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 ~~March 31,~~June 30, 2020



☐			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.)

~~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 ~~May 1,~~July 31, 2020, the Registrant had ~~43,771,333~~43,837,768 Common Shares outstanding.

Table of Contents

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


		Part I. Financial Information

Item 1.		~~Part I. Financial Information~~

~~Item 1.~~	Financial Statements (Unaudited)
		Condensed consolidated balance sheets – ~~March 31,~~June 30, 2020 and December 31, 2019	1
		Condensed consolidated statements of income – Three months ended ~~March 31,~~June 30, 2020 and 2019	2
		Condensed consolidated statements of income – Six months ended June 30, 2020 and 2019	3
		Condensed consolidated statements of comprehensive income – Three months ended ~~March 31,~~June 30, 2020 and 2019	34
		Condensed consolidated statements of comprehensive income – Six months ended June 30, 2020 and 2019	5
		Condensed consolidated statements of stockholders’ equity - Three months ended ~~March 31,~~June 30, 2020 and 2019	46
		Condensed consolidated statements of stockholders’ equity - Six months ended June 30, 2020 and 2019	7
		Condensed consolidated statements of cash flows – ~~Three~~Six months ended ~~March 31,~~June 30, 2020 and 2019	58
		Notes to condensed consolidated financial statements	69
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	2227
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	4657
Item 4.		Controls and Procedures	4758

		Part II. Other Information
Item 1.		Legal Proceedings	4859
Item 1A.		Risk Factors	4859
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	4960
Item 4.		Mine Safety Disclosures	4960
Item 5.		Other Information	4960
Item 6.		Exhibits	5061
		Signatures	5162

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)	June 30, 2020		December 31, 2019
(unaudited)
Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $1,983.5 and $2,080.0, respectively)	$	2,097.9	$	2,127.9
Equity securities	354.6		395.2
Other invested assets	60.4		69.7
Other invested assets, at cost	12.5		6.5
Notes receivable from affiliate	70.0		70.0
Total investments	2,595.4		2,669.3
Cash and cash equivalents	174.6		78.0
Accrued investment income and other assets	31.1		31.7
Deferred policy acquisition costs (affiliated net assumed $24.8 and $20.2, respectively)	120.0		111.1
Reinsurance recoverable on losses and loss expenses payable	36.4		13.6
Prepaid reinsurance premiums	8.5		7.5
Due from affiliate	54.1		21.5
Current federal income taxes	6.7		6.3
Net deferred federal income taxes	49.2		42.2
Property and equipment, held for sale	4.2		4.2
Total assets	$	3,080.2	$	2,985.4
Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliated net assumed $461.4 and $500.8, respectively)	$	1,105.3	$	1,066.5
Unearned premiums (affiliated net assumed $144.2 and $116.7, respectively)	705.8		649.2
Notes payable (affiliates $15.3 and $15.2, respectively)	182.1		122.0
Pension and postretirement benefits	61.4		72.9


Other liabilities (affiliated net assumed $12.7 and $19.5, respectively)	95.1		114.9
Total liabilities	2,149.7		2,025.5
Stockholders’ equity:
Class A Preferred stock (nonvoting), without par value. Authorized 2.5 shares; none issued	—		—
Class B Preferred stock, without par value. Authorized 2.5 shares; none issued	—		—
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
Treasury stock, 6.9 and 6.9 shares, respectively, at cost	(118.4)		(117.5)
Additional paid-in capital	211.1		206.7
Accumulated other comprehensive income (loss)	17.9		(37.9)
Retained earnings	693.2		782.7
Total stockholders’ equity	930.5		959.9
Total liabilities and stockholders’ equity	$	3,080.2	$	2,985.4

($ and shares in millions, except per share amounts) March 31, 2020 December 31, 2019
(unaudited)
Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $2,051.8 and $2,080.0, respectively) $ 2,128.3
$ 2,127.9
Equity securities 275.7
395.2
Other invested assets 54.6
69.7
Other invested assets, at cost 12.5
6.5
Notes receivable from affiliate 70.0
70.0
Total investments 2,541.1
2,669.3
Cash and cash equivalents 126.6
78.0
Accrued investment income and other assets 33.2
31.7
Deferred policy acquisition costs (affiliated net assumed $21.8 and $20.2, respectively) 113.3
111.1
Reinsurance recoverable on losses and loss expenses payable 39.7
13.6
Prepaid reinsurance premiums 7.9
7.5
Due from affiliate 22.5
21.5
Current federal income taxes 6.7
6.3
Net deferred federal income taxes 64.9
42.2
Property and equipment, held for sale 4.2
4.2
Total assets $ 2,960.1
$ 2,985.4
Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliated net assumed $457.3 and $500.8, respectively) $ 1,086.6
$ 1,066.5
Unearned premiums (affiliated net assumed $126.3 and $116.7, respectively) 665.7
649.2
Notes payable (affiliates $15.2 and $15.2, respectively) 182.1
122.0
Pension and postretirement benefits 71.5
72.9
Other liabilities (affiliated net assumed $10.7 and $19.5, respectively) 87.5
114.9
Total liabilities 2,093.4
2,025.5
Stockholders’ equity:
Class A Preferred stock (nonvoting), without par value. Authorized 2.5 shares; none issued —
—
Class B Preferred stock, without par value. Authorized 2.5 shares; none issued —
—
Common stock, without par value. Authorized 100.0 shares; 50.6 and 50.4 shares issued, respectively, at stated value of $2.50 per share 126.5
125.9
Treasury stock, 6.9 and 6.9 shares, respectively, at cost (118.4 ) (117.5 )
Additional paid-in capital 209.1
206.7
Accumulated other comprehensive loss (13.7 ) (37.9 )
Retained earnings 663.2
782.7
Total stockholders’ equity 866.7
959.9
Total liabilities and stockholders’ equity $ 2,960.1
$ 2,985.4

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 Income


($ in millions, except per share amounts)	Three months ended June 30
(unaudited)	2020		2019
Earned premiums (affiliated net assumed $61.6 and $53.1, respectively)	$	340.7	$	307.7
Net investment income (affiliates $0.7 and $0.4, respectively)	17.7		21.7
Net investment gain	75.9		10.3
Other income from affiliates	0.5		0.4
Total revenues	434.8		340.1

Losses and loss expenses (affiliated net assumed $73.2 and $50.0, respectively)	271.2		234.9
Acquisition and operating expenses (affiliated net assumed $21.0 and $12.7, respectively)	119.5		107.9
Interest expense (affiliates $0.3 and $0.3, respectively)	1.3		1.3
Other expenses	1.2		3.6
Total expenses	393.2		347.7
Income (loss) before federal income taxes	41.6		(7.6)
Federal income tax expense (benefit):
Current	(0.4)		—
Deferred	7.7		(1.4)
Total federal income tax expense (benefit)	7.3		(1.4)
Net income (loss)	$	34.3	$	(6.2)
Earnings (loss) per common share:
Basic	$	0.78	$	(0.14)
Diluted	$	0.74	$	(0.14)
Dividends paid per common share	$	0.10	$	0.10

($ in millions, except per share amounts) Three months ended March 31
(unaudited) 2020 2019
Earned premiums (affiliated net assumed $58.3 and $59.7, respectively) $ 330.5
$ 302.7
Net investment income (affiliates $0.7 and $1.2, respectively) 18.9
19.4
Net investment (loss) gain (135.2 ) 44.9
Other income from affiliates 0.6
0.6
Total revenues 214.8
367.6

Losses and loss expenses (affiliated net assumed $10.9 and $56.4, respectively) 239.4
194.3
Acquisition and operating expenses (affiliated net assumed $20.9 and $24.2, respectively) 114.9
107.6
Interest expense (affiliates $0.2 and $0.2, respectively) 1.2
1.2
Other expenses 3.3
2.9
Total expenses 358.8
306.0
(Loss) income before federal income taxes (144.0 ) 61.6
Federal income tax (benefit) expense:
Current —
(0.4 )
Deferred (29.4 ) 12.6
Total federal income tax (benefit) expense (29.4 ) 12.2
Net (loss) income $ (114.6 ) $ 49.4
(Loss) earnings per common share:
Basic $ (2.62 ) $ 1.14
Diluted $ (2.62 ) $ 1.12
Dividends paid per common share $ 0.10
$ 0.10

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


($ in millions, except per share amounts)	Six months ended June 30
(unaudited)	2020		2019
Earned premiums (affiliated net assumed $119.9 and $112.8, respectively)	$	671.2	$	610.4
Net investment income (affiliates $1.4 and $1.6, respectively)	36.6		41.1
Net investment (loss) gain	(59.3)		55.2
Other income from affiliates	1.1		1.0
Total revenues	649.6		707.7

Losses and loss expenses (affiliated net assumed $84.1 and $100.9, respectively)	510.6		429.2
Acquisition and operating expenses (affiliated net assumed $41.9 and $36.9, respectively)	234.4		215.5
Interest expense (affiliates $0.5 and $0.5, respectively)	2.5		2.5
Other expenses	4.5		6.5
Total expenses	752.0		653.7
(Loss) income before federal income taxes	(102.4)		54.0
Federal income tax (benefit) expense:
Current	(0.4)		(0.4)
Deferred	(21.7)		11.2
Total federal income tax (benefit) expense	(22.1)		10.8
Net (loss) income	$	(80.3)	$	43.2
(Loss) earnings per common share:
Basic	$	(1.83)	$	1.00
Diluted	$	(1.83)	$	1.00
Dividends paid per common share	$	0.20	$	0.20

($ in millions, except per share amounts) Three months ended March 31
(unaudited) 2020 2019
Net (loss) income $ (114.6 ) $ 49.4
Other comprehensive income, net of tax:
Net unrealized holding gains on available-for-sale investments:
Unrealized holding gains 31.0
34.5
Reclassification adjustments for gains realized in net income (2.4 ) (0.1 )
Income tax expense (6.0 ) (7.2 )
Total net unrealized holding gains on available-for-sale investments 22.6
27.2
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 (0.5 ) (0.2 )
Total net unrecognized benefit plan obligations 1.6
0.6
Other comprehensive income 24.2
27.8
Comprehensive (loss) income $ (90.4 ) $ 77.2

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~~Comprehensive Income


($ in millions, except per share amounts)	Three months ended June 30
(unaudited)	2020		2019
Net income (loss)	$	34.3	$	(6.2)
Other comprehensive income, net of tax:
Net unrealized holding gains on available-for-sale investments:
Unrealized holding gains	38.9		34.7
Reclassification adjustments for gains realized in net income	(1.0)		(1.5)
Income tax expense	(7.9)		(7.0)
Total net unrealized holding gains on available-for-sale investments	30.0		26.2
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost	(1.6)		(1.6)
Net actuarial loss	3.6		2.4
Income tax expense	(0.4)		(0.1)
Total net unrecognized benefit plan obligations	1.6		0.7
Other comprehensive income	31.6		26.9
Comprehensive income	$	65.9	$	20.7

(in millions) Three months ended March 31
2020 2019
Common shares:
Balance at beginning of period 50.4
50.0
Issuance of shares 0.2
0.1
Balance at March 31 50.6
50.1
Treasury shares:
Balance at beginning of period (6.9 ) (6.8 )
Balance at March 31 (6.9 ) (6.8 )
Common stock:
Balance at beginning of period $ 125.9
$ 125.0
Issuance of shares 0.6
0.3
Balance at March 31 $ 126.5
$ 125.3
Treasury stock:
Balance at beginning of period $ (117.5 ) $ (117.0 )
Shares acquired on stock award exercises and vested restricted shares (0.9 ) (0.5 )
Balance at March 31 $ (118.4 ) $ (117.5 )
Additional paid-in capital:
Balance at beginning of period $ 206.7
$ 194.2
Issuance of common stock 1.3
0.7
Stock awards granted 1.1
3.5
Balance at March 31 $ 209.1
$ 198.4
Accumulated other comprehensive loss:
Balance at beginning of period $ (37.9 ) $ (96.4 )
Change in net unrealized holding gains on available-for-sale investments 22.6
27.2
Total net unrecognized benefit plan obligations 1.6
0.6
Balance at March 31 $ (13.7 ) $ (68.6 )
Retained earnings:
Balance at beginning of period $ 782.7
$ 712.7
Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020 (0.5 ) —
Net (loss) income (114.6 ) 49.4
Dividends declared (affiliates $2.6 and $2.6, respectively) $ (4.4 ) $ (4.4 )
Balance at March 31 663.2
757.7
Total stockholders’ equity at March 31 $ 866.7
$ 895.3

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~~Comprehensive (Loss) Income


($ in millions, except per share amounts)	Six months ended June 30
(unaudited)	2020		2019
Net (loss) income	$	(80.3)	$	43.2
Other comprehensive income, net of tax:
Net unrealized holding gains on fixed available-for-sale investments:
Unrealized holding gains	69.9		69.2
Reclassification adjustments for gains realized in net income	(3.4)		(1.6)
Income tax expense	(13.9)		(14.2)
Total net unrealized holding gains on available-for-sale investments	52.6		53.4
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost	(3.2)		(3.2)
Net actuarial loss	7.3		4.8
Income tax expense	(0.9)		(0.3)
Total net unrecognized benefit plan obligations	3.2		1.3
Other comprehensive income	55.8		54.7
Comprehensive (loss) income	$	(24.5)	$	97.9

($ in millions) Three months ended March 31
(unaudited) 2020 2019
Cash flows from operating activities:
Net (loss) income $ (114.6 ) $ 49.4
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization, net 1.6
3.1
Share-based compensation 0.5
3.8
Net investment loss (gain) 135.2
(44.9 )
Changes in operating assets and liabilities:
Deferred policy acquisition costs (2.2 ) (2.4 )
Accrued investment income and other assets (1.5 ) (4.1 )
Postretirement and pension benefits (0.9 ) (0.1 )
Other liabilities and due to/from affiliates, net (26.2 ) (33.6 )
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums (26.5 ) 0.8
Losses and loss expenses payable 19.5
(17.9 )
Unearned premiums 16.5
3.3
Deferred tax (benefit) expense on share-based awards (0.2 ) 0.2
Federal income taxes (29.2 ) 12.0
Net cash used in operating activities (28.0 ) (30.4 )
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale (122.4 ) (137.2 )
Purchases of equity securities (16.1 ) (19.5 )
Purchases of other invested assets (6.6 ) (1.0 )
Maturities, calls and pay downs of fixed maturities available-for-sale 67.9
125.9
Sales of fixed maturities available-for-sale 83.5
65.6
Sales of equity securities 13.2
12.7
Sales of other invested assets 0.4
0.3
Disposals of property and equipment 0.2
—
Net cash provided by investing activities 20.1
46.8
Cash flows from financing activities:
Proceeds from issuance of common stock 1.8
1.0
Payments to acquire treasury stock (0.9 ) (0.5 )
Payment of dividends (4.4 ) (4.4 )
Proceeds from short-term debt 60.0
—
Net cash provided by (used in) financing activities 56.5
(3.9 )
Net increase in cash and cash equivalents 48.6
12.5
Cash and cash equivalents at beginning of period 78.0
59.8
Cash and cash equivalents at end of period $ 126.6
$ 72.3
Supplemental disclosures:
Interest paid (affiliates $0.2 and $0.2, respectively) $ 1.2
$ 1.7

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)	Three months ended June 30
	2020		2019
Common shares:
Balance at beginning of period	50.6		50.1
Issuance of shares	0.1		0.2
Balance at June 30	50.7		50.3
Treasury shares:
Balance at beginning of period	(6.9)		(6.8)

Balance at June 30	(6.9)		(6.8)
Common stock:
Balance at beginning of period	$	126.5	$	125.3
Issuance of shares	0.2		0.4
Balance at June 30	$	126.7	$	125.7
Treasury stock:
Balance at beginning of period	$	(118.4)	$	(117.5)

Balance at June 30	$	(118.4)	$	(117.5)
Additional paid-in capital:
Balance at beginning of period	$	209.1	$	198.4
Issuance of common stock	0.9		2.6

Stock awards granted	1.1		1.5
Balance at June 30	$	211.1	$	202.5
Accumulated other comprehensive income (loss):
Balance at beginning of period	$	(13.7)	$	(68.6)

Change in net unrealized holding gains on available-for-sale investments	30.0		26.2
Total net unrecognized benefit plan obligations	1.6		0.7
Balance at June 30	$	17.9	$	(41.7)
Retained earnings:
Balance at beginning of period	$	663.2	$	757.7

Net income (loss)	34.3		(6.2)
Dividends declared (affiliates $2.6 and $2.6, respectively)	$	(4.3)	$	(4.3)
Balance at June 30	693.2		747.2
Total stockholders’ equity at June 30	$	930.5	$	916.2

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)	Six months ended June 30
	2020		2019
Common shares:
Balance at beginning of year	50.4		50.0
Issuance of shares	0.3		0.3
Balance at June 30	50.7		50.3
Treasury shares:
Balance at beginning of year	(6.9)		(6.8)

Balance at June 30	(6.9)		(6.8)
Common stock:
Balance at beginning of year	$	125.9	$	125.0
Issuance of shares	0.8		0.7
Balance at June 30	$	126.7	$	125.7
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 June 30	$	(118.4)	$	(117.5)
Additional paid-in capital:
Balance at beginning of year	$	206.7	$	194.2
Issuance of common stock	2.2		3.3

Stock awards granted	2.2		5.0
Balance at June 30	$	211.1	$	202.5
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	52.6		53.4
Change in unrecognized benefit plan obligations, net of tax	3.2		1.3
Balance at June 30	$	17.9	$	(41.7)
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)		—
Net (loss) income	(80.3)		43.2
Dividends declared (affiliates $5.2 and $5.2, respectively)	$	(8.7)	$	(8.7)
Balance at June 30	693.2		747.2
Total stockholders’ equity at June 30	$	930.5	$	916.2

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 Cash Flows


($ in millions)	Six months ended June 30
(unaudited)	2020		2019
Cash flows from operating activities:
Net (loss) income	$	(80.3)	$	43.2
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization, net	5.7		3.8
Share-based compensation	(0.5)		4.4
Net investment loss (gain)	59.3		(55.2)
Changes in operating assets and liabilities:
Deferred policy acquisition costs	(8.9)		(7.2)
Accrued investment income and other assets	0.6		1.8
Postretirement and pension benefits	(10.5)		(11.3)
Other liabilities and due to/from affiliates, net	(46.5)		(79.1)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums	(23.8)		(3.4)
Losses and loss expenses payable	38.2		(11.6)
Unearned premiums	56.6		37.4
Deferred tax on share-based awards	(0.2)		(0.6)
Federal income taxes	(21.9)		11.4
Net cash used in operating activities	(32.2)		(66.4)
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale	(280.8)		(334.8)
Purchases of equity securities	(42.7)		(30.4)
Purchases of other invested assets	(6.9)		(2.6)
Maturities, calls and pay downs of fixed maturities available-for-sale	186.7		203.2
Sales of fixed maturities available-for-sale	188.3		198.7
Sales of equity securities	30.0		20.3
Sales of other invested assets	0.6		0.6
Disposals of property and equipment	0.2		1.6
Net cash provided by investing activities	75.4		56.6
Cash flows from financing activities:
Proceeds from issuance of common stock	3.0		4.0
Payments to acquire treasury stock	(0.9)		(0.5)
Payment of dividends	(8.7)		(8.7)

Proceeds from short-term debt	60.0		—
Net cash provided by (used in) financing activities	53.4		(5.2)
Net increase (decrease) in cash and cash equivalents	96.6		(15.0)
Cash and cash equivalents at beginning of period	78.0		59.8
Cash and cash equivalents at end of period	$	174.6	$	44.8
Supplemental disclosures:
Interest paid (affiliates $0.5 and $0.5, respectively)	$	2.3	$	2.3

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 six months ended ~~March 31,~~June 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet at December 31, 2019, 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 (the “2019 Form 10-K”). Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the 2019 Form 10-K.

The COVID-19 pandemic has caused an economic downturn on a global scale, including temporary closures of many businesses and reduced consumer spending due to shelter-in-place and other governmental regulations, as well as significant market disruption and volatility. The scope, duration and magnitude of the effects of COVID-19 ~~are evolving~~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. 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 ~~to disclose~~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.

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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)

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 effective date of ASU 2019-12 is for interim and annual periods beginning after December 15, 2020. Early adoption is permitted. The ASU has not yet been adopted; however, it is not expected to have a material impact on the Company’s results of operations, consolidated financial position or cash flows.

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 Form 10-K.

~~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)~~

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, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For fixed maturities that do not meet the aforementioned criteria, 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 2 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 asand, pursuant to the Pooling Arrangement (as defined in Note 6) ~~and~~, 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 6 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, State Auto Mutual receives all premiums 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

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)

share of the Pooled Companies net premiums written during the quarter, retaining all premium receivable amounts from insureds and agents.

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 ~~experiences~~experience along with reasonable and supportable forecasts are used to estimate athe 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 ~~March 31,~~June 30, 2020 and December 31, 2019 is approximately ~~$386.6~~$404.0 million and $371.0 million, respectively, net of the allowance for uncollectible premiums receivable of $7.0 million and $4.3 million, respectively.

2. Investments

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


($ millions)	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
June 30, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	518.9	$	43.6	$	—	$	562.5
Obligations of states and political subdivisions	391.5		25.7		—		417.2
Corporate securities	493.5		20.2		(0.3)		513.4
U.S. government agencies mortgage-backed securities	579.6		26.7		(1.5)		604.8
Total available-for-sale fixed maturities	$	1,983.5	$	116.2	$	(1.8)	$	2,097.9

($ millions)	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
December 31, 2019
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	569.2	$	12.3	$	(3.3)	$	578.2
Obligations of states and political subdivisions	404.3		21.1		—		425.4
Corporate securities	460.5		11.7		(0.4)		471.8
U.S. government agencies mortgage-backed securities	646.0		11.1		(4.6)		652.5
Total available-for-sale fixed maturities	$	2,080.0	$	56.2	$	(8.3)	$	2,127.9

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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)

~~2. Investments~~

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

($ millions) Cost or amortized cost Gross unrealized holding gains Gross unrealized holding losses Fair value
March 31, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies $ 559.3
$ 38.0
$ (0.2 ) $ 597.1
Obligations of states and political subdivisions 392.9
20.8
—
413.7
Corporate securities 470.1
5.0
(7.2 ) 467.9
U.S. government agencies mortgage-backed securities 629.5
24.7
(4.6 ) 649.6
Total available-for-sale fixed maturities $ 2,051.8
$ 88.5
$ (12.0 ) $ 2,128.3

($ millions) Cost or amortized cost Gross unrealized holding gains Gross unrealized holding losses Fair value
December 31, 2019
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies $ 569.2
$ 12.3
$ (3.3 ) $ 578.2
Obligations of states and political subdivisions 404.3
21.1
�� —
425.4
Corporate securities 460.5
11.7
(0.4 ) 471.8
U.S. government agencies mortgage-backed securities 646.0
11.1
(4.6 ) 652.5
Total available-for-sale fixed maturities $ 2,080.0
$ 56.2
$ (8.3 ) $ 2,127.9

~~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)~~

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 ~~March 31,~~June 30, 2020:

($ 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
March 31, 2020
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies $ 22.2
$ (0.2 ) 7
$ —
$ —
—
$ 22.2
$ (0.2 ) 7
Corporate securities 205.9
(7.1 ) 38
6.0
$ (0.1 ) 2
211.9
$ (7.2 ) 40
U.S. government agencies mortgage-backed securities 113.1
(3.9 ) 27
22.1
(0.7 ) 5
135.2
(4.6 ) 32
Total temporarily impaired securities $ 341.2
$ (11.2 ) 72
$ 28.1
$ (0.8 ) 7
$ 369.3
$ (12.0 ) 79


($ 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
June 30, 2020
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	3.0	$	—	2	$	—	$	—	—	$	3.0	$	—	2

Corporate securities	94.6		(0.3)		16	—		$	—	—	94.6		$	(0.3)	16
U.S. government agencies mortgage-backed securities	77.6		(1.3)		18	15.6		(0.2)		4	93.2		(1.5)		22
Total temporarily impaired securities	$	175.2	$	(1.6)	36	$	15.6	$	(0.2)	4	$	190.8	$	(1.8)	40

($ 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
December 31, 2019
Fixed maturities:
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
Corporate securities —
—
—
40.8
(0.4 ) 7
40.8
(0.4 ) 7
U.S. government agencies mortgage-backed securities 126.6
(1.5 ) 15
137.9
(3.1 ) 32
264.5
(4.6 ) 47
Total temporarily impaired securities $ 262.6
$ (4.0 ) 32
$ 336.3
$ (4.3 ) 50
$ 598.9
$ (8.3 ) 82


($ 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
December 31, 2019
Fixed maturities:
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

Corporate securities	—		—		—	40.8		(0.4)		7	40.8		(0.4)		7
U.S. government agencies mortgage-backed securities	126.6		(1.5)		15	137.9		(3.1)		32	264.5		(4.6)		47
Total temporarily impaired securities	$	262.6	$	(4.0)	32	$	336.3	$	(4.3)	50	$	598.9	$	(8.3)	82

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

•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.

~~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 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 ~~financial condition~~extent to which fair value is less than amortized cost, any changes to the rating of the ~~issuer including receipt of scheduled principal~~security by a rating agency, and ~~interest cash flows, and intent~~adverse conditions specifically related to ~~sell, including if it is more likely than not that~~ the ~~Company will be required to sell the investments before recovery.~~security, among other factors. When a fixed maturity has been determined to have an impairment, the impairment charge ~~is separated into an amount~~ representing the credit loss ~~which~~ 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 income.

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

($ millions) Amortized cost
Fair
value
Due in 1 year or less $ 106.6
$ 106.8
Due after 1 year through 5 years 586.1
594.4
Due after 5 years through 10 years 149.9
154.9
Due after 10 years 579.7
622.6
U.S. government agencies mortgage-backed securities 629.5
649.6
Total $ 2,051.8
$ 2,128.3


($ millions)	Amortized cost		Fair value
Due in 1 year or less	$	121.1	$	122.4
Due after 1 year through 5 years	525.8		552.0
Due after 5 years through 10 years	213.3		223.7
Due after 10 years	543.7		595.0
U.S. government agencies mortgage-backed securities	579.6		604.8
Total	$	1,983.5	$	2,097.9

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 ~~March 31,~~June 30, 2020, State Auto P&C had U.S. government agencies mortgage-backed fixed maturity securities, with a carrying value of approximately $166.5 million pledged as collateral for loans from the Federal Home Loan Bank of Cincinnati ("FHLB") as further described in Note 8. In accordance with the terms of the FHLB Loans, State Auto P&C retains all rights regarding these pledged securities.

At ~~March 31,~~June 30, 2020, State Auto P&C had fixed maturities with fair values of approximately ~~$29.3~~$30.4 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 ~~$9.1~~$9.2 million and $9.3 million were on deposit with insurance regulators as required by law at ~~March 31,~~June 30, 2020, and December 31, 2019, respectively. The Company retains all rights regarding these securities.

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

($ millions) Three months ended March 31
2020 2019
Fixed maturities $ 15.1
$ 15.1
Equity securities 3.1
2.8
Cash and cash equivalents, and other 1.0
1.7
Investment income 19.2
19.6
Investment expenses 0.3
0.2
Net investment income $ 18.9
$ 19.4


($ millions)	Three months ended June 30						Six months ended June 30
	2020		2019		2020		2019
Fixed maturities	$	14.5	$	17.3	$	29.6	$	32.4
Equity securities	2.6		3.1		5.7		5.9
Cash and cash equivalents, and other	0.8		1.4		1.8		3.1
Investment income	17.9		21.8		37.1		41.4
Investment expenses	0.2		0.1		0.5		0.3
Net investment income	$	17.7	$	21.7	$	36.6	$	41.1

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

Proceeds on sales of investments were $218.9 million and $219.6 million for the six months ended June 30, 2020, and 2019, respectively.

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)

~~Proceeds on sales of investments were $97.1 million and $78.6 million for the three months ended March 31, 2020, and 2019, respectively.~~

The following table sets forth the realized and unrealized holding gains (losses) on the Company’s investment portfolio for the three and six months ended ~~March 31,~~June 30, 2020 and 2019:

($ millions) Three months ended March 31
2020 2019
Investment gain (loss), net:
Fixed maturities:
Realized gains on sales of securities 3.6
0.1
Realized losses on sales of securities (1.2 ) —
Net gain on fixed maturities 2.4
0.1
Equity securities:
Realized gains (losses) on sales of securities, net 0.9
(1.9 )
Unrealized (loss) gain on securities still held, net (123.3 ) 44.1
Net (loss) gain on equity securities (122.4 ) 42.2
Other invested assets:
Unrealized (loss) gain on securities still held, net (15.4 ) 3.9
Net (loss) gain on other invested assets (15.4 ) 3.9
Other net realized gain (loss) 0.2
(1.3 )
Net (loss) gain on investments $ (135.2 ) $ 44.9

Change in unrealized holding gains (losses), net of tax:
Fixed maturities $ 28.6
$ 34.4
Deferred federal income tax liability (6.0 ) (7.2 )
Change in net unrealized holding gains, net of tax $ 22.6
$ 27.2


($ millions)	Three months ended June 30						Six months ended June 30
	2020		2019		2020		2019
Investment gain (loss), net:
Fixed maturities:
Realized gains on sales of securities	1.9		1.5		5.5		1.6
Realized losses on sales of securities	(0.9)		—		(2.1)		—
Net gain on fixed maturities	1.0		1.5		3.4		1.6
Equity securities:
Realized (losses) gains on sales of securities, net	(9.5)		1.2		(8.6)		(0.7)
Unrealized gain (loss) on securities still held, net	78.6		6.4		(44.7)		50.5
Net gain (loss) on equity securities	69.1		7.6		(53.3)		49.8
Other invested assets:

Unrealized gain (loss) on securities still held, net	5.8		1.2		(9.6)		5.1
Net gain (loss) on other invested assets	5.8		1.2		(9.6)		5.1
Other net realized gain (loss)	—		—		0.2		(1.3)
Net gain (loss) on investments	$	75.9	$	10.3	$	(59.3)	$	55.2

Change in unrealized holding gains (losses), net of tax:
Fixed maturities	$	37.9	$	33.2	$	66.5	$	67.6
Deferred federal income tax liability	(7.9)		(7.0)		(13.9)		(14.2)
Change in net unrealized holding gains, net of tax	$	30.0	$	26.2	$	52.6	$	53.4

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 ~~March 31,~~June 30, 2020, and December 31, 2019, the Company did not adjust any of the prices received from the pricing service.

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)

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 ~~$42.6~~$47.1 million and $56.4 million at ~~March 31,~~June 30, 2020, and December 31, 2019, 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.

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 investments within the fair value hierarchy at ~~March 31,~~June 30, 2020 and December 31, 2019:

($ millions) Total Level 1 Level 2
March 31, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies $ 597.1
$ —
$ 597.1
Obligations of states and political subdivisions 413.7
—
413.7
Corporate securities 467.9
—
467.9
U.S. government agencies mortgage-backed securities 649.6
—
649.6
Total available-for-sale fixed maturities 2,128.3
—
2,128.3
Equity securities:
Large-cap securities 86.9
86.9
—
Mutual and exchange traded funds 188.8
188.8
—
Total equity securities 275.7
275.7
—
Other invested assets 12.0
12.0
—
Total investments $ 2,416.0
$ 287.7
$ 2,128.3

($ millions) Total Level 1 Level 2
December 31, 2019
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies $ 578.2
$ —
$ 578.2
Obligations of states and political subdivisions 425.4
—
425.4
Corporate securities 471.8
—
471.8
U.S. government agencies mortgage-backed securities 652.5
—
652.5
Total available-for-sale fixed maturities 2,127.9
—
2,127.9
Equity securities:
Large-cap securities 104.4
104.4
—
Mutual and exchange traded funds 290.8
290.8
—
Total equity securities 395.2
395.2
—
Other invested assets 13.3
13.3
—
Total investments $ 2,536.4
$ 408.5
$ 2,127.9


($ millions)	Total		Level 1		Level 2
June 30, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	562.5	$	—	$	562.5
Obligations of states and political subdivisions	417.2		—		417.2
Corporate securities	513.4		—		513.4
U.S. government agencies mortgage-backed securities	604.8		—		604.8
Total available-for-sale fixed maturities	2,097.9		—		2,097.9
Equity securities:
Large-cap securities	111.9		111.9		—

Mutual and exchange traded funds	242.7		242.7		—
Total equity securities	354.6		354.6		—
Other invested assets	13.3		13.3		—
Total investments	$	2,465.8	$	367.9	$	2,097.9

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

Mutual and exchange traded funds	290.8		290.8		—
Total equity securities	395.2		395.2		—
Other invested assets	13.3		13.3		—
Total investments	$	2,536.4	$	408.5	$	2,127.9

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 ~~March 31,~~June 30, 2020, was $12.0 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.

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)

Notes Receivable from Affiliate

In May 2009, the Company entered into 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) March 31, 2020 December 31, 2019
Carrying value Fair value Interest rate Carrying value
Fair
value
Interest rate
Notes receivable from affiliate, May 2019 $ 70.0
$ 82.6
4.05 % $ 70.0
$ 74.6
4.05 %


($ millions, except interest rates)	June 30, 2020										December 31, 2019
	Carrying value		Fair value		Interest rate		Carrying value		Fair value		Interest rate
Notes receivable from affiliate, May 2019	$	70.0	$	81.8	4.05	%	$	70.0	$	74.6	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) March 31, 2020 December 31, 2019
Carrying value Fair Value Interest rate Carrying value Fair value Interest rate
FHLB Loan due 2021: issued $21.5, September 2016 with fixed interest $ 21.6
$ 21.5
1.73 % $ 21.5
$ 21.5
1.73 %
FHLB Loan due 2033: issued $85.0, May 2018 with fixed interest 85.3
100.0
3.96 % 85.3
97.8
3.96 %
FHLB REPO Based Advances due 2020:, issued $60.0, March 2020 with fixed interest 60.0
60.0
0.38 % —
—
— %
Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest 15.2
15.2
5.78 % 15.2
15.2
6.11 %
Total notes payable $ 182.1
$ 196.7
$ 122.0
$ 134.5


($ millions, except interest rates)	June 30, 2020										December 31, 2019
	Carrying value		Fair Value		Interest rate		Carrying value		Fair value		Interest rate
FHLB Loan due 2021: issued $21.5, September 2016 with fixed interest	$	21.5	$	21.6	1.73	%	$	21.5	$	21.5	1.73	%
FHLB Loan due 2033: issued $85.0, May 2018 with fixed interest	85.3		108.1		3.96	%	85.3		97.8		3.96	%
FHLB REPO Based Advances due 2020:, issued $60.0, March 2020 with fixed interest	60.0		60.0		0.38	%	—		—		—	%
Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest	15.3		15.2		4.55	%	15.2		15.2		6.11	%
Total notes payable	$	182.1	$	204.9			$	122.0	$	134.5

4. Deferred Acquisition Costs

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


($ millions)	2020		2019
Beginning balance at April 1	$	113.3	$	104.3
Acquisition costs deferred	100.3		92.0
Acquisition costs amortized to expense	(93.6)		(87.2)
Ending balance at June 30	$	120.0	$	109.1

Beginning balance at January 1	$	111.1	$	101.9
Acquisition costs deferred	191.4		176.0
Acquisition costs amortized to expense	(182.5)		(168.8)
Ending balance at June 30	$	120.0	$	109.1

Three months ended March 31
($ millions) 2020 2019
Balance, beginning of year $ 111.1
$ 101.9
Acquisition costs deferred 91.1
84.0
Acquisition costs amortized to expense (88.9 ) (81.6 )
Balance, end of period $ 113.3
$ 104.3

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)

5. Losses and Loss Expenses Payable

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

($ millions) 2020 2019
Losses and loss expenses payable, at beginning of period $ 1,066.5
$ 1,146.8
Less: reinsurance recoverable on losses and loss expenses payable 13.6
5.5
Net balance at beginning of period 1,052.9
1,141.3
Incurred related to:
Current year 246.9
215.7
Prior years (7.5 ) (21.4 )
Total incurred 239.4
194.3
Paid related to:
Current year 74.1
59.3
Prior years 171.3
152.0
Total paid 245.4
211.3
Net balance at end of period 1,046.9
1,124.3
Plus: reinsurance recoverable on losses and loss expenses payable 39.7
4.6
Losses and loss expenses payable, at end of period $ 1,086.6
$ 1,128.9


($ millions)	2020		2019
Losses and loss expenses payable, at beginning of period	$	1,066.5	$	1,146.8
Less: reinsurance recoverable on losses and loss expenses payable	13.6		5.5
Net balance at beginning of period	1,052.9		1,141.3
Incurred related to:
Current year	518.2		466.8
Prior years	(7.6)		(37.6)
Total incurred	510.6		429.2
Paid related to:
Current year	228.9		198.6
Prior years	265.7		245.1
Total paid	494.6		443.7
Net balance at end of period	1,068.9		1,126.8
Plus: reinsurance recoverable on losses and loss expenses payable	36.4		8.4
Losses and loss expenses payable, at end of period	$	1,105.3	$	1,135.2

The Company recorded less favorable development related to prior years’ loss and loss expense reserves for the ~~three~~six months ended ~~March 31,~~June 30, 2020, of ~~$7.5~~$7.6 million compared to ~~$21.4~~$37.6 million for the same 2019 period. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves for the ~~three~~six months ended ~~March 31,~~June 30, 2020 was ~~$10.5~~$12.5 million, due to favorable development in the commercial insurance segment. In the commercial insurance segment, all products developed favorably, with small commercial package, workers' compensation, and middle market commercial ~~and workers' compensation~~ contributing ~~$5.4~~$9.0 million, ~~$5.1~~$8.8 million, and ~~$4.0~~$8.0 million, respectively. ~~Somewhat~~Partially offsetting the favorable development was adverse development in the personal insurance segment ~~of $6.4~~and specialty run-off, which contributed $12.1 million and $6.1 million, respectively. The adverse development in the personal insurance segment was primarily driven by personal auto, ~~and homeowners~~ which contributed ~~$5.2 million and $2.2~~$11.1 million of adverse development. The personal auto adverse development ~~respectively.~~was driven by higher than expected severity of bodily injury claims and higher than expected frequency of property damage claims, primarily from the 2019 accident year. The specialty run-off adverse development primarily relates to an adverse court decision relating to an E&S casualty claim from 2016.

~~Favorable~~For the six months ended June 30, 2019, favorable development of prior accident ~~years'~~year's non-catastrophe loss and ALAE reserves ~~for the three months ended March 31, 2019~~ was $38.0 million, primarily due to favorable development in the personal and commercial ~~insurance~~ segments. ~~Favorable development of prior accident years' non-catastrophe loss and ALAE reserves for the three months ended March 31, 2019 was $20.9 million.~~ In the personal insurance segment, personal auto contributed ~~$6.8~~$9.8 million of favorable development, primarily attributable to ~~lower than anticipated severity from~~ the 2017 and 2018 accident ~~year partially offset by $0.6 million of adverse development in homeowners, primarily from the 2018 accident year.~~years. In the commercial insurance segment, ~~all products developed favorably, with~~workers' compensation, small commercial package, ~~workers' compensation,~~ and middle market commercial ~~contributing $4.8~~contributed favorable development of $9.0 million, ~~$4.5~~$7.7 million, and ~~$3.1~~$6.0 million, respectively. Slightly offsetting the favorable development was adverse development in the specialty run-off business of $1.3 million, primarily driven by large fire losses in the fourth quarter of 2018 in E&S property.

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.

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 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 six months ended ~~March 31,~~June 30, 2020 and 2019:

($ millions) Three months ended March 31
2020 2019
Premiums earned:
Assumed from external insurers and reinsurers $ 20.6
$ 18.2
Assumed under Pooling Arrangement 330.5
302.7
Ceded to external insurers and reinsurers (10.6 ) (5.9 )
Ceded under Pooling Arrangement (272.2 ) (243.0 )
Net assumed premiums earned $ 68.3
$ 72.0
Losses and loss expenses incurred:
Assumed from external insurers and reinsurers $ 11.7
$ 14.2
Assumed under Pooling Arrangement 239.4
200.2
Ceded to external insurers and reinsurers (33.5 ) (0.6 )
Ceded under Pooling Arrangement (228.5 ) (143.8 )
Net assumed losses and loss expenses incurred $ (10.9 ) $ 70.0


($ millions)	Three months ended June 30						Six months ended June 30
	2020		2019		2020		2019
Premiums earned:
Assumed from external insurers and reinsurers	$	20.7	$	20.1	$	41.3	$	38.3
Assumed under Pooling Arrangement	340.7		307.7		671.2		610.4
Ceded to external insurers and reinsurers	(7.1)		(6.3)		(17.7)		(12.2)
Ceded under Pooling Arrangement	(279.1)		(254.6)		(551.3)		(497.6)
Net assumed premiums earned	$	75.2	$	66.9	$	143.5	$	138.9
Losses and loss expenses incurred:
Assumed from external insurers and reinsurers	$	15.5	$	16.8	$	27.2	$	31.0
Assumed under Pooling Arrangement	271.2		235.4		510.6		430.1
Ceded to external insurers and reinsurers	(12.5)		(5.0)		(46.0)		(5.6)
Ceded under Pooling Arrangement	(198.0)		(185.4)		(426.5)		(329.2)
Net assumed losses and loss expenses incurred	$	76.2	$	61.8	$	65.3	$	126.3

7. 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 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 ~~March 31,~~June 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 ~~March 31,~~June 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 June 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 ~~March 31,~~June 30, 2020:

($ millions) Amortized Cost
Financial strength rating:
A++ $ 1.1
A+ 16.5
A 22.1
Reinsurance recoverable on losses and loss expenses payable, net of allowance for credit losses $ 39.7

~~The following table sets forth the changes in the Company’s allowance for credit losses on reinsurance recoverables, for the three months ended March 31, 2020:~~

($ millions) Allowance for credit losses on reinsurance recoverables
Beginning balance at January 1, 2020 $ —
Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020 0.7
Credit loss expense 0.2
Ending balance at March 31, 2020 $ 0.9


($ millions)	Amortized Cost
Financial strength rating:
A++	$	1.0
A+	14.3
A	21.1





Reinsurance recoverable on losses and loss expenses payable, net of allowance for credit losses	$	36.4

Premiums Receivables

Management utilizes a premiums receivables aging schedule to estimate an allowance for uncollectible premiums receivable on the State Auto Group’s premiums receivable balance. In addition to reliance upon recent and historical collection trends, determination of the allowance for uncollectible premiums receivable at ~~March 31,~~June 30, 2020 included consideration of other factors,

~~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)~~

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. The Company's share~~participation and is included in the quarterly settlement of ~~bad~~intercompany balances. Bad debt expense ~~for uncollectible premiums receivable for the three months ended March 31, 2020 and 2019 was $2.7 million and $0.3 million, respectively, and~~ 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 six months ended June 30, 2020:


($ millions)	Allowance for credit losses
Beginning balance at April 1, 2020	$	7.0
Current period provision	1.9
Writeoffs	(1.9)

Ending balance at June 30, 2020	$	7.0

Beginning balance at January 1, 2020	$	4.3
Current period provision	5.6
Writeoffs	(2.9)

Ending balance at June 30, 2020	$	7.0

8. Notes Payable and Open Line of Credit

FHLB Loans

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 was renewed for one year on April 2, 2020. 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.

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, is for general corporate purposes and is intended to provide additional liquidity to State Auto P&C. The REPO based advances can be drawn for a minimum of one day and may be drawn for longer periods of time subject to the FHLB agreement, which is for a ~~one-year~~one-year term. The REPO based advances are each at an interest rate determined on the initial date of such advance. All principal and interest is due at maturity of such advance and is not pre-payable. The REPO based advances are fully secured by a pledge of specific investment securities of

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)

State Auto P&C. As of ~~March 31,~~June 30, 2020, a REPO based ~~advances~~advance in the amount of $60.0 million was outstanding at a rate of 0.38%.

State Auto P&C also has two terms loans and a line of credit with the FHLB that are more fully disclosed in Note 8 of the Notes to Consolidated Financial Statements in the 2019 Form 10-K. The foregoing REPO based advances, line of credit. and term loans from the FHLB are collectively referred to as the "FHLB Loans."

~~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)~~

9. 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 projections of full-year pre-tax loss and income tax benefit, as well as the projected impact of permanent tax differences and other items that are generally not proportional to full-year earnings (“permanent differences”), 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 provision for the current year to date period that is not meaningful. 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. The tax expense for the three months ended June 30, 2020 is the tax benefit for the six months June 30, 2020 less the tax benefit recognized at March 30, 2020.

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 six months ended ~~March 31,~~June 30, 2020 and 2019:

($ millions) Three months ended March 31
2020 2019
Amount at statutory rate $ (30.2 ) 21.0 % $ 12.9
21.0 %
Tax-exempt interest and dividends received deduction (0.7 ) 0.5
(0.7 ) (1.1 )
Other, net 1.5
(1.1 ) —
—
Federal income tax (benefit) expense (29.4 ) 20.4 % 12.2
19.9 %


($ millions)	Three months ended June 30														Six months ended June 30
	2020						2019						2020				2019
Amount at statutory rate	$	8.7	21.0	%	$	(1.6)	21.0	%	$	(21.5)	21.0	%	$	11.3	21.0	%
Tax-exempt interest and dividends received deduction	(0.4)		(0.9)		(0.7)		9.0		(1.1)		1.1		(1.4)		(2.6)
Other, net	(1.0)		(2.5)		0.9		(10.7)		0.5		(0.5)		0.9		1.5
Federal income tax expense (benefit)	7.3		17.6	%	(1.4)		19.3	%	(22.1)		21.6	%	$	10.8	19.9	%

10. 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 six months ended ~~March 31,~~June 30, 2020 and 2019:

($ millions) Pension Postretirement
Three months ended March 31
2020 2019 2020 2019
Service cost $ 1.2
$ 1.0
$ —
$ —
Interest cost 2.4
2.9
0.1
0.2
Expected return on plan assets (4.4 ) (4.2 ) —
—
Amortization of:
Negative prior service cost —
—
(1.4 ) (1.4 )
Net actuarial loss 2.3
1.5
0.1
0.1
Net periodic cost (benefit) $ 1.5
$ 1.2
$ (1.2 ) $ (1.1 )


($ millions)	Pension						Postretirement						Pension				Postretirement
	Three months ended June 30														Six months ended June 30
	2020		2019		2020		2019		2020		2019		2020		2019
Service cost	$	1.2	$	1.0	$	—	$	—	$	2.4	$	2.0	$	—	$	—
Interest cost	2.4		2.8		0.1		0.1		4.8		5.7		0.2		0.3
Expected return on plan assets	(4.3)		(4.1)		—		—		(8.7)		(8.3)		—		—
Amortization of:
Negative prior service cost	—		—		(1.3)		(1.3)		—		—		(2.7)		(2.7)
Net actuarial loss	2.3		1.5		—		—		4.6		3.0		0.1		0.1
Net periodic cost (benefit)	$	1.6	$	1.2	$	(1.2)	$	(1.2)	$	3.1	$	2.4	$	(2.4)	$	(2.3)

The Company ~~expects to contribute $15.0~~contributed $9.0 million to its pension plan infor the six months ended June 30, 2020, and expects to contribute an additional $6.0 million to its pension plan during 2020.

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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)

11. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive ~~Loss~~Income (Loss)

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


($ millions)		Unrealized Gains and Losses on Available-for-Sale Securities		Benefit Plan Items		Total
Beginning balance at April 1, 2020		$	63.0	$	(76.7)	$	(13.7)
Other comprehensive income before reclassifications		30.8		—		30.8
Amounts reclassified from AOCI ^(a)		(0.8)		1.6		0.8
Net current period other comprehensive income		30.0		1.6		31.6
Ending balance at June 30, 2020		$	93.0	$	(75.1)	$	17.9

Beginning balance at April 1, 2019		$	7.0	$	(75.6)	$	(68.6)
Other comprehensive income before reclassifications		27.4		—		27.4
Amounts reclassified from AOCI ^(a)		(1.2)		0.7		(0.5)
Net current period other comprehensive income		26.2		0.7		26.9
Ending balance at June 30, 2019		$	33.2	$	(74.9)	$	(41.7)

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

($ millions)

Unrealized Gains
and Losses on
Available-for-Sale
Securities
Benefit Plan Items Total
Beginning balance at January 1, 2020 $ 40.4
$ (78.3 ) $ (37.9 )
Other comprehensive income before reclassifications 24.5
—
24.5
Amounts reclassified from AOCI ^(a)
(1.9 ) 1.6
(0.3 )
Net current period other comprehensive income 22.6
1.6
24.2
Ending balance at March 31, 2020 $ 63.0
$ (76.7 ) $ (13.7 )

Beginning balance at January 1, 2019 $ (20.2 ) $ (76.2 ) $ (96.4 )
Other comprehensive income before reclassifications 27.3
—
27.3
Amounts reclassified from AOCI ^(a)
(0.1 ) 0.6
0.5
Net current period other comprehensive income 27.2
0.6
27.8
Ending balance at March 31, 2019 $ 7.0
$ (75.6 ) $ (68.6 )

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


($ millions)		Unrealized Gains and Losses on Available-for-Sale Securities		Benefit Plan Items		Total
Beginning balance at January 1, 2020		$	40.4	$	(78.3)	$	(37.9)
Other comprehensive income before reclassifications		55.3		—		55.3
Amounts reclassified from AOCI ^(a)		(2.7)		3.2		0.5
Net current period other comprehensive income		52.6		3.2		55.8
Ending balance at June 30, 2020		$	93.0	$	(75.1)	$	17.9

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

Other comprehensive loss before reclassifications		54.7		—		54.7
Amounts reclassified from AOCI ^(a)		(1.3)		1.3		—
Net current period other comprehensive income		53.4		1.3		54.7
Ending balance at June 30, 2019		$	33.2	$	(74.9)	$	(41.7)

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

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 reclassifications out of accumulated other comprehensive income, by component, to the Company’s condensed consolidated statement of income for the three and six months ended ~~March 31,~~June 30, 2020 and 2019:


($ millions)
Details about Accumulated Other		Three months ended June 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		$	1.0	$	1.5	Realized gain on sale of securities
		1.0		1.5		Total before tax
		(0.2)		(0.3)		Tax expense
		0.8		1.2		Net of tax
Amortization of benefit plan items
Negative prior service cost		1.6		1.6		(b)
Net actuarial loss		(3.6)		(2.4)		(b)
		(2.0)		(0.8)		Total before tax
		0.4		0.1		Tax benefit
		(1.6)		(0.7)		Net of tax
Total reclassifications for the period		$	(0.8)	$	0.5

(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		Six months ended June 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		$	3.4	$	1.6	Realized gains on sale of securities
		3.4		1.6		Total before tax
		(0.7)		(0.3)		Tax expense
		2.7		1.3		Net of tax
Amortization of benefit plan items
Negative prior service cost		3.2		3.2		(b)
Net actuarial loss		(7.3)		(4.8)		(b)
		(4.1)		(1.6)		Total before tax
		0.9		0.3		Tax benefit
		(3.2)		(1.3)		Net of tax
Total reclassifications for the period		$	(0.5)	$	—

(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
2020 2019
Unrealized gains on available-for-sale fixed maturity investments $ 2.4
$ 0.1
Realized gains on sale of securities
2.4
0.1
Total before tax
(0.5 ) —
Tax expense
1.9
0.1
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
0.5
0.2
Tax benefit
(1.6 ) (0.6 ) Net of tax
Total reclassifications for the period $ 0.3
$ (0.5 )

(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)

12. Net Earnings (Loss) ~~Earnings~~ per Common Share

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

($ and shares in millions, except per share amounts) Three months ended March 31
2020 2019
Numerator:
Net (loss) income for basic earnings per common share $ (114.6 ) $ 49.4
Denominator:
Weighted average shares for basic (loss) earnings per common share 43.7
43.3
Effect of dilutive share-based awards —
0.6
Adjusted weighted average shares for diluted net (loss) earnings per common share 43.7
43.9

Basic net (loss) earnings per common share $ (2.62 ) $ 1.14
Diluted net (loss) earnings per common share $ (2.62 ) $ 1.12


($ and shares in millions, except per share amounts)	Three months ended June 30						Six months ended June 30
	2020		2019		2020		2019
Numerator:
Net income (loss) for basic earnings (loss) per common share	$	34.3	$	(6.2)	$	(80.3)	$	43.2
Effect of dilutive share-based awards	(1.6)		—		—		0.6
Adjusted net income (loss) for diluted earnings (loss) per common share	$	32.7	$	(6.2)	$	(80.3)	$	43.8
Denominator:
Weighted average shares for basic earnings (loss) per common share	43.8		43.4		43.7		43.3
Effect of dilutive share-based awards	0.3		—		—		0.6
Adjusted weighted average shares for diluted earnings (loss) per common share	44.1		43.4		43.7		43.9

Basic net earnings (loss) per common share	$	0.78	$	(0.14)	$	(1.83)	$	1.00
Diluted net earnings (loss) per common share	$	0.74	$	(0.14)	$	(1.83)	$	1.00

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) ~~earnings~~ 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 three and six months ended ~~March 31,~~June 30, 2020 and 2019:

(shares in millions) Three months ended March 31
2020 2019
Total number of antidilutive awards 0.5
—


(shares in millions)	Three months ended June 30			Six months ended June 30
	2020	2019	2020	2019
Total number of antidilutive awards	—	0.6	0.4	—

~~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. Segment Information

The Company changed its reportable segments from four to three effective January 1, 2019. The exit from the specialty insurance business resulted in the elimination of specialty insurance as a reportable segment as it no longer is material to the Company's results and is disclosed as "specialty run-off." The 3 remaining 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.

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 financial information regarding the Company’s reportable segments and specialty run-off for the three and six months ended ~~March 31,~~June 30, 2020 and 2019:

($ millions) Three months ended March 31
2020 2019
Revenue from external sources:
Insurance operations
Personal insurance $ 198.1
$ 181.5
Commercial insurance 132.4
116.4
Specialty run-off —
4.8
Total insurance operations 330.5
302.7
Investment operations
Net investment income 18.9
19.4
Net investment (loss) gain (135.2 ) 44.9
Total investment operations (116.3 ) 64.3
All other 0.6
0.6
Total revenue from external sources 214.8
367.6
Intersegment revenue 1.6
1.6
Total revenue 216.4
369.2
Reconciling items:
Eliminate intersegment revenue (1.6 ) (1.6 )
Total consolidated revenues $ 214.8
$ 367.6
Segment (loss) income before federal income tax:
Insurance operations SAP underwriting (loss) gain
Personal insurance $ 0.3
$ 4.2
Commercial insurance (30.0 ) (5.9 )
Specialty run-off (0.4 ) (1.4 )
Total insurance operations (30.1 ) (3.1 )
Investment operations
Net investment income 18.9
19.4
Net investment (loss) gain (135.2 ) 44.9
Total investment operations (116.3 ) 64.3
All other 0.1
0.1
Total segment (loss) income before reconciling items (146.3 ) 61.3
Reconciling items:
GAAP expense adjustments 5.9
4.1
Interest expense on corporate debt (1.2 ) (1.2 )
Corporate expenses (2.4 ) (2.6 )
Total reconciling items 2.3
0.3
Total consolidated (loss) income before federal income tax $ (144.0 ) $ 61.6


($ millions)	Three months ended June 30						Six months ended June 30
	2020		2019		2020		2019
Revenue from external sources:
Insurance operations
Personal insurance	$	202.8	$	188.3	$	400.9	$	369.8
Commercial insurance	137.9		118.0		270.3		234.4
Specialty run-off	—		1.4		—		6.2
Total insurance operations	340.7		307.7		671.2		610.4
Investment operations
Net investment income	17.7		21.7		36.6		41.1
Net investment gain (loss)	75.9		10.3		(59.3)		55.2
Total investment operations	93.6		32.0		(22.7)		96.3
All other	0.5		0.4		1.1		1.0
Total revenue from external sources	434.8		340.1		649.6		707.7
Intersegment revenue	1.5		1.6		3.1		3.2
Total revenue	436.3		341.7		652.7		710.9
Reconciling items:
Eliminate intersegment revenue	(1.5)		(1.6)		(3.1)		(3.2)
Total consolidated revenues	$	434.8	$	340.1	$	649.6	$	707.7
Segment (loss) income before federal income tax:
Insurance operations SAP underwriting (loss) gain
Personal insurance	$	(40.4)	$	(29.9)	$	(40.1)	$	(25.7)
Commercial insurance	(12.4)		(12.4)		(42.4)		(18.3)
Specialty run-off	(6.3)		0.7		(6.7)		(0.7)
Total insurance operations	(59.1)		(41.6)		(89.2)		(44.7)
Investment operations
Net investment income	17.7		21.7		36.6		41.1
Net investment gain (loss)	75.9		10.3		(59.3)		55.2

Total investment operations	93.6		32.0		(22.7)		96.3
All other	—		0.1		0.1		0.2
Total segment income (loss) before reconciling items	34.5		(9.5)		(111.8)		51.8
Reconciling items:
GAAP expense adjustments	8.7		6.1		14.6		10.1
Interest expense on corporate debt	(1.3)		(1.3)		(2.5)		(2.5)
Corporate expenses	(0.3)		(2.9)		(2.7)		(5.4)
Total reconciling items	7.1		1.9		9.4		2.2
Total consolidated income (loss) before federal income tax	$	41.6	$	(7.6)	$	(102.4)	$	54.0

Investable assets attributable to the Company’s investment operations segment totaled ~~$2,667.7~~$2,770.0 million and $2,747.3 million at ~~March 31,~~June 30, 2020, and December 31, 2019, respectively.

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)

14. 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. These lawsuits are in various stages of development. The Company generally will contest these matters vigorously but may pursue settlement if appropriate. Based on currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits will be material to its results of operations or have a material adverse effect on its 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 ~~“first~~“second quarter” as used below refers to the three months ended ~~March 31~~June 30 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 (the “2019 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 ~~March 31,~~June 30, 2020 and December 31, 2019, and for the consolidated statements of income for the three and six month periods ended ~~March 31,~~June 30, 2020 and 2019. This discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2019 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 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 Form 10-K, updated by Part II, Item 1A of

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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 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 is set forth in Note 13 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 ~~are evolving~~pandemic continue to evolve rapidly and in ways that are difficult or impossible to anticipate. ~~In addition, because~~For discussions on how COVID-19 ~~did not begin to affect~~affected our ~~financial results until late~~operations, see the "Results of Operations" included in ~~the first quarter of 2020, its impact on our results for the first quarter of 2020 is not indicative of its impact on our results for the remainder of 2020.~~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.

Table of Contents

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

Table of Contents

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 six months ended ~~March 31,~~June 30, 2020 and 2019:


($ millions, except per share amounts)	Three months ended June 30									Six months ended June 30
	2020			2019			2020			2019
GAAP Basis:
Total revenues	$	434.8		$	340.1		$	649.6		$	707.7
Income (loss) before federal income taxes	$	41.6		$	(7.6)		$	(102.4)		$	54.0
Net income (loss)	$	34.3		$	(6.2)		$	(80.3)		$	43.2
Basic earnings (loss) per share	$	0.78		$	(0.14)		$	(1.83)		$	1.00
Diluted earnings (loss) per share	$	0.74		$	(0.14)		$	(1.83)		$	1.00
Stockholders’ equity	$	930.5		$	916.2
Return on average equity (LTM)	(3.9)		%	6.0		%
Book value per share	$	21.26		$	21.07
Debt to capital ratio	16.4		%	11.8		%
Cat loss and ALAE ratio	26.5		%	15.4		%	19.7		%	10.7		%
Non-cat loss and LAE ratio	53.1		%	60.9		%	56.4		%	59.6		%
Loss and LAE ratio	79.6		%	76.3		%	76.1		%	70.3		%
Expense ratio	35.1		%	35.1		%	34.9		%	35.3		%
Combined ratio	114.7		%	111.4		%	111.0		%	105.6		%
Premium written growth	11.7		%	10.9		%	12.4		%	7.9		%
Investment yield	2.8		%	3.3		%	2.8		%	3.1		%

SAP Basis:
Cat loss and ALAE ratio	26.5		%	15.4		%	19.7		%	10.7		%
Non-cat loss and ALAE ratio	46.5		%	54.5		%	50.1		%	53.4		%
ULAE ratio	6.7		%	6.7		%	6.4		%	6.5		%
Loss and LAE ratio	79.7		%	76.6		%	76.2		%	70.6		%
Expense ratio	33.6		%	33.3		%	34.2		%	34.7		%
Combined ratio	113.3		%	109.9		%	110.4		%	105.3		%

($ millions, except per share amounts) Three months ended March 31
2020 2019
GAAP Basis:
Total revenues $ 214.8
$ 367.6
(Loss) income before federal income taxes $ (144.0 ) $ 61.6
Net (loss) income $ (114.6 ) $ 49.4
Basic (loss) earnings per share $ (2.62 ) $ 1.14
Diluted (loss) earnings per share $ (2.62 ) $ 1.12
Stockholders’ equity $ 866.7
$ 895.3
Return on average equity (LTM) (8.7 )% 7.5 %
Book value per share $ 19.83
$ 20.67
Debt to capital ratio 17.4 % 12.0 %
Cat loss and ALAE ratio 12.7 % 5.9 %
Non-cat loss and LAE ratio 59.7 % 58.3 %
Loss and LAE ratio 72.4 % 64.2 %
Expense ratio 34.8 % 35.5 %
Combined ratio 107.2 % 99.7 %
Premium written growth 13.2 % 4.7 %
Investment yield 2.9 % 2.9 %

SAP Basis:
Cat loss and ALAE ratio 12.7 % 5.9 %
Non-cat loss and ALAE ratio 53.6 % 52.1 %
ULAE ratio 6.2 % 6.3 %
Loss and LAE ratio 72.5 % 64.3 %
Expense ratio 34.9 % 36.4 %
Combined ratio 107.4 % 100.7 %


	Twelve months ended June 30
	2020	2019
Net premiums written to surplus	1.7	1.4

Second Quarter and Year to Date 2020 Overview:

Twelve months ended March 31
2020 2019
Net premiums written to surplus 1.8
1.4
COVID-19

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

~~Net~~•For the three and six months ended June 30, 2020, net investment gain was $75.9 million and net investment loss was ~~$135.2~~$59.3 million, respectively, which included ~~$138.7~~$84.4 million of unrealized gains and $54.3 million of unrealized losses, respectively, from equity securities and other invested assets. The fair ~~value~~values of our equity securities and other invested assets improved from the first quarter of 2020 but were ~~adversely affected by~~still below their fair values when compared to year-end 2019 primarily due to the ~~recent~~ disruption in global financial ~~markets as a result of the COVID-19 pandemic and its potential impact on the economy including the broader global economy.~~

The SAP catastrophe loss and ALAE ratio was 12.7%, or $41.9 million. First quarter 2020 was impacted by a severe wind and hail storm, including tornadoes in Tennessee that 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 commercial.

The SAP non-cat loss and ALAE ratio was 53.6%, or $177.1 million. Non-catastrophe losses and ALAE included 3.2 points of favorable development relating to prior years, or $10.5 million, primarily from the commercial insurance

markets.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

•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 the shelter-in-place orders,

◦A decline in claim frequency in small commercial package, middle market commercial and workers' compensation due to business shut downs and 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 six months ended June 30, 2020 were 26.5% and 19.7%, respectively, or $90.4 million and $132.3 million, respectively. The 2020 second quarter and year to date were impacted by wind and hail events in the South and Midwest. Approximately 60% of the catastrophe losses for the quarter were in our homeowners line of business. The 2020 year to date was also impacted by a first quarter 2020 wind and hail storm, including tornadoes, in Tennessee that primarily impacted the middle market line of business.

•The SAP non-cat loss and ALAE ratios for the three and six months ended June 30, 2020 were 46.5% and 50.1%, or $158.5 million and $335.6 million, respectively.

◦The 2020 second quarter and year to date current accident year non-cat loss and ALAE ratios were impacted by (i) the COVID-19 pandemic discussed above, and (ii) non-cat weather losses, primarily wind and hail. The 2020 year to date current accident year non-cat loss and ALAE ratio was also impacted by large losses, including fires, in the first quarter.

◦The 2020 second quarter and year to date non-catastrophe losses and ALAE included 0.6 points and 1.9 points, respectively, of favorable development relating to prior years, or $2.0 million and $12.5 million, respectively. For the second quarter and year to date, the commercial insurance segment ~~which~~ contributed ~~$16.8~~$13.9 million and $30.7 million, respectively, of favorable development partially offset by ~~$6.4~~(i) $5.7 million and $12.1 million, respectively, of adverse development from the personal insurance ~~segment. The current accident year non-cat loss and ALAE was impacted by (i) large losses, including fires,~~segment, and (ii) ~~a lower level~~$6.2 million and $6.1 million, respectively, of ~~claims attributable~~adverse development from specialty run-off primarily due to ~~fewer miles driven later in the quarter as a result of shelter-in-place orders in response~~an adverse court decision relating to ~~the COVID-19 pandemic.~~an E&S casualty claim from 2016.

~~First~~Second Quarter and Year to Date 2019 Overview:

~~Net~~•For the three and six months ended June 30, 2019, net investment ~~gain of $44.9~~gains were $10.3 million and $55.2 million, respectively, which ~~was impacted by $48.0~~included $7.6 million and $55.6 million, respectively, of unrealized gains from equity securities and other invested assets. ~~Net investment income was $19.4 million, which included $15.1 million of income from the fixed maturities portfolio.~~

•The catastrophe loss and ALAE ~~ratio was 5.9%~~ratios for the three and six months ended June 30, 2019 were 15.4% and 10.7%, respectively, or ~~$17.7 million. During~~$47.4 million and $65.1 million, respectively. The 2019 second quarter and year to date were impacted by severe storms in the ~~first quarter 2019, catastrophe events were widespread, primarily impacting Texas, the~~South and Midwest, and ~~Georgia. Three wind and hail storms in March contributed 75% to the quarterly catastrophe losses. Approximately 70%~~approximately half of the catastrophe losses ~~for the quarter~~ occurred ~~within homeowners.~~in Texas.

•The SAP non-cat loss and ALAE ~~ratio was 52.1%~~ratios for the three and six months ended June 30, 2019 were 54.5% and 53.4%, respectively or ~~$157.8 million. Non-catastrophe~~$167.6 million and $325.4 million, respectively.

◦The 2019 second quarter and year to date current accident year non-cat loss and ALAE ratios were impacted by elevated non-cat weather losses, primarily wind and hail.

◦The 2019 second quarter and year to date non-catastrophe losses and ALAE included ~~6.9~~5.5 points and 6.2 points, respectively, of favorable development relating to prior years, or ~~$20.9 million. The~~$17.1 million and $38.0 million, respectively. For three and six months ended June 30, 2019, the personal and commercial insurance segments contributed ~~7.4~~4.7 points and 6.0 points, respectively, or ~~$22.2~~$14.3 million and $36.5 million, respectively, of favorable development.

Table of Contents

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 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 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 Form 10-K.

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

~~Table of Contents~~

~~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 six months ended ~~March 31,~~June 30, 2020 and 2019:

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

Net written premiums $ 346.6
$ (0.1 ) $ 346.5
Net earned premiums 330.5
—
330.5
Losses and LAE incurred:
Cat loss and ALAE 41.8
0.1
41.9
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (10.4 ) (0.1 ) (10.5 )
Current accident year non-cat loss and ALAE 187.5
0.1
187.6
Total non-cat loss and ALAE 177.1
—
177.1
Total Loss and ALAE 218.9
0.1
219.0
ULAE 20.6
—
20.6
Total Loss and LAE 239.5
0.1
239.6
Underwriting expenses 120.7
0.3
121.0
Net underwriting loss $ (29.7 ) $ (0.4 ) $ (30.1 )

Cat loss and ALAE ratio 12.7 %
N/M⁽¹⁾

12.7 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (3.2 )% N/M
(3.2 )%
Current accident year non-cat loss and ALAE ratio 56.8 % N/M
56.8 %
Total non-cat loss and ALAE ratio 53.6 % N/M
53.6 %
Total Loss and ALAE ratio 66.3 % N/M
66.3 %
ULAE ratio 6.2 % N/M
6.2 %
Total Loss and LAE ratio 72.5 % N/M
72.5 %
Expense ratio 34.8 % N/M
34.9 %
Combined ratio 107.3 % N/M
107.4 %

⁽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)
Three months ended June 30, 2020	Personal & Commercial			Specialty run-off		Total

Net written premiums	$	381.7		$	(0.1)	$	381.6
Net earned premiums	340.7			—		340.7
Losses and LAE incurred:
Cat loss and ALAE	90.4			—		90.4
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(8.2)			6.2		(2.0)
Current accident year non-cat loss and ALAE	160.5			—		160.5
Total non-cat loss and ALAE	152.3			6.2		158.5
Total Loss and ALAE	242.7			6.2		248.9
ULAE	22.7			—		22.7
Total Loss and LAE	265.4			6.2		271.6
Underwriting expenses	128.1			0.1		128.2
Net underwriting loss	$	(52.8)		$	(6.3)	$	(59.1)

Cat loss and ALAE ratio	26.5		%	N/M⁽¹⁾		26.5		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(2.4)		%	N/M		(0.6)		%
Current accident year non-cat loss and ALAE ratio	47.1		%	N/M		47.1		%
Total non-cat loss and ALAE ratio	44.7		%	N/M		46.5		%
Total Loss and ALAE ratio	71.2		%	N/M		73.0		%
ULAE ratio	6.7		%	N/M		6.7		%
Total Loss and LAE ratio	77.9		%	N/M		79.7		%
Expense ratio	33.6		%	N/M		33.6		%
Combined ratio	111.5		%	N/M		113.3		%

⁽¹⁾N/M = Not Meaningful

($ in millions)
Three months ended March 31, 2019 Personal & Commercial Specialty run-off Total

Net written premiums $ 305.6
$ 0.4
$ 306.0
Net earned premiums 297.9
4.8
302.7
Losses and LAE incurred:
Cat loss and ALAE 17.2
0.5
17.7
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (22.2 ) 1.3
(20.9 )
Current accident year non-cat loss and ALAE 174.7
4.0
178.7
Total non-cat loss and ALAE 152.5
5.3
157.8
Total Loss and ALAE 169.7
5.8
175.5
ULAE 19.5
(0.4 ) 19.1
Total Loss and LAE 189.2
5.4
194.6
Underwriting expenses 110.4
0.8
111.2
Net underwriting loss $ (1.7 ) $ (1.4 ) $ (3.1 )

Cat loss and ALAE ratio 5.8 %
N/M⁽¹⁾

5.9 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (7.4 )% N/M
(6.9 )%
Current accident year non-cat loss and ALAE ratio 58.6 % N/M
59.0 %
Total non-cat loss and ALAE ratio 51.2 % N/M
52.1 %
Total Loss and ALAE ratio 57.0 % N/M
58.0 %
ULAE ratio 6.6 % N/M
6.3 %
Total Loss and LAE ratio 63.6 % N/M
64.3 %
Expense ratio 36.1 % N/M
36.4 %
Combined ratio 99.7 % N/M
100.7 %

⁽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)
Three months ended June 30, 2019	Personal & Commercial			Specialty run-off		Total

Net written premiums	$	341.2		$	0.5	$	341.7
Net earned premiums	306.3			1.4		307.7
Losses and LAE incurred:
Cat loss and ALAE	44.2			3.2		47.4
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(14.3)			(2.8)		(17.1)
Current accident year non-cat loss and ALAE	183.9			0.8		184.7
Total non-cat loss and ALAE	169.6			(2.0)		167.6
Total Loss and ALAE	213.8			1.2		215.0
ULAE	20.9			(0.3)		20.6
Total Loss and LAE	234.7			0.9		235.6
Underwriting expenses	113.9			(0.2)		113.7
Net underwriting (loss) gain	$	(42.3)		$	0.7	$	(41.6)

Cat loss and ALAE ratio	14.4		%	N/M⁽¹⁾		15.4		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(4.7)		%	N/M		(5.5)		%
Current accident year non-cat loss and ALAE ratio	60.0		%	N/M		60.0		%
Total non-cat loss and ALAE ratio	55.3		%	N/M		54.5		%
Total Loss and ALAE ratio	69.7		%	N/M		69.9		%
ULAE ratio	6.8		%	N/M		6.7		%
Total Loss and LAE ratio	76.5		%	N/M		76.6		%
Expense ratio	33.4		%	N/M		33.3		%
Combined ratio	109.9		%	N/M		109.9		%

⁽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)
Six months ended June 30, 2020	Personal & Commercial			Specialty run-off		Total

Net written premiums	$	728.3		$	(0.2)	$	728.1
Net earned premiums	671.2			—		671.2
Losses and LAE incurred:
Cat loss and ALAE	132.2			0.1		132.3
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(18.6)			6.1		(12.5)
Current accident year non-cat loss and ALAE	348.0			0.1		348.1
Total non-cat loss and ALAE	329.4			6.2		335.6
Total Loss and ALAE	461.6			6.3		467.9
ULAE	43.3			—		43.3
Total Loss and LAE	504.9			6.3		511.2
Underwriting expenses	248.8			0.4		249.2
Net underwriting loss	$	(82.5)		$	(6.7)	$	(89.2)

Cat loss and ALAE ratio	19.7		%	N/M⁽¹⁾		19.7		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(2.8)		%	N/M		(1.9)		%
Current accident year non-cat loss and ALAE ratio	51.8		%	N/M		52.0		%
Total non-cat loss and ALAE ratio	49.0		%	N/M		50.1		%
Total Loss and ALAE ratio	68.7		%	N/M		69.8		%
ULAE ratio	6.5		%	N/M		6.4		%
Total Loss and LAE ratio	75.2		%	N/M		76.2		%
Expense ratio	34.2		%	N/M		34.2		%
Combined ratio	109.4		%	N/M		110.4		%

⁽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)
Six months ended June 30, 2019	Personal & Commercial			Specialty run-off		Total

Net written premiums	$	646.8		$	0.9	$	647.7
Net earned premiums	604.2			6.2		610.4
Losses and LAE incurred:
Cat loss and ALAE	61.4			3.7		65.1
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(36.5)			(1.5)		(38.0)
Current accident year non-cat loss and ALAE	358.6			4.8		363.4
Total non-cat loss and ALAE	322.1			3.3		325.4
Total Loss and ALAE	383.5			7.0		390.5
ULAE	40.4			(0.7)		39.7
Total Loss and LAE	423.9			6.3		430.2
Underwriting expenses	224.3			0.6		224.9
Net underwriting loss	$	(44.0)		$	(0.7)	$	(44.7)

Cat loss and ALAE ratio	10.2		%	N/M⁽¹⁾		10.7		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(6.0)		%	N/M		(6.2)		%
Current accident year non-cat loss and ALAE ratio	59.3		%	N/M		59.6		%
Total non-cat loss and ALAE ratio	53.3		%	N/M		53.4		%
Total Loss and ALAE ratio	63.5		%	N/M		64.1		%
ULAE ratio	6.7		%	N/M		6.5		%
Total Loss and LAE ratio	70.2		%	N/M		70.6		%
Expense ratio	34.7		%	N/M		34.7		%
Combined ratio	104.9		%	N/M		105.3		%

⁽¹⁾N/M = Not Meaningful

Table of Contents

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 six months ended ~~March 31,~~June 30, 2020 and 2019:

Table 1

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

Net written premiums $ 104.6
$ 81.6
$ 13.3
$ 199.5
Net earned premiums 104.7
82.7
10.7
198.1
Losses and LAE incurred:
Cat loss and ALAE 0.5
10.7
1.5
12.7
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE 5.2
2.2
(1.0 ) 6.4
Current accident year non-cat loss and ALAE 62.0
37.6
4.3
103.9
Total non-cat loss and ALAE 67.2
39.8
3.3
110.3
Total Loss and ALAE 67.7
50.5
4.8
123.0
ULAE 7.3
5.3
0.4
13.0
Total Loss and LAE 75.0
55.8
5.2
136.0
Underwriting expenses 32.8
25.0
4.0
61.8
Net underwriting (loss) gain $ (3.1 ) $ 1.9
$ 1.5
$ 0.3

Cat loss and ALAE ratio 0.4 % 13.0 % 14.0 % 6.4 %
Non-cat loss and ALAE ratio
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 59.3 % 45.4 % 40.0 % 52.5 %
Total non-cat loss and ALAE ratio 64.3 % 48.1 % 30.8 % 55.7 %
Total Loss and ALAE ratio 64.7 % 61.1 % 44.8 % 62.1 %
ULAE ratio 6.9 % 6.4 % 4.0 % 6.5 %
Total Loss and LAE ratio 71.6 % 67.5 % 48.8 % 68.6 %
Expense ratio 31.4 % 30.6 % 30.0 % 31.0 %
Combined ratio 103.0 % 98.1 % 78.8 % 99.6 %


($ in millions)
Three months ended June 30, 2020	Personal Auto			Homeowners			Other Personal			Total

Net written premiums	$	104.3		$	106.1		$	15.0		$	225.4
Net earned premiums	103.3			87.7			11.8			202.8
Losses and LAE incurred:
Cat loss and ALAE	4.1			54.6			7.6			66.3
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	5.9			(0.1)			(0.1)			5.7
Current accident year non-cat loss and ALAE	45.5			36.7			3.9			86.1
Total non-cat loss and ALAE	51.4			36.6			3.8			91.8
Total Loss and ALAE	55.5			91.2			11.4			158.1
ULAE	8.3			6.5			0.6			15.4
Total Loss and LAE	63.8			97.7			12.0			173.5
Underwriting expenses	33.7			31.5			4.5			69.7
Net underwriting gain (loss)	$	5.8		$	(41.5)		$	(4.7)		$	(40.4)

Cat loss and ALAE ratio	4.0		%	62.3		%	64.3		%	32.7		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	5.7		%	(0.2)		%	(0.8)		%	2.8		%
Current accident year non-cat loss and ALAE ratio	44.0		%	41.8		%	33.2		%	42.4		%
Total non-cat loss and ALAE ratio	49.7		%	41.6		%	32.4		%	45.2		%
Total Loss and ALAE ratio	53.7		%	103.9		%	96.7		%	77.9		%
ULAE ratio	8.1		%	7.5		%	4.8		%	7.6		%
Total Loss and LAE ratio	61.8		%	111.4		%	101.5		%	85.5		%
Expense ratio	32.3		%	29.7		%	30.6		%	31.0		%
Combined ratio	94.1		%	141.1		%	132.1		%	116.5		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 2


($ in millions)
Three months ended June 30, 2019	Personal Auto			Homeowners			Other Personal			Total

Net written premiums	$	110.0		$	85.5		$	9.4		$	204.9
Net earned premiums	108.4			71.8			8.1			188.3
Losses and LAE incurred:
Cat loss and ALAE	3.6			28.4			3.0			35.0
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(3.0)			(0.1)			(0.3)			(3.4)
Current accident year non-cat loss and ALAE	69.0			39.3			3.6			111.9
Total non-cat loss and ALAE	66.0			39.2			3.3			108.5
Total Loss and ALAE	69.6			67.6			6.3			143.5
ULAE	7.6			5.5			0.4			13.5
Total Loss and LAE	77.2			73.1			6.7			157.0
Underwriting expenses	33.1			25.2			2.9			61.2
Net underwriting loss	$	(1.9)		$	(26.5)		$	(1.5)		$	(29.9)

Cat loss and ALAE ratio	3.3		%	39.5		%	37.3		%	18.6		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(2.7)		%	(0.2)		%	(4.6)		%	(1.8)		%
Current accident year non-cat loss and ALAE ratio	63.7		%	54.6		%	45.5		%	59.4		%
Total non-cat loss and ALAE ratio	61.0		%	54.4		%	40.9		%	57.6		%
Total Loss and ALAE ratio	64.3		%	93.9		%	78.2		%	76.2		%
ULAE ratio	7.0		%	7.7		%	5.1		%	7.2		%
Total Loss and LAE ratio	71.3		%	101.6		%	83.3		%	83.4		%
Expense ratio	30.0		%	29.6		%	30.8		%	29.9		%
Combined ratio	101.3		%	131.2		%	114.1		%	113.3		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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

Net written premiums $ 107.7
$ 64.4
$ 8.4
$ 180.5
Net earned premiums 105.4
68.7
7.4
181.5
Losses and LAE incurred:
Cat loss and ALAE 0.9
12.4
0.7
14.0
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE (6.8 ) 0.6
(0.7 ) (6.9 )
Current accident year non-cat loss and ALAE 65.8
29.9
4.4
100.1
Total non-cat loss and ALAE 59.0
30.5
3.7
93.2
Total Loss and ALAE 59.9
42.9
4.4
107.2
ULAE 7.2
5.2
0.3
12.7
Total Loss and LAE 67.1
48.1
4.7
119.9
Underwriting expenses 32.7
21.8
2.9
57.4
Net underwriting gain (loss) $ 5.6
$ (1.2 ) $ (0.2 ) $ 4.2

Cat loss and ALAE ratio 0.8 % 18.1 % 9.6 % 7.7 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio (6.5 )% 0.9 % (8.9 )% (3.8 )%
Current accident year non-cat loss and ALAE ratio 62.4 % 43.6 % 58.6 % 55.2 %
Total non-cat loss and ALAE ratio 55.9 % 44.5 % 49.7 % 51.4 %
Total Loss and ALAE ratio 56.7 % 62.6 % 59.3 % 59.1 %
ULAE ratio 6.8 % 7.5 % 4.1 % 7.0 %
Total Loss and LAE ratio 63.5 % 70.1 % 63.4 % 66.1 %
Expense ratio 30.4 % 33.7 % 34.6 % 31.8 %
Combined ratio 93.9 % 103.8 % 98.0 % 97.9 %
Table 3


($ in millions)
Six months ended June 30, 2020	Personal Auto			Homeowners			Other Personal			Total

Net written premiums	$	208.9		$	187.7		$	28.3		$	424.9
Net earned premiums	208.0			170.4			22.5			400.9
Losses and LAE incurred:
Cat loss and ALAE	4.6			65.3			9.1			79.0
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	11.1			2.1			(1.1)			12.1
Current accident year non-cat loss and ALAE	107.5			74.3			8.2			190.0
Total non-cat loss and ALAE	118.6			76.4			7.1			202.1
Total Loss and ALAE	123.2			141.7			16.2			281.1
ULAE	15.6			11.8			1.0			28.4
Total Loss and LAE	138.8			153.5			17.2			309.5
Underwriting expenses	66.5			56.5			8.5			131.5
Net underwriting gain (loss)	$	2.7		$	(39.6)		$	(3.2)		$	(40.1)

Cat loss and ALAE ratio	2.2		%	38.3		%	40.4		%	19.7		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	5.4		%	1.2		%	(4.8)		%	3.0		%
Current accident year non-cat loss and ALAE ratio	51.6		%	43.7		%	36.4		%	47.4		%
Total non-cat loss and ALAE ratio	57.0		%	44.9		%	31.6		%	50.4		%
Total Loss and ALAE ratio	59.2		%	83.2		%	72.0		%	70.1		%
ULAE ratio	7.5		%	6.9		%	4.4		%	7.1		%
Total Loss and LAE ratio	66.7		%	90.1		%	76.4		%	77.2		%
Expense ratio	31.9		%	30.1		%	30.3		%	31.0		%
Combined ratio	98.6		%	120.2		%	106.7		%	108.2		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 4


($ in millions)
Six months ended June 30, 2019	Personal Auto			Homeowners			Other Personal			Total

Net written premiums	$	217.7		$	149.9		$	17.8		$	385.4
Net earned premiums	213.8			140.5			15.5			369.8
Losses and LAE incurred:
Cat loss and ALAE	4.5			40.8			3.7			49.0
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(9.8)			0.5			(1.0)			(10.3)
Current accident year non-cat loss and ALAE	134.8			69.2			8.0			212.0
Total non-cat loss and ALAE	125.0			69.7			7.0			201.7
Total Loss and ALAE	129.5			110.5			10.7			250.7
ULAE	14.8			10.7			0.7			26.2
Total Loss and LAE	144.3			121.2			11.4			276.9
Underwriting expenses	65.8			47.0			5.8			118.6
Net underwriting gain (loss)	$	3.7		$	(27.7)		$	(1.7)		$	(25.7)

Cat loss and ALAE ratio	2.1		%	29.0		%	24.0		%	13.2		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(4.6)		%	0.4		%	(6.6)		%	(2.8)		%
Current accident year non-cat loss and ALAE ratio	63.1		%	49.2		%	51.8		%	57.3		%
Total non-cat loss and ALAE ratio	58.5		%	49.6		%	45.2		%	54.5		%
Total Loss and ALAE ratio	60.6		%	78.6		%	69.2		%	67.7		%
ULAE ratio	6.9		%	7.6		%	4.6		%	7.1		%
Total Loss and LAE ratio	67.5		%	86.2		%	73.8		%	74.8		%
Expense ratio	30.2		%	31.4		%	32.6		%	30.8		%
Combined ratio	97.7		%	117.6		%	106.4		%	105.6		%

The personal insurance segment's net written premiums for the three and six months ended ~~March 31,~~June 30, 2020 increased ~~10.5%~~10.0% and 10.2%, respectively, when compared to the same 2019 ~~period~~periods (Tables 1 - 2)4), 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 six months ended ~~March 31,~~June 30, 2020 compared to the same 2019 period. Partially offsetting the ~~first~~2020 second quarter ~~2020~~and year to date net written premium growth was a decrease in personal auto net written premiums, which was driven by a decline in new business ~~and retention~~ primarily attributable to cumulative rate and underwriting actions taken during the fourth quarter of 2019 and the first quarter of 2020 to address personal auto profitability.

In response to the COVID-19 pandemic and its impact on our 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. As of June 1,30, 2020, 26 of our 28 personal lines states had approved this plan with renewal effective dates beginning mid-July 2020. ~~The timing of discounts will vary by state and are subject to regulatory approval.~~

The personal insurance segment's SAP catastrophe loss and ALAE ratios for the three and six months ended ~~March 31,~~June 30, 2020 ~~improved 1.3~~increased 14.1 points and 6.5 points, respectively, when compared to the same 2019 ~~period~~periods (Tables 1 - ~~2). While~~4), driven by an increase in the ~~number~~frequency and severity of ~~catastrophe events was flat compared to 2019, the 2020 events were less severe. First quarter 2019 catastrophe events were widespread, primarily impacting Texas and the Midwest. Three~~ wind and hail ~~storms~~events. The 2020 second quarter and year to date were impacted by wind and hail events in ~~March 2019 contributed~~the South and Midwest, with Texas contributing approximately ~~75%~~40% of the ~~quarterly~~reported catastrophe losses. The 2019 second quarter and year to date were also impacted by wind and hail events, with approximately 65% of the reported losses occurring in Texas.

Table of Contents

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 six months ended ~~March 31,~~June 30, 2020 ~~increased 4.3~~improved 12.4 points and 4.1 points, respectively, when compared to the same 2019 ~~period~~periods (Tables 1 - 2)4).

The personal auto SAP non-catastrophe loss and ALAE ratios for the three and six months ended ~~March 31,~~June 30, 2020 ~~increased 8.4~~improved 11.3 points and 1.5 points, respectively, when compared to the same 2019 ~~period,~~periods. The 2020 second quarter and year to date non-catastrophe loss and ALAE ratios were impacted by (i) a lower level of current accident year losses due to a lower frequency attributable to a reduction in miles driven as a result of shelter-in-place orders and individuals working remotely in response to the COVID-19 pandemic, and (ii) adverse development offrom prior accident years ~~losses partially offset by improvement in the current accident year when~~ compared to favorable development in the same 2019 ~~period.~~periods. The ~~first~~2020 second quarter ~~2020 prior accident~~and year ~~loss ratio increased 11.5 points when compared~~ to ~~the same 2019 period. The first quarter 2020~~date prior accident year adverse development was driven by (i) higher than expected severity for bodily injury claims, and (ii) higher than expected frequency for property damage claims, primarily from the 2019 accident ~~year, for bodily injury, property damage, and personal injury protection, particularly in Michigan.~~year. The 2019 prior accident year favorable development ~~was~~relates primarily ~~attributable~~ to ~~lower than anticipated~~the 2017 and 2018 accident years, with severity developing favorable versus expected for bodily injury claims from the 2018 accident year. The first quarter 2020 current accident year loss ratio improved 3.1 points when compared to the same 2019 period. The first quarter 2020 current accident year loss ratio improvement included a lower level of claims for all coverages attributable to fewer miles driven later in the quarter as a result of shelter-in-place orders in response to the COVID-19 pandemic.and uninsured motorist bodily injury claims.

The homeowners SAP non-catastrophe loss and ALAE ratios for the three and six months ended ~~March 31,~~June 30, 2020 ~~increased 3.6~~improved 12.8 points and 4.7 points, respectively, when compared to the same 2019 ~~period,~~periods, primarily driven by ~~(i) more~~an improvement in the current accident year due to lower claim frequency. Slightly offsetting the year to date improvement was adverse development of prior accident year losses, ~~and (ii) an increase in the current accident year compared to the same 2019 period. The first quarter 2020 prior accident year loss ratio increased 1.8 points when compared to the same 2019 period,~~ primarily driven by higher severity on fourth quarter 2019 third-party liability and property ~~claims. The~~claims that emerged during the first quarter ~~2020 current accident year loss ratio increased 1.8 points when compared to the same 2019 period, primarily driven by an increase in the severity~~ of ~~property losses.~~2020.

Table of Contents

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 six months ended ~~March 31,~~June 30, 2020 and 2019:

Table 35


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

Net written premiums	$	41.4		$	32.5		$	46.5		$	13.0		$	17.5		$	5.4		$	156.3
Net earned premiums	31.6			31.1			39.6			17.2			13.7			4.7			137.9
Losses and LAE incurred:
Cat loss and ALAE	0.7			11.9			6.9			—			4.6			—			24.1
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(0.2)			(3.6)			(2.9)			(4.8)			(0.3)			(2.1)			(13.9)
Current accident year non-cat loss and ALAE	15.0			17.2			22.0			12.8			6.1			1.3			74.4
Total non-cat loss and ALAE	14.8			13.6			19.1			8.0			5.8			(0.8)			60.5
Total Loss and ALAE	15.5			25.5			26.0			8.0			10.4			(0.8)			84.6
ULAE	1.7			2.1			1.1			1.7			0.6			0.1			7.3
Total Loss and LAE	17.2			27.6			27.1			9.7			11.0			(0.7)			91.9
Underwriting expenses	13.7			11.3			17.7			6.0			7.7			2.0			58.4
Net underwriting gain (loss)	$	0.7		$	(7.8)		$	(5.2)		$	1.5		$	(5.0)		$	3.4		$	(12.4)

Cat loss and ALAE ratio	2.0		%	38.4		%	17.6		%	—		%	33.4		%	(0.1)		%	17.5		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(0.6)		%	(11.7)		%	(7.3)		%	(28.0)		%	(2.0)		%	(43.9)		%	(10.1)		%
Current accident year non-cat loss and ALAE ratio	47.7		%	55.3		%	55.4		%	74.3		%	45.2		%	27.5		%	54.0		%
Total non-cat loss and ALAE ratio	47.1		%	43.6		%	48.1		%	46.3		%	43.2		%	(16.4)		%	43.9		%
Total Loss and ALAE ratio	49.1		%	82.0		%	65.7		%	46.3		%	76.6		%	(16.5)		%	61.4		%
ULAE ratio	5.3		%	6.7		%	2.8		%	9.9		%	4.5		%	1.8		%	5.3		%
Total Loss and LAE ratio	54.4		%	88.7		%	68.5		%	56.2		%	81.1		%	(14.7)		%	66.7		%
Expense ratio	33.1		%	34.8		%	38.1		%	45.5		%	43.4		%	37.6		%	37.3		%
Combined ratio	87.5		%	123.5		%	106.6		%	101.7		%	124.5		%	22.9		%	104.0		%

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

Net written premiums $ 36.4
$ 31.9
$ 40.3
$ 18.8
$ 14.8
$ 4.9
$ 147.1
Net earned premiums 29.0
30.3
36.1
19.7
12.6
4.7
132.4
Losses and LAE incurred:
Cat loss and ALAE 0.3
3.6
24.1
—
0.9
0.2
29.1
Non-cat loss and ALAE
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 16.6
19.1
27.5
13.4
4.0
3.0
83.6
Total non-cat loss and ALAE 16.5
13.7
22.4
9.4
3.2
1.6
66.8
Total Loss and ALAE 16.8
17.3
46.5
9.4
4.1
1.8
95.9
ULAE 1.5
1.6
2.1
1.7
0.5
0.2
7.6
Total Loss and LAE 18.3
18.9
48.6
11.1
4.6
2.0
103.5
Underwriting expenses 12.7
11.8
16.7
8.9
6.7
2.1
58.9
Net underwriting (loss) gain $ (2.0 ) $ (0.4 ) $ (29.2 ) $ (0.3 ) $ 1.3
$ 0.6
$ (30.0 )

Cat loss and ALAE ratio 1.1 % 12.0 % 66.7 % — % 7.3 % 3.8 % 22.0 %
Non-cat loss and ALAE ratio
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 57.2 % 62.8 % 76.4 % 68.2 % 31.6 % 63.9 % 63.1 %
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 58.0 % 57.0 % 128.9 % 47.7 % 32.5 % 37.8 % 72.4 %
ULAE ratio 5.2 % 5.3 % 5.8 % 8.9 % 3.9 % 4.0 % 5.8 %
Total Loss and LAE ratio 63.2 % 62.3 % 134.7 % 56.6 % 36.4 % 41.8 % 78.2 %
Expense ratio 35.0 % 37.0 % 41.4 % 47.7 % 45.5 % 41.7 % 40.1 %
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 6


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

Net written premiums	$	29.7		$	31.5		$	41.1		$	15.4		$	13.6		$	5.0		$	136.3
Net earned premiums	21.8			29.4			32.5			18.1			12.0			4.2			118.0
Losses and LAE incurred:
Cat loss and ALAE	—			3.5			3.9			—			1.8			—			9.2
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(1.0)			(2.9)			(2.9)			(4.5)			(0.8)			1.2			(10.9)
Current accident year non-cat loss and ALAE	14.1			17.5			16.5			14.8			6.7			2.4			72.0
Total non-cat loss and ALAE	13.1			14.6			13.6			10.3			5.9			3.6			61.1
Total Loss and ALAE	13.1			18.1			17.5			10.3			7.7			3.6			70.3
ULAE	1.3			1.7			1.7			2.0			0.5			0.2			7.4
Total Loss and LAE	14.4			19.8			19.2			12.3			8.2			3.8			77.7
Underwriting expenses	11.0			11.8			15.9			5.6			6.5			1.9			52.7
Net underwriting (loss) gain	$	(3.6)		$	(2.2)		$	(2.6)		$	0.2		$	(2.7)		$	(1.5)		$	(12.4)

Cat loss and ALAE ratio	0.2		%	11.8		%	11.8		%	—		%	15.1		%	—		%	7.8		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(5.0)		%	(10.0)		%	(8.7)		%	(24.7)		%	(6.2)		%	28.4		%	(9.2)		%
Current accident year non-cat loss and ALAE ratio	64.8		%	59.3		%	50.8		%	81.4		%	56.0		%	55.8		%	60.9		%
Total non-cat loss and ALAE ratio	59.8		%	49.3		%	42.1		%	56.7		%	49.8		%	84.2		%	51.7		%
Total Loss and ALAE ratio	60.0		%	61.1		%	53.9		%	56.7		%	64.9		%	84.2		%	59.5		%
ULAE ratio	6.1		%	5.9		%	5.2		%	10.7		%	4.3		%	4.5		%	6.3		%
Total Loss and LAE ratio	66.1		%	67.0		%	59.1		%	67.4		%	69.2		%	88.7		%	65.8		%
Expense ratio	36.9		%	37.2		%	38.7		%	36.8		%	47.5		%	38.7		%	38.6		%
Combined ratio	103.0		%	104.2		%	97.8		%	104.2		%	116.7		%	127.4		%	104.4		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 7


($ in millions)
Six months ended June 30, 2020	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total

Net written premiums	$	77.8		$	64.4		$	86.8		$	31.8		$	32.3		$	10.3		$	303.4
Net earned premiums	60.6			61.4			75.7			36.9			26.3			9.4			270.3
Losses and LAE incurred:
Cat loss and ALAE	1.0			15.5			31.0			—			5.5			0.2			53.2
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(0.3)			(9.0)			(8.0)			(8.8)			(1.1)			(3.5)			(30.7)
Current accident year non-cat loss and ALAE	31.6			36.3			49.5			26.2			10.1			4.3			158.0
Total non-cat loss and ALAE	31.3			27.3			41.5			17.4			9.0			0.8			127.3
Total Loss and ALAE	32.3			42.8			72.5			17.4			14.5			1.0			180.5
ULAE	3.2			3.7			3.2			3.4			1.1			0.3			14.9
Total Loss and LAE	35.5			46.5			75.7			20.8			15.6			1.3			195.4
Underwriting expenses	26.4			23.1			34.4			14.9			14.4			4.1			117.3
Net underwriting (loss) gain	$	(1.3)		$	(8.2)		$	(34.4)		$	1.2		$	(3.7)		$	4.0		$	(42.4)

Cat loss and ALAE ratio	1.6		%	25.3		%	41.0		%	—		%	20.8		%	1.9		%	19.7		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(0.4)		%	(14.7)		%	(10.6)		%	(24.0)		%	(4.1)		%	(36.9)		%	(11.4)		%
Current accident year non-cat loss and ALAE ratio	52.2		%	59.1		%	65.4		%	71.1		%	38.7		%	45.5		%	58.5		%
Total non-cat loss and ALAE ratio	51.8		%	44.4		%	54.8		%	47.1		%	34.6		%	8.6		%	47.1		%
Total Loss and ALAE ratio	53.4		%	69.7		%	95.8		%	47.1		%	55.4		%	10.5		%	66.8		%
ULAE ratio	5.2		%	6.0		%	4.2		%	9.3		%	4.2		%	2.9		%	5.5		%
Total Loss and LAE ratio	58.6		%	75.7		%	100.0		%	56.4		%	59.6		%	13.4		%	72.3		%
Expense ratio	34.0		%	35.9		%	39.6		%	46.8		%	44.4		%	39.6		%	38.6		%
Combined ratio	92.6		%	111.6		%	139.6		%	103.2		%	104.0		%	53.0		%	110.9		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 48


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

Net written premiums	$	24.0		$	30.5		$	34.2		$	19.5		$	12.4		$	4.5		$	125.1		Net written premiums	$	53.7		$	62.0		$	75.3		$	34.9		$	26.0		$	9.5		$	261.4
Net earned premiums	19.7			29.6			30.7			20.5			11.8			4.1			116.4			Net earned premiums	41.5			59.0			63.2			38.6			23.8			8.3			234.4
Losses and LAE incurred:																						Losses and LAE incurred:
Cat loss and ALAE	0.1			1.5			1.3			—			0.3			—			3.2			Cat loss and ALAE	0.1			5.0			5.2			—			2.1			—			12.4
Non-cat loss and ALAE																						Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(1.5		)	(4.8		)	(3.1		)	(4.5		)	(0.4		)	(1.0		)	(15.3		)	Prior accident years non-cat loss and ALAE	(2.5)			(7.7)			(6.0)			(9.0)			(1.2)			0.2			(26.2)
Current accident year non-cat loss and ALAE	11.9			15.9			26.0			13.6			5.1			2.1			74.6			Current accident year non-cat loss and ALAE	26.0			33.4			42.5			28.4			11.8			4.5			146.6
Total non-cat loss and ALAE	10.4			11.1			22.9			9.1			4.7			1.1			59.3			Total non-cat loss and ALAE	23.5			25.7			36.5			19.4			10.6			4.7			120.4
Total Loss and ALAE	10.5			12.6			24.2			9.1			5.0			1.1			62.5			Total Loss and ALAE	23.6			30.7			41.7			19.4			12.7			4.7			132.8
ULAE	1.3			1.8			1.3			1.6			0.6			0.2			6.8			ULAE	2.6			3.5			3.0			3.6			1.1			0.4			14.2
Total Loss and LAE	11.8			14.4			25.5			10.7			5.6			1.3			69.3			Total Loss and LAE	26.2			34.2			44.7			23.0			13.8			5.1			147.0
Underwriting expenses	10.7			12.5			14.2			7.4			6.2			2.0			53.0			Underwriting expenses	21.7			24.3			30.1			13.0			12.7			3.9			105.7
Net underwriting (loss) gain	$	(2.8	)	$	2.7		$	(9.0	)	$	2.4		$	—		$	0.8		$	(5.9	)	Net underwriting (loss) gain	$	(6.4)		$	0.5		$	(11.6)		$	2.6		$	(2.7)		$	(0.7)		$	(18.3)

Cat loss and ALAE ratio	0.4		%	5.1		%	4.3		%	—		%	2.2		%	—		%	2.7		%	Cat loss and ALAE ratio	0.3		%	8.5		%	8.2		%	—		%	8.7		%	—		%	5.3		%
Non-cat loss and ALAE ratio																						Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(7.3		)%	(16.2		)%	(10.2		)%	(22.0		)%	(3.7		)%	(23.5		)%	(13.1		)%	Prior accident years non-cat loss and ALAE ratio	(6.1)		%	(13.1)		%	(9.4)		%	(23.2)		%	(4.9)		%	2.8		%	(11.1)		%
Current accident year non-cat loss and ALAE ratio	60.2		%	53.8		%	84.7		%	66.4		%	43.0		%	52.6		%	64.1		%	Current accident year non-cat loss and ALAE ratio	62.6		%	56.5		%	67.3		%	73.4		%	49.6		%	54.2		%	62.5		%
Total non-cat loss and ALAE ratio	52.9		%	37.6		%	74.5		%	44.4		%	39.3		%	29.1		%	51.0		%	Total non-cat loss and ALAE ratio	56.5		%	43.4		%	57.9		%	50.2		%	44.7		%	57.0		%	51.4		%
Total Loss and ALAE ratio	53.3		%	42.7		%	78.8		%	44.4		%	41.5		%	29.1		%	53.7		%	Total Loss and ALAE ratio	56.8		%	51.9		%	66.1		%	50.2		%	53.4		%	57.0		%	56.7		%
ULAE ratio	6.6		%	6.1		%	4.2		%	8.1		%	5.0		%	4.4		%	5.9		%	ULAE ratio	6.3		%	6.0		%	4.7		%	9.3		%	4.6		%	4.4		%	6.1		%
Total Loss and LAE ratio	59.9		%	48.8		%	83.0		%	52.5		%	46.5		%	33.5		%	59.6		%	Total Loss and LAE ratio	63.1		%	57.9		%	70.8		%	59.5		%	58.0		%	61.4		%	62.8		%
Expense ratio	44.8		%	41.0		%	41.5		%	37.9		%	50.0		%	44.6		%	42.4		%	Expense ratio	40.5		%	39.1		%	39.9		%	37.4		%	48.7		%	41.5		%	40.4		%
Combined ratio	104.7		%	89.8		%	124.5		%	90.4		%	96.5		%	78.1		%	102.0		%	Combined ratio	103.6		%	97.0		%	110.7		%	96.9		%	106.7		%	102.9		%	103.2		%

The commercial insurance segment's net written premiums for the three and six months ended ~~March 31,~~June 30, 2020, increased ~~17.6%~~14.7% and 16.1%, respectively, when compared to the same 2019 ~~period~~periods (Tables 35 - 4)8), primarily driven by new business growth and rate increases in commercial auto and middle market ~~commercial. In February 2020,~~commercial and new business growth in farm & ranch. The new business growth in farm & ranch was driven by the continued state rollout on the State Auto Connect platform ~~was launched for~~during the second quarter, which is now live in 24 states. The rollout of farm & ranch in three new states and two existing states, which contributed to the 19.4% increase in net written premiums for this product when compared to the same 2019 period. Farm & ranch will continue to launch on the State Auto Connect platform in its remaining states will continue throughout 2020. Additionally, middle market commercial was launched on the State Auto Connect platform in its first state in March 2020 and launched in six more states in May 2020, with subsequent state rollouts scheduled throughout 2020 and the first half of 2021.

The commercial insurance segment's SAP catastrophe loss and ALAE ~~ratio~~ratios for the three and six months ended ~~March 31,~~June 30, 2020 increased ~~19.3~~9.7 points and 14.4 points, respectively, when compared to the same 2019 ~~period~~periods (Tables 35 - 4)8), with most of the catastrophe losses impacting small commercial package and middle market ~~commercial~~commercial. The 2020 second quarter and ~~small commercial package. While~~year to date cat loss and ALAE ratios were impacted by (i) an increase in the ~~number~~frequency and severity of ~~catastrophe~~weather events ~~was flat~~when compared to the same 2019 periods, and (ii) property losses resulting from the civil unrest which added 4.6 points and 2.4 points, respectively, to the cat loss and LAE ratios. Year to date 2020 ~~events were more severe. During the first quarter 2020,~~was also impacted by a severe wind and hail storm, including tornadoes, in Tennessee, which contributed ~~19.0~~9.0 points to the ~~first quarter~~year to date cat loss and ALAE ratio, of which ~~11.4~~5.7 points were from three large losses in Nashville.

The commercial insurance segment’s SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and six months ended ~~March 31,~~June 30, 2020 improved ~~0.6~~7.8 points and 4.3 points, respectively, when compared to the same 2019 ~~period~~periods (Tables 35 - 4)8).

The commercial auto SAP non-catastrophe loss and ALAE ratio for the three months ended March 31, 2020 increased 4.0 points when compared to the same 2019 period, primarily driven by less favorable development of prior accident year losses. The first quarter 2019 prior accident year favorable development was primarily attributable to lower than anticipated severity from the

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

~~2017 accident year. Partially offsetting the lower level of favorable development for the quarter was improvement in the current accident year non-cat~~The commercial auto SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and six months ended June 30, 2020 improved 12.7 points and 4.7 points, respectively, when compared to the same 2019 ~~period, primarily~~periods, driven by aimprovement in the current accident year. The 2020 second quarter and year to date current accident year were impacted by lower ~~level of~~ claims frequency attributable to ~~fewer~~a reduction in miles driven ~~later in the quarter~~ as a result of shelter-in-place orders and individuals working remotely in response to the COVID-19 pandemic.

The small commercial package SAP non-catastrophe loss and ALAE ratio for the three months ended March 31, 2020 increased 7.4 points when compared to the same 2019 period, driven by increased severity of current accident year property losses, primarily related to fire. Partially offsetting the ~~increase in the current accident~~2020 second quarter and year ~~non-cat loss and ALAE ratio~~to date improvement was ~~greater~~less favorable development of prior accident year losses when compared to the same 2019 ~~period,~~periods. The 2019 prior accident year favorable development was primarily attributable to lower than ~~expected bodily injury~~anticipated severity from ~~multiple~~the 2017 accident ~~years.~~year.

The small commercial package SAP non-catastrophe loss and ALAE ratios for the three and six months ended June 30, 2020 improved 5.7 points and increased 1.0 points, respectively, when compared to the same 2019 periods. The 2020 second quarter and year to date current accident year ratios were impacted by COVID-19, reflecting the impact of (i) a decline in claim frequency as a result of business shut downs and reduced business activity, and (ii) increased legal defense costs due to litigation involving business interruption insurance claims which added 6.6 points and 3.3 points, respectively to the quarter and year to date non-cat loss ratios. The 2020 quarter and year to date current accident year ratios were also impacted by increased severity of property losses, primarily related to fire.

The middle market commercial SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and six months ended ~~March 31,~~June 30, 2020 increased 6.0 points and improved ~~12.3~~3.1 points, respectively, when compared to the same 2019 periods. The second quarter 2020 increase was primarily driven by a higher level of fire losses in the current accident year when compared to the same 2019 period. ~~The first~~Despite the 2020 second quarter fire losses, the 2020 ~~improvement was driven by (i) a lower level of~~year to date current accident year ~~losses~~ratio improved when compared to the same 2019 period, which was impacted by large fire losses in the first quarter of 2019. The 2020 second quarter and year to date current accident year ratios were also impacted by COVID-19, reflecting the impact of (i) a decline in claim frequency as a result of business shut downs and reduced business activity, and (ii) increased legal defense costs due to litigation involving business interruption insurance claims which added 2.2 points and 1.2 points, respectively, to the non-cat loss ratios. In addition, the 2020 year to date non-cat loss and ALAE ratio was impacted by greater favorable development of prior accident year losses, primarily attributable to lower than expected bodily injury severity from multiple accident ~~years.~~years when compared to the same 2019 period.

The workers' compensation SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and six months ended ~~March 31,~~June 30, 2020 ~~increased 3.3~~improved 10.4 points and 3.1 points, respectively, when compared to the same 2019 ~~period.~~periods. The ~~first~~2020 second quarter ~~2020 was~~and year to date ratios were impacted by ~~(i) a higher~~lower current accident year loss ~~ratio, which reflected elevated claim severity~~ratios, primarily due to a large loss in 2019 that added 14.9 points and ~~continued pricing pressure,~~7.0 points, respectively, to the 2019 loss ratios. The 2020 quarter and ~~(ii) slightly less favorable development of prior~~year to date current accident year ~~losses when compared~~ratios were impacted by increased 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 which added 16.0 points and 7.5 points, respectively, to the ~~same 2019 period.~~2020 second quarter and year to date non-cat loss ratios, which was mostly offset by a decline in claim frequency due to business shut downs and reduced business and employment activity in response to the COVID-19 pandemic.

The farm & ranch SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and six months ended ~~March 31,~~June 30, 2020 improved ~~14.1~~6.6 points and 10.1 points, respectively, when compared to the same 2019 ~~period,~~periods, primarily due to lower claim frequency in the current accident year.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

(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 six months ended ~~March 31,~~June 30, 2020 and 2019:


($ millions)	Three months ended March 31									($ millions)	Three months ended June 30										Six months ended June 30
	2020			2019			$ Change				2020		2019		$ Change		2020		2019		$ Change
	(Redundancy)/Deficiency										(Redundancy)/Deficiency								(Redundancy)/Deficiency
Non-cat loss and ALAE:										Non-cat loss and ALAE:
Personal Insurance Segment:										Personal Insurance Segment:
Personal Auto	$	5.2		$	(6.8	)	$	12.0		Personal Auto	$	5.9	$	(3.0)	$	8.9	$	11.1	$	(9.8)	$	20.9
Homeowners	2.2			0.6			1.6			Homeowners	(0.1)		(0.1)		—		2.1		0.5		1.6
Other Personal	(1.0		)	(0.7		)	(0.3		)	Other Personal	(0.1)		(0.3)		0.2		(1.1)		(1.0)		(0.1)
Total Personal Insurance Segment	6.4			(6.9		)	13.3			Total Personal Insurance Segment	5.7		(3.4)		9.1		12.1		(10.3)		22.4

Commercial Insurance Segment:										Commercial Insurance Segment:
Commercial Auto	(0.1		)	(1.5		)	1.4			Commercial Auto	(0.2)		(1.0)		0.8		(0.3)		(2.5)		2.2
Small Commercial Package	(5.4		)	(4.8		)	(0.6		)	Small Commercial Package	(3.6)		(2.9)		(0.7)		(9.0)		(7.7)		(1.3)
Middle Market Commercial	(5.1		)	(3.1		)	(2.0		)	Middle Market Commercial	(2.9)		(2.9)		—		(8.0)		(6.0)		(2.0)
Workers' Compensation	(4.0		)	(4.5		)	0.5			Workers' Compensation	(4.8)		(4.5)		(0.3)		(8.8)		(9.0)		0.2
Farm & Ranch	(0.8		)	(0.4		)	(0.4		)	Farm & Ranch	(0.3)		(0.8)		0.5		(1.1)		(1.2)		0.1
Other Commercial	(1.4		)	(1.0		)	(0.4		)	Other Commercial	(2.1)		1.2		(3.3)		(3.5)		0.2		(3.7)
Total Commercial Insurance Segment	(16.8		)	(15.3		)	(1.5		)	Total Commercial Insurance Segment	(13.9)		(10.9)		(3.0)		(30.7)		(26.2)		(4.5)


Specialty run-off	(0.1		)	1.3			(1.4		)	Specialty run-off	6.2		(2.8)		9.0		6.1		(1.5)		7.6
Cat Loss and ALAE	0.3			(0.8		)	1.1			Cat Loss and ALAE	0.9		1.6		(0.7)		1.2		0.8		0.4
ULAE	2.7			0.3			2.4			ULAE	1.0		(0.7)		1.7		3.7		(0.4)		4.1
Total	$	(7.5	)	$	(21.4	)	$	13.9		Total	$	(0.1)	$	(16.2)	$	16.1	$	(7.6)	$	(37.6)	$	30.0

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 ~~March 31,~~June 30, 2020 and December 31, 2019:


($ millions)	March 31, 2020		December 31, 2019		$ Change			($ millions)	June 30, 2020		December 31, 2019		$ Change
Personal Insurance Segment:								Personal Insurance Segment:
Personal Auto	$	154.8	$	162.9	$	(8.1	)	Personal Auto	$	155.5	$	162.9	$	(7.4)
Homeowners	74.8		69.2		5.6			Homeowners	97.1		69.2		27.9
Other Personal	15.1		15.1		—			Other Personal	17.8		15.1		2.7
Total Personal Insurance Segment	244.7		247.2		(2.5		)	Total Personal Insurance Segment	270.4		247.2		23.2
Commercial Insurance Segment:								Commercial Insurance Segment:
Commercial Auto	77.7		76.7		1.0			Commercial Auto	80.9		76.7		4.2
Small Commercial Package	110.8		110.5		0.3			Small Commercial Package	116.6		110.5		6.1
Middle Market Commercial	172.9		152.8		20.1			Middle Market Commercial	174.7		152.8		21.9
Workers’ Compensation	188.0		187.8		0.2			Workers’ Compensation	187.4		187.8		(0.4)
Farm & Ranch	13.4		13.3		0.1			Farm & Ranch	16.8		13.3		3.5
Other Commercial	32.5		30.9		1.6			Other Commercial	30.9		30.9		—
Total Commercial Insurance Segment	595.3		572.0		23.3			Total Commercial Insurance Segment	607.3		572.0		35.3
Specialty run-off:								Specialty run-off:
E&S Property	23.7		27.8		(4.1		)	E&S Property	19.8		27.8		(8.0)
E&S Casualty	133.4		145.9		(12.5		)	E&S Casualty	125.6		145.9		(20.3)
Programs	49.8		60.0		(10.2		)	Programs	45.8		60.0		(14.2)
Total Specialty run-off	206.9		233.7		(26.8		)	Total Specialty run-off	191.2		233.7		(42.5)
Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable and allowance for credit losses	$	1,046.9	$	1,052.9	$	(6.0	)	Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable and allowance for credit losses	$	1,068.9	$	1,052.9	$	16.0

Losses and loss expenses payable ~~decreased $6.0~~increased $16.0 million since December 31, 2019 primarily due to ~~the specialty run-off business, partially offset by~~ a higher level of catastrophe losses in the commercial and personal insurance ~~segment~~segments discussed ~~above.~~above, partially offset by the run-off of specialty 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 the 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.

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 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 six months ended ~~March 31,~~June 30, 2020 were ~~$114.9~~$119.5 million and $234.4 million, respectively, compared to ~~$107.6~~$107.9 million and $215.5 million, respectively, for the same 2019 ~~period.~~periods. The ~~increase was~~second quarter and year to date increases were driven by ~~an increase in~~(i) amortization of deferred acquisition costs due to growth, (ii) IT expenses, including electronic data processing equipment and software cost amortization and IT consulting, ~~partially offset by a decrease~~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 second quarter and year to date increases in acquisition and operating expenses were decreases in estimated variable associate ~~compensation.~~compensation and travel-related expenses when compared to the same 2019 periods.

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 Form 10-K.

Composition of Investment Portfolio

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

($ millions) March 31, 2020 % of Total December 31, 2019 % of Total
Cash and cash equivalents $ 126.6
4.7 % $ 78.0
2.8 %
Fixed maturities, at fair value:
Fixed maturities 2,016.9
75.6 % 1,992.3
72.5 %
Treasury inflation-protected securities 111.4
4.2 % 135.6
5.0 %
Total fixed maturities 2,128.3
79.8 % 2,127.9
77.5 %
Notes receivable from affiliate 70.0
2.6 % 70.0
2.5 %
Equity securities:
Large-cap securities 86.9
3.3 % 104.4
3.8 %
Mutual and exchange traded funds 188.8
7.1 % 290.8
10.6 %
Total equity securities 275.7
10.4 % 395.2
14.4 %
Other invested assets:
International funds 42.6
1.6 % 56.4
2.1 %
Other invested assets 12.0
0.4 % 13.3
0.5 %
Total other invested assets 54.6
2.0 % 69.7
2.6 %
Other invested assets, at cost 12.5
0.5 % 6.5
0.2 %
Total portfolio $ 2,667.7
100.0 % $ 2,747.3
100.0 %


($ millions)	June 30, 2020		% of Total		December 31, 2019		% of Total
Cash and cash equivalents	$	174.6	6.3	%	$	78.0	2.8	%
Fixed maturities, at fair value:
Fixed maturities	1,982.0		71.5	%	1,992.3		72.5	%
Treasury inflation-protected securities	115.9		4.2	%	135.6		5.0	%
Total fixed maturities	2,097.9		75.7	%	2,127.9		77.5	%
Notes receivable from affiliate	70.0		2.5	%	70.0		2.5	%
Equity securities:
Large-cap securities	111.9		4.0	%	104.4		3.8	%
Mutual and exchange traded funds	242.7		8.8	%	290.8		10.6	%
Total equity securities	354.6		12.8	%	395.2		14.4	%
Other invested assets:
International funds	47.1		1.7	%	56.4		2.1	%
Other invested assets	13.3		0.5	%	13.3		0.5	%
Total other invested assets	60.4		2.2	%	69.7		2.6	%
Other invested assets, at cost	12.5		0.5	%	6.5		0.2	%
Total portfolio	$	2,770.0	100.0	%	$	2,747.3	100.0	%

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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 ~~March 31,~~June 30, 2020:


($ millions)	Amortized cost		Fair value		($ millions)	Amortized cost		Fair value
Due in 1 year or less	$	106.6	$	106.8	Due in 1 year or less	$	121.1	$	122.4
Due after 1 year through 5 years	586.1		594.4		Due after 1 year through 5 years	525.8		552.0
Due after 5 years through 10 years	149.9		154.9		Due after 5 years through 10 years	213.3		223.7
Due after 10 years	579.7		622.6		Due after 10 years	543.7		595.0
U.S. government agencies mortgage-backed securities	629.5		649.6		U.S. government agencies mortgage-backed securities	579.6		604.8
Total	$	2,051.8	$	2,128.3	Total	$	1,983.5	$	2,097.9

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 ~~4.52~~4.30 and 4.17 as of ~~March 31,~~June 30, 2020, and December 31, 2019, respectively.

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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 six months ended ~~March 31,~~June 30, 2020 and 2019:


($ millions)	Three months ended March 31						($ millions)	Three months ended June 30									Six months ended June 30
	2020			2019				2020			2019			2020			2019
Gross investment income:							Gross investment income:
Fixed maturities	$	15.1		$	15.1		Fixed maturities	$	14.5		$	17.3		$	29.6		$	32.4
Equity securities	3.1			2.8			Equity securities	2.6			3.1			5.7			5.9
Other	1.0			1.7			Other	0.8			1.4			1.8			3.1
Total gross investment income	19.2			19.6			Total gross investment income	17.9			21.8			37.1			41.4
Less: Investment expenses	0.3			0.2			Less: Investment expenses	0.2			0.1			0.5			0.3
Net investment income	$	18.9		$	19.4		Net investment income	$	17.7		$	21.7		$	36.6		$	41.1

Average invested assets (at cost)	$	2,623.9		$	2,675.5		Average invested assets (at cost)	$	2,552.9		$	2,629.8		$	2,579.5		$	2,656.1
Annualized investment yield	2.9		%	2.9		%	Annualized investment yield	2.8		%	3.3		%	2.8		%	3.1		%
Annualized investment yield, after tax	2.4		%	2.4		%	Annualized investment yield, after tax	2.3		%	2.7		%	2.3		%	2.5		%
Net investment income, after tax	$	15.6		$	16.0		Net investment income, after tax	$	14.4		$	17.8		$	30.0		$	33.8
Effective tax rate	17.2		%	17.4		%	Effective tax rate	18.9		%	17.9		%	18.0		%	17.6		%

The following table sets forth realized gains (losses) and the proceeds received from the sale of our investment portfolio for the three and six months ended ~~March 31,~~June 30, 2020 and 2019:


($ in millions)	Three months ended March 31										($ in millions)	Three months ended June 30														Six months ended June 30
	2020					2019						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 (losses)		Proceeds received on sale		Realized gains (losses)		Proceeds received on sale
Realized gains:											Realized gains:
Fixed maturities	$	3.6		$	78.9	$	0.1		$	65.6	Fixed maturities	$	1.9	$	85.5	$	1.5	$	133.1	$	5.5	$	164.4	$	1.6	$	198.7
Equity securities	2.1			7.2		0.3			2.7		Equity securities	0.2		5.0		1.2		7.5		2.3		12.2		1.5		10.2

Total realized gains	5.7			86.1		0.4			68.3		Total realized gains	2.1		90.5		2.7		140.6		7.8		176.6		3.1		208.9
Realized losses:											Realized losses:
Fixed maturities	(1.2		)	4.6		—			—		Fixed maturities	(0.9)		19.3		—		—		(2.1)		23.9		—		—
Equity securities	(1.2		)	6.0		(2.2		)	10.0		Equity securities	(9.7)		11.8		—		—		(10.9)		17.8		(2.2)		10.1
Other invested assets	—			0.4		—			0.3		Other invested assets	—		0.2		—		0.3		—		0.6		—		0.6
Total realized losses	(2.4		)	11.0		(2.2		)	10.3		Total realized losses	(10.6)		31.3		—		0.3		(13.0)		42.3		(2.2)		10.7
Net realized gains (losses) on investments	$	3.3		$	97.1	$	(1.8	)	$	78.6
Net realized (losses) gains on investments											Net realized (losses) gains on investments	$	(8.5)	$	121.8	$	2.7	$	140.9	$	(5.2)	$	218.9	$	0.9	$	219.6

When a fixed maturity has been determined to have an impairment, the impairment charge ~~is separated into an amount~~ representing the credit loss ~~which~~ 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 ~~March 31,~~June 30, 2020 and determined that no credit impairment existed in the gross unrealized holding losses. See Note 2, “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 ~~March 31,~~June 30, 2020, 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 ~~March 31,~~June 30, 2020:


($ millions, except # of positions)	Cost or amortized cost		Gross unrealized holding gains		Gross unrealized holding losses			Fair value		($ millions, except # of positions)	Cost or amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
Available-for-sale fixed maturities:										Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	559.3	$	38.0	$	(0.2	)	$	597.1	U.S. treasury securities and obligations of U.S. government agencies	$	518.9	$	43.6	$	—	$	562.5
Obligations of states and political subdivisions	392.9		20.8		—			413.7		Obligations of states and political subdivisions	391.5		25.7		—		417.2
Corporate securities	470.1		5.0		(7.2		)	467.9		Corporate securities	493.5		20.2		(0.3)		513.4
U.S. government agencies mortgage-backed securities	629.5		24.7		(4.6		)	649.6		U.S. government agencies mortgage-backed securities	579.6		26.7		(1.5)		604.8
Total available-for-sale fixed maturities	$	2,051.8	$	88.5	$	(12.0	)	$	2,128.3	Total available-for-sale fixed maturities	$	1,983.5	$	116.2	$	(1.8)	$	2,097.9

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 ~~March 31,~~June 30, 2020, and December 31, 2019, and the change in unrealized holding gains, net of deferred tax, for the ~~three~~six months ended ~~March 31,~~June 30, 2020:


($ millions)	March 31, 2020			December 31, 2019			$ Change			($ millions)	June 30, 2020		December 31, 2019		$ Change
Available-for-sale investments:										Available-for-sale investments:
Unrealized holding gains (losses):
Unrealized holding gains:										Unrealized holding gains:
Fixed maturities	$	76.5		$	47.9		$	28.6		Fixed maturities	$	114.4	$	47.9	$	66.5
Net deferred federal income tax	(16.1		)	(10.1		)	(6.0		)	Net deferred federal income tax	(24.0)		(10.1)		(13.9)
Unrealized gains, net of tax	$	60.4		$	37.8		$	22.6		Unrealized gains, net of tax	$	90.4	$	37.8	$	52.6

At ~~March 31,~~June 30, 2020, State Auto P&C had U.S. government agencies mortgage-backed fixed maturity securities with a carrying value of approximately $166.5 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 the FHLB 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 3, “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 ~~March 31,~~June 30, 2020, and December 31, 2019.

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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 six months ended ~~March 31,~~June 30, 2020 and 2019.

($ millions) Three months ended March 31
2020 2019
(Loss) income before federal income taxes $ (144.0 ) $ 61.6
Federal income tax (benefit) expense
Current —
(0.4 )
Deferred (29.4 ) 12.6
Total federal income tax (benefit) expense (29.4 ) 12.2
Net (loss) income $ (114.6 ) $ 49.4


($ millions)	Three months ended June 30						Six months ended June 30
	2020		2019		2020		2019
Income (loss) before federal income taxes	$	41.6	$	(7.6)	$	(102.4)	$	54.0
Federal income tax expense (benefit)
Current	(0.4)		—		(0.4)		(0.4)
Deferred	7.7		(1.4)		(21.7)		11.2
Total federal income tax expense (benefit)	7.3		(1.4)		(22.1)		10.8
Net income (loss)	$	34.3	$	(6.2)	$	(80.3)	$	43.2

The effective tax rate for the three and six months ended ~~March 31,~~June 30, 2020 was ~~20.4%~~17.6% and 21.6%, respectively, compared to 19.3% and 19.9%, respectively, for the same 2019 ~~period.~~periods.

For additional information, see Note 9 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 and a $60.0 million short-term loan arrangement 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, State Auto Mutual receives all premiums 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.

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 ~~March 31,~~June 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 it's included in "other expenses" on the condensed consolidated statements of income and in “due to/from affiliates” on the Company's 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 six months ended ~~March 31,~~June 30, 2020.

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 ~~March 31,~~June 30, 2020, and December 31, 2019, we had ~~$126.6~~$174.6 million and $78.0 million, respectively, in cash and cash equivalents, and ~~$2,458.6~~$2,512.9 million and $2,592.8 million, respectively, of total investments. Our available-for-sale fixed maturities included ~~$9.1~~$9.2 million and $9.3 million of securities on deposit with insurance regulators as required by law at ~~March 31,~~June 30, 2020, and December 31, 2019; 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.

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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Cash used in operating activities was ~~$28.0~~$32.2 million compared to ~~$30.4~~$66.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 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 provided by investing activities was ~~$20.1~~$75.4 million compared to ~~$46.8~~$56.6 million for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively. The change was primarily ~~driven by decreases in~~due to the ~~purchases~~accumulation of sales and ~~maturities~~maturity proceeds, primarily fixed income, for reinvestment during the second half of ~~fixed maturities and an increase in the sales of fixed maturities.~~2020.

Cash provided by financing activities was ~~$56.5~~$53.4 million and cash used in financing activities was ~~$3.9~~$5.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively. The change was primarily driven by proceeds from the new FHLB REPO loan.

Borrowing Arrangements

FHLB Loans

~~As of March 31, 2020,~~ State Auto P&C ~~had~~has an Open Line of Credit Commitment (the "Prior OLC") with the FHLB that provided it with a $100.0 million open line of credit available for general corporate purposes. As of March 31, 2020, no advances had been made under the Prior OLC. The Prior OLC matured on April 2, 2020, and on that date, State Auto P&C entered into a new Open Line of Credit Commitment (the “New OLC”"OLC") with the FHLB that provides itState Auto P&C with a $100.0 million one-year open line of credit available for general corporate purposes. The OLC was renewed for one year on April 2, 2020. 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.

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, is for general corporate purposes and is intended to provide additional liquidity to State Auto P&C. REPO based advances can be drawn for a minimum of one day and may be drawn for longer periods of time subject to the FHLB agreement, which is for a one-year term. The REPO based advances are each at an interest rate determined on the initial date of such advance. All principal and interest is due at maturity of such advance and is not pre-payable. The REPO based advances are fully secured by a pledge of specific investment securities of State Auto P&C. As of ~~March 31,~~June 30, 2020, a REPO based advance in the amount of $60.0 million was outstanding at a rate of 0.38%.

The 2016 and 2018 FHLB Loans are fully secured by a pledge of specific investment securities of State Auto P&C.

State Auto P&C has outstanding two term loans with the FHLB in the principal amounts of $21.5 million (the “2016 FHLB Loan”) and $85.0 million (the "2018 FHLB Loan"). The 2016 FHLB Loan matures in September 2021 and may be prepaid without penalty. The 2016 FHLB Loan 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 1.73%. 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 2016 and 2018 FHLB Loans are 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 ~~March 31,~~June 30, 2020, and 2019 were ~~5.78%~~4.55% and ~~6.83%~~6.72%, 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.

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~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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, ~~2019.~~2020. Under this reinsurance agreement, we retain the first ~~$75.0~~$90.0 million of catastrophe loss, each occurrence, with a 5.0% co-participation on the next ~~$125.0~~$180.0 million of covered loss, each ~~occurrence.~~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 ~~$75.0~~$90.0 million up to ~~$200.0~~$270.0 million, each occurrence. The State Auto Group is responsible for catastrophe losses above ~~$200.0~~$270.0 million. There is also an automatic restatement of the limit, for ~~125%~~100% of the deposit premium.

Property Per Risk Treaty

As of ~~July~~April 1, ~~2019,~~2020, the State Auto Group renewed the property per risk excess of loss reinsurance ~~agreement. This reinsurance~~ agreement provides individual property risk coverage for the State Auto Group for losses exceeding $4.0 million. The reinsurers are responsible for 100.0% of the loss excess of the $4.0 million retention for property business up to $20.0 million of covered loss which is broken down into two layers of $6.0 million and $10.0 million. During the three months ended March 31, 2020, the limits of the in-force property per risk treaty were exhausted, meaning reinsurance coverage was no longer available on individual property losses in excess of $4.0 million. As a result, the State Auto Group entered into a new property per risk excess of loss reinsurance agreement effective April 1, 2020 for a 15-month term. Under ~~the new~~this reinsurance agreement, ~~we retain~~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, ~~2019,~~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 June 30, 2020, 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)

~~Regulatory Considerations~~

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

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 ~~June 20, 2019,~~July 16, 2020, A.M. Best ~~reaffirmed~~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 Form 10-K. There have been no material changes from the information reported regarding Market Risk in the 2019 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.~~

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.

Table of Contents

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 ~~will~~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, ~~purported~~putative class action litigation has been recently 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. However, over time such action has a negative impact on our cash flows, and if this situation would continue for a significant period of time, we could be forced to sell investments to compensate for the decreased cash flow.

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 ~~decrease~~increase in ~~the~~volatility in financial markets, which has had a significant negative impact on our investment portfolio. AnA prolonged economic recession caused by COVID-19 ~~would~~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.

Table of Contents

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 ~~over~~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 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. ~~We anticipate this continuing and perhaps becoming more significant in the second quarter of 2020, but given~~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. In response to economic decline, businesses may undertake new activities that they will be less familiar with that may result in more of their workers getting injured. However, due to business closures there could be reduced exposure as a result.

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 ~~as more states have implemented stay at home and social distancing measures.~~due to concerns with in-person contact. We may see an increase in commercial property claims due to unoccupied businesses. ~~We have begun to see~~Since the outset of the pandemic, there has been a decrease in frequency of personal auto claims attributed to ~~fewer~~a reduction in miles ~~being~~ driven by insureds as a result of ~~the shelter at home~~shelter-in-place orders ~~in place around the country.~~and working remotely. 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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Item 6. Exhibits

Exhibit
No.

Description of Exhibits

10.01

~~Exhibit~~

~~No.~~Form of Time Based Deferred Stock Unit Award Agreement under the State Auto Financial Corporation 2017 Long-Term Incentive Plan

~~Description of Exhibits~~Included herein.

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

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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)

Table of Contents

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

		~~State Auto Financial Corporation~~

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



($ millions)	Allowance for credit losses on reinsurance recoverables
Beginning balance at January 1, 2020	$	—
Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020	0.7
Credit loss expense	0.2
Ending balance at March 31, 2020	$	0.9



	Twelve months ended March 31
	2020	2019
Net premiums written to surplus	1.8	1.4



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

Net written premiums	$	346.6		$	(0.1	)	$	346.5
Net earned premiums	330.5			—			330.5
Losses and LAE incurred:
Cat loss and ALAE	41.8			0.1			41.9
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(10.4		)	(0.1		)	(10.5		)
Current accident year non-cat loss and ALAE	187.5			0.1			187.6
Total non-cat loss and ALAE	177.1			—			177.1
Total Loss and ALAE	218.9			0.1			219.0
ULAE	20.6			—			20.6
Total Loss and LAE	239.5			0.1			239.6
Underwriting expenses	120.7			0.3			121.0
Net underwriting loss	$	(29.7	)	$	(0.4	)	$	(30.1	)

Cat loss and ALAE ratio	12.7		%	N/M⁽¹⁾			12.7		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(3.2		)%	N/M			(3.2		)%
Current accident year non-cat loss and ALAE ratio	56.8		%	N/M			56.8		%
Total non-cat loss and ALAE ratio	53.6		%	N/M			53.6		%
Total Loss and ALAE ratio	66.3		%	N/M			66.3		%
ULAE ratio	6.2		%	N/M			6.2		%
Total Loss and LAE ratio	72.5		%	N/M			72.5		%
Expense ratio	34.8		%	N/M			34.9		%
Combined ratio	107.3		%	N/M			107.4		%

⁽¹⁾N/M = Not Meaningful



($ in millions)
Three months ended March 31, 2019	Personal & Commercial			Specialty run-off			Total

Net written premiums	$	305.6		$	0.4		$	306.0
Net earned premiums	297.9			4.8			302.7
Losses and LAE incurred:
Cat loss and ALAE	17.2			0.5			17.7
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(22.2		)	1.3			(20.9		)
Current accident year non-cat loss and ALAE	174.7			4.0			178.7
Total non-cat loss and ALAE	152.5			5.3			157.8
Total Loss and ALAE	169.7			5.8			175.5
ULAE	19.5			(0.4		)	19.1
Total Loss and LAE	189.2			5.4			194.6
Underwriting expenses	110.4			0.8			111.2
Net underwriting loss	$	(1.7	)	$	(1.4	)	$	(3.1	)

Cat loss and ALAE ratio	5.8		%	N/M⁽¹⁾			5.9		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(7.4		)%	N/M			(6.9		)%
Current accident year non-cat loss and ALAE ratio	58.6		%	N/M			59.0		%
Total non-cat loss and ALAE ratio	51.2		%	N/M			52.1		%
Total Loss and ALAE ratio	57.0		%	N/M			58.0		%
ULAE ratio	6.6		%	N/M			6.3		%
Total Loss and LAE ratio	63.6		%	N/M			64.3		%
Expense ratio	36.1		%	N/M			36.4		%
Combined ratio	99.7		%	N/M			100.7		%

⁽¹⁾N/M = Not Meaningful



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

Net written premiums	$	36.4		$	31.9		$	40.3		$	18.8		$	14.8		$	4.9		$	147.1
Net earned premiums	29.0			30.3			36.1			19.7			12.6			4.7			132.4
Losses and LAE incurred:
Cat loss and ALAE	0.3			3.6			24.1			—			0.9			0.2			29.1
Non-cat loss and ALAE
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	16.6			19.1			27.5			13.4			4.0			3.0			83.6
Total non-cat loss and ALAE	16.5			13.7			22.4			9.4			3.2			1.6			66.8
Total Loss and ALAE	16.8			17.3			46.5			9.4			4.1			1.8			95.9
ULAE	1.5			1.6			2.1			1.7			0.5			0.2			7.6
Total Loss and LAE	18.3			18.9			48.6			11.1			4.6			2.0			103.5
Underwriting expenses	12.7			11.8			16.7			8.9			6.7			2.1			58.9
Net underwriting (loss) gain	$	(2.0	)	$	(0.4	)	$	(29.2	)	$	(0.3	)	$	1.3		$	0.6		$	(30.0	)

Cat loss and ALAE ratio	1.1		%	12.0		%	66.7		%	—		%	7.3		%	3.8		%	22.0		%
Non-cat loss and ALAE ratio
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	57.2		%	62.8		%	76.4		%	68.2		%	31.6		%	63.9		%	63.1		%
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	58.0		%	57.0		%	128.9		%	47.7		%	32.5		%	37.8		%	72.4		%
ULAE ratio	5.2		%	5.3		%	5.8		%	8.9		%	3.9		%	4.0		%	5.8		%
Total Loss and LAE ratio	63.2		%	62.3		%	134.7		%	56.6		%	36.4		%	41.8		%	78.2		%
Expense ratio	35.0		%	37.0		%	41.4		%	47.7		%	45.5		%	41.7		%	40.1		%
Combined ratio	98.2		%	99.3		%	176.1		%	104.3		%	81.9		%	83.5		%	118.3		%