2020,~~March 31, 2021, State Auto P&C had U.S. government agencies mortgage-backed fixed maturity securities with a carrying value of approximately $106.5 million pledged as collateral for loans from the FHLB. See “Liquidity and Capital Resources - Borrowing Arrangements - FHLB Loans” in this Item 2 for a further description of these loans. In accordance with the terms of the FHLB loans, State Auto P&C retains all rights regarding these pledged securities.

Fair Value Measurements

We primarily use one independent nationally recognized third party pricing service in developing fair value estimates. We obtain one price per security, and our processes and control procedures are designed to ensure the value is accurately recorded on an unadjusted basis. Through discussions with the pricing service, we gain an understanding of the methodologies used to price the different types of securities, that the data and the valuation methods utilized are appropriate and consistently applied, and that the assumptions are reasonable and representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service, we compare to other fair value pricing information gathered from other independent pricing sources. See Note 4, “Fair Value of Financial Instruments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for a presentation of our available-for-sale investments within the fair value hierarchy at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019.~~2020.

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Other Items~~

~~Income Taxes~~

~~The following table sets forth the components of our federal income tax (benefit) expense for the three and nine months ended September 30, 2020 and 2019.~~

($ millions) Three months ended September 30 Nine months ended September 30
2020 2019 2020 2019
Income (loss) before federal income taxes $ 14.8 $ 12.7 $ (87.6) $ 66.7
Federal income tax expense (benefit)
Current — — (0.4) (0.4)
Deferred 3.2 1.2 (18.5) 12.4
Total federal income tax expense (benefit) 3.2 1.2 (18.9) 12.0
Net income (loss) $ 11.6 $ 11.5 $ (68.7) $ 54.7

~~The effective tax rate for the three and nine months ended September 30, 2020 was 21.4% and 21.5%, respectively, compared to 9.4% and 17.9%, respectively, for the same 2019 periods.~~

We have foreign tax credit carryforwards of $0.5 million which will expire in 2021 and 2022. We believe it is more likely than not that the benefit from these foreign tax credit carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $0.5 million on the deferred tax assets related to these foreign tax credit carryforwards.

~~For additional information, see Note 10 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.~~

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

LIQUIDITY AND CAPITAL RESOURCES

General

Liquidity refers to our ability to generate adequate amounts of cash to meet our short- and long-term needs. Our primary sources of cash are premiums, investment income, investment sales and the maturity of fixed income security investments. The significant outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends, interest and principal payments on debt and investment purchases. The cash outflows may vary due to uncertainties regarding settlement of large losses or catastrophic events. As a result, we continually monitor our investment and reinsurance programs to ensure they are appropriately structured to enable the insurance subsidiaries to meet anticipated short-term and long-term cash requirements without the need to sell investments to meet fluctuations in claim payments.

Liquidity

Our insurance subsidiaries must have adequate liquidity to ensure that their cash obligations are met. However, as discussed below, the STFC Pooled Companies do not have the day-to-day liquidity concerns normally associated with an insurance company due to their participation in, and the terms of, the Pooling Arrangement. In addition, State Auto P&C has a $100.0 million line of credit in place with the FHLB available for general corporate purposes such as funding liquidity needs. See “Borrowing Arrangements - FHLB Loans” described below.

Under the terms of the Pooling Arrangement, each period State Auto Mutual collects all premiums from policyholders and pays all losses and expenses associated with the insurance business produced by the STFC Pooled Companies and the other pool participants, and then it settles the intercompany balances generated by these transactions with the pool participants within 60 days following each quarter end. We believe this provides State Auto Mutual with sufficient liquidity to pay losses and expenses of our insurance operations on a timely basis.

We are exposed to third-party credit risk both directly through its cessions to reinsurers and indirectly through its participation in the Pooling Arrangement. In addition to exposure to credit risk on reinsurance recoverables, we are also exposed to credit risk on amounts due from insureds and agents. When settling the intercompany balances, State Auto Mutual provides the STFC Pooled Companies with full credit for the net premiums written and net losses paid during the quarter.

While the total amount due to State Auto Mutual from policyholders and agents is significant, the individual amounts due are relatively small at the policyholder and agency level. The State Auto Group mitigates its exposure to this credit risk through its in-house collections unit for both personal and commercial accounts which is supplemented by third party collection service providers. In addition to reliance upon recent and historical collection trends, determination of the allowance for uncollectible premiums receivable at ~~September 30, 2020~~March 31, 2021 included consideration of other factors, including macro-economic conditions and trends, in particular the estimated impact of COVID-19. Credit risk is partially mitigated by the State Auto Group's ability to cancel the policy if the policyholder does not pay the premium. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums for the pool is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. This is included in "other expenses" on the condensed consolidated statements of income and reflected in “due to/from affiliates” on our condensed consolidated balance sheets.

We generally manage our cash flows through current operational activity and maturing investments, without a need to liquidate any of our other investments; however, should our written premiums decline or paid losses increase significantly, or a combination thereof, we may need to liquidate investments at losses in order to meet our cash obligations. This action was not necessary for the three ~~and nine~~ months ended ~~September 30, 2020.~~March 31, 2021.

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 ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, we had ~~$131.4~~$59.1 million and ~~$78.0~~$90.7 million, respectively, in cash and cash equivalents, and ~~$2,568.3~~$2,685.0 million and ~~$2,592.8~~$2,698.0 million, respectively, of total investments. Our available-for-sale fixed maturities included ~~$9.6~~$9.4 million and ~~$9.3~~$9.7 million of securities on deposit with insurance regulators as required by law at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019;~~2020; in addition, substantially all of our fixed maturity and equity securities are traded on public markets. For a further discussion regarding investments, see “Investments Operations Segment” included in this Item 2.

In May 2009, we entered into two separate credit agreements with State Auto Mutual pursuant to which we loaned State Auto Mutual a total of $70.0 million. In May 2019, we refinanced the two credit agreements with State Auto Mutual at a fixed annual interest rate of 4.05% (the prior fixed annual interest rate was 7.00%), with interest payable semi-annually and principal payable in May 2029.

Cash ~~provided by operating activities was $21.8 million and cash~~ used in operating activities was ~~$43.9~~$18.9 million and $28.0 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. Net cash from operations will vary from period to period if there are significant changes in underwriting results, primarily the level of premiums written or loss and loss expenses paid, and in cash flows from investment income or federal income taxes paid.

Cash used in investing activities was $9.0 million and cash provided by investing activities was $20.1 million for the three months ended March 31, 2021 and 2020, respectively. The change was primarily driven by an increase in the purchase of

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

~~there are significant changes~~fixed maturities, partially offset by an increase in ~~underwriting results, primarily~~ the ~~level~~maturities of ~~premiums written or loss~~fixed maturities and ~~loss expenses paid,~~the sale of fixed maturities and ~~in cash flows from investment income or federal income taxes paid.~~equity securities.

Cash used in financing activities was $3.7 million and cash provided by ~~investing~~financing activities was ~~$42.8 million compared to $31.1~~$56.5 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. The change was primarily driven by proceeds from the ~~sale of our MLP ETFs during the 2020 third quarter.~~

~~Cash used~~FHLB REPO loan in financing activities was $11.2 million compared to $8.7 million for the nine months ended September 30, 2020 and 2019, respectively. The change was primarily driven by a decrease in stock option exercises when compared to the same 2019 period.2020.

Borrowing Arrangements

FHLB ~~Loans~~Line of Credit

~~On September 2, 2020,~~As of March 31, 2021, State Auto P&C ~~retired its five-year term loan~~had an Open Line of Credit Commitment (the "Prior OLC") with the FHLB inthat provided it with a $100.0 million open line of credit available for general corporate purposes. As of March 31, 2021, no advances had been made under the ~~amount of $21.5 million and maturing~~Prior OLC. The Prior OLC matured on ~~September~~April 2, 2021, and ~~replaced~~on that date, State Auto P&C entered into a new Open Line of Credit Commitment (the “New OLC”) with the FHLB that provides it with a ~~new ten-year~~$100.0 million one-year open line of credit available for general corporate purposes. Draws under the New OLC are to be funded with a daily variable rate advance with a term of no more than 180 days with interest payable monthly. All advances under the New OLC are fully secured by a pledge of specific investment securities of State Auto P&C.

FHLB Loans

State Auto P&C has a term loan with the FHLB in the amount of $21.5 million (the “2020 FHLB Loan”). The 2020 FHLB Loan ~~is at a fixed rate~~Matures in September of ~~interest of 1.37%,~~2030 and provides for interest-only payments during its term, with principal due in full at maturity, and may be prepaid without penalty after five years and each of the succeeding six months thereafter. The interest rate is fixed over the term of the loan at 1.37%. The 2020 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C.

State Auto P&C has an Open Line of Credit Commitment (the "OLC") with the FHLB that provides State Auto P&C with a $100.0 million one-year open line of credit available for general corporate purposes. The OLC matures in April 2021. Draws under the OLC are to be funded with a daily variable rate advance with a term of no more than 180 days with interest payable monthly. All advances under the OLC are fully secured by a pledge of specific investment securities of State Auto P&C. As of September 30, 2020, no advances had been made under the OLC.

State Auto P&C also has an outstanding term loan with the FHLB in the principal amount of $85.0 million (the "2018 FHLB Loan"). The 2018 FHLB Loan matures in May 2033 and provides for interest-only payments during its term, with principal due in full at maturity. The interest rate is fixed over the term of the loan at 3.96%. Prepayment of the 2018 FHLB Loan would require a prepayment fee. The 2018 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C.

Subordinated Debentures

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 ~~September 30,~~March 31, 2021, and 2020 were 4.39% and ~~2019 were 4.44% and 6.33%~~5.78%, respectively.

Reinsurance Arrangements

Members of the State Auto Group follow the customary industry practice of reinsuring a portion of their exposures and paying to the reinsurers a portion of the premiums received. Insurance is ceded principally to reduce net liability on individual risks or for individual loss occurrences, including catastrophic losses. Although reinsurance does not legally discharge the individual members of the State Auto Group from primary liability for the full amount of limits applicable under their policies, it does make the assuming reinsurer liable to the extent of the reinsurance ceded.

To minimize the risk of reinsurer default, the State Auto Group cedes only to third-party reinsurers who are rated A- or better by A.M. Best or Standard & Poor’s and also utilizes both domestic and international markets to diversify its credit risk. We utilize reinsurance to limit our loss exposure and contribute to our liquidity and capital resources.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Other Reinsurance Arrangements

Each member of the State Auto Group is party to working reinsurance treaties for casualty, workers’ compensation and property lines with several reinsurers arranged through reinsurance intermediaries. These agreements are described in more detail below. We have also secured other reinsurance to limit the net cost of large loss events for certain types of coverage. The State Auto Group also makes use of facultative reinsurance for unique risk situations. The State Auto Group also participates in state insurance pools and associations. In general, these pools and associations are state sponsored and/or operated, impose mandatory participation by insurers doing business in that state, and offer coverage for hard-to-place risks at rates established by the state sponsor or operator, thereby transferring risk of loss to the participating insurers in exchange for premiums which may not be commensurate with the risk assumed.

Adverse Development Cover

The State Auto Group has an adverse development reinsurance agreement implemented at the end of 2014, providing $40.0 million of coverage for adverse claims development in excess of carried reserves as of November 30, 2014 for the terminated restaurant program business previously underwritten by a MGU-subsidiary of State Auto Mutual.

Property Catastrophe Treaty

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, 2020. Under this reinsurance agreement, we retain the first $90.0 million of catastrophe loss, each occurrence, with a 5.0% co-participation on the next $180.0 million of covered loss, each occurrence which is broken down into two layers of $70.0 million and $110.0 million. The reinsurers are responsible for 95.0% of the catastrophe losses excess of $90.0 million up to $270.0 million, each occurrence. The State Auto Group is responsible for catastrophe losses above $270.0 million. There is also an automatic restatement of the limit, for 100% of the deposit premium.

Property Per Risk Treaty

As of April 1, 2020, the State Auto Group renewed the property per risk excess of loss reinsurance agreement for a 15-month term. Under this reinsurance agreement, the State Auto Group retains the first $4.0 million of covered loss, with a 19.5% co-participation on the next $6.0 million of covered loss and a 14.0% co-participation on covered loss between $10.0 million and $20.0 million. The reinsurers are responsible for 80.5% of the loss excess of the $4.0 million retention up to $10.0 million and 86.0% of the loss excess of $10 million up to $20.0 million.

Casualty and Workers' Compensation Treaties

As of July 1, 2020, the State Auto Group renewed the casualty excess of loss reinsurance agreement. Under this reinsurance agreement, the State Auto Group is responsible for the first $3.0 million of losses that involve workers' compensation, auto liability, other liability and umbrella liability policies. 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.

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 $20.0 million of coverage in excess of $10.0 million retention for each loss occurrence. This Clash reinsurance coverage sits above the $7.0 million excess of $3.0 million arrangement.

In addition, each company in the State Auto Group is party to a workers’ compensation catastrophe insurance agreement that provides additional reinsurance coverage for workers’ compensation losses involving multiple workers. Subject to $10.0 million of retention, reinsurers are responsible for 100.0% of the excess over $10.0 million up to $30.0 million of covered loss. For loss amounts over $30.0 million, the casualty excess of loss reinsurance agreement provides $20.0 million coverage in excess of $30.0 million. Workers’ compensation catastrophe coverage is subject to a “Maximum Any One Life” limitation of $10.0 million. This limitation means that losses associated with each worker may contribute no more than $10.0 million to covered loss under these agreements.

Regulatory Considerations

At ~~September 30, 2020,~~March 31, 2021, all of our insurance subsidiaries were in compliance with statutory requirements relating to capital adequacy.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

For information on this topic, see Note 1 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.

CREDIT AND FINANCIAL STRENGTH RATINGS

On July 16, 2020, A.M. Best affirmed the State Auto Group’s financial strength rating of A- (Excellent) with a stable outlook.

MARKET RISK

With respect to Market Risk, see the discussion regarding this subject at “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Investment Operations Segment – Market Risk” in Item 7 of the ~~2019~~2020 Form 10-K. There have been no material changes from the information reported regarding Market Risk in the ~~2019~~2020 Form 10-K.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Item 3. Quantitative and Qualitative Disclosure of Market Risk

The information called for by this item is provided in this Form 10-Q under the caption “Market Risk” under Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Item 4. Controls and Procedures

Disclosure Controls and Procedures

With the participation of our principal executive officer and principal financial officer, our management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report:

1.Information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission;

2.Information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; and

3.Our disclosure controls and procedures are effective in timely making known to them material information required to be included in our periodic filings with the Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, nor is it likely to materially affect, our internal control over financial reporting.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

~~Item 1A. Risk Factors~~

~~Risks Related to COVID-19~~

The COVID-19 pandemic has had, and has the potential to continue to have for the foreseeable future, a significant adverse impact on the global economy. Due to the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and will likely continue to emerge over time. The most significant risks and uncertainties presented to State Auto Financial by this pandemic are discussed below.

Legislative, regulatory and judicial actions as a result of COVID-19 could have a material adverse impact on our operations, financial position, liquidity, and cash flows and, potentially, our solvency.

In our commercial insurance segment, we write insurance covering business interruption. In general, business interruption insurance is intended to compensate an insured for income lost during instances of direct physical damage to covered property. Our business interruption insurance is not intended to provide coverage for business closures in connection with human infectious disease epidemics or pandemics. There are efforts at the state and federal levels to implement legislation that would expand the scope of business interruption insurance to include business closures related to COVID-19, although we are not aware of any such legislation being enacted at this time. In addition, putative class action litigation has been initiated against us and many other insurers regarding the denial of business interruption coverage claims for business closures related to COVID-19. We intend to vigorously challenge any claims that our business interruption insurance covers business closures related to COVID-19. If legislation would be enacted in states where we do business to expand the scope of business interruption insurance to include COVID-19 business closures, or judicial decisions of courts in such states found that business interruption coverage included COVID-19 business closures, such legislation or judicial decisions would have a material adverse effect on our results of operations, liquidity, financial condition, and cash flows, and, potentially, our solvency.

As a result of COVID-19, many states have either mandated insurers provide grace periods for the payment of premiums or requested insurers provide such grace periods in the event an insured requests a payment deferral. To date, we have complied with these payment extension periods in those states where we do business.

Furthermore, some states have issued regulatory guidance encouraging premium relief or a return of premium to insureds. While we are voluntarily, under certain circumstances and subject to regulatory approval, providing a 5% discount to our personal auto insureds upon future renewal of their existing policies, if states where we do business were to mandate such type of premium action beyond what we have implemented, such action could have a material adverse effect on our results of operations and cash flows.

Concerns about COVID-19 have caused market volatility, which has negatively impacted our investment portfolio. The extent of the negative impact will depend on the length of this pandemic and is highly uncertain.

Our investment portfolio is invested mostly in fixed income securities the majority of which consists of securities issued by the U.S. Treasury, federal agencies, and state and local governments. Our portfolio also contains a number of securities issued by corporations. Concerns about COVID-19 have caused a sharp increase in volatility in financial markets, which has had a significant negative impact on our investment portfolio. A prolonged economic recession caused by COVID-19 could negatively impact the financial condition of corporate issuers in our portfolio, resulting in rating downgrades or an inability to make timely principal and or interest payments. It is possible we could suffer a partial or complete loss of principal from an issuer who fails to meet its obligations. Our portfolio could suffer large decreases in market value if the economic crisis deepens and the financial solvency of issuers are called into question. Likewise, our exposure to state and local governments carries risk of loss in an economic downturn. A reduction in tax collections for local governments can cause them to default on interest or principal payments resulting in permanent loss of principal from our portfolio. The value of our equity portfolio, which consists of mutual funds, exchange traded funds, and individual company holdings, is impacted by economic activity in the United States and around the world. Mutual funds and exchange traded funds can be expected to exhibit less volatility than an individual company security, but these funds are exposed to economic risk as well. Depending upon the length and depth of the pandemic, it is possible that companies in which we have invested could become bankrupt or cease doing business. As a result, our portfolio could suffer a permanent loss of capital. It is also possible that equity prices could remain depressed for an extended period of time. Portfolio dividend income can also decline as companies reduce or eliminate dividends as they look for ways to survive in a difficult economy.

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~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~(a majority-owned subsidiary of State Automobile Mutual Insurance Company)~~

~~Changes in economic conditions could lead to inflation.~~

Reactions to COVID-19 by federal and state governmental agencies, including the Federal Reserve, and consumers could lead to higher inflation, which can in turn result in an increase in our loss costs, ultimately resulting in the need to strengthen loss and loss adjustment expense reserves. The impact of inflation could be greater on our longer tail casualty claim liabilities. In addition, inflation may cause changes in interest rates which can affect the market value of our fixed income investments.

~~With most of our associates working remotely during this pandemic, we have a greater risk to cybersecurity threats.~~

As a result of COVID-19, we have approximately 90% of our associates working remotely. While we have implemented enhanced procedures and protocols to protect the security of our data and systems, having a remote workforce increases our risk to successful cybersecurity attacks. Furthermore, there has been an increase in phishing and other social engineering attacks focused on COVID-19. These attacks typically come in the form of malicious links or emails, but they could involve phone calls or text messages as well. These cyberattacks, if successful, could interrupt, damage or otherwise adversely affect the operation of our critical systems.

A significant interruption or major failure of the Internet would have an adverse effect on our ability to write and process new and renewal business, provide customer service, receive premium payments, pay claims in a timely manner or perform other necessary corporate functions, which would result in a materially adverse effect on our business and may cause reputational damage.

Our ability to execute necessary business functions, such as online support and 24-hour claims contact centers, processing new and renewal business, receiving and processing payment receipts and processing and paying claims in an efficient and uninterrupted fashion is highly dependent upon the Internet and related technology. Because many businesses are deploying a remote workforce as a result of COVID-19, Internet usage has increased significantly. A significant interruption or major failure of the Internet would substantially impair our ability to perform daily functions on a timely basis and could result in a material adverse impact on our operations.

~~COVID-19 has had and will have an impact on our revenues.~~

Due to COVID-19’s impact on economic activity, we began to experience reduced quote and policy issuance volumes in certain lines of business beginning in mid-March 2020. Given the unprecedented nature of COVID-19, at this time it is not possible to accurately project the degree or duration of the continued impact.

~~We may experience changes to frequency and severity of claims in certain lines of business.~~

As a result of COVID-19, we may experience higher claim and claim adjustment expenses in certain lines of business, such as workers’ compensation, if the injury or illness arose both out of and in the course of employment.

We may also see an impact on our auto and property coverages due to changes in both business practices and individual behaviors. For example, there has been an increase in delivery services due to concerns with in-person contact. We may see an increase in commercial property claims due to unoccupied businesses. Since the outset of the pandemic, there has been a decrease in frequency of personal auto claims attributed to a reduction in miles driven by insureds as a result of people working remotely and staying at home more because of COVID-19 concerns. The duration of this decrease and its impact to severity is unknown at this time.

Further, because the risks associated with COVID-19 are so unknown at this time we may experience uncertainty in estimating claims. We may also experience an increase in fraudulent claims, and there may be an impact in the timing of claims settlements as a result of court delays.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

Item 6. Exhibits


Exhibit No.						Description of Exhibits

31.01						CEO certification required by Section 302 of Sarbanes Oxley Act of 2002

31.02						CFO certification required by Section 302 of Sarbanes Oxley Act of 2002

32.01						CEO certification required by Section 906 of Sarbanes Oxley Act of 2002

32.02						CFO certification required by Section 906 of Sarbanes Oxley Act of 2002

101.INS						The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document

101.SCH						Inline XBRL Taxonomy Extension Schema Document

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						Inline XBRL Taxonomy Definition Linkbase Document

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(a majority-owned subsidiary of State Automobile Mutual Insurance Company)

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


			State Auto Financial Corporation

Date: ~~November 6, 2020~~May 7, 2021			/s/ Steven E. English
			Steven E. English
			Chief Financial Officer
			(Duly Authorized Officer and
			Principal Financial Officer)

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Revised Consolidated Balance Sheets
($ in millions)	Year Ended December 31, 2019
	As Reported		Adjustment		As Revised
Assets
Premiums receivable	$	0	$	13.6	$	13.6
Due from affiliate	21.5		(13.6)		7.9
Total Assets	$	2,985.4	$	0	$	2,985.4


	Twelve months ended September 30
	2020	2019
Net premiums written to surplus	1.7	1.5


($ in millions)
Three months ended September 30, 2019	Personal & Commercial			Specialty run-off		Total

Net written premiums	$	347.2		$	(0.4)	$	346.8
Net earned premiums	319.7			(0.1)		319.6
Losses and LAE incurred:
Cat loss and ALAE	10.3			0.3		10.6
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(15.2)			(0.9)		(16.1)
Current accident year non-cat loss and ALAE	195.0			0.1		195.1
Total non-cat loss and ALAE	179.8			(0.8)		179.0
Total Loss and ALAE	190.1			(0.5)		189.6
ULAE	19.2			(0.1)		19.1
Total Loss and LAE	209.3			(0.6)		208.7
Underwriting expenses	115.5			1.1		116.6
Net underwriting loss	$	(5.1)		$	(0.6)	$	(5.7)

Cat loss and ALAE ratio	3.2		%	N/M(1)		3.3		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(4.8)		%	N/M		(5.1)		%
Current accident year non-cat loss and ALAE ratio	61.0		%	N/M		61.2		%
Total non-cat loss and ALAE ratio	56.2		%	N/M		56.1		%
Total Loss and ALAE ratio	59.4		%	N/M		59.4		%
ULAE ratio	6.0		%	N/M		6.0		%
Total Loss and LAE ratio	65.4		%	N/M		65.4		%
Expense ratio	33.3		%	N/M		33.6		%
Combined ratio	98.7		%	N/M		99.0		%

(1) N/M = Not Meaningful


($ in millions)
Nine months ended September 30, 2020	Personal & Commercial			Specialty run-off		Total

Net written premiums	$	1,107.3		$	(0.1)	$	1,107.2
Net earned premiums	1,024.4			—		1,024.4
Losses and LAE incurred:
Cat loss and ALAE	178.6			12.4		191.0
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(37.0)			5.2		(31.8)
Current accident year non-cat loss and ALAE	542.1			0.3		542.4
Total non-cat loss and ALAE	505.1			5.5		510.6
Total Loss and ALAE	683.7			17.9		701.6
ULAE	62.9			(1.3)		61.6
Total Loss and LAE	746.6			16.6		763.2
Underwriting expenses	376.6			0.5		377.1
Net underwriting loss	$	(98.8)		$	(17.1)	$	(115.9)

Cat loss and ALAE ratio	17.4		%	N/M(1)		18.6		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(3.6)		%	N/M		(3.1)		%
Current accident year non-cat loss and ALAE ratio	53.0		%	N/M		53.0		%
Total non-cat loss and ALAE ratio	49.4		%	N/M		49.9		%
Total Loss and ALAE ratio	66.8		%	N/M		68.5		%
ULAE ratio	6.1		%	N/M		6.0		%
Total Loss and LAE ratio	72.9		%	N/M		74.5		%
Expense ratio	34.0		%	N/M		34.1		%
Combined ratio	106.9		%	N/M		108.6		%

(1) N/M = Not Meaningful