UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
| ☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 20202021
or
| | | | | |
| ☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 000-19289
STATE AUTO FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
| | | | | | | | | | | |
| Ohio | | | 31-1324304 |
(State or other jurisdiction of
incorporation or organization) | | | (I.R.S. Employer
Identification No.) |
| | | |
| 518 East Broad Street | Columbus | Ohio | 43215-3976 |
| (Address of principal executive offices) | | | (Zip Code) |
Registrant’s telephone number, including area code: (614) 464-5000
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading symbol | Name of each exchange on which registered |
| Common shares, without par value | STFC | The NASDAQ Global Select Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | x |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| (Do not check if a smaller reporting company) | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ý
On October 30, 2020,29, 2021, the Registrant had 43,837,76844,512,210 Common Shares outstanding.
Index to Form 10-Q Quarterly Report for the three and nine month periods ended September 30, 20202021
| | | | | | | | |
| | |
| | |
| Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | |
| | |
| Item 1. | | |
Item 1A. | | |
| Item 2. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
| | |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
PART I – FINANCIAL STATEMENTS
Item 1. Condensed Consolidated Balance Sheets
| | ($ and shares in millions, except per share amounts) | ($ and shares in millions, except per share amounts) | September 30, 2020 | | December 31, 2019 | ($ and shares in millions, except per share amounts) | September 30, 2021 | | December 31, 2020 |
| (unaudited) | (unaudited) | | | | (unaudited) | | | |
| Assets | Assets | | Assets | |
| Fixed maturities, available-for-sale, at fair value (amortized cost $2,047.1 and $2,080.0, respectively) | $ | 2,166.3 | | | $ | 2,127.9 | | |
| Fixed maturities, available-for-sale, at fair value (amortized cost $2,159.6 and $2,117.0, respectively) | | Fixed maturities, available-for-sale, at fair value (amortized cost $2,159.6 and $2,117.0, respectively) | $ | 2,223.5 | | | $ | 2,237.2 | |
| Equity securities | Equity securities | 339.5 | | | 395.2 | | Equity securities | 376.0 | | | 389.7 | |
| Other invested assets | Other invested assets | 62.5 | | | 69.7 | | Other invested assets | 79.3 | | | 71.1 | |
| Other invested assets, at cost | Other invested assets, at cost | 12.5 | | | 6.5 | | Other invested assets, at cost | 10.4 | | | 12.1 | |
| Notes receivable from affiliate | Notes receivable from affiliate | 70.0 | | | 70.0 | | Notes receivable from affiliate | 70.0 | | | 70.0 | |
| Total investments | Total investments | 2,650.8 | | | 2,669.3 | | Total investments | 2,759.2 | | | 2,780.1 | |
| Cash and cash equivalents | Cash and cash equivalents | 131.4 | | | 78.0 | | Cash and cash equivalents | 46.1 | | | 90.7 | |
| Accrued investment income and other assets | Accrued investment income and other assets | 31.1 | | | 31.7 | | Accrued investment income and other assets | 30.7 | | | 29.7 | |
| Premiums receivable | Premiums receivable | 14.1 | | | 13.6 | | Premiums receivable | 14.1 | | | 14.0 | |
| Deferred policy acquisition costs (affiliated net assumed $27.6 and $20.2, respectively) | 123.7 | | | 111.1 | | |
| Deferred policy acquisition costs (affiliated net assumed $39.9 and $30.1, respectively) | | Deferred policy acquisition costs (affiliated net assumed $39.9 and $30.1, respectively) | 131.5 | | | 122.2 | |
| Reinsurance recoverable on losses and loss expenses payable | Reinsurance recoverable on losses and loss expenses payable | 35.2 | | | 13.6 | | Reinsurance recoverable on losses and loss expenses payable | 19.6 | | | 24.3 | |
| Prepaid reinsurance premiums | Prepaid reinsurance premiums | 8.4 | | | 7.5 | | Prepaid reinsurance premiums | 8.7 | | | 8.3 | |
| Due from affiliate | Due from affiliate | 18.3 | | | 7.9 | | Due from affiliate | 28.7 | | | — | |
| Current federal income taxes | Current federal income taxes | 6.7 | | | 6.3 | | Current federal income taxes | 1.8 | | | 1.7 | |
| Net deferred federal income taxes | Net deferred federal income taxes | 44.6 | | | 42.2 | | Net deferred federal income taxes | 43.1 | | | 27.3 | |
| Property and equipment, held for sale | 4.2 | | | 4.2 | | |
| Property and equipment, at cost (net of accumulated depreciation of $3.5 and $3.5, respectively) | | Property and equipment, at cost (net of accumulated depreciation of $3.5 and $3.5, respectively) | 3.8 | | | 4.2 | |
| Total assets | Total assets | $ | 3,068.5 | | | $ | 2,985.4 | | Total assets | $ | 3,087.3 | | | $ | 3,102.5 | |
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | | | Liabilities and Stockholders’ Equity | | | |
| Losses and loss expenses payable (affiliated net assumed $450.9 and $500.8, respectively) | $ | 1,091.3 | | | $ | 1,066.5 | | |
| Unearned premiums (affiliated net assumed $450.8 and $415.8, respectively) | 731.0 | | | 649.2 | | |
| Notes payable (affiliates $15.2 and $15.2, respectively) | 122.0 | | | 122.0 | | |
| Losses and loss expenses payable (affiliated net assumed $422.1 and $438.8, respectively) | | Losses and loss expenses payable (affiliated net assumed $422.1 and $438.8, respectively) | $ | 1,059.7 | | | $ | 1,050.4 | |
| Unearned premiums (affiliated net assumed $516.1 and $452.4, respectively) | | Unearned premiums (affiliated net assumed $516.1 and $452.4, respectively) | 805.0 | | | 723.4 | |
| Notes payable (affiliates $15.3 and $15.3, respectively) | | Notes payable (affiliates $15.3 and $15.3, respectively) | 122.1 | | | 122.1 | |
| Pension and postretirement benefits | Pension and postretirement benefits | 54.0 | | | 72.9 | | Pension and postretirement benefits | 45.0 | | | 66.2 | |
| Due to affiliate | | Due to affiliate | — | | | 11.2 | |
| | Other liabilities (affiliated net assumed $18.8 and $22.4, respectively) | | Other liabilities (affiliated net assumed $18.8 and $22.4, respectively) | 100.6 | | | 119.2 | |
| Total liabilities | | Total liabilities | 2,132.4 | | | 2,092.5 | |
| Stockholders’ equity: | | Stockholders’ equity: | |
| | Other liabilities (affiliated net assumed $18.5 and $19.5, respectively) | 126.1 | | | 114.9 | | |
| Total liabilities | 2,124.4 | | | 2,025.5 | | |
| Stockholders’ equity: | | |
| Class A Preferred stock (nonvoting), without par value. Authorized 2.5 shares; none issued | 0 | | | 0 | | |
| Class B Preferred stock, without par value. Authorized 2.5 shares; none issued | 0 | | | 0 | | |
| Common stock, without par value. Authorized 100.0 shares; 50.7 and 50.4 shares issued, respectively, at stated value of $2.50 per share | 126.7 | | | 125.9 | | |
| Common stock, without par value. Authorized 100.0 shares; 51.3 and 50.7 shares issued, respectively, at stated value of $2.50 per share | | Common stock, without par value. Authorized 100.0 shares; 51.3 and 50.7 shares issued, respectively, at stated value of $2.50 per share | 128.4 | | | 126.8 | |
| Treasury stock, 6.9 and 6.9 shares, respectively, at cost | Treasury stock, 6.9 and 6.9 shares, respectively, at cost | (118.4) | | | (117.5) | | Treasury stock, 6.9 and 6.9 shares, respectively, at cost | (118.8) | | | (118.4) | |
| Additional paid-in capital | Additional paid-in capital | 212.1 | | | 206.7 | | Additional paid-in capital | 218.1 | | | 213.3 | |
| Accumulated other comprehensive income (loss) | 23.3 | | | (37.9) | | |
| Accumulated other comprehensive (loss) income | | Accumulated other comprehensive (loss) income | (23.8) | | | 13.9 | |
| Retained earnings | Retained earnings | 700.4 | | | 782.7 | | Retained earnings | 751.0 | | | 774.4 | |
| Total stockholders’ equity | Total stockholders’ equity | 944.1 | | | 959.9 | | Total stockholders’ equity | 954.9 | | | 1,010.0 | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 3,068.5 | | | $ | 2,985.4 | | Total liabilities and stockholders’ equity | $ | 3,087.3 | | | $ | 3,102.5 | |
|
See accompanying notes to condensed consolidated financial statements.
1
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Income
| | ($ in millions, except per share amounts) | ($ in millions, except per share amounts) | Three months ended September 30 | ($ in millions, except per share amounts) | Three months ended September 30 |
| (unaudited) | (unaudited) | 2020 | | 2019 | (unaudited) | 2021 | | 2020 |
| Earned premiums (affiliated net assumed $69.3 and $55.7, respectively) | $ | 353.2 | | | $ | 319.6 | | |
| Earned premiums (affiliated net assumed $104.7 and $69.3, respectively) | | Earned premiums (affiliated net assumed $104.7 and $69.3, respectively) | $ | 381.8 | | | $ | 353.2 | |
| Net investment income (affiliates $0.7 and $0.7, respectively) | Net investment income (affiliates $0.7 and $0.7, respectively) | 17.9 | | | 19.3 | | Net investment income (affiliates $0.7 and $0.7, respectively) | 17.0 | | | 17.9 | |
| Net investment gain (loss) | 20.0 | | | (5.0) | | |
| Net investment (loss) gain | | Net investment (loss) gain | (8.1) | | | 20.0 | |
| Other income from affiliates | Other income from affiliates | 0.5 | | | 0.6 | | Other income from affiliates | 0.4 | | | 0.5 | |
| Total revenues | Total revenues | 391.6 | | | 334.5 | | Total revenues | 391.1 | | | 391.6 | |
| | Losses and loss expenses (affiliated net assumed $48.7 and $24.2, respectively) | 251.6 | | | 208.4 | | |
| Acquisition and operating expenses (affiliated net assumed $24.2 and $17.6, respectively) | 123.0 | | | 109.7 | | |
| Interest expense (affiliates $0.1 and $0.2, respectively) | 1.1 | | | 1.2 | | |
| Losses and loss expenses (affiliated net assumed $69.0 and $48.7, respectively) | | Losses and loss expenses (affiliated net assumed $69.0 and $48.7, respectively) | 287.2 | | | 251.6 | |
| Acquisition and operating expenses (affiliated net assumed $29.4 and $24.2, respectively) | | Acquisition and operating expenses (affiliated net assumed $29.4 and $24.2, respectively) | 115.0 | | | 123.0 | |
| Interest expense (affiliates $0.2 and $0.1, respectively) | | Interest expense (affiliates $0.2 and $0.1, respectively) | 1.1 | | | 1.1 | |
| Other expenses | Other expenses | 1.1 | | | 2.5 | | Other expenses | 13.5 | | | 1.1 | |
| Total expenses | Total expenses | 376.8 | | | 321.8 | | Total expenses | 416.8 | | | 376.8 | |
| Income before federal income taxes | 14.8 | | | 12.7 | | |
| Federal income tax expense: | | |
| | (Loss) income before federal income taxes | | (Loss) income before federal income taxes | (25.7) | | | 14.8 | |
| Federal income tax (benefit) expense: | | Federal income tax (benefit) expense: | |
| Current | | Current | (0.1) | | | — | |
| Deferred | Deferred | 3.2 | | | 1.2 | | Deferred | (11.3) | | | 3.2 | |
| Total federal income tax expense | 3.2 | | | 1.2 | | |
| Net income | $ | 11.6 | | | $ | 11.5 | | |
| Earnings per common share: | | | | |
| Total federal income tax (benefit) expense | | Total federal income tax (benefit) expense | (11.4) | | | 3.2 | |
| Net (loss) income | | Net (loss) income | $ | (14.3) | | | $ | 11.6 | |
| (Loss) earnings per common share: | | (Loss) earnings per common share: | | | |
| Basic | Basic | $ | 0.26 | | | $ | 0.26 | | Basic | $ | (0.32) | | | $ | 0.26 | |
| Diluted | Diluted | $ | 0.26 | | | $ | 0.25 | | Diluted | $ | (0.32) | | | $ | 0.26 | |
|
See accompanying notes to condensed consolidated financial statements.
2
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) | Nine months ended September 30 |
| (unaudited) | 2020 | | 2019 |
| Earned premiums (affiliated net assumed $189.2 and $168.5, respectively) | $ | 1,024.4 | | | $ | 930.0 | |
| Net investment income (affiliates $2.1 and $2.3, respectively) | 54.5 | | | 60.4 | |
| Net investment (loss) gain | (39.3) | | | 50.2 | |
| Other income from affiliates | 1.6 | | | 1.6 | |
| Total revenues | 1,041.2 | | | 1,042.2 | |
| | | |
| Losses and loss expenses (affiliated net assumed $132.8 and $125.1, respectively) | 762.2 | | | 637.6 | |
| Acquisition and operating expenses (affiliated net assumed $65.9 and $54.5, respectively) | 357.4 | | | 325.2 | |
| Interest expense (affiliates $0.6 and $0.7, respectively) | 3.6 | | | 3.7 | |
| Other expenses | 5.6 | | | 9.0 | |
| Total expenses | 1,128.8 | | | 975.5 | |
| (Loss) income before federal income taxes | (87.6) | | | 66.7 | |
| Federal income tax (benefit) expense: | | | |
| Current | (0.4) | | | (0.4) | |
| Deferred | (18.5) | | | 12.4 | |
| Total federal income tax (benefit) expense | (18.9) | | | 12.0 | |
| Net (loss) income | $ | (68.7) | | | $ | 54.7 | |
| (Loss) earnings per common share: | | | |
| Basic | $ | (1.57) | | | $ | 1.26 | |
| Diluted | $ | (1.57) | | | $ | 1.25 | |
| | | |
| | | | | | | | | | | |
| ($ in millions, except per share amounts) | Nine months ended September 30 |
| (unaudited) | 2021 | | 2020 |
| Earned premiums (affiliated net assumed $274.9 and $189.2, respectively) | $ | 1,107.6 | | | $ | 1,024.4 | |
| Net investment income (affiliates $2.1 and $2.1, respectively) | 52.3 | | | 54.5 | |
| Net investment gain (loss) | 56.8 | | | (39.3) | |
| Other income from affiliates | 1.3 | | | 1.6 | |
| Total revenues | 1,218.0 | | | 1,041.2 | |
| | | |
| Losses and loss expenses (affiliated net assumed $290.5 and $132.8, respectively) | 867.8 | | | 762.2 | |
| Acquisition and operating expenses (affiliated net assumed $93.5 and $65.9, respectively) | 343.2 | | | 357.4 | |
| Interest expense (affiliates $0.5 and $0.6, respectively) | 3.3 | | | 3.6 | |
| Other expenses | 19.6 | | | 5.6 | |
| Total expenses | 1,233.9 | | | 1,128.8 | |
| Loss before federal income taxes | (15.9) | | | (87.6) | |
| Federal income tax benefit: | | | |
| Current | (0.1) | | | (0.4) | |
| Deferred | (5.7) | | | (18.5) | |
| Total federal income tax benefit | (5.8) | | | (18.9) | |
| Net loss | $ | (10.1) | | | $ | (68.7) | |
| Loss per common share: | | | |
| Basic | $ | (0.23) | | | $ | (1.57) | |
| Diluted | $ | (0.23) | | | $ | (1.57) | |
| | | |
See accompanying notes to condensed consolidated financial statements.
3
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Comprehensive (Loss) Income
| | ($ in millions, except per share amounts) | ($ in millions, except per share amounts) | Three months ended September 30 | ($ in millions, except per share amounts) | Three months ended September 30 |
| (unaudited) | (unaudited) | 2020 | | 2019 | (unaudited) | 2021 | | 2020 |
| Net income | $ | 11.6 | | | $ | 11.5 | | |
| Other comprehensive income, net of tax: | | |
| Net (loss) income | | Net (loss) income | $ | (14.3) | | | $ | 11.6 | |
| Other comprehensive (loss) income, net of tax: | | Other comprehensive (loss) income, net of tax: | |
| Net unrealized holding gains on available-for-sale investments: | Net unrealized holding gains on available-for-sale investments: | | Net unrealized holding gains on available-for-sale investments: | |
| Unrealized holding gains | 4.6 | | | 22.6 | | |
| Unrealized holding (losses) gains | | Unrealized holding (losses) gains | (17.1) | | | 4.6 | |
| Reclassification adjustments for losses (gains) realized in net income | Reclassification adjustments for losses (gains) realized in net income | 0.2 | | | (1.2) | | Reclassification adjustments for losses (gains) realized in net income | 1.0 | | | 0.2 | |
| Income tax expense | (1.1) | | | (4.5) | | |
| Total net unrealized holding gains on available-for-sale investments | 3.7 | | | 16.9 | | |
| Income tax benefit (expense) | | Income tax benefit (expense) | 3.3 | | | (1.1) | |
| Total net unrealized holding (losses) gains on available-for-sale investments | | Total net unrealized holding (losses) gains on available-for-sale investments | (12.8) | | | 3.7 | |
| Net unrecognized benefit plan obligations: | Net unrecognized benefit plan obligations: | | | | Net unrecognized benefit plan obligations: | | | |
| Reclassification adjustments for amortization to statements of income: | Reclassification adjustments for amortization to statements of income: | | Reclassification adjustments for amortization to statements of income: | |
| Negative prior service cost | Negative prior service cost | (1.6) | | | (1.6) | | Negative prior service cost | (1.6) | | | (1.6) | |
| Net actuarial loss | Net actuarial loss | 3.7 | | | 2.4 | | Net actuarial loss | 4.5 | | | 3.7 | |
| Income tax expense | Income tax expense | (0.4) | | | (0.2) | | Income tax expense | (0.6) | | | (0.4) | |
| Total net unrecognized benefit plan obligations | Total net unrecognized benefit plan obligations | 1.7 | | | 0.6 | | Total net unrecognized benefit plan obligations | 2.3 | | | 1.7 | |
| Other comprehensive income | 5.4 | | | 17.5 | | |
| Comprehensive income | $ | 17.0 | | | $ | 29.0 | | |
| Other comprehensive (loss) income | | Other comprehensive (loss) income | (10.5) | | | 5.4 | |
| Comprehensive (loss) income | | Comprehensive (loss) income | $ | (24.8) | | | $ | 17.0 | |
|
Consolidated Statements of Comprehensive Loss
| | | | | | | | | | | |
| ($ in millions, except per share amounts) | Nine months ended September 30 |
| (unaudited) | 2021 | | 2020 |
| Net loss | $ | (10.1) | | | $ | (68.7) | |
| Other comprehensive (loss) income, net of tax: | | | |
| Net unrealized holding gains on fixed available-for-sale investments: | | | |
| Unrealized holding (losses) gains | (56.6) | | | 74.5 | |
| Reclassification adjustments for gains realized in net income | 0.3 | | | (3.2) | |
| Income tax benefit (expense) | 11.8 | | | (15.0) | |
| Total net unrealized holding (loss) gains on available-for-sale investments | (44.5) | | | 56.3 | |
| Net unrecognized benefit plan obligations: | | | |
| Reclassification adjustments for amortization to statements of income: | | | |
| Negative prior service cost | (4.8) | | | (4.8) | |
| Net actuarial loss | 13.4 | | | 11.0 | |
| Income tax expense | (1.8) | | | (1.3) | |
| Total net unrecognized benefit plan obligations | 6.8 | | | 4.9 | |
| Other comprehensive (loss) income | (37.7) | | | 61.2 | |
| Comprehensive loss | $ | (47.8) | | | $ | (7.5) | |
| | | |
See accompanying notes to condensed consolidated financial statements.
4
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Comprehensive (Loss) IncomeStockholders’ Equity
| | | | | | | | | | | |
| ($ in millions, except per share amounts) | Nine months ended September 30 |
| (unaudited) | 2020 | | 2019 |
| Net (loss) income | $ | (68.7) | | | $ | 54.7 | |
| Other comprehensive income, net of tax: | | | |
| Net unrealized holding gains on fixed available-for-sale investments: | | | |
| Unrealized holding gains | 74.5 | | | 91.8 | |
| Reclassification adjustments for gains realized in net income | (3.2) | | | (2.8) | |
| Income tax expense | (15.0) | | | (18.7) | |
| Total net unrealized holding gains on available-for-sale investments | 56.3 | | | 70.3 | |
| Net unrecognized benefit plan obligations: | | | |
| Reclassification adjustments for amortization to statements of income: | | | |
| Negative prior service cost | (4.8) | | | (4.8) | |
| Net actuarial loss | 11.0 | | | 7.2 | |
| Income tax expense | (1.3) | | | (0.5) | |
| Total net unrecognized benefit plan obligations | 4.9 | | | 1.9 | |
| Other comprehensive income | 61.2 | | | 72.2 | |
| Comprehensive (loss) income | $ | (7.5) | | | $ | 126.9 | |
| | | |
| | | | | | | | | | | |
| (in millions) | Three months ended September 30 |
| 2021 | | 2020 |
| Common shares: | | | |
| Balance at beginning of period | 51.0 | | | 50.7 | |
| Issuance of shares | 0.3 | | | — | |
| Balance at September 30 | 51.3 | | | 50.7 | |
| Treasury shares: | | | |
| Balance at beginning of period | (6.9) | | | (6.9) | |
| | | |
| Balance at September 30 | (6.9) | | | (6.9) | |
| Common stock: | | | |
| Balance at beginning of period | $ | 127.5 | | | $ | 126.7 | |
| Issuance of shares | 0.9 | | | — | |
| Balance at September 30 | $ | 128.4 | | | $ | 126.7 | |
| Treasury stock: | | | |
| Balance at beginning of period | $ | (118.8) | | | $ | (118.4) | |
| | | |
| Balance at September 30 | $ | (118.8) | | | $ | (118.4) | |
| Additional paid-in capital: | | | |
| Balance at beginning of period | $ | 213.1 | | | $ | 211.1 | |
| Issuance of common stock | 5.5 | | | (0.2) | |
| | | |
| Stock awards granted | (0.5) | | | 1.2 | |
| Balance at September 30 | $ | 218.1 | | | $ | 212.1 | |
| Accumulated other comprehensive (loss) income: | | | |
| Balance at beginning of period | $ | (13.3) | | | $ | 17.9 | |
| | | |
| Change in net unrealized holding gains on available-for-sale investments | (12.8) | | | 3.7 | |
| Change in net unrecognized benefit plan obligations | 2.3 | | | 1.7 | |
| Balance at September 30 | $ | (23.8) | | | $ | 23.3 | |
| Retained earnings: | | | |
| Balance at beginning of period | $ | 769.8 | | | $ | 693.2 | |
| | | |
| Net (loss) income | (14.3) | | | 11.6 | |
| Dividends declared, $0.10 and $0.10 per share (affiliates $2.6 and $2.6, respectively) | $ | (4.5) | | | $ | (4.4) | |
| Balance at September 30 | 751.0 | | | 700.4 | |
| Total stockholders’ equity at September 30 | $ | 954.9 | | | $ | 944.1 | |
| | | |
See accompanying notes to condensed consolidated financial statements.
5
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Stockholders’ Equity
| | (in millions) | (in millions) | Three months ended September 30 | (in millions) | Nine months ended September 30 |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Common shares: | Common shares: | | | | Common shares: | | | |
| Balance at beginning of period | 50.7 | | | 50.3 | | |
| | Balance at beginning of year | | Balance at beginning of year | 50.7 | | | 50.4 | |
| Issuance of shares | | Issuance of shares | 0.6 | | | 0.3 | |
| Balance at September 30 | Balance at September 30 | 50.7 | | | 50.3 | | Balance at September 30 | 51.3 | | | 50.7 | |
| Treasury shares: | Treasury shares: | | | | Treasury shares: | | | |
| Balance at beginning of period | (6.9) | | | (6.8) | | |
| Balance at beginning of year | | Balance at beginning of year | (6.9) | | | (6.9) | |
| | Balance at September 30 | Balance at September 30 | (6.9) | | | (6.8) | | Balance at September 30 | (6.9) | | | (6.9) | |
| Common stock: | Common stock: | | | | Common stock: | | | |
| Balance at beginning of period | $ | 126.7 | | | $ | 125.7 | | |
| Balance at beginning of year | | Balance at beginning of year | $ | 126.8 | | | $ | 125.9 | |
| Issuance of shares | Issuance of shares | 0 | | | 0.1 | | Issuance of shares | 1.6 | | | 0.8 | |
| Balance at September 30 | Balance at September 30 | $ | 126.7 | | | $ | 125.8 | | Balance at September 30 | $ | 128.4 | | | $ | 126.7 | |
| Treasury stock: | Treasury stock: | | | | Treasury stock: | | | |
| Balance at beginning of period | $ | (118.4) | | | $ | (117.5) | | |
| | Balance at beginning of year | | Balance at beginning of year | $ | (118.4) | | | $ | (117.5) | |
| Shares acquired on stock award exercises and vested restricted shares | | Shares acquired on stock award exercises and vested restricted shares | (0.4) | | | (0.9) | |
| Balance at September 30 | Balance at September 30 | $ | (118.4) | | | $ | (117.5) | | Balance at September 30 | $ | (118.8) | | | $ | (118.4) | |
| Additional paid-in capital: | Additional paid-in capital: | | | | Additional paid-in capital: | | | |
| Balance at beginning of period | $ | 211.1 | | | $ | 202.5 | | |
| Balance at beginning of year | | Balance at beginning of year | $ | 213.3 | | | $ | 206.7 | |
| Issuance of common stock | Issuance of common stock | (0.2) | | | 0.7 | | Issuance of common stock | 6.9 | | | 2.0 | |
| | Stock awards granted | Stock awards granted | 1.2 | | | 2.0 | | Stock awards granted | (2.1) | | | 3.4 | |
| Balance at September 30 | Balance at September 30 | $ | 212.1 | | | $ | 205.2 | | Balance at September 30 | $ | 218.1 | | | $ | 212.1 | |
| Accumulated other comprehensive income (loss): | | | | |
| Balance at beginning of period | $ | 17.9 | | | $ | (41.7) | | |
| Accumulated other comprehensive (loss) income: | | Accumulated other comprehensive (loss) income: | | | |
| Balance at beginning of year | | Balance at beginning of year | $ | 13.9 | | | $ | (37.9) | |
| | Change in net unrealized holding gains on available-for-sale investments | 3.7 | | | 16.9 | | |
| Total net unrecognized benefit plan obligations | 1.7 | | | 0.6 | | |
| Change in net unrealized holding (losses) gains on available-for-sale investments | | Change in net unrealized holding (losses) gains on available-for-sale investments | (44.5) | | | 56.3 | |
| Change in unrecognized benefit plan obligations, net of tax | | Change in unrecognized benefit plan obligations, net of tax | 6.8 | | | 4.9 | |
| Balance at September 30 | Balance at September 30 | $ | 23.3 | | | $ | (24.2) | | Balance at September 30 | $ | (23.8) | | | $ | 23.3 | |
| Retained earnings: | Retained earnings: | | | | Retained earnings: | | | |
| Balance at beginning of period | $ | 693.2 | | | $ | 747.2 | | |
| | Net income | 11.6 | | | 11.5 | | |
| Dividends declared, $0.10 and $0.10 per share (affiliates $2.6 and $2.6, respectively) | $ | (4.4) | | | $ | (4.3) | | |
| Balance at beginning of year | | Balance at beginning of year | $ | 774.4 | | | $ | 782.7 | |
| Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020 | | Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020 | — | | | (0.5) | |
| Net (loss) income | | Net (loss) income | (10.1) | | | (68.7) | |
| Dividends declared, $0.30 and $0.30 per share (affiliates $7.8 and $7.8, respectively) | | Dividends declared, $0.30 and $0.30 per share (affiliates $7.8 and $7.8, respectively) | $ | (13.3) | | | $ | (13.1) | |
| Balance at September 30 | Balance at September 30 | 700.4 | | | 754.4 | | Balance at September 30 | 751.0 | | | 700.4 | |
| Total stockholders’ equity at September 30 | Total stockholders’ equity at September 30 | $ | 944.1 | | | $ | 943.7 | | Total stockholders’ equity at September 30 | $ | 954.9 | | | $ | 944.1 | |
|
See accompanying notes to condensed consolidated financial statements.
6
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Stockholders’ EquityCash Flows
| | | | | | | | | | | |
| (in millions) | Nine months ended September 30 |
| 2020 | | 2019 |
| Common shares: | | | |
| Balance at beginning of year | 50.4 | | | 50.0 | |
| Issuance of shares | 0.3 | | | 0.3 | |
| Balance at September 30 | 50.7 | | | 50.3 | |
| Treasury shares: | | | |
| Balance at beginning of year | (6.9) | | | (6.8) | |
| | | |
| Balance at September 30 | (6.9) | | | (6.8) | |
| Common stock: | | | |
| Balance at beginning of year | $ | 125.9 | | | $ | 125.0 | |
| Issuance of shares | 0.8 | | | 0.8 | |
| Balance at September 30 | $ | 126.7 | | | $ | 125.8 | |
| Treasury stock: | | | |
| Balance at beginning of year | $ | (117.5) | | | $ | (117.0) | |
| Shares acquired on stock award exercises and vested restricted shares | (0.9) | | | (0.5) | |
| Balance at September 30 | $ | (118.4) | | | $ | (117.5) | |
| Additional paid-in capital: | | | |
| Balance at beginning of year | $ | 206.7 | | | $ | 194.2 | |
| Issuance of common stock | 2.0 | | | 4.0 | |
| | | |
| Stock awards granted | 3.4 | | | 7.0 | |
| Balance at September 30 | $ | 212.1 | | | $ | 205.2 | |
| Accumulated other comprehensive income (loss): | | | |
| Balance at beginning of year | $ | (37.9) | | | $ | (96.4) | |
| | | |
| Change in net unrealized holding gains on available-for-sale investments | 56.3 | | | 70.3 | |
| Change in unrecognized benefit plan obligations, net of tax | 4.9 | | | 1.9 | |
| Balance at September 30 | $ | 23.3 | | | $ | (24.2) | |
| Retained earnings: | | | |
| Balance at beginning of year | $ | 782.7 | | | $ | 712.7 | |
| Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020 | (0.5) | | | 0 | |
| Net (loss) income | (68.7) | | | 54.7 | |
| Dividends declared, $0.30 and $0.30 per share (affiliates $7.8 and $7.8, respectively) | $ | (13.1) | | | $ | (13.0) | |
| Balance at September 30 | 700.4 | | | 754.4 | |
| Total stockholders’ equity at September 30 | $ | 944.1 | | | $ | 943.7 | |
| | | |
| | | | | | | | | | | |
| ($ in millions) | Nine months ended September 30 |
| (unaudited) | 2021 | | 2020 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (10.1) | | | $ | (68.7) | |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | | | |
| Depreciation and amortization, net | 4.7 | | | 7.6 | |
| Share-based compensation | 9.5 | | | — | |
| Net investment (gain) loss | (57.2) | | | 39.3 | |
| Changes in operating assets and liabilities: | | | |
| Deferred policy acquisition costs | (9.3) | | | (12.6) | |
| Accrued investment income and other assets | (1.0) | | | 0.6 | |
| Premiums receivables | (0.1) | | | (0.5) | |
| Postretirement and pension benefits | (17.5) | | | (17.0) | |
| Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums | 4.3 | | | (22.5) | |
| Other liabilities and due to/from affiliates, net | (63.0) | | | 8.5 | |
| Losses and loss expenses payable | 9.3 | | | 24.2 | |
| Unearned premiums | 81.6 | | | 81.8 | |
| Deferred tax on share-based awards | 1.4 | | | (0.1) | |
| Federal income taxes | (7.2) | | | (18.8) | |
| Net cash (used in) provided by operating activities | (54.6) | | | 21.8 | |
| Cash flows from investing activities: | | | |
| Purchases of fixed maturities available-for-sale | (570.4) | | | (462.6) | |
| Purchases of equity securities | (24.0) | | | (65.6) | |
| Purchases of other invested assets | (0.9) | | | (7.3) | |
| Maturities, calls and pay downs of fixed maturities available-for-sale | 327.5 | | | 274.9 | |
| Sales of fixed maturities available-for-sale | 195.6 | | | 216.1 | |
| Sales of equity securities | 87.4 | | | 86.2 | |
| Sales of other invested assets | 2.3 | | | 0.9 | |
| Disposals of property and equipment | — | | | 0.2 | |
| Net cash provided by investing activities | 17.5 | | | 42.8 | |
| Cash flows from financing activities: | | | |
| Proceeds from issuance of common stock | 6.2 | | | 2.8 | |
| Payments to acquire treasury stock | (0.4) | | | (0.9) | |
| Payment of dividends | (13.3) | | | (13.1) | |
| Proceeds from short-term debt | — | | | 60.0 | |
| Repayment of short-term debt | — | | | (60.0) | |
| Proceeds from long-term debt | — | | | 21.5 | |
| Repayment of long-term debt | — | | | (21.5) | |
| Net cash used in financing activities | (7.5) | | | (11.2) | |
| Net (decrease) increase in cash and cash equivalents | (44.6) | | | 53.4 | |
| Cash and cash equivalents at beginning of period | 90.7 | | | 78.0 | |
| Cash and cash equivalents at end of period | $ | 46.1 | | | $ | 131.4 | |
| Supplemental disclosures: | | | |
| Interest paid (affiliates $0.5 and $0.6, respectively) | $ | 3.3 | | | $ | 3.5 | |
| | | |
| | | |
See accompanying notes to condensed consolidated financial statements.
7
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Cash Flows
| | | | | | | | | | | |
| ($ in millions) | Nine months ended September 30 |
| (unaudited) | 2020 | | 2019 |
| Cash flows from operating activities: | | | |
| Net (loss) income | $ | (68.7) | | | $ | 54.7 | |
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities | | | |
| Depreciation and amortization, net | 7.6 | | | 6.2 | |
| Share-based compensation | 0 | | | 7.0 | |
| Net investment loss (gain) | 39.3 | | | (50.2) | |
| Changes in operating assets and liabilities: | | | |
| Deferred policy acquisition costs | (12.6) | | | (12.4) | |
| Accrued investment income and other assets | 0.6 | | | (2.3) | |
| Premiums receivables | (0.5) | | | (3.2) | |
| Postretirement and pension benefits | (17.0) | | | (12.2) | |
| Other liabilities and due to/from affiliates, net | 8.5 | | | (51.8) | |
| Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums | (22.5) | | | (2.6) | |
| Losses and loss expenses payable | 24.2 | | | (54.1) | |
| Unearned premiums | 81.8 | | | 65.0 | |
| Deferred tax on share-based awards | (0.1) | | | (0.7) | |
| Federal income taxes | (18.8) | | | 12.7 | |
| Net cash provided by (used in) operating activities | 21.8 | | | (43.9) | |
| Cash flows from investing activities: | | | |
| Purchases of fixed maturities available-for-sale | (462.6) | | | (459.9) | |
| Purchases of equity securities | (65.6) | | | (48.9) | |
| Purchases of other invested assets | (7.3) | | | (12.9) | |
| Maturities, calls and pay downs of fixed maturities available-for-sale | 274.9 | | | 267.1 | |
| Sales of fixed maturities available-for-sale | 216.1 | | | 248.7 | |
| Sales of equity securities | 86.2 | | | 34.4 | |
| Sales of other invested assets | 0.9 | | | 1.0 | |
| Disposals of property and equipment | 0.2 | | | 1.6 | |
| Net cash provided by investing activities | 42.8 | | | 31.1 | |
| Cash flows from financing activities: | | | |
| Proceeds from issuance of common stock | 2.8 | | | 4.8 | |
| Payments to acquire treasury stock | (0.9) | | | (0.5) | |
| Payment of dividends | (13.1) | | | (13.0) | |
| | | |
| Proceeds from short-term debt | 60.0 | | | 0 | |
| Repayment of short-term debt | (60.0) | | | 0 | |
| Proceeds from long-term debt | 21.5 | | | 0 | |
| Repayment of long-term debt | (21.5) | | | 0 | |
| Net cash used in financing activities | (11.2) | | | (8.7) | |
| Net increase (decrease) in cash and cash equivalents | 53.4 | | | (21.5) | |
| Cash and cash equivalents at beginning of period | 78.0 | | | 59.8 | |
| Cash and cash equivalents at end of period | $ | 131.4 | | | $ | 38.3 | |
| Supplemental disclosures: | | | |
| Interest paid (affiliates $0.6 and $0.7, respectively) | $ | 3.5 | | | $ | 3.5 | |
| | | |
| | | |
See accompanying notes to condensed consolidated financial statements.
8
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of State Auto Financial Corporation and Subsidiaries (“State Auto Financial” or the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine months ended September 30, 2020,2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021. The balance sheet at December 31, 2019,2020, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20192020 (the “2019“2020 Form 10-K”). Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the 20192020 Form 10-K.
The COVID-19 pandemic has caused an economic downturn on a global scale, as well as significant market disruption and volatility. The scope, duration and magnitude of the effects of COVID-19 continue to evolve rapidly and in ways that are difficult or impossible to anticipate. The Company cannot, at this time, predict the impact the pandemic will have on its future consolidated financial position, cash flows or results of operations, however, the impact could be material. The Company's future financial results and operations depend in part on the duration and severity of the pandemic and what actions are taken to mitigate the outbreak.
Adoption of Recent Accounting Pronouncements
Measurement of Credit Losses on Financial Instruments
On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. This includes the Company's direct third party reinsurance recoverables, and the Company's share of the State Auto Group's third party reinsurance recoverables assumed via the Pooling Arrangement (as defined in Note 7). In addition, ASC 326 made changes to the accounting for available-for-sale fixed maturities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale fixed maturities management does not intend to sell or believes that it is more likely than not they will not be required to sell.
The adoption of this guidance reduced retained earnings by $0.5 million, net of tax, and established an allowance for estimated uncollectible reinsurance as of January 1, 2020. Adoption of ASC 326 for available-for-sale fixed maturities was prospective, and therefore there was no adjustment to retained earnings as of January 1, 2020. Changes to the Company's accounting policy resulting from the adoption of the guidance are discussed below.
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13 which changes the fair value measurement disclosure requirements of ASC 820 by adding, eliminating and modifying disclosures. The new guidance eliminates (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the entity's policy for the timing of transfers between levels, and (iii) the entity's valuation process for Level 3 fair value measurements. Additionally, the guidance now requires the disclosure of (i) the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements, and (ii) the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated for Level 3 fair value measurements. Finally, the guidance requires entities to provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future. The guidance became effective for annual reporting periods after December 15, 2019 and it did not have a material impact on the Company's results of operations, consolidated financial position or cash flows.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
Pending Adoption of Recent Accounting Pronouncements
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12 which updated guidance for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The guidance became effective date of ASU 2019-12 is for annual and interim and annualreporting periods beginning after December 15, 2020. Early adoption is permitted. The ASU hasOn January 1, 2021, the Company adopted this guidance and it did not yet been adopted; however, it is not expected to have a material impact on the Company’sCompany's results of operations, consolidated financial position or cash flows.
Pending Adoption of Recent Accounting Pronouncements
For information regarding other accounting pronouncements that the Company has not yet adopted, see the “Pending Adoption of Recent Accounting Pronouncements” section of Note 1 of the Notes to Consolidated Financial Statements in the 20192020 Form 10-K.
Significant Accounting Policy Updates
The following accounting policies have been updated to reflect the Company's adoption of ASU 2016-13 Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instrumentsas described above.
Investments
Investments in fixed maturities are classified as available-for-sale and are carried at fair value. For fixed maturities in an unrealized loss position, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded in the "net investment gain (loss)" line item on the condensed consolidated statement of income. Losses are charged against the allowance when management believes the uncollectibility of a fixed maturity is confirmed or when either of the criteria regarding intent or requirement to sell is met. Description and disclosure of credit losses on fixed maturities are disclosed in Note 3 of the Notes to Condensed Consolidated Financial Statements.
The Company excludes accrued interest receivable from both the estimated fair value and the amortized cost basis of available-for-sale fixed maturities and includes such amounts within "accrued investment income and other assets" on the Company's condensed consolidated balance sheets. Any uncollectible accrued interest receivable is written off in the period it is deemed uncollectible.
Reinsurance Recoverables
Management assesses expected credit losses on third party reinsurance recoverables for the entire State Auto Pool and, pursuant to the Pooling Arrangement (as defined in Note 7), the Company is responsible for its share of the estimated uncollectible reinsurance for the entire pool. Management uses A.M. Best’s Financial Strength ratings or equivalent such as S&P, Moody’s, or Fitch when an A.M. Best Financial Strength rating is not available to assess the credit risk of the reinsurance recoverables. The estimate of expected credit losses considers historical credit loss information as well as current conditions and reasonable and supportable forecasts. Description and disclosure of credit losses on reinsurance recoverables are disclosed in Note 8 of the Notes to Condensed Consolidated Financial Statements.
Premiums
Premiums are recognized as earned pro rata over the policy period. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage.
Under the terms of the Pooling Arrangement, each period State Auto Mutual collects all premiums from policyholders and pays all losses and expenses associated with the insurance business produced by the STFC Pooled Companies and the other pool participants, and then it settles the intercompany balances generated by these transactions with the pool participants within 60 days following each quarter end. When settling the intercompany balances, State Auto Mutual provides the pool participants with full credit for their share of the Pooled Companies net premiums written during the quarter.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
Management utilizes an aging schedule to estimate an allowance for uncollectible amounts relating to the State Auto Group’s premiums receivable balance. Current and historical collection experience along with reasonable and supportable forecasts are used to estimate the percentage of the premiums receivable balance that will be uncollectible. Credit risk is partially mitigated by the State Auto Group's ability to cancel the policy if the policyholder does not pay the premium. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums receivable is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. This is included in "other expenses" on the condensed consolidated statements of income and reflected in “due to/from affiliates” on the Company's condensed consolidated balance sheets. The Company’s share of the premium balances due to State Auto Mutual from agents and insureds at September 30, 2020 and December 31, 2019 is approximately $404.8 million and $371.0 million, respectively, net of the allowance for uncollectible premiums receivable of $7.0 million and $4.3 million, respectively.
2. Correction of Misstatement in Prior Period Financial Statements
The Company has corrected the presentation of premiums receivable on its condensed consolidated balance sheet for the period ended December 31, 2019 to appropriately reflect outstanding balances for premiums billed and due on premiums written directly by the STFC Pooled Companies. Based on the Pooling Arrangement (as defined in Note 7), this has no impact on the underwriting operations of the STFC Pooled Companies given the role of State Auto Mutual as agent for the State Auto Group.
The Company's balance sheet has been revised to include "premiums receivable", which represents the billed and due premium from its policyholders, with an offsetting adjustment to "due to/from affiliates". This adjustment was not material to the Company’s previously issued financial statements.
The effect of the revisions on the Company's previously issued financial statements are provided in the tables below. Amounts throughout the consolidated financial statements and notes thereto have been adjusted to incorporate the revised amounts, where applicable. The following tables reconcile selected lines from the Company’s year-end 2019 consolidated balance sheet and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 from the previously reported amounts to the revised amounts. There were no changes to the condensed consolidated statements of income, condensed consolidated statements of comprehensive income, and condensed consolidated statements of stockholders' equity.
| | | | | | | | | | | |
| Revised Consolidated Balance Sheets |
| ($ in millions) | Year Ended December 31, 2019 |
| As Reported | Adjustment | As Revised |
| Assets | | | |
| Premiums receivable | $ | 0 | | $ | 13.6 | | $ | 13.6 | |
| Due from affiliate | 21.5 | | (13.6) | | 7.9 | |
| Total Assets | $ | 2,985.4 | | $ | 0 | | $ | 2,985.4 | |
| | | |
| | | | | | | | | | | |
| Revised Consolidated Statement of Cash Flows |
| ($ in millions) | Nine months ended September 30, 2019 |
| As Reported | Adjustment | As Revised |
| Cash flows from operating activities: | | | |
| Changes in operating assets and liabilities: | | | |
| Premiums receivable | $ | 0 | | $ | (3.2) | | $ | (3.2) | |
| Other liabilities and due to/from affiliates, net | (55.0) | | 3.2 | | (51.8) | |
| Net cash used in operating activities | $ | (43.9) | | $ | 0 | | $ | (43.9) | |
| | | |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
3.2. Investments
The following tables set forth the amortized cost and fair value of investments by investment category at September 30, 20202021 and December 31, 2019:2020:
| | ($ millions) | ($ millions) | Amortized cost | | Gross unrealized holding gains | | Gross unrealized holding losses | | Fair value | ($ millions) | Amortized cost | | Gross unrealized holding gains | | Gross unrealized holding losses | | Fair value |
| September 30, 2020 | |
| September 30, 2021 | | September 30, 2021 | Amortized cost | | Gross unrealized holding gains | | Gross unrealized holding losses | | Fair value |
| Available-for-sale fixed maturities: | Available-for-sale fixed maturities: | | | | | | | | Available-for-sale fixed maturities: |
| U.S. treasury securities and obligations of U.S. government agencies | U.S. treasury securities and obligations of U.S. government agencies | $ | 510.9 | | | $ | 48.1 | | | $ | 0 | | | $ | 559.0 | | U.S. treasury securities and obligations of U.S. government agencies | $ | 483.8 | | | $ | 25.1 | | | $ | (0.9) | | | $ | 508.0 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 527.5 | | | 26.7 | | | (1.5) | | | 552.7 | | Obligations of states and political subdivisions | 470.7 | | | 22.7 | | | (0.5) | | | 492.9 | |
| Corporate securities | Corporate securities | 451.7 | | | 21.9 | | | 0 | | | 473.6 | | Corporate securities | 507.8 | | | 16.1 | | | (0.9) | | | 523.0 | |
| U.S. government agencies mortgage-backed securities | U.S. government agencies mortgage-backed securities | 557.0 | | | 25.3 | | | (1.3) | | | 581.0 | | U.S. government agencies mortgage-backed securities | 697.3 | | | 13.4 | | | (11.1) | | | 699.6 | |
| Total available-for-sale fixed maturities | Total available-for-sale fixed maturities | $ | 2,047.1 | | | $ | 122.0 | | | $ | (2.8) | | | $ | 2,166.3 | | Total available-for-sale fixed maturities | $ | 2,159.6 | | | $ | 77.3 | | | $ | (13.4) | | | $ | 2,223.5 | |
| | ($ millions) | ($ millions) | Amortized cost | | Gross unrealized holding gains | | Gross unrealized holding losses | | Fair value | ($ millions) | Amortized cost | | Gross unrealized holding gains | | Gross unrealized holding losses | | Fair value |
| December 31, 2019 | |
| December 31, 2020 | | December 31, 2020 | Amortized cost | | Gross unrealized holding gains | | Gross unrealized holding losses | | Fair value |
| Available-for-sale fixed maturities: | Available-for-sale fixed maturities: | | | | | | | | Available-for-sale fixed maturities: |
| U.S. treasury securities and obligations of U.S. government agencies | U.S. treasury securities and obligations of U.S. government agencies | $ | 569.2 | | | $ | 12.3 | | | $ | (3.3) | | | $ | 578.2 | | U.S. treasury securities and obligations of U.S. government agencies | $ | 506.5 | | | $ | 45.2 | | | $ | — | | | $ | 551.7 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 404.3 | | | 21.1 | | | 0 | | | 425.4 | | Obligations of states and political subdivisions | 511.3 | | | 30.4 | | | (0.2) | | | 541.5 | |
| Corporate securities | Corporate securities | 460.5 | | | 11.7 | | | (0.4) | | | 471.8 | | Corporate securities | 459.9 | | | 23.4 | | | — | | | 483.3 | |
| U.S. government agencies mortgage-backed securities | U.S. government agencies mortgage-backed securities | 646.0 | | | 11.1 | | | (4.6) | | | 652.5 | | U.S. government agencies mortgage-backed securities | 639.3 | | | 22.9 | | | (1.5) | | | 660.7 | |
| Total available-for-sale fixed maturities | Total available-for-sale fixed maturities | $ | 2,080.0 | | | $ | 56.2 | | | $ | (8.3) | | | $ | 2,127.9 | | Total available-for-sale fixed maturities | $ | 2,117.0 | | | $ | 121.9 | | | $ | (1.7) | | | $ | 2,237.2 | |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following tables set forth the Company’s gross unrealized losses and fair value on its investments by lot, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 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 |
| September 30, 2020 |
| Fixed maturities: | | | | | | | | | | | | | | | | | |
| U.S. treasury securities and obligations of U.S. government agencies | $ | 0.7 | | | $ | 0 | | | 1 | | | $ | 0 | | | $ | 0 | | | 0 | | | $ | 0.7 | | | $ | 0 | | | 1 | |
| Obligations of states and political subdivisions | 94.3 | | | (1.5) | | | 18 | | | 0 | | | 0 | | | 0 | | | 94.3 | | | (1.5) | | | 18 | |
| Corporate securities | 15.1 | | | 0 | | | 4 | | | 0 | | | 0 | | | 0 | | | 15.1 | | | 0 | | | 4 | |
| U.S. government agencies mortgage-backed securities | 76.1 | | | (1.1) | | | 22 | | | 9.4 | | | (0.2) | | | 4 | | | 85.5 | | | (1.3) | | | 26 | |
| Total temporarily impaired securities | $ | 186.2 | | | $ | (2.6) | | | 45 | | | $ | 9.4 | | | $ | (0.2) | | | 4 | | | $ | 195.6 | | | $ | (2.8) | | | 49 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
The following tables set forth the Company’s gross unrealized losses2021 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 at December 31, 2019:2020:
| | ($ millions, except # of positions) | ($ millions, except # of positions) | Less than 12 months | | 12 months or more | | Total | ($ millions, except # of positions) | Less than 12 months | | 12 months or more | | Total |
| | Fair value | | Unrealized losses | | Number of positions | | Fair value | | Unrealized losses | | Number of positions | | Fair value | | Unrealized losses | | Number of positions | | Fair value | | Unrealized losses | | Number of positions | | Fair value | | Unrealized losses | | Number of positions | | Fair value | | Unrealized losses | | Number of positions |
| December 31, 2019 | |
| September 30, 2021 | | September 30, 2021 | Fair value | | Unrealized losses | | Number of positions | | Fair value | | Unrealized losses | | Number of positions | | Fair value | | Unrealized losses | | Number of positions |
| Fixed maturities: | Fixed maturities: | | | | | | | | | | | | | | | | | | Fixed maturities: |
| U.S. treasury securities and obligations of U.S. government agencies | U.S. treasury securities and obligations of U.S. government agencies | $ | 136.0 | | | $ | (2.5) | | | 17 | | $ | 157.6 | | | $ | (0.8) | | | 11 | | | $ | 293.6 | | | $ | (3.3) | | | 28 | U.S. treasury securities and obligations of U.S. government agencies | $ | 115.0 | | | $ | (1.0) | | | 17 | | | $ | — | | | $ | — | | | — | | | $ | 115.0 | | | $ | (1.0) | | | 17 | |
| | Obligations of states and political subdivisions | | Obligations of states and political subdivisions | 21.0 | | | (0.3) | | | 4 | | | 3.7 | | | (0.1) | | | 1 | | | 24.7 | | | (0.4) | | | 5 | |
| Corporate securities | Corporate securities | 0 | | | 0 | | | 0 | | | 40.8 | | | (0.4) | | | 7 | | | 40.8 | | | (0.4) | | | 7 | Corporate securities | 142.6 | | | (0.8) | | | 24 | | | — | | | — | | | — | | | 142.6 | | | (0.8) | | | 24 | |
| U.S. government agencies mortgage-backed securities | U.S. government agencies mortgage-backed securities | 126.6 | | | (1.5) | | | 15 | | 137.9 | | | (3.1) | | | 32 | | 264.5 | | | (4.6) | | | 47 | U.S. government agencies mortgage-backed securities | 358.9 | | | (11.1) | | | 81 | | | 5.2 | | | (0.1) | | | 8 | | | 364.1 | | | (11.2) | | | 89 | |
| Total temporarily impaired securities | Total temporarily impaired securities | $ | 262.6 | | | $ | (4.0) | | | 32 | | $ | 336.3 | | | $ | (4.3) | | | 50 | | $ | 598.9 | | | $ | (8.3) | | | 82 | Total temporarily impaired securities | $ | 637.5 | | | $ | (13.2) | | | 126 | | | $ | 8.9 | | | $ | (0.2) | | | 9 | | | $ | 646.4 | | | $ | (13.4) | | | 135 | |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ 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, 2020 |
| Fixed maturities: | | | | | | | | | | | | | | | | | |
| U.S. treasury securities and obligations of U.S. government agencies | $ | 9.6 | | | $ | — | | | 4 | | $ | — | | | $ | — | | | — | | | $ | 9.6 | | | $ | — | | | 4 |
| Obligations of states and political subdivisions | 19.5 | | | (0.2) | | | 5 | | — | | | — | | | — | | | 19.5 | | | (0.2) | | | 5 |
| Corporate securities | 1.5 | | | — | | | 2 | | | — | | | — | | | — | | | 1.5 | | | — | | | 2 |
| U.S. government agencies mortgage-backed securities | 136.1 | | | (1.4) | | | 35 | | 7.0 | | | (0.1) | | | 3 | | 143.1 | | | (1.5) | | | 38 |
| Total temporarily impaired securities | $ | 166.7 | | | $ | (1.6) | | | 46 | | $ | 7.0 | | | $ | (0.1) | | | 3 | | $ | 173.7 | | | $ | (1.7) | | | 49 |
| | | | | | | | | | | | | | | | | |
The Company reviewed its available-for-sale fixed maturities at September 30, 2020,2021, and determined that no credit impairment existed in the gross unrealized holding losses, due to the reasons discussed below:
•ObligationsU.S. treasury securities and obligations of U.S. government agencies: These securities were issued by the U.S. Treasury Department or Federal government-sponsored entities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.
•Corporate securities: Corporations in various industries issued these securities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company reviewed the issuers of these securities to identify any significant adverse change in financial condition, a change in the quality of credit enhancement (if any), a ratings decrease, or negative outlook assignment from a major credit rating agency, and any failure to make interest or principal payments. After these reviews, the Company determined that the decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.
•U.S. government agencies mortgage-backed securities: Federal government-sponsored entities issued these securities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.
The Company regularly monitors its available-for-sale fixed maturities that have fair values less than cost or amortized cost for signs of impairment, an assessment that requires significant management judgment regarding the evidence known. Such
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. When a fixed maturity has been determined to have an impairment, the impairment charge representing the credit loss is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive income.
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at September 30, 2020:2021:
| | ($ millions) | ($ millions) | Amortized cost | | Fair
value | ($ millions) | Amortized cost | | Fair
value |
| Due in 1 year or less | Due in 1 year or less | $ | 119.8 | | | $ | 120.9 | | Due in 1 year or less | $ | 141.6 | | | $ | 142.7 | |
| Due after 1 year through 5 years | Due after 1 year through 5 years | 519.9 | | | 548.0 | | Due after 1 year through 5 years | 592.3 | | | 614.4 | |
| Due after 5 years through 10 years | Due after 5 years through 10 years | 168.0 | | | 178.9 | | Due after 5 years through 10 years | 211.7 | | | 218.2 | |
| Due after 10 years | Due after 10 years | 682.4 | | | 737.5 | | Due after 10 years | 516.7 | | | 548.6 | |
| U.S. government agencies mortgage-backed securities | U.S. government agencies mortgage-backed securities | 557.0 | | | 581.0 | | U.S. government agencies mortgage-backed securities | 697.3 | | | 699.6 | |
| Total | Total | $ | 2,047.1 | | | $ | 2,166.3 | | Total | $ | 2,159.6 | | | $ | 2,223.5 | |
|
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligations with or without call or prepayment penalties.
At September 30, 2020,2021, State Auto P&C had U.S. government agencies mortgage-backed fixed maturity securities, with a carrying value of approximately $106.5 million pledged as collateral for loans from the Federal Home Loan Bank of Cincinnati ("FHLB"), which loans are further described in Note 9.. In accordance with the terms of the FHLB Loans, State Auto P&C retains all rights regarding these pledged securities.
At September 30, 2020,2021, State Auto P&C had fixed maturities with fair values of approximately $31.7$33.7 million pledged as collateral for the performance obligations under its reinsurance agreement with Home State County Mutual Insurance Company. In accordance with the terms of the trust agreement, State Auto P&C retains all rights regarding these securities, which are included in the “U.S. treasury securities and obligations of U.S. government agencies” classification of the Company’s fixed maturity securities portfolio.
Fixed maturities with fair values of $9.6 million and $9.3$9.7 million were on deposit with insurance regulators as required by law at September 30, 2020,2021, and December 31, 2019,2020, respectively. The Company retains all rights regarding these securities.
The following table sets forth the components of net investment income for the three and nine months ended September 30, 20202021 and 2019:2020:
| | ($ millions) | ($ millions) | Three months ended September 30 | | Nine Months Ended September 30 | ($ millions) | Three months ended September 30 | | Nine Months Ended September 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Fixed maturities | Fixed maturities | $ | 15.0 | | | $ | 15.3 | | | $ | 44.6 | | | $ | 47.7 | | Fixed maturities | $ | 15.2 | | | $ | 15.0 | | | $ | 46.0 | | | $ | 44.6 | |
| Equity securities | Equity securities | 2.1 | | | 3.0 | | | 7.8 | | | 8.9 | | Equity securities | 1.2 | | | 2.1 | | | 4.0 | | | 7.8 | |
| Cash and cash equivalents, and other | Cash and cash equivalents, and other | 0.9 | | | 1.1 | | | 2.7 | | | 4.2 | | Cash and cash equivalents, and other | 1.0 | | | 0.9 | | | 3.0 | | | 2.7 | |
| Investment income | Investment income | 18.0 | | | 19.4 | | | 55.1 | | | 60.8 | | Investment income | 17.4 | | | 18.0 | | | 53.0 | | | 55.1 | |
| Investment expenses | Investment expenses | 0.1 | | | 0.1 | | | 0.6 | | | 0.4 | | Investment expenses | 0.4 | | | 0.1 | | | 0.7 | | | 0.6 | |
| Net investment income | Net investment income | $ | 17.9 | | | $ | 19.3 | | | $ | 54.5 | | | $ | 60.4 | | Net investment income | $ | 17.0 | | | $ | 17.9 | | | $ | 52.3 | | | $ | 54.5 | |
|
The Company’s current investment strategy does not rely on the use of derivative financial instruments.
Proceeds on sales of investments were $303.2$285.3 million and $284.1$303.2 million for the nine months ended September 30, 2020,2021, and 2019,2020, respectively.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following table sets forth the realized and unrealized holding gains (losses) on the Company’s investment portfolio for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | Three months ended September 30 | | Nine Months Ended September 30 |
| 2021 | | 2020 | | 2021 | | 2020 |
| Investment gain (loss), net: | | | | | | | |
| Fixed maturities: | | | | | | | |
| Realized gains on sales of securities | $ | 0.4 | | | $ | 1.3 | | | $ | 4.3 | | | $ | 6.8 | |
| Realized losses on sales of securities | (1.4) | | | (1.5) | | | (4.6) | | | (3.6) | |
| Net (loss) gain on fixed securities | (1.0) | | | (0.2) | | | (0.3) | | | 3.2 | |
| Net (loss) gain on equity securities | (6.7) | | | 18.2 | | | 49.7 | | | (35.1) | |
| Net (loss) gain on other invested assets | (0.4) | | | 2.0 | | | 7.8 | | | (7.6) | |
| Other net realized (loss)/gain | — | | | — | | | (0.4) | | | 0.2 | |
| Net (loss) gain on investments | $ | (8.1) | | | $ | 20.0 | | | $ | 56.8 | | | $ | (39.3) | |
| | | | | | | |
| Change in net unrealized holding (losses) gains, net of tax | | | | | | | |
| Fixed maturities | $ | (16.1) | | | $ | 4.8 | | | $ | (56.3) | | | $ | 71.3 | |
| Deferred federal income tax benefit (liability) | 3.3 | | | (1.1) | | | 11.8 | | | (15.0) | |
| Change in net unrealized holding (losses) gains, net of tax | $ | (12.8) | | | $ | 3.7 | | | $ | (44.5) | | | $ | 56.3 | |
| | | | | | | |
The unrealized holding (losses)/gains recognized for the three and nine months ended September 30, 2021 on equity securities still held were $(8.4) million and $37.6 million, respectively. The unrealized holding gains recognized for the three and nine months ended September 30, 2020 on equity securities still held were $60.5 million and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | Three months ended September 30 | | Nine Months Ended September 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
| Investment gain (loss), net: | | | | | | | |
| Fixed maturities: | | | | | | | |
| Realized gains on sales of securities | $ | 1.3 | | | $ | 1.2 | | | $ | 6.8 | | | $ | 2.8 | |
| Realized losses on sales of securities | (1.5) | | | 0 | | | (3.6) | | | 0 | |
| Net (loss) gain on fixed securities | (0.2) | | | 1.2 | | | 3.2 | | | 2.8 | |
| Equity securities: | | | | | | | |
| Realized losses on sales of securities, net | (42.3) | | | (1.8) | | | (50.9) | | | (2.5) | |
| Unrealized gain (loss) on securities still held, net | 60.5 | | | (4.1) | | | 15.8 | | | 46.4 | |
| Net gain (loss) on equity securities | 18.2 | | | (5.9) | | | (35.1) | | | 43.9 | |
| Other invested assets: | | | | | | | |
| | | | | | | |
| Unrealized gain (loss) on securities still held, net | 2.0 | | | (0.3) | | | (7.6) | | | 4.8 | |
| Net gain (loss) on other invested assets | 2.0 | | | (0.3) | | | (7.6) | | | 4.8 | |
| Other net realized gain (loss) | 0 | | | 0 | | | 0.2 | | | (1.3) | |
| Net gain (loss) on investments | $ | 20.0 | | | $ | (5.0) | | | $ | (39.3) | | | $ | 50.2 | |
| | | | | | | |
| Change in net unrealized holding gains, net of tax | | | | | | | |
| Fixed maturities | $ | 4.8 | | | $ | 21.4 | | | $ | 71.3 | | | $ | 89.0 | |
| Deferred federal income tax liability | (1.1) | | | (4.5) | | | (15.0) | | | (18.7) | |
| Change in net unrealized holding gains, net of tax | $ | 3.7 | | | $ | 16.9 | | | $ | 56.3 | | | $ | 70.3 | |
| | | | | | | |
4.3. Fair Value of Financial Instruments
Below is the fair value hierarchy that categorizes into three levels the inputs to valuation techniques that are used to measure fair value:
•Level 1 includes observable inputs which reflect quoted prices for identical assets or liabilities in active markets at the measurement date.
•Level 2 includes observable inputs for assets or liabilities other than quoted prices included in Level 1, and it includes valuation techniques which use prices for similar assets and liabilities.
•Level 3 includes unobservable inputs which reflect the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company utilizes a nationally recognized third party pricing service to estimate the majority of its investment portfolio’s fair value. The Company obtains one price per security and the processes and control procedures employed by the Company are designed to ensure the value is accurately recorded on an unadjusted basis. Through discussions with the pricing service, the Company gains an understanding of the methodologies used to price the different types of securities, that the data and the valuation methods utilized are appropriate and consistently applied, and that the assumptions are reasonable and representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service, the Company compares to fair value pricing information gathered from other independent pricing sources. At September 30, 2020,2021, and December 31, 2019,2020, the Company did not adjust any of the prices received from the pricing service.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
Fixed Maturities
The Company utilizes a nationally recognized third party pricing service to estimate fair value measurements for the majority of its fixed maturities. The fair value estimate of the Company’s fixed maturity investments are determined by evaluations that are based on observable market information rather than market quotes. Inputs to the evaluations include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, and other market-observable information. The fixed maturity portfolio pricing obtained from the pricing service is reviewed for reasonableness. The Company regularly selects a sample of security prices which are compared to one or more alternative pricing sources for reasonableness. Any significant discrepancies with the pricing are returned to the pricing service for further explanation and, if necessary, adjustments are made. To date, the Company has not identified any significant discrepancies in the pricing provided by its third party pricing service. Investments valued using these inputs include U.S. treasury securities and obligations of U.S. government agencies, obligations of states and political subdivisions, corporate securities (except for a security discussed below), and U.S. government agencies' mortgage-backed securities. All unadjusted estimates of fair value for fixed maturities priced by the pricing service are included in the amounts disclosed in Level 2 of the hierarchy. If market inputs are unavailable, then no fair value is provided by the pricing service. For these securities, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote; or the Company internally determines the fair values by employing widely accepted pricing valuation models, and depending on the level of observable market inputs, renders the fair value estimate as Level 2 or Level 3.
Equities
The fair value of each equity security is based on an observable market price for an identical asset in an active market and is priced by the same pricing service discussed above. All equity securities are recorded using unadjusted market prices and have been disclosed in Level 1.
Other Invested Assets
Included in other invested assets is 1 international fund (“the fund”) that invests in equity securities of foreign issuers and is managed by a third party investment manager. The fund had a fair value of $48.5$62.2 million and $56.4$55.8 million at September 30, 2020,2021, and December 31, 2019,2020, respectively, which was determined using the fund’s net asset value. The Company employs procedures to assess the reasonableness of the fair value of the fund, including obtaining and reviewing the fund’s audited financial statements. There are no unfunded commitments related to the fund. The Company may not sell its investment in the fund; however, the Company may redeem all or a portion of its investment in the fund at net asset value per share with the appropriate prior written notice. In accordance with ASC 820-10, this investment is measured at fair value using the net asset value per share practical expedient and has not been classified in the fair value hierarchy. Fair values presented here are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.
The remainder of the Company’s other invested assets consist primarily of holdings in publicly-traded mutual funds. The Company believes that its prices for these publicly-traded mutual funds, which are each based on an observable market price for an identical asset in an active market reflect their fair values and consequently these securities have been disclosed in Level 1.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following tables set forth the Company’s investments within the fair value hierarchy at September 30, 20202021 and December 31, 2019:2020:
| | ($ millions) | ($ millions) | Total | | Level 1 | | Level 2 | ($ millions) | Total | | Level 1 | | Level 2 |
| September 30, 2020 | |
| September 30, 2021 | | September 30, 2021 | Total | | Level 1 | | Level 2 |
| Available-for-sale fixed maturities: | Available-for-sale fixed maturities: | | | | | | Available-for-sale fixed maturities: |
| U.S. treasury securities and obligations of U.S. government agencies | U.S. treasury securities and obligations of U.S. government agencies | $ | 559.0 | | | $ | 0 | | | $ | 559.0 | | U.S. treasury securities and obligations of U.S. government agencies | $ | 508.0 | | | $ | — | | | $ | 508.0 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 552.7 | | | 0 | | | 552.7 | | Obligations of states and political subdivisions | 492.9 | | | — | | | 492.9 | |
| Corporate securities | Corporate securities | 473.6 | | | 0 | | | 473.6 | | Corporate securities | 523.0 | | | — | | | 523.0 | |
| U.S. government agencies mortgage-backed securities | U.S. government agencies mortgage-backed securities | 581.0 | | | 0 | | | 581.0 | | U.S. government agencies mortgage-backed securities | 699.6 | | | — | | | 699.6 | |
| Total available-for-sale fixed maturities | Total available-for-sale fixed maturities | 2,166.3 | | | 0 | | | 2,166.3 | | Total available-for-sale fixed maturities | 2,223.5 | | | — | | | 2,223.5 | |
| Equity securities: | Equity securities: | | Equity securities: | |
| Large-cap securities | Large-cap securities | 120.0 | | | 120.0 | | | 0 | | Large-cap securities | 163.5 | | | 163.5 | | | — | |
| | Mutual and exchange traded funds | Mutual and exchange traded funds | 219.5 | | | 219.5 | | | 0 | | Mutual and exchange traded funds | 212.5 | | | 212.5 | | | — | |
| Total equity securities | Total equity securities | 339.5 | | | 339.5 | | | 0 | | Total equity securities | 376.0 | | | 376.0 | | | — | |
| Other invested assets | Other invested assets | 14.0 | | | 14.0 | | | 0 | | Other invested assets | 17.1 | | | 17.1 | | | — | |
| Total investments | Total investments | $ | 2,519.8 | | | $ | 353.5 | | | $ | 2,166.3 | | Total investments | $ | 2,616.6 | | | $ | 393.1 | | | $ | 2,223.5 | |
| | ($ millions) | ($ millions) | Total | | Level 1 | | Level 2 | ($ millions) | Total | | Level 1 | | Level 2 |
| December 31, 2019 | |
| December 31, 2020 | | December 31, 2020 | Total | | Level 1 | | Level 2 |
| Available-for-sale fixed maturities: | Available-for-sale fixed maturities: | | | | | | Available-for-sale fixed maturities: |
| U.S. treasury securities and obligations of U.S. government agencies | U.S. treasury securities and obligations of U.S. government agencies | $ | 578.2 | | | $ | 0 | | | $ | 578.2 | | U.S. treasury securities and obligations of U.S. government agencies | $ | 551.7 | | | $ | — | | | $ | 551.7 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 425.4 | | | 0 | | | 425.4 | | Obligations of states and political subdivisions | 541.5 | | | — | | | 541.5 | |
| Corporate securities | Corporate securities | 471.8 | | | 0 | | | 471.8 | | Corporate securities | 483.3 | | | — | | | 483.3 | |
| U.S. government agencies mortgage-backed securities | U.S. government agencies mortgage-backed securities | 652.5 | | | 0 | | | 652.5 | | U.S. government agencies mortgage-backed securities | 660.7 | | | — | | | 660.7 | |
| Total available-for-sale fixed maturities | Total available-for-sale fixed maturities | 2,127.9 | | | 0 | | | 2,127.9 | | Total available-for-sale fixed maturities | 2,237.2 | | | — | | | 2,237.2 | |
| Equity securities: | Equity securities: | | Equity securities: | |
| Large-cap securities | Large-cap securities | 104.4 | | | 104.4 | | | 0 | | Large-cap securities | 134.2 | | | 134.2 | | | — | |
| | Mutual and exchange traded funds | Mutual and exchange traded funds | 290.8 | | | 290.8 | | | 0 | | Mutual and exchange traded funds | 255.5 | | | 255.5 | | | — | |
| Total equity securities | Total equity securities | 395.2 | | | 395.2 | | | 0 | | Total equity securities | 389.7 | | | 389.7 | | | — | |
| Other invested assets | Other invested assets | 13.3 | | | 13.3 | | | 0 | | Other invested assets | 15.3 | | | 15.3 | | | — | |
| Total investments | Total investments | $ | 2,536.4 | | | $ | 408.5 | | | $ | 2,127.9 | | Total investments | $ | 2,642.2 | | | $ | 405.0 | | | $ | 2,237.2 | |
|
The following sections describe the valuation methods used by the Company for each type of financial instrument it holds that is not measured at fair value but for which fair value is disclosed:
Financial Instruments Disclosed, But Not Carried, At Fair Value
Other Invested Assets, at Cost
Included in other invested assets, at cost are common stock of the FHLB and the Trust Securities. The Trust Securities and FHLB common stock are carried at cost, which approximates fair value. The fair value of the FHLB common stock at September 30, 2020,2021, was $12.0$9.9 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.
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, theThe Company entered intohas 2 separate credit agreements with State Automobile Mutual Insurance Company (“State Auto Mutual") pursuant to which it loaned State Auto Mutual a total of $70.0 million at an interest rate of 7.00%. In May 2019, the Company refinanced the 2 credit agreements with State Auto Mutual at an interest rate of 4.05%, with principal payable in May 2029. The Company estimates the fair value of the notes receivable from affiliate using market quotations for U.S. treasury securities with similar maturity dates and applies an appropriate credit spread. Consequently this has been placed in Level 2 of the fair value hierarchy.
| | ($ millions, except interest rates) | ($ millions, except interest rates) | September 30, 2020 | | December 31, 2019 | ($ millions, except interest rates) | September 30, 2021 | | December 31, 2020 |
| | | Carrying value | | Fair value | | Interest rate | | Carrying value | | Fair
value | | Interest rate | | Carrying value | | Fair value | | Interest rate | | Carrying value | | Fair
value | | Interest rate |
| Notes receivable from affiliate, issued May 2019 | Notes receivable from affiliate, issued May 2019 | $ | 70.0 | | | $ | 82.4 | | | 4.05 | % | | $ | 70.0 | | | $ | 74.6 | | | 4.05 | % | Notes receivable from affiliate, issued May 2019 | $ | 70.0 | | | $ | 77.4 | | | 4.05 | % | | $ | 70.0 | | | $ | 80.4 | | | 4.05 | % |
|
Notes Payable
Included in notes payable are the FHLB Loans and Subordinated Debentures. The Company estimates the fair value of the FHLB Loans by discounting cash flows using a borrowing rate currently available to the Company for loans with similar terms. The FHLB Loans have been placed in Level 3 of the fair value hierarchy. The carrying amount of the Subordinated Debentures approximates its fair value as the interest rate adjusts quarterly and has been disclosed in Level 3.
| | ($ millions, except interest rates) | ($ millions, except interest rates) | September 30, 2020 | | December 31, 2019 | ($ millions, except interest rates) | September 30, 2021 | | December 31, 2020 |
| | | Carrying value | | Fair Value | | Interest rate | | Carrying value | | Fair value | | Interest rate | | Carrying value | | Fair Value | | Interest rate | | Carrying value | | Fair value | | Interest rate |
| FHLB Loan due 2021: issued $21.5, September 2016 with fixed interest | $ | 0 | | | $ | 0 | | | 0 | % | | $ | 21.5 | | | $ | 21.5 | | | 1.73 | % | |
| | FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest | FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest | 21.5 | | | 21.8 | | | 1.37 | % | | 0 | | | 0 | | | 0 | % | FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest | $ | 21.5 | | | $ | 20.6 | | | 1.37 | % | | $ | 21.5 | | | $ | 21.6 | | | 1.37 | % |
| FHLB Loan due 2033: issued $85.0, May 2018 with fixed interest | 85.3 | | | 108.6 | | | 3.96 | % | | 85.3 | | | 97.8 | | | 3.96 | % | |
| FHLB Loan due 2033:, issued $85.0, May 2018 with fixed interest | | FHLB Loan due 2033:, issued $85.0, May 2018 with fixed interest | 85.3 | | | 102.2 | | | 3.96 | % | | 85.3 | | | 107.1 | | | 3.96 | % |
| Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest | Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest | 15.2 | | | 15.2 | | | 4.44 | % | | 15.2 | | | 15.2 | | | 6.11 | % | Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest | 15.3 | | | 15.3 | | | 4.32 | % | | 15.3 | | | 15.3 | | | 4.43 | % |
| Total notes payable | Total notes payable | $ | 122.0 | | | $ | 145.6 | | | $ | 122.0 | | | $ | 134.5 | | | Total notes payable | $ | 122.1 | | | $ | 138.1 | | | $ | 122.1 | | | $ | 144.0 | | |
|
5.4. Deferred Acquisition Costs
The following table sets forth net deferred acquisition costs for the three and nine months ended September 30, 20202021 and 2019:2020:
| | ($ millions) | ($ millions) | | 2020 | | 2019 | ($ millions) | | 2021 | | 2020 |
| Beginning balance at July 1 | Beginning balance at July 1 | | $ | 120.0 | | | $ | 109.1 | | Beginning balance at July 1 | | $ | 127.2 | | | $ | 120.0 | |
| Acquisition costs deferred | Acquisition costs deferred | | 98.4 | | | 94.6 | | Acquisition costs deferred | | 67.1 | | | 98.4 | |
| Acquisition costs amortized to expense | Acquisition costs amortized to expense | | (94.7) | | | (89.4) | | Acquisition costs amortized to expense | | (62.8) | | | (94.7) | |
| Ending balance at September 30 | Ending balance at September 30 | | $ | 123.7 | | | $ | 114.3 | | Ending balance at September 30 | | $ | 131.5 | | | $ | 123.7 | |
| | Beginning balance at January 1 | Beginning balance at January 1 | | $ | 111.1 | | | $ | 101.9 | | Beginning balance at January 1 | | $ | 122.2 | | | $ | 111.1 | |
| Acquisition costs deferred | Acquisition costs deferred | | 289.8 | | | 270.6 | | Acquisition costs deferred | | 196.1 | | | 289.8 | |
| Acquisition costs amortized to expense | Acquisition costs amortized to expense | | (277.2) | | | (258.2) | | Acquisition costs amortized to expense | | (186.8) | | | (277.2) | |
| Ending balance at September 30 | Ending balance at September 30 | | $ | 123.7 | | | $ | 114.3 | | Ending balance at September 30 | | $ | 131.5 | | | $ | 123.7 | |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
6.5. Losses and Loss Expenses Payable
The following table sets forth the activity in the liability for losses and loss expenses for the nine months ended September 30, 20202021 and 2019:2020:
| | ($ millions) | ($ millions) | 2020 | | 2019 | ($ millions) | 2021 | | 2020 |
| Losses and loss expenses payable, at beginning of period | Losses and loss expenses payable, at beginning of period | $ | 1,066.5 | | | $ | 1,146.8 | | Losses and loss expenses payable, at beginning of period | $ | 1,050.4 | | | $ | 1,066.5 | |
| Less: reinsurance recoverable on losses and loss expenses payable | Less: reinsurance recoverable on losses and loss expenses payable | 13.6 | | | 5.5 | | Less: reinsurance recoverable on losses and loss expenses payable | 24.3 | | | 13.6 | |
| Net balance at beginning of period | Net balance at beginning of period | 1,052.9 | | | 1,141.3 | | Net balance at beginning of period | 1,026.1 | | | 1,052.9 | |
| Incurred related to: | Incurred related to: | | | | Incurred related to: | | | |
| Current year | Current year | 779.8 | | | 692.7 | | Current year | 910.2 | | | 779.8 | |
| Prior years | Prior years | (17.6) | | | (55.1) | | Prior years | (42.4) | | | (17.6) | |
| Total incurred | Total incurred | 762.2 | | | 637.6 | | Total incurred | 867.8 | | | 762.2 | |
| Paid related to: | Paid related to: | | Paid related to: | |
| Current year | Current year | 420.8 | | | 366.4 | | Current year | 510.2 | | | 420.8 | |
| Prior years | Prior years | 338.2 | | | 327.0 | | Prior years | 343.6 | | | 338.2 | |
| Total paid | Total paid | 759.0 | | | 693.4 | | Total paid | 853.8 | | | 759.0 | |
| Net balance at end of period | Net balance at end of period | 1,056.1 | | | 1,085.5 | | Net balance at end of period | 1,040.1 | | | 1,056.1 | |
| Plus: reinsurance recoverable on losses and loss expenses payable | Plus: reinsurance recoverable on losses and loss expenses payable | 35.2 | | | 7.2 | | Plus: reinsurance recoverable on losses and loss expenses payable | 19.6 | | | 35.2 | |
| Losses and loss expenses payable, at end of period | Losses and loss expenses payable, at end of period | $ | 1,091.3 | | | $ | 1,092.7 | | Losses and loss expenses payable, at end of period | $ | 1,059.7 | | | $ | 1,091.3 | |
|
The Company recorded lessmore favorable development related to prior years’ loss and loss expense reserves for the nine months ended September 30, 2020,2021, of $17.6$42.4 million compared to $55.1$17.6 million for the same 20192020 period. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves for the nine months ended September 30, 2021 was $45.5 million, driven by favorable development of $47.7 million in the commercial insurance segment. In the commercial insurance segment, workers' compensation and middle market commercial contributed $21.8 million and $14.7 million, respectively, of favorable development.
For the nine months ended September 30, 2020, favorable development of prior accident year's non-catastrophe loss and ALAE reserves was $31.8 million, due to favorable development in the commercial insurance segment. In the commercial insurance segment, all products developed favorably,lines contributed favorable development, with small commercial package, workers' compensation and middle market commercial contributing $16.5 million, $16.1 million and $14.3 million, respectively. Partially offsetting the favorable development was adverse development in the personal insurance segment and specialty run-off, which contributed $20.2 million and $5.2 million, respectively. The adverse development in the personal insurance segment was primarily driven by personal auto, which contributed $19.1 million of adverse development. The personal auto adverse development was driven by higher than expected severity of bodily injury claims and higher than expected frequency of property damage claims, primarily from multiplethe 2019 accident years.year. The specialty run-off adverse development primarily relatedrelates to an adverse court decision relating to an E&S casualty claim from 2016. Partially offsetting the favorable development of prior years' non-catastrophe loss and ALAE reserves was adverse development in catastrophe loss and ALAE reserves driven by $12.4 million of adverse development in E&S property related to Hurricane Irma.
For the nine months ended September 30, 2019, favorable development of prior accident year's non-catastrophe loss and ALAE reserves was $54.1 million. In the personal insurance segment, personal auto contributed $11.0 million of favorable development. In the commercial insurance segment, all lines contributed favorable development, with workers' compensation, small commercial package, and middle market commercial contributing $13.4 million, $11.8 million, and $7.2 million, respectively.
7.6. Reinsurance
The insurance subsidiaries of State Auto Financial, referred to as the STFC Pooled Companies, participate in a quota share reinsurance pooling arrangement (“the Pooling Arrangement”) with the Mutual Pooled Companies.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following table sets forth a summary of the Company’s external reinsurance transactions, as well as reinsurance transactions with State Auto Mutual under the Pooling Arrangement, for the three and nine months ended September 30, 20202021 and 2019:2020:
| | ($ millions) | ($ millions) | Three months ended September 30 | | Nine months ended September 30 | ($ millions) | Three months ended September 30 | | Nine months ended September 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Premiums earned: | Premiums earned: | | | | | | | | Premiums earned: | | | | | | | |
| Assumed from external insurers and reinsurers | Assumed from external insurers and reinsurers | $ | 21.7 | | | $ | 21.0 | | | $ | 63.0 | | | $ | 59.3 | | Assumed from external insurers and reinsurers | $ | 19.7 | | | $ | 21.7 | | | $ | 61.7 | | | $ | 63.0 | |
| Assumed under Pooling Arrangement | Assumed under Pooling Arrangement | 353.2 | | | 319.6 | | | 1,024.4 | | | 930.0 | | Assumed under Pooling Arrangement | 381.8 | | | 353.2 | | | 1,107.6 | | | 1,024.4 | |
| Ceded to external insurers and reinsurers | Ceded to external insurers and reinsurers | (7.7) | | | (6.6) | | | (25.4) | | | (18.8) | | Ceded to external insurers and reinsurers | (9.7) | | | (7.7) | | | (27.2) | | | (25.4) | |
| Ceded under Pooling Arrangement | Ceded under Pooling Arrangement | (283.9) | | | (263.9) | | | (835.2) | | | (761.5) | | Ceded under Pooling Arrangement | (277.1) | | | (283.9) | | | (832.7) | | | (835.2) | |
| Net assumed premiums earned | Net assumed premiums earned | $ | 83.3 | | | $ | 70.1 | | | $ | 226.8 | | | $ | 209.0 | | Net assumed premiums earned | $ | 114.7 | | | $ | 83.3 | | | $ | 309.4 | | | $ | 226.8 | |
| Losses and loss expenses incurred: | Losses and loss expenses incurred: | | | | | | | | Losses and loss expenses incurred: | | | | | | | |
| Assumed from external insurers and reinsurers | Assumed from external insurers and reinsurers | $ | 14.1 | | | $ | 14.6 | | | $ | 41.3 | | | $ | 45.6 | | Assumed from external insurers and reinsurers | $ | 17.0 | | | $ | 14.1 | | | $ | 53.1 | | | $ | 41.3 | |
| Assumed under Pooling Arrangement | Assumed under Pooling Arrangement | 251.6 | | | 209.3 | | | 762.2 | | | 639.4 | | Assumed under Pooling Arrangement | 287.2 | | | 251.6 | | | 867.8 | | | 762.2 | |
| Ceded to external insurers and reinsurers | Ceded to external insurers and reinsurers | (9.9) | | | (0.6) | | | (55.9) | | | (6.2) | | Ceded to external insurers and reinsurers | (4.8) | | | (9.9) | | | (11.1) | | | (55.9) | |
| Ceded under Pooling Arrangement | Ceded under Pooling Arrangement | (202.9) | | | (185.1) | | | (629.4) | | | (514.3) | | Ceded under Pooling Arrangement | (218.2) | | | (202.9) | | | (577.3) | | | (629.4) | |
| Net assumed losses and loss expenses incurred | Net assumed losses and loss expenses incurred | $ | 52.9 | | | $ | 38.2 | | | $ | 118.2 | | | $ | 164.5 | | Net assumed losses and loss expenses incurred | $ | 81.2 | | | $ | 52.9 | | | $ | 332.5 | | | $ | 118.2 | |
|
8. Current Expected Credit Losses
The Company is exposed to third-party credit risk both directly through its cessions to reinsurers and indirectly through its participation in the Pooling Arrangement. In addition to exposure to credit risk on reinsurance recoverables, the Company is also exposed to credit risk on amounts due from insureds and agents through the Pooling Arrangement. When settling the intercompany balances, State Auto Mutual provides the STFC Pooled Companies with full credit for the net premiums written and net losses paid during the quarter and retains all receivable amounts from insureds and agents and reinsurance recoverable on paid losses from unaffiliated reinsurers.
At September 30, 2020, the determination of the allowance for credit losses for premiums receivable and reinsurance recoverables included considerations for the potential impacts of the COVID-19 pandemic on the Company's ability to collect balances due from its insureds, agents, and reinsurers.
Reinsurance recoverables
The State Auto Group monitors the credit quality of its reinsurance recoverables through the use of A.M. Best’s Financial Strength rating ("FSR"), or in the absence of an FSR consideration of credit ratings issued by approved rating agencies such as S&P, Moody’s, or Fitch. At September 30, 2020, the determination of the allowance for credit losses on reinsurance recoverables included analysis of (i) reinsurance recoverable balances by reinsurer FSR, (ii) estimated payment patterns associated with the claims underlying the reinsurance balances and (iii) historical default rates by reinsurer FSR as published by A.M. Best. In addition to the quantitative analysis, qualitative factors considered include but are not limited to (i) global reinsurer capital level, (ii) reinsurance market trends, (iii) the low interest rate environment and (iv) the stressed global economy, including the impact of COVID-19. The allowance for credit losses is included in the "reinsurance recoverables on losses and loss expenses payable" and "losses and loss expenses payable" line items in the Company's condensed consolidated balance sheets. The Company’s allowance for credit losses for reinsurance recoverables at September 30, 2020 is $0.8 million.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following table sets forth the amortized cost of the Company's direct third-party reinsurance recoverables by FSR, net of the allowance for credit losses, at September 30, 2020:
| | | | | | | |
($ millions) | Amortized Cost | | |
Financial strength rating: | | | |
A++ | $ | 1.2 | | | |
A+ | 15.3 | | | |
A | 18.7 | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Reinsurance recoverable on losses and loss expenses payable, net of allowance for credit losses | $ | 35.2 | | | |
| | | |
Premiums Receivables
Management utilizes an aging schedule to estimate an allowance for uncollectible amounts relating to the State Auto Pool premiums receivable balance including the Company's billed and due premium from its policyholders. In addition to reliance upon recent and historical collection trends, determination of the allowance for uncollectible premiums receivable at September 30, 2020 included consideration of other factors, including macro-economic conditions and trends, in particular the estimated impact of COVID-19. Credit risk is partially mitigated by the State Auto Group's ability to cancel a policy if the policyholder does not pay the premium due. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums receivable is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. Bad debt expense is included in "other expenses" on the condensed consolidated statements of income and reflected in “due to/from affiliates” on the Company's condensed consolidated balance sheets.
The following table sets forth the changes in the Company's share of the allowance for uncollectible premiums receivable for the three and nine months ended September 30, 2020:
| | | | | | |
($ millions) | | Allowance for credit losses |
Beginning balance at July 1, 2020 | | $ | 7.0 | |
Current period provision | | 1.1 | |
Writeoffs | | (1.1) | |
| | |
Ending balance at September 30, 2020 | | $ | 7.0 | |
| | |
Beginning balance at January 1, 2020 | | $ | 4.3 | |
Current period provision | | 6.7 | |
Writeoffs | | (4.0) | |
| | |
Ending balance at September 30, 2020 | | $ | 7.0 | |
| | |
9. Notes Payable and Open Line of Credit
FHLB Loans
On September 2, 2020 State Auto P&C retired its five-year term loan with the FHLB in the amount of $21.5 million and maturing September 2, 2021 and replaced it with a new ten-year term loan with the FHLB in the amount of $21.5 million (the "2020 FHLB Loan"). The 2020 FHLB Loan is at a fixed rate of interest of 1.37%, provides for interest-only payments during its term, with principal due in full at maturity, and may be prepaid without penalty after five years and each of the succeeding six months thereafter. The 2020 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C.
State Auto P&C has an Open Line of Credit Commitment (the "OLC") with the FHLB that provides State Auto P&C with a $100.0 million one-year open line of credit available for general corporate purposes. The OLC matures in April 2021. Draws under the OLC are to be funded with a daily variable rate advance with a term of no more than 180 days with interest payable monthly. All advances under the OLC are fully secured by a pledge of specific investment securities of State Auto P&C. As of September 30, 2020, no advances had been made under the OLC.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
On March 19, 2020, State Auto P&C entered into a short-term loan arrangement with the FHLB in the principal amount of $60.0 million. This loan arrangement, known as REPO based advances, was for general corporate purposes and was intended to provide additional liquidity to State Auto P&C. The REPO based advances were repaid in full on September 22, 2020, and this loan arrangement was terminated.
State Auto P&C also has a fifteen-year term loan with the FHLB that is more fully disclosed in Note 8 of the Notes to Consolidated Financial Statements in the 2019 Form 10-K. The foregoing OLC and term loans from the FHLB are collectively referred to as the "FHLB Loans."
10.7. Income Taxes
Interim Period Tax Expense
Due to an increase in the frequency and severityvariability of catastrophic events in 2020 and the uncertainty regarding the total impact of COVID-19 on the Company's futureour operating results, of operations and financial condition, the Company's normal approach ofwe determined using an estimated full-yearfull year 2021 effective income tax rate to determine interim period tax expense (benefit)expense(benefit) produces an income tax benefit for the current year to date periodand effective rate that would have exceeded the tax benefit the Company expects to realizenot be meaningful for the full year.investors. Accordingly, the Company calculated a year to date tax benefit based on the year to date loss before federal income taxes using the U.S. Federal statutory tax rate and adjusted for the estimated impact of permanent differences and discrete items. The tax expense for the three months ended September 30, 2020 is the tax benefit for the nine months September 30, 2020 less the tax benefit recognized at June 30, 2020.
The Company has foreign tax credit carryforwards of $0.5 million which will expire in 2021 and 2022. The Company believes it is more likely than not that the benefit from these foreign tax credit carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $0.5 million on the deferred tax assets related to these foreign tax credit carryforwards. The valuation allowance is included in the "other, net" line item in the table below.
The following table sets forth the reconciliation between actual federal income tax (benefit) expense and the amount computed at the indicated statutory rate for the three and nine months ended September 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | Three months ended September 30 | | Nine months ended September 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
| Amount at statutory rate | $ | 3.1 | | | 21.0 | % | | $ | 2.7 | | | 21.0 | % | | $ | (18.4) | | | 21.0 | % | | $ | 14.0 | | | 21.0 | % |
| Tax-exempt interest and dividends received deduction | (0.6) | | | (4.1) | | | (0.7) | | | (5.3) | | | (1.7) | | | 1.9 | | | (2.1) | | | (3.1) | |
| Other, net | 0.7 | | | 4.5 | | | (0.8) | | | (6.3) | | | 1.2 | | | (1.4) | | | 0.1 | | | 0 | |
| Federal income tax expense (benefit) | 3.2 | | | 21.4 | % | | 1.2 | | | 9.4 | % | | (18.9) | | | 21.5 | % | | $ | 12.0 | | | 17.9 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
11. Pension and Postretirement Benefit Plans
The following table sets forth information regarding the Company’s share of pension and postretirement benefit plans’
components of net periodic cost for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | Pension | | Postretirement | | Pension | | Postretirement |
| Three months ended September 30 | | Nine months ended September 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Service cost | $ | 1.2 | | | $ | 0.8 | | | $ | 0 | | | $ | 0 | | | $ | 3.6 | | | $ | 2.8 | | | $ | 0 | | | $ | 0 | |
| Interest cost | 2.4 | | | 2.9 | | | 0.2 | | | 0.2 | | | 7.2 | | | 8.6 | | | 0.4 | | | 0.5 | |
| Expected return on plan assets | (4.4) | | | (4.2) | | | 0 | | | 0 | | | (13.1) | | | (12.5) | | | 0 | | | 0 | |
| Amortization of: | | | | | | | | | | | | | | | |
| Negative prior service cost | 0 | | | 0 | | | (1.4) | | | (1.4) | | | 0 | | | 0 | | | (4.1) | | | (4.1) | |
| Net actuarial loss | 2.3 | | | 1.5 | | | 0.1 | | | 0.1 | | | 6.9 | | | 4.5 | | | 0.2 | | | 0.2 | |
| Net periodic cost (benefit) | $ | 1.5 | | | $ | 1.0 | | | $ | (1.1) | | | $ | (1.1) | | | $ | 4.6 | | | $ | 3.4 | | | $ | (3.5) | | | $ | (3.4) | |
| | | | | | | | | | | | | | | |
The Company contributed $15.0 million to its pension plan for the nine months ended September 30, 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | Three months ended September 30 | | Nine months ended September 30 |
| 2021 | | 2020 | | 2021 | | 2020 |
| Amount at statutory rate | $ | (5.4) | | | 21.0 | % | | $ | 3.1 | | | 21.0 | % | | $ | (3.3) | | | 21.0 | % | | $ | (18.4) | | | 21.0 | % |
| Tax-exempt interest and dividends received deduction | (0.6) | | | 2.3 | | | (0.6) | | | (4.1) | | | (1.8) | | | 11.5 | | | (1.7) | | | 1.9 | |
| Other, net | (5.4) | | | 20.9 | | | 0.7 | | | 4.5 | | | (0.7) | | | 3.8 | | | 1.2 | | | (1.4) | |
| Federal income tax (benefit) expense | $ | (11.4) | | | 44.2 | % | | $ | 3.2 | | | 21.4 | % | | $ | (5.8) | | | 36.3 | % | | $ | (18.9) | | | 21.5 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
12.8. Pension and Postretirement Benefit Plans
The following table sets forth information regarding the Company’s share of pension and postretirement benefit plans’
components of net periodic cost for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | Pension | | Postretirement | | Pension | | Postretirement |
| Three months ended September 30 | | Nine months ended September 30 |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Service cost | $ | 1.3 | | | $ | 1.2 | | | $ | — | | | $ | — | | | $ | 3.8 | | | $ | 3.6 | | | $ | — | | | $ | — | |
| Interest cost | 2.1 | | | 2.4 | | | — | | | 0.2 | | | 6.3 | | | 7.2 | | | 0.1 | | | 0.4 | |
| Expected return on plan assets | (4.3) | | | (4.4) | | | — | | | — | | | (12.8) | | | (13.1) | | | — | | | — | |
| Amortization of: | | | | | | | | | | | | | | | |
| Negative prior service cost | — | | | — | | | (1.3) | | | (1.4) | | | — | | | — | | | (4.1) | | | (4.1) | |
| Net actuarial loss/(gain) | 3.4 | | | 2.3 | | | (0.1) | | | 0.1 | | | 10.4 | | | 6.9 | | | (0.2) | | | 0.2 | |
| Net periodic cost (benefit) | $ | 2.5 | | | $ | 1.5 | | | $ | (1.4) | | | $ | (1.1) | | | $ | 7.7 | | | $ | 4.6 | | | $ | (4.2) | | | $ | (3.5) | |
| | | | | | | | | | | | | | | |
The Company contributed $15.0 million to its pension plan for the nine months ended September 30, 2021.
9. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive (Loss) Income (Loss)
The following tables set forth the changes in the Company’s accumulated other comprehensive (loss) income (loss) ("AOCI(L)"AOC(L)I"), net of tax, for the three and nine months ended September 30, 20202021 and 2019:2020:
| ($ millions)
| ($ millions)
| Unrealized Gains
and Losses on
Available-for-Sale
Securities | | Benefit Plan Items | | Total | ($ millions)
| Unrealized Gains
and Losses on
Available-for-Sale
Securities | | Benefit Plan Items | | Total |
| Beginning balance at July 1, 2021 | | Beginning balance at July 1, 2021 | $ | 65.8 | | | $ | (79.1) | | | $ | (13.3) | |
| Other comprehensive loss before reclassifications | | Other comprehensive loss before reclassifications | (13.6) | | | — | | | (13.6) | |
Amounts reclassified from AOCI (a) | | Amounts reclassified from AOCI (a) | 0.8 | | | 2.3 | | | 3.1 | |
| Net current period other comprehensive (loss) income | | Net current period other comprehensive (loss) income | (12.8) | | | 2.3 | | | (10.5) | |
| Ending balance at September 30, 2021 | | Ending balance at September 30, 2021 | $ | 53.0 | | | $ | (76.8) | | | $ | (23.8) | |
| | Beginning balance at July 1, 2020 | Beginning balance at July 1, 2020 | $ | 93.0 | | | $ | (75.1) | | | $ | 17.9 | | Beginning balance at July 1, 2020 | $ | 93.0 | | | $ | (75.1) | | | $ | 17.9 | |
| Other comprehensive income before reclassifications | Other comprehensive income before reclassifications | 3.5 | | | 0 | | | 3.5 | | Other comprehensive income before reclassifications | 3.5 | | | — | | | 3.5 | |
Amounts reclassified from AOCI (a) | Amounts reclassified from AOCI (a) | 0.2 | | | 1.7 | | | 1.9 | | Amounts reclassified from AOCI (a) | 0.2 | | | 1.7 | | | 1.9 | |
| Net current period other comprehensive income | Net current period other comprehensive income | 3.7 | | | 1.7 | | | 5.4 | | Net current period other comprehensive income | 3.7 | | | 1.7 | | | 5.4 | |
| Ending balance at September 30, 2020 | Ending balance at September 30, 2020 | $ | 96.7 | | | $ | (73.4) | | | $ | 23.3 | | Ending balance at September 30, 2020 | $ | 96.7 | | | $ | (73.4) | | | $ | 23.3 | |
| | Beginning balance at July 1, 2019 | $ | 33.2 | | | $ | (74.9) | | | $ | (41.7) | | |
| Other comprehensive income before reclassifications | 17.8 | | | 0 | | | 17.8 | | |
Amounts reclassified from AOCI (a) | (0.9) | | | 0.6 | | | (0.3) | | |
| Net current period other comprehensive income | 16.9 | | | 0.6 | | | 17.5 | | |
| Ending balance at September 30, 2019 | $ | 50.1 | | | $ | (74.3) | | | $ | (24.2) | | |
| | (a) | (a) | See separate table below for details about these reclassifications | (a) | See separate table below for details about these reclassifications |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
| | | | | | | | | | | | | | | | | | | | |
($ millions)
| Unrealized Gains
and Losses on
Available-for-Sale
Securities | | Benefit Plan Items | | Total |
| Beginning balance at January 1, 2021 | $ | 97.5 | | | $ | (83.6) | | | $ | 13.9 | |
| Other comprehensive income before reclassifications | (44.7) | | | — | | | (44.7) | |
Amounts reclassified from AOCI (a) | 0.2 | | | 6.8 | | | 7.0 | |
| Net current period other comprehensive income | (44.5) | | | 6.8 | | | (37.7) | |
| Ending balance at September 30, 2021 | $ | 53.0 | | | $ | (76.8) | | | $ | (23.8) | |
| | | | | |
| Beginning balance at January 1, 2020 | $ | 40.4 | | | $ | (78.3) | | | $ | (37.9) | |
| | | | | |
| Other comprehensive loss before reclassifications | 58.8 | | | — | | | 58.8 | |
Amounts reclassified from AOCI (a) | (2.5) | | | 4.9 | | | 2.4 | |
| Net current period other comprehensive income | 56.3 | | | 4.9 | | | 61.2 | |
| Ending balance at September 30, 2020 | $ | 96.7 | | | $ | (73.4) | | | $ | 23.3 | |
| | | | | | |
| (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 | 58.8 | | | 0 | | | 58.8 | |
Amounts reclassified from AOCI (a) | (2.5) | | | 4.9 | | | 2.4 | |
| Net current period other comprehensive income | 56.3 | | | 4.9 | | | 61.2 | |
| Ending balance at September 30, 2020 | $ | 96.7 | | | $ | (73.4) | | | $ | 23.3 | |
| | | | | |
| Beginning balance at January 1, 2019 | $ | (20.2) | | | $ | (76.2) | | | $ | (96.4) | |
| | | | | |
| Other comprehensive loss before reclassifications | 72.5 | | | 0 | | | 72.5 | |
Amounts reclassified from AOCI (a) | (2.2) | | | 1.9 | | | (0.3) | |
| Net current period other comprehensive income | 70.3 | | | 1.9 | | | 72.2 | |
| Ending balance at September 30, 2019 | $ | 50.1 | | | $ | (74.3) | | | $ | (24.2) | |
| | | | | | |
| (a) | See separate table below for details about these reclassifications |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following tables set forth the reclassifications out of accumulated other comprehensive (loss) income, by component, to the Company’s condensed consolidated statement of income for the three and nine months ended September 30, 20202021 and 2019:2020:
| | ($ millions) | ($ millions) | | ($ millions) | |
| Details about Accumulated Other | Details about Accumulated Other | | Three months ended September 30 | | Affected line item in the Condensed | Details about Accumulated Other | | Three months ended September 30 | | Affected line item in the Condensed |
| Comprehensive Income Components | Comprehensive Income Components | | Consolidated Statements of Income | Comprehensive Income Components | | Consolidated Statements of Income |
| | | 2020 | | 2019 | | | | | 2021 | | 2020 | | |
| Unrealized gains on available-for-sale fixed maturity investments | Unrealized gains on available-for-sale fixed maturity investments | | $ | (0.2) | | | $ | 1.2 | | | Realized gain on sale of securities | Unrealized gains on available-for-sale fixed maturity investments | | $ | (1.0) | | | $ | (0.2) | | | Realized gain on sale of securities |
| | | (0.2) | | | 1.2 | | | Total before tax | | | (1.0) | | | (0.2) | | | Total before tax |
| | | 0 | | | (0.3) | | | Tax expense | | | 0.2 | | | — | | | Tax expense |
| | | (0.2) | | | 0.9 | | | Net of tax | | | (0.8) | | | (0.2) | | | Net of tax |
| Amortization of benefit plan items | Amortization of benefit plan items | | | | | | Amortization of benefit plan items | | | | | |
| Negative prior service cost | Negative prior service cost | | 1.6 | | | 1.6 | | | (b) | Negative prior service cost | | 1.6 | | | 1.6 | | | (b) |
| Net actuarial loss | Net actuarial loss | | (3.7) | | | (2.4) | | | (b) | Net actuarial loss | | (4.5) | | | (3.7) | | | (b) |
| | | (2.1) | | | (0.8) | | | Total before tax | | | (2.9) | | | (2.1) | | | Total before tax |
| | | 0.4 | | | 0.2 | | | Tax benefit | | | 0.6 | | | 0.4 | | | Tax benefit |
| | | (1.7) | | | (0.6) | | | Net of tax | | | (2.3) | | | (1.7) | | | Net of tax |
| Total reclassifications for the period | Total reclassifications for the period | | $ | (1.9) | | | $ | 0.3 | | | Total reclassifications for the period | | $ | (3.1) | | | $ | (1.9) | | |
| | (b) | (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). | (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) | ($ millions) | | ($ millions) | |
| Details about Accumulated Other | Details about Accumulated Other | | Nine months ended September 30 | | Affected line item in the Condensed | Details about Accumulated Other | | Nine months ended September 30 | | Affected line item in the Condensed |
| Comprehensive Income Components | Comprehensive Income Components | | Consolidated Statements of Income | Comprehensive Income Components | | Consolidated Statements of Income |
| | | 2020 | | 2019 | | | | | 2021 | | 2020 | | |
| Unrealized gains on available-for-sale fixed maturity investments | Unrealized gains on available-for-sale fixed maturity investments | | $ | 3.2 | | | $ | 2.8 | | | Realized gains on sale of securities | Unrealized gains on available-for-sale fixed maturity investments | | $ | (0.3) | | | $ | 3.2 | | | Realized gains on sale of securities |
| | | 3.2 | | | 2.8 | | | Total before tax | | | (0.3) | | | 3.2 | | | Total before tax |
| | | (0.7) | | | (0.6) | | | Tax expense | | | 0.1 | | | (0.7) | | | Tax expense |
| | | 2.5 | | | 2.2 | | | Net of tax | | | (0.2) | | | 2.5 | | | Net of tax |
| Amortization of benefit plan items | Amortization of benefit plan items | | | | | | Amortization of benefit plan items | | | | | |
| Negative prior service cost | Negative prior service cost | | 4.8 | | | 4.8 | | | (b) | Negative prior service cost | | 4.8 | | | 4.8 | | | (b) |
| Net actuarial loss | Net actuarial loss | | (11.0) | | | (7.2) | | | (b) | Net actuarial loss | | (13.4) | | | (11.0) | | | (b) |
| | | (6.2) | | | (2.4) | | | Total before tax | | | (8.6) | | | (6.2) | | | Total before tax |
| | | 1.3 | | | 0.5 | | | Tax benefit | | | 1.8 | | | 1.3 | | | Tax benefit |
| | | (4.9) | | | (1.9) | | | Net of tax | | | (6.8) | | | (4.9) | | | Net of tax |
| Total reclassifications for the period | Total reclassifications for the period | | $ | (2.4) | | | $ | 0.3 | | | Total reclassifications for the period | | $ | (7.0) | | | $ | (2.4) | | |
| | (b) | (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). | (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). |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
13.10. Net (Loss) Earnings (Loss) per Common Share
The following table sets forth the compilation of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ and shares in millions, except per share amounts) | Three months ended September 30 | | Nine months ended September 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
| Numerator: | | | | | | | |
| Net income (loss) for basic earnings (loss) per common share | $ | 11.6 | | | $ | 11.5 | | | $ | (68.7) | | | $ | 54.7 | |
| | | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average shares for basic earnings (loss) per common share | 43.8 | | | 43.5 | | | 43.7 | | | 43.4 | |
| Effect of dilutive share-based awards | 0.5 | | | 0.5 | | | 0 | | | 0.6 | |
| Adjusted weighted average shares for diluted earnings (loss) per common share | 44.3 | | | 44.0 | | | 43.7 | | | 44.0 | |
| | | | | | | |
| Basic net earnings (loss) per common share | $ | 0.26 | | | $ | 0.26 | | | $ | (1.57) | | | $ | 1.26 | |
| Diluted net earnings (loss) per common share | $ | 0.26 | | | $ | 0.25 | | | $ | (1.57) | | | $ | 1.25 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ and shares in millions, except per share amounts) | Three months ended September 30 | | Nine months ended September 30 |
| 2021 | | 2020 | | 2021 | | 2020 |
| Numerator: | | | | | | | |
| Net (loss) income for basic (loss) earnings per common share | $ | (14.3) | | | $ | 11.6 | | | $ | (10.1) | | | $ | (68.7) | |
| | | | | | | |
| Adjusted net (loss) income for diluted (loss) earnings per common share | $ | (14.3) | | | $ | 11.6 | | | $ | (10.1) | | | $ | (68.7) | |
| Denominator: | | | | | | | |
| Weighted average shares for basic (loss) earnings per common share | 44.3 | | | 43.8 | | | 44.1 | | | 43.7 | |
| Effect of dilutive share-based awards | — | | | 0.5 | | | — | | | — | |
| Adjusted weighted average shares for diluted (loss) earnings per common share | 44.3 | | | 44.3 | | | 44.1 | | | 43.7 | |
| | | | | | | |
| Basic net (loss) earnings per common share | $ | (0.32) | | | $ | 0.26 | | | $ | (0.23) | | | $ | (1.57) | |
| Diluted net (loss) earnings per common share | $ | (0.32) | | | $ | 0.26 | | | $ | (0.23) | | | $ | (1.57) | |
| | | | | | | |
The following table sets forth stock awards and restricted share units ("RSU award") of the Company that were not included in the computation of diluted earnings (loss) per common share because the exercise price of the awards was greater than the average market price or their inclusion would have been antidilutive for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | |
(shares in millions) | | | Nine months ended September 30 |
| | | | | 2020 | | |
Total number of antidilutive awards | | | | | 0.6 | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (shares in millions) | Three months ended September 30 | | Nine months ended September 30 |
| 2021 | | 2020 | | 2021 | | 2020 |
| Total number of antidilutive awards | 1.0 | | | — | | | 0.8 | | | 0.6 | |
| | | | | | | |
14.11. Segment Information
The Company's reportable segments are: personal insurance, commercial insurance, and investment operations. The reportable insurance segments are business units managed separately because of the differences in the type of customers they serve, the products they provide or services they offer. The insurance segments market a broad line of property and casualty insurance products throughout the United States through independent insurance agencies, which include retail agents and wholesale brokers. The investment operations segment, managed by Stateco, provides investment services.
The Company evaluates the performance of its insurance segments using industry financial measurements based on Statutory Accounting Practices (“SAP”), which include loss and loss adjustment expense ratios, underwriting expense ratios, combined ratios, statutory underwriting gain (loss), net premiums earned and net written premiums. One of the most significant differences between SAP and GAAP is that SAP requires all underwriting expenses to be expensed immediately and not deferred and amortized over the same period the premium is earned.
The investment operations segment is evaluated based on investment returns of assets managed by Stateco. Asset information by segment is not reported for the insurance segments because the Company does not produce such information internally.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following table sets forth financial information regarding the Company’s reportable segments and specialty run-off (for the previously exited specialty insurance business) for the three and nine months ended September 30, 20202021 and 2019:2020:
| | ($ millions) | ($ millions) | Three months ended September 30 | | Nine months ended September 30 | ($ millions) | Three months ended September 30 | | Nine months ended September 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Revenue from external sources: | Revenue from external sources: | | | | | | | | Revenue from external sources: | | | | | | | |
| Insurance operations | Insurance operations | | Insurance operations | |
| Personal insurance | Personal insurance | $ | 208.8 | | | $ | 192.7 | | | $ | 609.7 | | | $ | 562.5 | | Personal insurance | $ | 217.2 | | | $ | 208.8 | | | $ | 638.1 | | | $ | 609.7 | |
| Commercial insurance | Commercial insurance | 144.4 | | | 127.0 | | | 414.7 | | | 361.4 | | Commercial insurance | 164.4 | | | 144.4 | | | 470.7 | | | 414.7 | |
| Specialty run-off | Specialty run-off | 0 | | | (0.1) | | | 0 | | | 6.1 | | Specialty run-off | 0.2 | | | — | | | (1.2) | | | — | |
| Total insurance operations | Total insurance operations | 353.2 | | | 319.6 | | | 1,024.4 | | | 930.0 | | Total insurance operations | 381.8 | | | 353.2 | | | 1,107.6 | | | 1,024.4 | |
| Investment operations | Investment operations | | Investment operations | |
| Net investment income | Net investment income | 17.9 | | | 19.3 | | | 54.5 | | | 60.4 | | Net investment income | 17.0 | | | 17.9 | | | 52.3 | | | 54.5 | |
| Net investment gain (loss) | 20.0 | | | (5.0) | | | (39.3) | | | 50.2 | | |
| Net investment (loss) gain | | Net investment (loss) gain | (8.1) | | | 20.0 | | | 56.8 | | | (39.3) | |
| Total investment operations | Total investment operations | 37.9 | | | 14.3 | | | 15.2 | | | 110.6 | | Total investment operations | 8.9 | | | 37.9 | | | 109.1 | | | 15.2 | |
| All other | All other | 0.5 | | | 0.6 | | | 1.6 | | | 1.6 | | All other | 0.4 | | | 0.5 | | | 1.3 | | | 1.6 | |
| Total revenue from external sources | Total revenue from external sources | 391.6 | | | 334.5 | | | 1,041.2 | | | 1,042.2 | | Total revenue from external sources | 391.1 | | | 391.6 | | | 1,218.0 | | | 1,041.2 | |
| Intersegment revenue | Intersegment revenue | 1.5 | | | 1.7 | | | 4.6 | | | 4.9 | | Intersegment revenue | 1.6 | | | 1.5 | | | 4.8 | | | 4.6 | |
| Total revenue | Total revenue | 393.1 | | | 336.2 | | | 1,045.8 | | | 1,047.1 | | Total revenue | 392.7 | | | 393.1 | | | 1,222.8 | | | 1,045.8 | |
| Reconciling items: | Reconciling items: | | Reconciling items: | |
| Eliminate intersegment revenue | Eliminate intersegment revenue | (1.5) | | | (1.7) | | | (4.6) | | | (4.9) | | Eliminate intersegment revenue | (1.6) | | | (1.5) | | | (4.8) | | | (4.6) | |
| Total consolidated revenues | Total consolidated revenues | $ | 391.6 | | | $ | 334.5 | | | $ | 1,041.2 | | | $ | 1,042.2 | | Total consolidated revenues | $ | 391.1 | | | $ | 391.6 | | | $ | 1,218.0 | | | $ | 1,041.2 | |
| Segment income (loss) before federal income tax: | | | | | | | | |
| Segment (loss) income before federal income tax: | | Segment (loss) income before federal income tax: | | | | | | | |
| Insurance operations SAP underwriting (loss) gain | Insurance operations SAP underwriting (loss) gain | | Insurance operations SAP underwriting (loss) gain | |
| Personal insurance | Personal insurance | $ | (30.7) | | | $ | (6.3) | | | $ | (70.8) | | | $ | (32.0) | | Personal insurance | $ | (21.0) | | | $ | (30.7) | | | $ | (114.6) | | | $ | (70.8) | |
| Commercial insurance | Commercial insurance | 14.4 | | | 1.2 | | | (28.0) | | | (17.1) | | Commercial insurance | (2.7) | | | 14.4 | | | 3.1 | | | (28.0) | |
| Specialty run-off | Specialty run-off | (10.4) | | | (0.6) | | | (17.1) | | | (1.3) | | Specialty run-off | — | | | (10.4) | | | 0.2 | | | (17.1) | |
| Total insurance operations | Total insurance operations | (26.7) | | | (5.7) | | | (115.9) | | | (50.4) | | Total insurance operations | (23.7) | | | (26.7) | | | (111.3) | | | (115.9) | |
| Investment operations | Investment operations | | Investment operations | |
| Net investment income | Net investment income | 17.9 | | | 19.3 | | | 54.5 | | | 60.4 | | Net investment income | 17.0 | | | 17.9 | | | 52.3 | | | 54.5 | |
| Net investment gain (loss) | 20.0 | | | (5.0) | | | (39.3) | | | 50.2 | | |
| Net investment (loss) gain | | Net investment (loss) gain | (8.1) | | | 20.0 | | | 56.8 | | | (39.3) | |
| | Total investment operations | Total investment operations | 37.9 | | | 14.3 | | | 15.2 | | | 110.6 | | Total investment operations | 8.9 | | | 37.9 | | | 109.1 | | | 15.2 | |
| All other | All other | 0 | | | 0 | | | 0.1 | | | 0.2 | | All other | — | | | — | | | — | | | 0.1 | |
| Total segment income (loss) before reconciling items | 11.2 | | | 8.6 | | | (100.6) | | | 60.4 | | |
| Total segment (loss) income before reconciling items | | Total segment (loss) income before reconciling items | (14.8) | | | 11.2 | | | (2.2) | | | (100.6) | |
| Reconciling items: | Reconciling items: | | Reconciling items: | |
| GAAP expense adjustments | GAAP expense adjustments | 5.6 | | | 7.2 | | | 20.2 | | | 17.3 | | GAAP expense adjustments | 3.1 | | | 5.6 | | | 7.5 | | | 20.2 | |
| Interest expense on corporate debt | Interest expense on corporate debt | (1.1) | | | (1.2) | | | (3.6) | | | (3.7) | | Interest expense on corporate debt | (1.1) | | | (1.1) | | | (3.3) | | | (3.6) | |
| Corporate expenses | Corporate expenses | (0.9) | | | (1.9) | | | (3.6) | | | (7.3) | | Corporate expenses | (12.9) | | | (0.9) | | | (17.9) | | | (3.6) | |
| Total reconciling items | Total reconciling items | 3.6 | | | 4.1 | | | 13.0 | | | 6.3 | | Total reconciling items | (10.9) | | | 3.6 | | | (13.7) | | | 13.0 | |
| Total consolidated income (loss) before federal income tax | $ | 14.8 | | | $ | 12.7 | | | $ | (87.6) | | | $ | 66.7 | | |
| Total consolidated (loss) income before federal income tax | | Total consolidated (loss) income before federal income tax | $ | (25.7) | | | $ | 14.8 | | | $ | (15.9) | | | $ | (87.6) | |
|
Investable assets attributable to the Company’s investment operations segment totaled $2,782.2$2,805.3 million and $2,747.3$2,870.8 million at September 30, 2020,2021, and December 31, 2019,2020, respectively.
12. 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
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
15. Contingencies and Litigation
In accordance with the Contingencies Topic of the FASB's Accounting Standards Codification, the Company accrues for a litigation-related liability when it is probable that such a liability has been incurred and the amount can be reasonably estimated. The Company reviews all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, the Company cannot reasonably estimate a loss or a range of loss, if any, particularly for proceedings that are in their early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated. If the loss contingency in question is not both probable and reasonably estimable, the Company does not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. Based on currently available information known to the Company, it believes that its reserves for litigation-related liabilities are reasonable. However, in the event that a legal proceeding results in a substantial judgment against, or settlement by, the Company, there can be no assurance that any resulting liability or financial commitment would not have a material adverse effect on the financial condition, results of operations or cash flows of the consolidated financial statements of the Company.
The Company is involved in lawsuits in the ordinary course of its business arising out of or otherwise related to its insurance policies. Additionally, from time to time the Company may be involved in lawsuits, including class actions, in the ordinary course of business but not arising out of or otherwise related to its insurance policies. Recently, these proceedings have included claims and lawsuits seeking coverage under commercial property policies for pure economic losses related to COVID-19, which our policies were not intended to cover.COVID-19. These lawsuits which seek to extend coverage beyond the terms and conditions of those policies, are in various stages of development, in various jurisdictions, and the Company intends to vigorously contest these matters. Based on currently available information, the Company does not believe that any such lawsuits will have a material adverse effect on its consolidated financial position, results of operations, or cash flows. However, the Company cannot provide assurance that it will not be negatively impacted by adverse legislation or adverse judicial rulings in some of these matters. Future court decisions and interpretations, as well as future changes, if any, in legislation could create uncertainties and additional liabilities may arise which could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
Additionally, the Company may be impacted by adverse regulatory actions and adverse court decisions where insurance coverages are expanded beyond the scope originally contemplated in its insurance policies. The Company believes that the effects, if any, of such regulatory actions and published court decisions are not likely to have a material adverse effect on its consolidated financial position, results of operations or cash flows.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The term “State Auto Financial” as used below refers only to State Auto Financial Corporation and the terms “our Company,” “we,” “us,” and “our” as used below refer to State Auto Financial Corporation and its consolidated subsidiaries. The term “third quarter” as used below refers to the three months ended September 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, 20192020 (the “2019“2020 Form 10-K”).
The discussion and analysis presented below relates to the material changes in financial condition and results of operations for our consolidated balance sheets as of September 30, 20202021 and December 31, 2019,2020, and for the consolidated statements of income for the three and nine month periods ended September 30, 20202021 and 2019.2020. This discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of the 20192020 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 20192020 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.
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 2020 Form 10-K for more information about our insurance segments. The results from our previously exited specialty insurance business are disclosed as "specialty run-off." Financial information about our reportable segments for 2021 is set forth in Note 12 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.
Cautionary Notice Regarding Forward Looking Statements
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. In addition, the forward-looking statements contained in the “Proposed Transactions with Liberty Mutual” section are subject to additional risks and uncertainties, such as (1) conditions to the closing of the Transactions may not be satisfied; (2) regulatory approvals required for the Transactions may not be obtained, or required regulatory approvals may delay the Transactions or result in the imposition of conditions that could have a material adverse effect on LMHC, State Auto Mutual or State Auto Financial or State Auto Financial or cause the parties to abandon the Transactions; (3) uncertainty as to the timing of completion of the Transactions; (4) the business of LMHC, State Auto Mutual or State Auto Financial may suffer as a result of uncertainty surrounding the Transactions; (5) the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; (6) risks related to disruption of management’s attention from the ongoing business operations of LMHC, State Auto Mutual or State Auto Financial due to the Transactions; (7) the effect of the announcement of the Transactions on the relationships of LMHC, State Auto Mutual or State Auto Financial with its clients, operating results and business generally; (8) the outcome of any legal proceedings to the extent initiated against LMHC, State Auto Mutual or State Auto Financial following the announcement of the proposed Transactions; and (9) LMHC, State Auto Mutual or State Auto Financial may be adversely affected by other economic, business, and/or competitive factors as well as management’s response to any of the aforementioned factors. 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 20192020 Form 10-K, updated by Part II, Item 1A of this Form 10-Q. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
We have three reportable segments: personal insurance, commercial insurance,
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
PROPOSED TRANSACTION WITH LIBERTY MUTUAL
On July 12, 2021, State Auto Financial and investment operations. The reportable insurance segments are business units managed separately becauseState Auto Mutual, which owned approximately 58.7% of State Auto Financial’s issued and outstanding common stock as of the differencesdate thereof, entered into an Agreement and Plan of Merger and Combination (the “Merger Agreement”) with Liberty Mutual Holding Company Inc. (“LMHC”), Pymatuning, Inc., a wholly-owned indirect subsidiary of LMHC (“Merger Sub I”), and Andover, Inc., a wholly-owned direct subsidiary of LMHC (“Merger Sub II”).
The Merger Agreement provides for State Auto Mutual to reorganize through a merger of Merger Sub II with and into State Auto Mutual, with State Auto Mutual surviving such merger as an Ohio domiciled reorganized stock insurance subsidiary of LMHC and LMHC granting equity rights in LMHC to each State Auto Mutual member upon the typeextinguishment of customers they serve or products they provide or services they offer. The insurance segments marketsuch State Auto Mutual member’s equity rights in State Auto Mutual at the effective time of such merger. Simultaneously with that transaction, the Merger Agreement provides for LMHC to acquire State Auto Financial through a broad linemerger of propertyMerger Sub I with and casualty insurance products throughoutinto State Auto Financial, with State Auto Financial surviving such merger (the “Merger”). Subject to the United States through independent insurance agencies, which include retail agentsterms 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 isconditions set forth in Note 14the Merger Agreement, if the transactions contemplated by the Merger Agreement, including the Merger (collectively, the “Transactions”) are consummated, at the effective time of our condensed consolidated financial statements includedthe Transactions: (i) the members of State Auto Mutual will become members of LMHC; and (ii) each share of State Auto Financial’s common stock issued and outstanding immediately prior to the effective time (other than (1) treasury shares owned by State Auto Financial and shares owned by LMHC and its subsidiaries, (2) shares owned by State Auto Mutual or any of State Auto Financial’s subsidiaries, and (3) shares for which appraisal rights have been properly exercised under Ohio law) will be converted into the right to receive $52.00 in cash, without interest and less any applicable withholding taxes. The Transactions are expected to close in 2022. As discussed below, the Merger Agreement has been adopted by the shareholders of State Auto Financial. The Transactions remain subject to approval by the members of State Auto Mutual, and a membership meeting is scheduled for November 22, 2021 for the members of State Auto Mutual to vote on whether to approve the Transactions. The Transactions are also subject to receipt of required regulatory approvals and satisfaction of other customary closing conditions. See Part II, Item 11A of this Form 10-Q.
COVID-19
The impact of COVID-19 on our future results of operations and financial condition are highly uncertain at this time and outside of our control. The scope, duration and magnitude of the effects of the on-going COVID-19 pandemic continue to evolve rapidly and in ways that are difficult or impossible to anticipate. For discussions on how COVID-19 affected our operations, see the "Results of Operations" included in this Item 2. For10-Q, for a discussion of certain risks related to the most significant risksproposed Transactions.
A special meeting of shareholders (the “Special Meeting”) of State Auto Financial was held on September 29, 2021 to vote on the proposals identified in State Auto Financial’s definitive proxy statement for the Special Meeting, which proxy statement was filed by State Auto Financial with the Securities and uncertaintiesExchange Commission (“SEC”) on August 27, 2021. At the Special Meeting, the State Auto Financial shareholders voted to adopt the Merger Agreement, with 99.5% of the common shares of State Auto Financial voting (including abstentions) in favor of such adoption.
For a detailed description of the Merger Agreement and the Transactions, please see Item 1.01 of the Current Report on Form 8-K that could impact ourwe filed with the SEC on July 12, 2021, and a copy of the Merger Agreement filed as Exhibit 2.1 therewith. For a detailed description of the results of operations, financial position, liquidity or cash flows as a resultthe Special Meeting, please see Item 5.07 of the COVID-19 pandemic, see “Part II-Item 1A-Risk Factors” included in thisCurrent Report on Form 10-Q.8-K that we filed with the SEC on September 30, 2021, and a copy of the press release filed as Exhibit 99.1 therewith.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
POOLING ARRANGEMENT
The STFC Pooled Companies and the Mutual Pooled Companies participate in a quota share reinsurance pooling arrangement referred to as the “Pooling Arrangement." Under the Pooling Arrangement, State Auto Mutual assumes premiums, losses and expenses from each of the Pooled Companies and in turn cedes to each of the Pooled Companies a specified portion of premiums, losses and expenses based on each of the Pooled Companies’ respective pooling percentages. State Auto Mutual then retains the balance of the pooled business.
The following table sets forth the participants and their participation percentages in the Pooling Arrangement:
| | | | | | | | |
| STFC Pooled Companies: | |
| State Auto P&C | 51.0 | % |
| Milbank | 14.0 | |
| SA Ohio | — | |
| Total STFC Pooled Companies | 65.0 | % |
| State Auto Mutual Pooled Companies: | |
| State Auto Mutual | 34.5 | % |
| SA Wisconsin | — | |
| Meridian Security | — | |
| Patrons Mutual | 0.5 | |
| RIC | — | |
| Plaza | — | |
| American Compensation | — | |
| Bloomington Compensation | — | |
| Total State Auto Mutual Pooled Companies | 35.0 | % |
| | |
| |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
RESULTS OF OPERATIONS
The following table sets forth certain key performance indicators we use to monitor our operations for the three and nine months ended September 30, 20202021 and 2019:2020:
| | ($ millions, except per share amounts) | ($ millions, except per share amounts) | Three months ended September 30 | | Nine months ended September 30 | ($ millions, except per share amounts) | Three months ended September 30 | | Nine months ended September 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| GAAP Basis: | GAAP Basis: | | | | | | | | GAAP Basis: | | | | | | | |
| Total revenues | Total revenues | $ | 391.6 | | | $ | 334.5 | | | $ | 1,041.2 | | | $ | 1,042.2 | | Total revenues | $ | 391.1 | | | $ | 391.6 | | | $ | 1,218.0 | | | $ | 1,041.2 | |
| Income (loss) before federal income taxes | $ | 14.8 | | | $ | 12.7 | | | $ | (87.6) | | | $ | 66.7 | | |
| Net income (loss) | $ | 11.6 | | | $ | 11.5 | | | $ | (68.7) | | | $ | 54.7 | | |
| Basic earnings (loss) per share | $ | 0.26 | | | $ | 0.26 | | | $ | (1.57) | | | $ | 1.26 | | |
| Diluted earnings (loss) per share | $ | 0.26 | | | $ | 0.25 | | | $ | (1.57) | | | $ | 1.25 | | |
| (Loss) income before federal income taxes | | (Loss) income before federal income taxes | $ | (25.7) | | | $ | 14.8 | | | $ | (15.9) | | | $ | (87.6) | |
| Net (loss) income | | Net (loss) income | $ | (14.3) | | | $ | 11.6 | | | $ | (10.1) | | | $ | (68.7) | |
| Basic (loss) earnings per share | | Basic (loss) earnings per share | $ | (0.32) | | | $ | 0.26 | | | $ | (0.23) | | | $ | (1.57) | |
| Diluted (loss) earnings per share | | Diluted (loss) earnings per share | $ | (0.32) | | | $ | 0.26 | | | $ | (0.23) | | | $ | (1.57) | |
| Stockholders’ equity | Stockholders’ equity | | $ | 944.1 | | | $ | 943.7 | | Stockholders’ equity | | $ | 954.9 | | | $ | 944.1 | |
| Return on average equity (LTM) | Return on average equity (LTM) | | (3.8) | % | | 3.4 | % | Return on average equity (LTM) | | 7.5 | % | | (3.8) | % |
| Book value per share | Book value per share | | $ | 21.57 | | | $ | 21.68 | | Book value per share | | $ | 21.49 | | | $ | 21.57 | |
| Debt to capital ratio | Debt to capital ratio | | 11.4 | % | | 11.4 | % | Debt to capital ratio | | 11.3 | % | | 11.4 | % |
| Cat loss and ALAE ratio | Cat loss and ALAE ratio | 16.6 | % | | 3.3 | % | | 18.6 | % | | 8.1 | % | Cat loss and ALAE ratio | 10.3 | % | | 16.6 | % | | 17.2 | % | | 18.6 | % |
| Non-cat loss and LAE ratio | Non-cat loss and LAE ratio | 54.6 | % | | 61.9 | % | | 55.8 | % | | 60.5 | % | Non-cat loss and LAE ratio | 64.9 | % | | 54.6 | % | | 61.2 | % | | 55.8 | % |
| Loss and LAE ratio | Loss and LAE ratio | 71.2 | % | | 65.2 | % | | 74.4 | % | | 68.6 | % | Loss and LAE ratio | 75.2 | % | | 71.2 | % | | 78.4 | % | | 74.4 | % |
| Expense ratio | Expense ratio | 34.8 | % | | 34.3 | % | | 34.9 | % | | 35.0 | % | Expense ratio | 30.1 | % | | 34.8 | % | | 31.0 | % | | 34.9 | % |
| Combined ratio | Combined ratio | 106.0 | % | | 99.5 | % | | 109.3 | % | | 103.6 | % | Combined ratio | 105.3 | % | | 106.0 | % | | 109.4 | % | | 109.3 | % |
| Premium written growth | Premium written growth | 9.3 | % | | 11.0 | % | | 11.3 | % | | 9.0 | % | Premium written growth | 10.2 | % | | 9.3 | % | | 7.4 | % | | 11.3 | % |
| Investment yield | Investment yield | 2.8 | % | | 2.9 | % | | 2.9 | % | | 3.0 | % | Investment yield | 2.7 | % | | 2.8 | % | | 2.7 | % | | 2.9 | % |
| | SAP Basis: | SAP Basis: | | SAP Basis: | |
| Cat loss and ALAE ratio | Cat loss and ALAE ratio | 16.6 | % | | 3.3 | % | | 18.6 | % | | 8.1 | % | Cat loss and ALAE ratio | 10.3 | % | | 16.6 | % | | 17.2 | % | | 18.6 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | 49.5 | % | | 56.1 | % | | 49.9 | % | | 54.3 | % | Non-cat loss and ALAE ratio | 59.2 | % | | 49.5 | % | | 55.2 | % | | 49.9 | % |
| ULAE ratio | ULAE ratio | 5.2 | % | | 6.0 | % | | 6.0 | % | | 6.3 | % | ULAE ratio | 5.6 | % | | 5.2 | % | | 5.8 | % | | 6.0 | % |
| Loss and LAE ratio | Loss and LAE ratio | 71.3 | % | | 65.4 | % | | 74.5 | % | | 68.7 | % | Loss and LAE ratio | 75.1 | % | | 71.3 | % | | 78.2 | % | | 74.5 | % |
| Expense ratio | Expense ratio | 33.8 | % | | 33.6 | % | | 34.1 | % | | 34.3 | % | Expense ratio | 28.4 | % | | 33.8 | % | | 29.6 | % | | 34.1 | % |
| Combined ratio | Combined ratio | 105.1 | % | | 99.0 | % | | 108.6 | % | | 103.0 | % | Combined ratio | 103.5 | % | | 105.1 | % | | 107.8 | % | | 108.6 | % |
|
| | | | | | | | | | | |
| Twelve months ended September 30 |
| | 2020 | | 2019 |
| Net premiums written to surplus | 1.7 | | | 1.5 | |
| | | | | | | | | | | |
| Twelve months ended September 30 |
| | 2021 | | 2020 |
| Net premiums written to surplus | 1.7 | | | 1.7 | |
Third Quarter and Year to Date 2021 Overview:
•For the three and nine months ended September 30, 2021, net investment loss was $8.1 million and net investment gain was $56.8 million, respectively, which included $6.7 million of losses recognized on equity securities and $49.7 million of gains recognized on equity securities, respectively.
•The SAP catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2021 were 10.3% and 17.2%, respectively, or $39.4 million and $191.0 million, respectively. The 2021 third quarter was impacted by severe weather events in the Midwest and Texas. The 2021 year to date was also impacted by winter storms Uri and Viola in Texas, which added 5.6 points to the year to date loss and ALAE ratio. Approximately 60% and 70% of the catastrophe losses for the 2021 third quarter and year to date periods, respectively, occurred within the homeowners line of business.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
•The SAP non-cat loss and ALAE ratios for the three and nine months ended September 30, 2021 were 59.2% and 55.2%, respectively, or $226.1 million and $611.3 million, respectively.
◦The 2021 third quarter and year to date current accident year non-cat loss and ALAE ratios were impacted by elevated claim frequency and severity in personal auto and commercial auto. The 2021 year to date was also impacted by elevated frequency and severity of property losses in homeowners.
◦The 2021 third quarter and year to date non-catastrophe losses and ALAE included 1.3 and 4.1 points, respectively, of favorable development relating to prior years, or $5.0 million and $45.5 million, respectively. For the 2021 third quarter and year to date, the commercial insurance segment contributed $9.2 million and $47.7 million, respectively, of favorable development.
•For the three and nine months ended September 30, 2021, we incurred the following expenses, included in "other expenses", as a result of the pending Merger:
◦$9.3 million due to an increase in the valuation of the Director RSU awards as a result of the increase in our stock price, and
◦$2.9 million of legal and investment banking fees and expenses.
Third Quarter and Year to Date 2020 Overview:
COVID-19
Beginning in March 2020, the global COVID-19 pandemic has impacted our results of operations. For the 2020 third quarter and year to date, our results were impacted as follows:
•For the three and nine months ended September 30, 2020, net investment gain was $20.0 million and net investment loss was $39.3 million, respectively, which includedincluding $42.3 million and $50.9 million, respectively, of realized losses on equity securities. During the third quarter, we completed the exit of our investments in the Master Limited Partnership Exchange Traded Funds ("MLP ETF's") equity security asset class and realized losses of $45.9 million and $56.5 million, respectively, for the three and nine months ended September 30, 2020. The decline in the fair value of the investments in the MLP ETFs during 2020 was due to the market volatility caused
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
by the COVID-19 pandemic. Net investment gain (loss) for the 2020 third quarter and year to date included $62.5 million and $8.2 million, respectively, of unrealized gains from equity securities and other invested assets. The fair values of our equity securities and other invested assets still held in our investment portfolio have mostly recovered from the disruption in global financial markets caused by the COVID-19 pandemic.
•The impact on the current accident year non-cat loss and ALAE current accident year included:
◦A decline in claim frequency in personal auto and commercial auto due to a reduction in miles driven as a result of people working remotely and staying at home more because of COVID-19 concerns,
◦A decline in claim frequency in small commercial package, middle market commercial and workers' compensation due to reduced business and employment activity,
◦Increased workers' compensation claims for businesses in the medical field such as nursing homes and hospitals, due to employees being exposed to COVID-19 in the course of their employment, and
◦Increased legal defense costs in small commercial package and middle market commercial due to litigation involving business interruption insurance claims.
Other FactorsResults
•The SAP catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2020 were 16.6% and 18.6%, respectively, or $58.7 million and $191.0 million, respectively. The 2020 third quarter and year to date were impacted by the Midwest derecho in August, with approximately 75% of the losses occurring in Iowa, as well as widespread wind and hail events. Approximately 50% of the catastrophe losses for the quarter were in our homeowners line of business. The 2020 third quarter and year to date were also impacted by adverse development of prior accident year losses of $12.4 million in E&S property related to hurricane Irma. The 2020 year to date was also impacted by (i) a first quarter wind and hail storm, including tornadoes, in Tennessee that primarily impacted the middle market line of business, and (ii) widespread second quarter wind and hail events in the South and Midwest that primarily impacted the homeowners line of business.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
•The SAP non-cat loss and ALAE ratios for the three and nine months ended September 30, 2020 were 49.5% and 49.9%, or $175.0 million and $510.6 million, respectively.
◦The 2020 third 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 an elevated level of large losses, including fires.
◦The 2020 third quarter and year to date non-catastrophe losses and ALAE included 5.5 points and 3.1 points, respectively, of favorable development relating to prior years, or $19.3 million and $31.8 million, respectively. For the 2020 third quarter and year to date, the commercial insurance segment contributed $26.5 million and $57.2 million, respectively, of favorable development, which was partially offset by $8.1 million and $20.2 million, respectively, of adverse development from the personal insurance segment. The 2020 year to date was also impacted by $5.2 million of adverse development from specialty run-off primarily due to an adverse court decision relating to an E&S casualty claim from 2016.
Third Quarter and Year to Date 2019 Overview:
•For the three and nine months ended September 30, 2019, net investment losses were $5.0 million and net investment gains were $50.2 million, respectively, which included $4.4 million of unrealized losses and $51.2 million of unrealized gains, respectively, from equity securities and other invested assets.
•The catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2019 were 3.3% and 8.1%, respectively, or $10.6 million and $75.7 million, respectively. The 2019 third quarter and year to date were impacted by severe storms in the South and Midwest. Approximately 50 percent of the year to date catastrophe losses occurred in Texas.
•The SAP non-cat loss and ALAE ratios for the three and nine months ended September 30, 2019 were 56.1% and 54.3%, respectively or $179.0 million and $504.4 million, respectively.
◦The 2019 third quarter and year to date current accident year non-cat loss and ALAE ratios were impacted by non-cat weather losses, primarily wind and hail.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
◦The 2019 third quarter and year to date non-catastrophe losses and ALAE included 5.1 points and 5.8 points, respectively, of favorable development relating to prior years, or $16.1 million and $54.1 million, respectively. For three and nine months ended September 30, 2019, the personal and commercial insurance segments contributed 4.8 points and 5.6 points, respectively, or $15.2 million and $51.7 million, respectively, of favorable development.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Insurance Segments
We measure our top-line growth for our insurance segments based on net written premiums, which provides us with an indication of how well we are doing in terms of revenue growth before it is actually earned. Our policies provide a fixed amount of coverage for a stated period of time, often referred to as the “policy term.” As such, our net written premiums are recognized as earned ratably over the policy term. The unearned portion of written premiums, called unearned premiums, is reflected on our balance sheet as a liability and represents our obligation to provide coverage for the unexpired term of the policies.
Insurance industry regulators require our insurance subsidiaries to report their financial condition and results of operations using SAP. We use SAP financial results, along with industry standard financial measures determined on a SAP basis and certain measures determined on a GAAP basis, to internally monitor the performance of our insurance segments and reward our employees.
One of the more significant differences between GAAP and SAP is that SAP requires all underwriting expenses to be expensed immediately and not deferred over the same period that the premium is earned. In converting SAP underwriting results to GAAP underwriting results, acquisition costs are deferred and amortized over the periods the related written premiums are earned. For a discussion of deferred acquisition costs, see “Critical Accounting Policies – Deferred Acquisition Costs” section included in Item 7 of our 2019the 2020 Form 10-K.
The accounting for pension benefits also contributes to the difference between our GAAP loss and expense ratios and our SAP loss and expense ratios. For a discussion of our pension and postretirement benefit obligations, see the “Critical Accounting Policies – Pension and Postretirement Benefit Obligations” section included in Item 7 of our 2019the 2020 Form 10-K.
All references to financial measures or components thereof in this discussion are calculated on a GAAP basis, unless otherwise noted.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
The following tables set forth certain key performance indicators based on SAP for our insurance segments for the three and nine months ended September 30, 20202021 and 2019:2020:
| | ($ in millions) | ($ in millions) | | ($ in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Three months ended September 30, 2020 | | Personal & Commercial | | Specialty run-off | | Total | |
| Three months ended September 30 | | Three months ended September 30 | | Personal & Commercial | | Personal & Commercial | | Total(1) | | Total(1) |
| | Net written premiums | Net written premiums | | $ | 379.0 | | | $ | 0.1 | | | $ | 379.1 | | Net written premiums | | $ | 417.6 | | | $ | 379.0 | | | $ | 417.7 | | | $ | 379.1 | |
| Net earned premiums | Net earned premiums | | 353.2 | | | — | | | 353.2 | | Net earned premiums | | 381.6 | | | 353.2 | | | 381.8 | | | 353.2 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 46.4 | | | 12.3 | | | 58.7 | | Cat loss and ALAE | | 39.5 | | | 46.4 | | | 39.4 | | | 58.7 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | (18.4) | | | (0.9) | | | (19.3) | | Prior accident years non-cat loss and ALAE | | (4.9) | | | (18.4) | | | (5.0) | | | (19.3) | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 194.1 | | | 0.2 | | | 194.3 | | Current accident year non-cat loss and ALAE | | 230.9 | | | 194.1 | | | 231.1 | | | 194.3 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 175.7 | | | (0.7) | | | 175.0 | | Total non-cat loss and ALAE | | 226.0 | | | 175.7 | | | 226.1 | | | 175.0 | |
| Total Loss and ALAE | Total Loss and ALAE | | 222.1 | | | 11.6 | | | 233.7 | | Total Loss and ALAE | | 265.5 | | | 222.1 | | | 265.5 | | | 233.7 | |
| ULAE | ULAE | | 19.6 | | | (1.3) | | | 18.3 | | ULAE | | 21.3 | | | 19.6 | | | 21.4 | | | 18.3 | |
| Total Loss and LAE | Total Loss and LAE | | 241.7 | | | 10.3 | | | 252.0 | | Total Loss and LAE | | 286.8 | | | 241.7 | | | 286.9 | | | 252.0 | |
| Underwriting expenses | Underwriting expenses | | 127.8 | | | 0.1 | | | 127.9 | | Underwriting expenses | | 118.5 | | | 127.8 | | | 118.6 | | | 127.9 | |
| Net underwriting loss | Net underwriting loss | | $ | (16.3) | | | $ | (10.4) | | | $ | (26.7) | | Net underwriting loss | | $ | (23.7) | | | $ | (16.3) | | | $ | (23.7) | | | $ | (26.7) | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 13.1 | % | | N/M(1) | | 16.6 | % | Cat loss and ALAE ratio | | 10.3 | % | | 13.1 | % | | 10.3 | % | | 16.6 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | (5.2) | % | | N/M | | (5.5) | % | Prior accident years non-cat loss and ALAE ratio | | (1.3) | % | | (5.2) | % | | (1.3) | % | | (5.5) | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 55.1 | % | | N/M | | 55.0 | % | Current accident year non-cat loss and ALAE ratio | | 60.5 | % | | 55.1 | % | | 60.5 | % | | 55.0 | % |
| Total non-cat loss and ALAE ratio | Total non-cat loss and ALAE ratio | | 49.9 | % | | N/M | | 49.5 | % | Total non-cat loss and ALAE ratio | | 59.2 | % | | 49.9 | % | | 59.2 | % | | 49.5 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 63.0 | % | | N/M | | 66.1 | % | Total Loss and ALAE ratio | | 69.5 | % | | 63.0 | % | | 69.5 | % | | 66.1 | % |
| ULAE ratio | ULAE ratio | | 5.5 | % | | N/M | | 5.2 | % | ULAE ratio | | 5.6 | % | | 5.5 | % | | 5.6 | % | | 5.2 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 68.5 | % | | N/M | | 71.3 | % | Total Loss and LAE ratio | | 75.1 | % | | 68.5 | % | | 75.1 | % | | 71.3 | % |
| Expense ratio | Expense ratio | | 33.7 | % | | N/M | | 33.8 | % | Expense ratio | | 28.4 | % | | 33.7 | % | | 28.4 | % | | 33.8 | % |
| Combined ratio | Combined ratio | | 102.2 | % | | N/M | | 105.1 | % | Combined ratio | | 103.5 | % | | 102.2 | % | | 103.5 | % | | 105.1 | % |
| (1) N/M = Not Meaningful | | |
(1)Includes specialty run-off | | (1)Includes specialty run-off | |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
| | ($ in millions) | ($ in millions) | | ($ in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Three months ended September 30, 2019 | | Personal & Commercial | | Specialty run-off | | Total | |
| Nine Months Ended September 30 | | Nine Months Ended September 30 | | Personal & Commercial | | Personal & Commercial | | Total(1) | | Total(1) |
| | Net written premiums | Net written premiums | | $ | 347.2 | | | $ | (0.4) | | | $ | 346.8 | | Net written premiums | | $ | 1,190.0 | | | $ | 1,107.3 | | | $ | 1,188.7 | | | $ | 1,107.2 | |
| Net earned premiums | Net earned premiums | | 319.7 | | | (0.1) | | | 319.6 | | Net earned premiums | | 1,108.8 | | | 1,024.4 | | | 1,107.6 | | | 1,024.4 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 10.3 | | | 0.3 | | | 10.6 | | Cat loss and ALAE | | 192.8 | | | 178.6 | | | 191.0 | | | 191.0 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | (15.2) | | | (0.9) | | | (16.1) | | Prior accident years non-cat loss and ALAE | | (45.3) | | | (37.0) | | | (45.5) | | | (31.8) | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 195.0 | | | 0.1 | | | 195.1 | | Current accident year non-cat loss and ALAE | | 656.6 | | | 542.1 | | | 656.8 | | | 542.4 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 179.8 | | | (0.8) | | | 179.0 | | Total non-cat loss and ALAE | | 611.3 | | | 505.1 | | | 611.3 | | | 510.6 | |
| Total Loss and ALAE | Total Loss and ALAE | | 190.1 | | | (0.5) | | | 189.6 | | Total Loss and ALAE | | 804.1 | | | 683.7 | | | 802.3 | | | 701.6 | |
| ULAE | ULAE | | 19.2 | | | (0.1) | | | 19.1 | | ULAE | | 64.2 | | | 62.9 | | | 64.2 | | | 61.6 | |
| Total Loss and LAE | Total Loss and LAE | | 209.3 | | | (0.6) | | | 208.7 | | Total Loss and LAE | | 868.3 | | | 746.6 | | | 866.5 | | | 763.2 | |
| Underwriting expenses | Underwriting expenses | | 115.5 | | | 1.1 | | | 116.6 | | Underwriting expenses | | 352.0 | | | 376.6 | | | 352.4 | | | 377.1 | |
| Net underwriting loss | Net underwriting loss | | $ | (5.1) | | | $ | (0.6) | | | $ | (5.7) | | Net underwriting loss | | $ | (111.5) | | | $ | (98.8) | | | $ | (111.3) | | | $ | (115.9) | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 3.2 | % | | N/M(1) | | 3.3 | % | Cat loss and ALAE ratio | | 17.4 | % | | 17.4 | % | | 17.2 | % | | 18.6 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | (4.8) | % | | N/M | | (5.1) | % | Prior accident years non-cat loss and ALAE ratio | | (4.1) | % | | (3.6) | % | | (4.1) | % | | (3.1) | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 61.0 | % | | N/M | | 61.2 | % | Current accident year non-cat loss and ALAE ratio | | 59.2 | % | | 53.0 | % | | 59.3 | % | | 53.0 | % |
| Total non-cat loss and ALAE ratio | Total non-cat loss and ALAE ratio | | 56.2 | % | | N/M | | 56.1 | % | Total non-cat loss and ALAE ratio | | 55.1 | % | | 49.4 | % | | 55.2 | % | | 49.9 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 59.4 | % | | N/M | | 59.4 | % | Total Loss and ALAE ratio | | 72.5 | % | | 66.8 | % | | 72.4 | % | | 68.5 | % |
| ULAE ratio | ULAE ratio | | 6.0 | % | | N/M | | 6.0 | % | ULAE ratio | | 5.8 | % | | 6.1 | % | | 5.8 | % | | 6.0 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 65.4 | % | | N/M | | 65.4 | % | Total Loss and LAE ratio | | 78.3 | % | | 72.9 | % | | 78.2 | % | | 74.5 | % |
| Expense ratio | Expense ratio | | 33.3 | % | | N/M | | 33.6 | % | Expense ratio | | 29.6 | % | | 34.0 | % | | 29.6 | % | | 34.1 | % |
| Combined ratio | Combined ratio | | 98.7 | % | | N/M | | 99.0 | % | Combined ratio | | 107.9 | % | | 106.9 | % | | 107.8 | % | | 108.6 | % |
| (1) N/M = Not Meaningful | | |
(1)Includes specialty run-off | | (1)Includes specialty run-off | |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
| | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | | | | |
| Nine months ended September 30, 2020 | | Personal & Commercial | | Specialty run-off | | Total |
| | | | | | |
| Net written premiums | | $ | 1,107.3 | | | $ | (0.1) | | | $ | 1,107.2 | |
| Net earned premiums | | 1,024.4 | | | — | | | 1,024.4 | |
| Losses and LAE incurred: | | | | | | |
| Cat loss and ALAE | | 178.6 | | | 12.4 | | | 191.0 | |
| Non-cat loss and ALAE | | | | | | |
| Prior accident years non-cat loss and ALAE | | (37.0) | | | 5.2 | | | (31.8) | |
| Current accident year non-cat loss and ALAE | | 542.1 | | | 0.3 | | | 542.4 | |
| Total non-cat loss and ALAE | | 505.1 | | | 5.5 | | | 510.6 | |
| Total Loss and ALAE | | 683.7 | | | 17.9 | | | 701.6 | |
| ULAE | | 62.9 | | | (1.3) | | | 61.6 | |
| Total Loss and LAE | | 746.6 | | | 16.6 | | | 763.2 | |
| Underwriting expenses | | 376.6 | | | 0.5 | | | 377.1 | |
| Net underwriting loss | | $ | (98.8) | | | $ | (17.1) | | | $ | (115.9) | |
| | | | | | |
| Cat loss and ALAE ratio | | 17.4 | % | | N/M(1) | | 18.6 | % |
| Non-cat loss and ALAE ratio | | | | | | |
| Prior accident years non-cat loss and ALAE ratio | | (3.6) | % | | N/M | | (3.1) | % |
| Current accident year non-cat loss and ALAE ratio | | 53.0 | % | | N/M | | 53.0 | % |
| Total non-cat loss and ALAE ratio | | 49.4 | % | | N/M | | 49.9 | % |
| Total Loss and ALAE ratio | | 66.8 | % | | N/M | | 68.5 | % |
| ULAE ratio | | 6.1 | % | | N/M | | 6.0 | % |
| Total Loss and LAE ratio | | 72.9 | % | | N/M | | 74.5 | % |
| Expense ratio | | 34.0 | % | | N/M | | 34.1 | % |
| Combined ratio | | 106.9 | % | | N/M | | 108.6 | % |
| | | | | | |
(1) N/M = Not Meaningful | | | | | | |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
| | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | | | | |
| Nine months ended September 30, 2019 | | Personal & Commercial | | Specialty run-off | | Total |
| | | | | | |
| Net written premiums | | $ | 994.0 | | | $ | 0.5 | | | $ | 994.5 | |
| Net earned premiums | | 923.9 | | | 6.1 | | | 930.0 | |
| Losses and LAE incurred: | | | | | | |
| Cat loss and ALAE | | 71.7 | | | 4.0 | | | 75.7 | |
| Non-cat loss and ALAE | | | | | | |
| Prior accident years non-cat loss and ALAE | | (51.7) | | | (2.4) | | | (54.1) | |
| Current accident year non-cat loss and ALAE | | 553.6 | | | 4.9 | | | 558.5 | |
| Total non-cat loss and ALAE | | 501.9 | | | 2.5 | | | 504.4 | |
| Total Loss and ALAE | | 573.6 | | | 6.5 | | | 580.1 | |
| ULAE | | 59.6 | | | (0.8) | | | 58.8 | |
| Total Loss and LAE | | 633.2 | | | 5.7 | | | 638.9 | |
| Underwriting expenses | | 339.8 | | | 1.7 | | | 341.5 | |
| Net underwriting loss | | $ | (49.1) | | | $ | (1.3) | | | $ | (50.4) | |
| | | | | | |
| Cat loss and ALAE ratio | | 7.8 | % | | N/M(1) | | 8.1 | % |
| Non-cat loss and ALAE ratio | | | | | | |
| Prior accident years non-cat loss and ALAE ratio | | (5.6) | % | | N/M | | (5.8) | % |
| Current accident year non-cat loss and ALAE ratio | | 59.9 | % | | N/M | | 60.1 | % |
| Total non-cat loss and ALAE ratio | | 54.3 | % | | N/M | | 54.3 | % |
| Total Loss and ALAE ratio | | 62.1 | % | | N/M | | 62.4 | % |
| ULAE ratio | | 6.4 | % | | N/M | | 6.3 | % |
| Total Loss and LAE ratio | | 68.5 | % | | N/M | | 68.7 | % |
| Expense ratio | | 34.2 | % | | N/M | | 34.3 | % |
| Combined ratio | | 102.7 | % | | N/M | | 103.0 | % |
| | | | | | |
(1) N/M = Not Meaningful | | | | | | |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Personal Insurance Segment
The following tables set forth certain key performance indicators based on SAP by major product line for our personal insurance segment for the three and nine months ended September 30, 20202021 and 2019:2020:
Table 1
| | ($ in millions) | ($ in millions) | | ($ in millions) | |
| Three months ended September 30, 2020 | | Personal Auto | | Homeowners | | Other Personal | | Total | |
| Three months ended September 30, 2021 | | Three months ended September 30, 2021 | | Personal Auto | | Homeowners | | Other Personal | | Total |
| | Net written premiums | Net written premiums | | $ | 101.4 | | | $ | 111.4 | | | $ | 17.4 | | | $ | 230.2 | | Net written premiums | | $ | 92.4 | | | $ | 127.2 | | | $ | 23.7 | | | $ | 243.3 | |
| Net earned premiums | Net earned premiums | | 103.0 | | | 92.5 | | | 13.3 | | | 208.8 | | Net earned premiums | | 91.8 | | | 106.5 | | | 18.9 | | | 217.2 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 1.9 | | | 28.1 | | | 2.9 | | | 32.9 | | Cat loss and ALAE | | 1.3 | | | 22.2 | | | 0.7 | | | 24.2 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | 8.0 | | | 0.7 | | | (0.6) | | | 8.1 | | Prior accident years non-cat loss and ALAE | | 6.8 | | | (2.5) | | | — | | | 4.3 | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 58.2 | | | 50.7 | | | 4.8 | | | 113.7 | | Current accident year non-cat loss and ALAE | | 67.2 | | | 55.8 | | | 9.4 | | | 132.4 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 66.2 | | | 51.4 | | | 4.2 | | | 121.8 | | Total non-cat loss and ALAE | | 74.0 | | | 53.3 | | | 9.4 | | | 136.7 | |
| Total Loss and ALAE | Total Loss and ALAE | | 68.1 | | | 79.5 | | | 7.1 | | | 154.7 | | Total Loss and ALAE | | 75.3 | | | 75.5 | | | 10.1 | | | 160.9 | |
| ULAE | ULAE | | 7.4 | | | 6.8 | | | 0.2 | | | 14.4 | | ULAE | | 7.9 | | | 5.3 | | | 1.0 | | | 14.2 | |
| Total Loss and LAE | Total Loss and LAE | | 75.5 | | | 86.3 | | | 7.3 | | | 169.1 | | Total Loss and LAE | | 83.2 | | | 80.8 | | | 11.1 | | | 175.1 | |
| Underwriting expenses | Underwriting expenses | | 32.0 | | | 33.2 | | | 5.2 | | | 70.4 | | Underwriting expenses | | 25.0 | | | 32.2 | | | 5.9 | | | 63.1 | |
| Net underwriting (loss) gain | Net underwriting (loss) gain | | $ | (4.5) | | | $ | (27.0) | | | $ | 0.8 | | | $ | (30.7) | | Net underwriting (loss) gain | | $ | (16.4) | | | $ | (6.5) | | | $ | 1.9 | | | $ | (21.0) | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 1.9 | % | | 30.4 | % | | 21.5 | % | | 15.8 | % | Cat loss and ALAE ratio | | 1.4 | % | | 20.8 | % | | 3.9 | % | | 11.1 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | 7.8 | % | | 0.7 | % | | (4.1) | % | | 3.9 | % | Prior accident years non-cat loss and ALAE ratio | | 7.4 | % | | (2.4) | % | | (0.1) | % | | 2.0 | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 56.4 | % | | 54.9 | % | | 36.2 | % | | 54.4 | % | Current accident year non-cat loss and ALAE ratio | | 73.2 | % | | 52.4 | % | | 49.5 | % | | 60.9 | % |
| Total non-cat loss and ALAE ratio | Total non-cat loss and ALAE ratio | | 64.2 | % | | 55.6 | % | | 32.1 | % | | 58.3 | % | Total non-cat loss and ALAE ratio | | 80.6 | % | | 50.0 | % | | 49.4 | % | | 62.9 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 66.1 | % | | 86.0 | % | | 53.6 | % | | 74.1 | % | Total Loss and ALAE ratio | | 82.0 | % | | 70.8 | % | | 53.3 | % | | 74.0 | % |
| ULAE ratio | ULAE ratio | | 7.2 | % | | 7.3 | % | | 1.6 | % | | 6.9 | % | ULAE ratio | | 8.6 | % | | 5.0 | % | | 6.0 | % | | 6.6 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 73.3 | % | | 93.3 | % | | 55.2 | % | | 81.0 | % | Total Loss and LAE ratio | | 90.6 | % | | 75.8 | % | | 59.3 | % | | 80.6 | % |
| Expense ratio | Expense ratio | | 31.4 | % | | 29.8 | % | | 29.4 | % | | 30.5 | % | Expense ratio | | 27.1 | % | | 25.4 | % | | 24.7 | % | | 26.0 | % |
| Combined ratio | Combined ratio | | 104.7 | % | | 123.1 | % | | 84.6 | % | | 111.5 | % | Combined ratio | | 117.7 | % | | 101.2 | % | | 84.0 | % | | 106.6 | % |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table 2
| | ($ in millions) | ($ in millions) | | ($ in millions) | |
| Three months ended September 30, 2019 | | Personal Auto | | Homeowners | | Other Personal | | Total | |
| Three months ended September 30, 2020 | | Three months ended September 30, 2020 | | Personal Auto | | Homeowners | | Other Personal | | Total |
| | Net written premiums | Net written premiums | | $ | 107.1 | | | $ | 91.5 | | | $ | 11.2 | | | $ | 209.8 | | Net written premiums | | $ | 101.4 | | | $ | 111.4 | | | $ | 17.4 | | | $ | 230.2 | |
| Net earned premiums | Net earned premiums | | 108.3 | | | 75.6 | | | 8.8 | | | 192.7 | | Net earned premiums | | 103.0 | | | 92.5 | | | 13.3 | | | 208.8 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 0.9 | | | 7.0 | | | 0.3 | | | 8.2 | | Cat loss and ALAE | | 1.9 | | | 28.1 | | | 2.9 | | | 32.9 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | (1.2) | | | — | | | (0.9) | | | (2.1) | | Prior accident years non-cat loss and ALAE | | 8.0 | | | 0.7 | | | (0.6) | | | 8.1 | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 73.0 | | | 41.2 | | | 4.7 | | | 118.9 | | Current accident year non-cat loss and ALAE | | 58.2 | | | 50.7 | | | 4.8 | | | 113.7 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 71.8 | | | 41.2 | | | 3.8 | | | 116.8 | | Total non-cat loss and ALAE | | 66.2 | | | 51.4 | | | 4.2 | | | 121.8 | |
| Total Loss and ALAE | Total Loss and ALAE | | 72.7 | | | 48.2 | | | 4.1 | | | 125.0 | | Total Loss and ALAE | | 68.1 | | | 79.5 | | | 7.1 | | | 154.7 | |
| ULAE | ULAE | | 7.4 | | | 4.4 | | | 0.2 | | | 12.0 | | ULAE | | 7.4 | | | 6.8 | | | 0.2 | | | 14.4 | |
| Total Loss and LAE | Total Loss and LAE | | 80.1 | | | 52.6 | | | 4.3 | | | 137.0 | | Total Loss and LAE | | 75.5 | | | 86.3 | | | 7.3 | | | 169.1 | |
| Underwriting expenses | Underwriting expenses | | 30.9 | | | 27.8 | | | 3.3 | | | 62.0 | | Underwriting expenses | | 32.0 | | | 33.2 | | | 5.2 | | | 70.4 | |
| Net underwriting (loss) gain | Net underwriting (loss) gain | | $ | (2.7) | | | $ | (4.8) | | | $ | 1.2 | | | $ | (6.3) | | Net underwriting (loss) gain | | $ | (4.5) | | | $ | (27.0) | | | $ | 0.8 | | | $ | (30.7) | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 0.8 | % | | 9.2 | % | | 3.5 | % | | 4.2 | % | Cat loss and ALAE ratio | | 1.9 | % | | 30.4 | % | | 21.5 | % | | 15.8 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | (1.2) | % | | 0.1 | % | | (9.8) | % | | (1.1) | % | Prior accident years non-cat loss and ALAE ratio | | 7.8 | % | | 0.7 | % | | (4.1) | % | | 3.9 | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 67.4 | % | | 54.5 | % | | 52.5 | % | | 61.7 | % | Current accident year non-cat loss and ALAE ratio | | 56.4 | % | | 54.9 | % | | 36.2 | % | | 54.4 | % |
| Total non-cat loss and ALAE ratio | Total non-cat loss and ALAE ratio | | 66.2 | % | | 54.6 | % | | 42.7 | % | | 60.6 | % | Total non-cat loss and ALAE ratio | | 64.2 | % | | 55.6 | % | | 32.1 | % | | 58.3 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 67.0 | % | | 63.8 | % | | 46.2 | % | | 64.8 | % | Total Loss and ALAE ratio | | 66.1 | % | | 86.0 | % | | 53.6 | % | | 74.1 | % |
| ULAE ratio | ULAE ratio | | 6.9 | % | | 5.8 | % | | 2.0 | % | | 6.2 | % | ULAE ratio | | 7.2 | % | | 7.3 | % | | 1.6 | % | | 6.9 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 73.9 | % | | 69.6 | % | | 48.2 | % | | 71.0 | % | Total Loss and LAE ratio | | 73.3 | % | | 93.3 | % | | 55.2 | % | | 81.0 | % |
| Expense ratio | Expense ratio | | 28.9 | % | | 30.3 | % | | 29.6 | % | | 29.6 | % | Expense ratio | | 31.4 | % | | 29.8 | % | | 29.4 | % | | 30.5 | % |
| Combined ratio | Combined ratio | | 102.8 | % | | 99.9 | % | | 77.8 | % | | 100.6 | % | Combined ratio | | 104.7 | % | | 123.1 | % | | 84.6 | % | | 111.5 | % |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table 3
| | ($ in millions) | ($ in millions) | | ($ in millions) | |
| Nine months ended September 30, 2020 | | Personal Auto | | Homeowners | | Other Personal | | Total | |
| Nine months ended September 30, 2021 | | Nine months ended September 30, 2021 | | Personal Auto | | Homeowners | | Other Personal | | Total |
| | Net written premiums | Net written premiums | | $ | 310.3 | | | $ | 299.1 | | | $ | 45.7 | | | $ | 655.1 | | Net written premiums | | $ | 273.5 | | | $ | 329.6 | | | $ | 61.9 | | | $ | 665.0 | |
| Net earned premiums | Net earned premiums | | 311.0 | | | 262.9 | | | 35.8 | | | 609.7 | | Net earned premiums | | 281.1 | | | 304.9 | | | 52.1 | | | 638.1 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 6.5 | | | 93.4 | | | 12.0 | | | 111.9 | | Cat loss and ALAE | | 6.3 | | | 129.8 | | | 19.8 | | | 155.9 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | 19.1 | | | 2.8 | | | (1.7) | | | 20.2 | | Prior accident years non-cat loss and ALAE | | 4.7 | | | (2.1) | | | (0.2) | | | 2.4 | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 165.7 | | | 125.0 | | | 13.0 | | | 303.7 | | Current accident year non-cat loss and ALAE | | 186.7 | | | 156.9 | | | 26.9 | | | 370.5 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 184.8 | | | 127.8 | | | 11.3 | | | 323.9 | | Total non-cat loss and ALAE | | 191.4 | | | 154.8 | | | 26.7 | | | 372.9 | |
| Total Loss and ALAE | Total Loss and ALAE | | 191.3 | | | 221.2 | | | 23.3 | | | 435.8 | | Total Loss and ALAE | | 197.7 | | | 284.6 | | | 46.5 | | | 528.8 | |
| ULAE | ULAE | | 23.0 | | | 18.6 | | | 1.2 | | | 42.8 | | ULAE | | 22.6 | | | 19.2 | | | 2.9 | | | 44.7 | |
| Total Loss and LAE | Total Loss and LAE | | 214.3 | | | 239.8 | | | 24.5 | | | 478.6 | | Total Loss and LAE | | 220.3 | | | 303.8 | | | 49.4 | | | 573.5 | |
| Underwriting expenses | Underwriting expenses | | 98.5 | | | 89.7 | | | 13.7 | | | 201.9 | | Underwriting expenses | | 76.3 | | | 87.0 | | | 15.9 | | | 179.2 | |
| Net underwriting loss | Net underwriting loss | | $ | (1.8) | | | $ | (66.6) | | | $ | (2.4) | | | $ | (70.8) | | Net underwriting loss | | $ | (15.5) | | | $ | (85.9) | | | $ | (13.2) | | | $ | (114.6) | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 2.1 | % | | 35.5 | % | | 33.4 | % | | 18.4 | % | Cat loss and ALAE ratio | | 2.3 | % | | 42.6 | % | | 38.0 | % | | 24.4 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | 6.2 | % | | 1.0 | % | | (4.5) | % | | 3.3 | % | Prior accident years non-cat loss and ALAE ratio | | 1.7 | % | | (0.7) | % | | (0.4) | % | | 0.4 | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 53.2 | % | | 47.6 | % | | 36.2 | % | | 49.8 | % | Current accident year non-cat loss and ALAE ratio | | 66.4 | % | | 51.4 | % | | 51.6 | % | | 58.1 | % |
| Total non-cat loss and ALAE ratio | Total non-cat loss and ALAE ratio | | 59.4 | % | | 48.6 | % | | 31.7 | % | | 53.1 | % | Total non-cat loss and ALAE ratio | | 68.1 | % | | 50.7 | % | | 51.2 | % | | 58.5 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 61.5 | % | | 84.1 | % | | 65.1 | % | | 71.5 | % | Total Loss and ALAE ratio | | 70.4 | % | | 93.3 | % | | 89.2 | % | | 82.9 | % |
| ULAE ratio | ULAE ratio | | 7.4 | % | | 7.1 | % | | 3.4 | % | | 7.0 | % | ULAE ratio | | 8.0 | % | | 6.3 | % | | 5.8 | % | | 7.0 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 68.9 | % | | 91.2 | % | | 68.5 | % | | 78.5 | % | Total Loss and LAE ratio | | 78.4 | % | | 99.6 | % | | 95.0 | % | | 89.9 | % |
| Expense ratio | Expense ratio | | 31.7 | % | | 30.0 | % | | 30.0 | % | | 30.8 | % | Expense ratio | | 27.9 | % | | 26.4 | % | | 25.6 | % | | 26.9 | % |
| Combined ratio | Combined ratio | | 100.6 | % | | 121.2 | % | | 98.5 | % | | 109.3 | % | Combined ratio | | 106.3 | % | | 126.0 | % | | 120.6 | % | | 116.8 | % |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table 4
| | ($ in millions) | ($ in millions) | | ($ in millions) | |
| Nine months ended September 30, 2019 | | Personal Auto | | Homeowners | | Other Personal | | Total | |
| Nine months ended September 30, 2020 | | Nine months ended September 30, 2020 | | Personal Auto | | Homeowners | | Other Personal | | Total |
| | Net written premiums | Net written premiums | | $ | 324.8 | | | $ | 241.4 | | | $ | 29.0 | | | $ | 595.2 | | Net written premiums | | $ | 310.3 | | | $ | 299.1 | | | $ | 45.7 | | | $ | 655.1 | |
| Net earned premiums | Net earned premiums | | 322.1 | | | 216.1 | | | 24.3 | | | 562.5 | | Net earned premiums | | 311.0 | | | 262.9 | | | 35.8 | | | 609.7 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 5.4 | | | 47.8 | | | 4.0 | | | 57.2 | | Cat loss and ALAE | | 6.5 | | | 93.4 | | | 12.0 | | | 111.9 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | (11.0) | | | 0.5 | | | (1.9) | | | (12.4) | | Prior accident years non-cat loss and ALAE | | 19.1 | | | 2.8 | | | (1.7) | | | 20.2 | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 207.8 | | | 110.4 | | | 12.7 | | | 330.9 | | Current accident year non-cat loss and ALAE | | 165.7 | | | 125.0 | | | 13.0 | | | 303.7 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 196.8 | | | 110.9 | | | 10.8 | | | 318.5 | | Total non-cat loss and ALAE | | 184.8 | | | 127.8 | | | 11.3 | | | 323.9 | |
| Total Loss and ALAE | Total Loss and ALAE | | 202.2 | | | 158.7 | | | 14.8 | | | 375.7 | | Total Loss and ALAE | | 191.3 | | | 221.2 | | | 23.3 | | | 435.8 | |
| ULAE | ULAE | | 22.2 | | | 15.1 | | | 0.9 | | | 38.2 | | ULAE | | 23.0 | | | 18.6 | | | 1.2 | | | 42.8 | |
| Total Loss and LAE | Total Loss and LAE | | 224.4 | | | 173.8 | | | 15.7 | | | 413.9 | | Total Loss and LAE | | 214.3 | | | 239.8 | | | 24.5 | | | 478.6 | |
| Underwriting expenses | Underwriting expenses | | 96.7 | | | 74.8 | | | 9.1 | | | 180.6 | | Underwriting expenses | | 98.5 | | | 89.7 | | | 13.7 | | | 201.9 | |
| Net underwriting gain (loss) | | $ | 1.0 | | | $ | (32.5) | | | $ | (0.5) | | | $ | (32.0) | | |
| Net underwriting loss | | Net underwriting loss | | $ | (1.8) | | | $ | (66.6) | | | $ | (2.4) | | | $ | (70.8) | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 1.6 | % | | 22.1 | % | | 16.5 | % | | 10.2 | % | Cat loss and ALAE ratio | | 2.1 | % | | 35.5 | % | | 33.4 | % | | 18.4 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | (3.4) | % | | 0.3 | % | | (7.8) | % | | (2.2) | % | Prior accident years non-cat loss and ALAE ratio | | 6.2 | % | | 1.0 | % | | (4.5) | % | | 3.3 | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 64.5 | % | | 51.0 | % | | 52.0 | % | | 58.7 | % | Current accident year non-cat loss and ALAE ratio | | 53.2 | % | | 47.6 | % | | 36.2 | % | | 49.8 | % |
| Total non-cat loss and ALAE ratio | Total non-cat loss and ALAE ratio | | 61.1 | % | | 51.3 | % | | 44.2 | % | | 56.5 | % | Total non-cat loss and ALAE ratio | | 59.4 | % | | 48.6 | % | | 31.7 | % | | 53.1 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 62.7 | % | | 73.4 | % | | 60.7 | % | | 66.7 | % | Total Loss and ALAE ratio | | 61.5 | % | | 84.1 | % | | 65.1 | % | | 71.5 | % |
| ULAE ratio | ULAE ratio | | 6.9 | % | | 7.0 | % | | 3.7 | % | | 6.8 | % | ULAE ratio | | 7.4 | % | | 7.1 | % | | 3.4 | % | | 7.0 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 69.6 | % | | 80.4 | % | | 64.4 | % | | 73.5 | % | Total Loss and LAE ratio | | 68.9 | % | | 91.2 | % | | 68.5 | % | | 78.5 | % |
| Expense ratio | Expense ratio | | 29.8 | % | | 31.0 | % | | 31.5 | % | | 30.4 | % | Expense ratio | | 31.7 | % | | 30.0 | % | | 30.0 | % | | 30.8 | % |
| Combined ratio | Combined ratio | | 99.4 | % | | 111.4 | % | | 95.9 | % | | 103.9 | % | Combined ratio | | 100.6 | % | | 121.2 | % | | 98.5 | % | | 109.3 | % |
|
The personal insurance segment's net written premiums for the three and nine months ended September 30, 20202021 increased 9.7%5.7% and 10.1%1.5%, respectively, when compared to the same 20192020 periods (Tables 1 - 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 nine months ended September 30, 2020 compared to the same 2019 periods. Partially offsetting the 20202021 third quarter and year to date net written premiumwere impacted by (i) increased rates in homeowners, (ii) increased rates and new business growth was a decrease in other personal, auto net written premiums, which was driven byand (iii) a decline in new business in personal auto, primarily attributable to cumulative rate and underwriting actions taken during the fourth quarter of 2019throughout 2020 and throughout 20202021 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. The plan was approved by 26 of our 28 personal lines states with renewal effective dates beginning mid-July.
The personal insurance segment's SAP catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2020 increased 11.62021 improved 4.7 points and 8.2increased 6.0 points, respectively, when compared to the same 20192020 periods (Tables 1 - 4), driven. The 2021 third quarter was impacted by an increase inhigher frequency but lower severity of CAT events when compared to the severity ofsame 2020 period. However, on a year to date basis, 2021 CAT events were both more frequent and more severe when compared to the same 2020 period. The 2021 third quarter and year to date were impacted by wind and hail events, which primarily impactedin the homeowners line of business. The 2021 year to date was also impacted by winter storms Uri and Viola in the first quarter, which contributed 8.2 points to the cat loss and ALAE ratio. For the 2021 third quarter and year to date, approximately 50% and 80%, respectively, of the reported catastrophe losses occurred in Texas. The 2020 third quarter and year to date cat loss and ALAE ratios were impacted by (i) thea Midwest derecho in August that contributed 4.7 points and 1.6 points, respectively, to the loss ratios, and (ii) other wind and hail events in the South and Midwest, with Texas contributing approximately 40% of the reported year to date catastrophe losses.
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 ratioratios for the three and nine months ended September 30, 2020 improved 2.32021 increased 4.6 points and 3.45.4 points, respectively, when compared to the same 20192020 periods (Tables 1 - 4).
The personal auto SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2020 improved 2.02021 increased 16.4 points and 1.78.7 points, respectively, when compared to the same 20192020 periods. The 2020 third quarter and year2021 increase is attributable to date non-catastrophe loss and ALAE ratios were impacted by (i) a lower level ofthe current accident year losses attributableratio, which was elevated due to an increase in claims frequency and severity when compared to the same 2020 periods. Frequency was suppressed in 2020 due to fewer miles driven as a result of people working remotelyshelter-in-place orders in response to the COVID-19 pandemic. Severity is higher in the 2021 current accident year, driven by bodily injury coverage as well as personal injury protection coverage in Michigan. Partially offsetting the year to date increase in the 2021 non-catastrophe loss and staying at home more becauseALAE ratios was less adverse development of COVID-19 concerns duringprior accident year losses. The 2021 third quarter and year to date prior accident year development was attributable to (i) bodily injury claims from multiple accident years and (ii) PIP claims in Michigan, primarily from the first nine months of 2020 and (ii) adverse development from prior2019 accident years compared to favorable development in the same 2019 periods.years. The 2020 third quarter and year to date prior accident year adverse development was primarily driven by higher than expected severity for bodily injury claims from multiple accident years. The 2019 third quarter and year to date prior accident year favorable development was primarily driven by uninsured motorist and personal injury protection coverages.
The homeowners SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 20202021 improved 5.6 points and increased 1.0 point and improved 2.72.1 points, respectively, when compared to the same 20192020 periods. The improvement in the 2021 third quarter ratio was due to favorable development of prior accident year losses, primarily from the 2020 accident year, compared to adverse development in the 2020 third quarter. The increase in the 2021 year to date improvementratio was primarily driven by lower claimdue to higher frequency and severity of both property and liability claims in the current accident year. Partially offsetting the year to date improvementincrease in the 2021 non-catastrophe loss and ALAE ratio was adversefavorable development of prior accident year losses, primarily from the 2020 accident year, compared to adverse development in the same 2020 period. The 2020 year to date prior accident year adverse development was primarily driven by higher severity on fourth quarter 2019 third-party liability and property claims that emerged during the first quarter of 2020.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Commercial Insurance Segment
The following tables set forth certain key performance indicators based on SAP by major product line for our commercial insurance segment for the three and nine months ended September 30, 20202021 and 2019:2020:
Table 5
| | ($ in millions) | ($ in millions) | | ($ in millions) | |
Three months ended
September 30, 2020 | | Commercial Auto | | Small Commercial Package | | Middle Market Commercial | | Workers' Comp | | Farm & Ranch | | Other Commercial | | Total | |
Three months ended
September 30, 2021 | | Three months ended
September 30, 2021 | | Commercial Auto | | Small Commercial Package | | Middle Market Commercial | | Workers' Comp | | Farm & Ranch | | Other Commercial | | Total |
| | Net written premiums | Net written premiums | | $ | 40.0 | | | $ | 31.4 | | | $ | 40.0 | | | $ | 17.4 | | | $ | 15.0 | | | $ | 5.0 | | | $ | 148.8 | | Net written premiums | | $ | 51.9 | | | $ | 33.6 | | | $ | 44.0 | | | $ | 20.8 | | | $ | 18.6 | | | $ | 5.4 | | | $ | 174.3 | |
| Net earned premiums | Net earned premiums | | 35.6 | | | 31.4 | | | 40.3 | | | 17.5 | | | 14.5 | | | 5.1 | | | 144.4 | | Net earned premiums | | 48.7 | | | 33.8 | | | 41.7 | | | 15.9 | | | 19.0 | | | 5.3 | | | 164.4 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 0.1 | | | 5.5 | | | 4.7 | | | — | | | 3.2 | | | — | | | 13.5 | | Cat loss and ALAE | | (0.2) | | | 3.6 | | | 9.2 | | | — | | | 2.7 | | | — | | | 15.3 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | (1.2) | | | (7.5) | | | (6.3) | | | (7.3) | | | (0.6) | | | (3.6) | | | (26.5) | | Prior accident years non-cat loss and ALAE | | 3.7 | | | (2.4) | | | (1.2) | | | (6.4) | | | (0.5) | | | (2.4) | | | (9.2) | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 20.8 | | | 17.0 | | | 20.1 | | | 14.4 | | | 5.1 | | | 3.0 | | | 80.4 | | Current accident year non-cat loss and ALAE | | 42.2 | | | 16.3 | | | 17.8 | | | 11.7 | | | 6.6 | | | 3.9 | | | 98.5 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 19.6 | | | 9.5 | | | 13.8 | | | 7.1 | | | 4.5 | | | (0.6) | | | 53.9 | | Total non-cat loss and ALAE | | 45.9 | | | 13.9 | | | 16.6 | | | 5.3 | | | 6.1 | | | 1.5 | | | 89.3 | |
| Total Loss and ALAE | Total Loss and ALAE | | 19.7 | | | 15.0 | | | 18.5 | | | 7.1 | | | 7.7 | | | (0.6) | | | 67.4 | | Total Loss and ALAE | | 45.7 | | | 17.5 | | | 25.8 | | | 5.3 | | | 8.8 | | | 1.5 | | | 104.6 | |
| ULAE | ULAE | | 1.7 | | | 0.5 | | | 1.3 | | | 1.1 | | | 0.5 | | | 0.1 | | | 5.2 | | ULAE | | 2.9 | | | 1.2 | | | 1.3 | | | 1.0 | | | 0.6 | | | 0.1 | | | 7.1 | |
| Total Loss and LAE | Total Loss and LAE | | 21.4 | | | 15.5 | | | 19.8 | | | 8.2 | | | 8.2 | | | (0.5) | | | 72.6 | | Total Loss and LAE | | 48.6 | | | 18.7 | | | 27.1 | | | 6.3 | | | 9.4 | | | 1.6 | | | 111.7 | |
| Underwriting expenses | Underwriting expenses | | 13.7 | | | 10.9 | | | 16.4 | | | 7.8 | | | 6.7 | | | 1.9 | | | 57.4 | | Underwriting expenses | | 15.1 | | | 10.7 | | | 14.7 | | | 7.1 | | | 6.1 | | | 1.7 | | | 55.4 | |
| Net underwriting gain (loss) | | $ | 0.5 | | | $ | 5.0 | | | $ | 4.1 | | | $ | 1.5 | | | $ | (0.4) | | | $ | 3.7 | | | $ | 14.4 | | |
| Net underwriting (loss) gain | | Net underwriting (loss) gain | | $ | (15.0) | | | $ | 4.4 | | | $ | (0.1) | | | $ | 2.5 | | | $ | 3.5 | | | $ | 2.0 | | | $ | (2.7) | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 0.4 | % | | 17.3 | % | | 11.6 | % | | — | % | | 22.1 | % | | — | % | | 9.3 | % | Cat loss and ALAE ratio | | (0.4) | % | | 10.7 | % | | 22.0 | % | | — | % | | 14.1 | % | | (0.4) | % | | 9.3 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | (3.4) | % | | (23.8) | % | | (15.5) | % | | (41.6) | % | | (4.2) | % | | (72.6) | % | | (18.3) | % | Prior accident years non-cat loss and ALAE ratio | | 7.6 | % | | (7.0) | % | | (2.9) | % | | (40.3) | % | | (2.4) | % | | (46.1) | % | | (5.6) | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 58.3 | % | | 54.3 | % | | 49.7 | % | | 82.2 | % | | 35.0 | % | | 60.4 | % | | 55.7 | % | Current accident year non-cat loss and ALAE ratio | | 86.6 | % | | 48.0 | % | | 42.9 | % | | 73.9 | % | | 35.5 | % | | 72.8 | % | | 60.0 | % |
| Total non-cat loss and ALAE ratio | Total non-cat loss and ALAE ratio | | 54.9 | % | | 30.5 | % | | 34.2 | % | | 40.6 | % | | 30.8 | % | | (12.2) | % | | 37.4 | % | Total non-cat loss and ALAE ratio | | 94.2 | % | | 41.0 | % | | 40.0 | % | | 33.6 | % | | 33.1 | % | | 26.7 | % | | 54.4 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 55.3 | % | | 47.8 | % | | 45.8 | % | | 40.6 | % | | 52.9 | % | | (12.2) | % | | 46.7 | % | Total Loss and ALAE ratio | | 93.8 | % | | 51.7 | % | | 62.0 | % | | 33.6 | % | | 47.2 | % | | 26.3 | % | | 63.7 | % |
| ULAE ratio | ULAE ratio | | 4.8 | % | | 1.5 | % | | 3.3 | % | | 6.4 | % | | 3.4 | % | | 1.9 | % | | 3.6 | % | ULAE ratio | | 6.0 | % | | 3.5 | % | | 3.1 | % | | 6.0 | % | | 2.7 | % | | 1.6 | % | | 4.2 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 60.1 | % | | 49.3 | % | | 49.1 | % | | 47.0 | % | | 56.3 | % | | (10.3) | % | | 50.3 | % | Total Loss and LAE ratio | | 99.8 | % | | 55.2 | % | | 65.1 | % | | 39.6 | % | | 49.9 | % | | 27.9 | % | | 67.9 | % |
| Expense ratio | Expense ratio | | 34.2 | % | | 34.7 | % | | 41.0 | % | | 45.1 | % | | 45.1 | % | | 38.6 | % | | 38.6 | % | Expense ratio | | 29.2 | % | | 31.7 | % | | 33.4 | % | | 34.3 | % | | 32.2 | % | | 32.2 | % | | 31.8 | % |
| Combined ratio | Combined ratio | | 94.3 | % | | 84.0 | % | | 90.1 | % | | 92.1 | % | | 101.4 | % | | 28.3 | % | | 88.9 | % | Combined ratio | | 129.0 | % | | 86.9 | % | | 98.5 | % | | 73.9 | % | | 82.1 | % | | 60.1 | % | | 99.7 | % |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table 6
| | ($ in millions) | ($ in millions) | | ($ in millions) | |
Three months ended
September 30, 2019 | | Commercial Auto | | Small Commercial Package | | Middle Market Commercial | | Workers' Comp | | Farm & Ranch | | Other Commercial | | Total | |
Three months ended
September 30, 2020 | | Three months ended
September 30, 2020 | | Commercial Auto | | Small Commercial Package | | Middle Market Commercial | | Workers' Comp | | Farm & Ranch | | Other Commercial | | Total |
| | Net written premiums | Net written premiums | | $ | 27.7 | | | $ | 30.0 | | | $ | 39.8 | | | $ | 23.9 | | | $ | 11.4 | | | $ | 4.6 | | | $ | 137.4 | | Net written premiums | | $ | 40.0 | | | $ | 31.4 | | | $ | 40.0 | | | $ | 17.4 | | | $ | 15.0 | | | $ | 5.0 | | | $ | 148.8 | |
| Net earned premiums | Net earned premiums | | 23.8 | | | 29.9 | | | 34.9 | | | 21.7 | | | 12.4 | | | 4.3 | | | 127.0 | | Net earned premiums | | 35.6 | | | 31.4 | | | 40.3 | | | 17.5 | | | 14.5 | | | 5.1 | | | 144.4 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 0.1 | | | 1.1 | | | 0.5 | | | — | | | 0.4 | | | — | | | 2.1 | | Cat loss and ALAE | | 0.1 | | | 5.5 | | | 4.7 | | | — | | | 3.2 | | | — | | | 13.5 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | (1.1) | | | (4.1) | | | (1.2) | | | (4.4) | | | (0.7) | | | (1.6) | | | (13.1) | | Prior accident years non-cat loss and ALAE | | (1.2) | | | (7.5) | | | (6.3) | | | (7.3) | | | (0.6) | | | (3.6) | | | (26.5) | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 15.2 | | | 17.9 | | | 19.7 | | | 13.9 | | | 6.2 | | | 3.2 | | | 76.1 | | Current accident year non-cat loss and ALAE | | 20.8 | | | 17.0 | | | 20.1 | | | 14.4 | | | 5.1 | | | 3.0 | | | 80.4 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 14.1 | | | 13.8 | | | 18.5 | | | 9.5 | | | 5.5 | | | 1.6 | | | 63.0 | | Total non-cat loss and ALAE | | 19.6 | | | 9.5 | | | 13.8 | | | 7.1 | | | 4.5 | | | (0.6) | | | 53.9 | |
| Total Loss and ALAE | Total Loss and ALAE | | 14.2 | | | 14.9 | | | 19.0 | | | 9.5 | | | 5.9 | | | 1.6 | | | 65.1 | | Total Loss and ALAE | | 19.7 | | | 15.0 | | | 18.5 | | | 7.1 | | | 7.7 | | | (0.6) | | | 67.4 | |
| ULAE | ULAE | | 1.6 | | | 1.3 | | | 2.0 | | | 1.8 | | | 0.4 | | | 0.1 | | | 7.2 | | ULAE | | 1.7 | | | 0.5 | | | 1.3 | | | 1.1 | | | 0.5 | | | 0.1 | | | 5.2 | |
| Total Loss and LAE | Total Loss and LAE | | 15.8 | | | 16.2 | | | 21.0 | | | 11.3 | | | 6.3 | | | 1.7 | | | 72.3 | | Total Loss and LAE | | 21.4 | | | 15.5 | | | 19.8 | | | 8.2 | | | 8.2 | | | (0.5) | | | 72.6 | |
| Underwriting expenses | Underwriting expenses | | 11.9 | | | 11.7 | | | 15.9 | | | 7.2 | | | 4.7 | | | 2.1 | | | 53.5 | | Underwriting expenses | | 13.7 | | | 10.9 | | | 16.4 | | | 7.8 | | | 6.7 | | | 1.9 | | | 57.4 | |
| Net underwriting (loss) gain | | $ | (3.9) | | | $ | 2.0 | | | $ | (2.0) | | | $ | 3.2 | | | $ | 1.4 | | | $ | 0.5 | | | $ | 1.2 | | |
| Net underwriting gain (loss) | | Net underwriting gain (loss) | | $ | 0.5 | | | $ | 5.0 | | | $ | 4.1 | | | $ | 1.5 | | | $ | (0.4) | | | $ | 3.7 | | | $ | 14.4 | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 0.5 | % | | 3.7 | % | | 1.6 | % | | — | % | | 3.2 | % | | — | % | | 1.7 | % | Cat loss and ALAE ratio | | 0.4 | % | | 17.3 | % | | 11.6 | % | | — | % | | 22.1 | % | | — | % | | 9.3 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | (4.6) | % | | (13.7) | % | | (3.6) | % | | (20.1) | % | | (5.7) | % | | (37.9) | % | | (10.4) | % | Prior accident years non-cat loss and ALAE ratio | | (3.4) | % | | (23.8) | % | | (15.5) | % | | (41.6) | % | | (4.2) | % | | (72.6) | % | | (18.3) | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 63.8 | % | | 60.1 | % | | 56.3 | % | | 64.2 | % | | 50.0 | % | | 75.9 | % | | 60.0 | % | Current accident year non-cat loss and ALAE ratio | | 58.3 | % | | 54.3 | % | | 49.7 | % | | 82.2 | % | | 35.0 | % | | 60.4 | % | | 55.7 | % |
| Total non-cat loss and ALAE ratio | Total non-cat loss and ALAE ratio | | 59.2 | % | | 46.4 | % | | 52.7 | % | | 44.1 | % | | 44.3 | % | | 38.0 | % | | 49.6 | % | Total non-cat loss and ALAE ratio | | 54.9 | % | | 30.5 | % | | 34.2 | % | | 40.6 | % | | 30.8 | % | | (12.2) | % | | 37.4 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 59.7 | % | | 50.1 | % | | 54.3 | % | | 44.1 | % | | 47.5 | % | | 38.0 | % | | 51.3 | % | Total Loss and ALAE ratio | | 55.3 | % | | 47.8 | % | | 45.8 | % | | 40.6 | % | | 52.9 | % | | (12.2) | % | | 46.7 | % |
| ULAE ratio | ULAE ratio | | 6.7 | % | | 4.2 | % | | 5.7 | % | | 8.3 | % | | 3.2 | % | | 4.1 | % | | 5.7 | % | ULAE ratio | | 4.8 | % | | 1.5 | % | | 3.3 | % | | 6.4 | % | | 3.4 | % | | 1.9 | % | | 3.6 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 66.4 | % | | 54.3 | % | | 60.0 | % | | 52.4 | % | | 50.7 | % | | 42.1 | % | | 57.0 | % | Total Loss and LAE ratio | | 60.1 | % | | 49.3 | % | | 49.1 | % | | 47.0 | % | | 56.3 | % | | (10.3) | % | | 50.3 | % |
| Expense ratio | Expense ratio | | 43.0 | % | | 39.1 | % | | 40.0 | % | | 30.0 | % | | 41.7 | % | | 42.2 | % | | 38.9 | % | Expense ratio | | 34.2 | % | | 34.7 | % | | 41.0 | % | | 45.1 | % | | 45.1 | % | | 38.6 | % | | 38.6 | % |
| Combined ratio | Combined ratio | | 109.4 | % | | 93.4 | % | | 100.0 | % | | 82.4 | % | | 92.4 | % | | 84.3 | % | | 95.9 | % | Combined ratio | | 94.3 | % | | 84.0 | % | | 90.1 | % | | 92.1 | % | | 101.4 | % | | 28.3 | % | | 88.9 | % |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table 7
| | ($ in millions) | ($ in millions) | | ($ in millions) | |
| Nine months ended September 30, 2020 | | Commercial Auto | | Small Commercial Package | | Middle Market Commercial | | Workers' Comp | | Farm & Ranch | | Other Commercial | | Total | |
| Nine months ended September 30, 2021 | | Nine months ended September 30, 2021 | | Commercial Auto | | Small Commercial Package | | Middle Market Commercial | | Workers' Comp | | Farm & Ranch | | Other Commercial | | Total |
| | Net written premiums | Net written premiums | | $ | 117.8 | | | $ | 95.8 | | | $ | 126.8 | | | $ | 49.2 | | | $ | 47.3 | | | $ | 15.3 | | | $ | 452.2 | | Net written premiums | | $ | 160.6 | | | $ | 103.5 | | | $ | 133.7 | | | $ | 48.6 | | | $ | 61.0 | | | $ | 17.6 | | | $ | 525.0 | |
| Net earned premiums | Net earned premiums | | 96.2 | | | 92.8 | | | 116.0 | | | 54.4 | | | 40.8 | | | 14.5 | | | 414.7 | | Net earned premiums | | 134.6 | | | 98.6 | | | 122.6 | | | 45.6 | | | 53.3 | | | 16.0 | | | 470.7 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 1.1 | | | 21.0 | | | 35.7 | | | — | | | 8.7 | | | 0.2 | | | 66.7 | | Cat loss and ALAE | | 1.9 | | | 12.0 | | | 14.2 | | | — | | | 8.8 | | | — | | | 36.9 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | (1.5) | | | (16.5) | | | (14.3) | | | (16.1) | | | (1.7) | | | (7.1) | | | (57.2) | | Prior accident years non-cat loss and ALAE | | 2.8 | | | (6.9) | | | (14.7) | | | (21.8) | | | (2.0) | | | (5.1) | | | (47.7) | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 52.4 | | | 53.3 | | | 69.6 | | | 40.6 | | | 15.2 | | | 7.3 | | | 238.4 | | Current accident year non-cat loss and ALAE | | 97.5 | | | 59.4 | | | 66.3 | | | 33.6 | | | 21.9 | | | 7.4 | | | 286.1 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 50.9 | | | 36.8 | | | 55.3 | | | 24.5 | | | 13.5 | | | 0.2 | | | 181.2 | | Total non-cat loss and ALAE | | 100.3 | | | 52.5 | | | 51.6 | | | 11.8 | | | 19.9 | | | 2.3 | | | 238.4 | |
| Total Loss and ALAE | Total Loss and ALAE | | 52.0 | | | 57.8 | | | 91.0 | | | 24.5 | | | 22.2 | | | 0.4 | | | 247.9 | | Total Loss and ALAE | | 102.2 | | | 64.5 | | | 65.8 | | | 11.8 | | | 28.7 | | | 2.3 | | | 275.3 | |
| ULAE | ULAE | | 4.9 | | | 4.2 | | | 4.5 | | | 4.5 | | | 1.6 | | | 0.4 | | | 20.1 | | ULAE | | 7.6 | | | 4.7 | | | 2.8 | | | 2.4 | | | 1.7 | | | 0.3 | | | 19.5 | |
| Total Loss and LAE | Total Loss and LAE | | 56.9 | | | 62.0 | | | 95.5 | | | 29.0 | | | 23.8 | | | 0.8 | | | 268.0 | | Total Loss and LAE | | 109.8 | | | 69.2 | | | 68.6 | | | 14.2 | | | 30.4 | | | 2.6 | | | 294.8 | |
| Underwriting expenses | Underwriting expenses | | 40.1 | | | 34.0 | | | 50.8 | | | 22.7 | | | 21.1 | | | 6.0 | | | 174.7 | | Underwriting expenses | | 47.0 | | | 32.2 | | | 46.5 | | | 20.1 | | | 21.1 | | | 5.9 | | | 172.8 | |
| Net underwriting (loss) gain | Net underwriting (loss) gain | | $ | (0.8) | | | $ | (3.2) | | | $ | (30.3) | | | $ | 2.7 | | | $ | (4.1) | | | $ | 7.7 | | | $ | (28.0) | | Net underwriting (loss) gain | | $ | (22.2) | | | $ | (2.8) | | | $ | 7.5 | | | $ | 11.3 | | | $ | 1.8 | | | $ | 7.5 | | | $ | 3.1 | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 1.2 | % | | 22.6 | % | | 30.7 | % | | — | % | | 21.3 | % | | 1.2 | % | | 16.1 | % | Cat loss and ALAE ratio | | 1.4 | % | | 12.2 | % | | 11.6 | % | | — | % | | 16.5 | % | | 0.1 | % | | 7.8 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | (1.5) | % | | (17.8) | % | | (12.3) | % | | (29.6) | % | | (4.1) | % | | (49.3) | % | | (13.8) | % | Prior accident years non-cat loss and ALAE ratio | | 2.1 | % | | (7.0) | % | | (12.0) | % | | (47.8) | % | | (3.7) | % | | (32.1) | % | | (10.1) | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 54.3 | % | | 57.5 | % | | 60.1 | % | | 74.6 | % | | 37.3 | % | | 50.7 | % | | 57.4 | % | Current accident year non-cat loss and ALAE ratio | | 72.4 | % | | 60.2 | % | | 54.1 | % | | 73.8 | % | | 41.1 | % | | 46.1 | % | | 60.8 | % |
Total non-cat loss and
ALAE ratio | Total non-cat loss and
ALAE ratio | | 52.8 | % | | 39.7 | % | | 47.8 | % | | 45.0 | % | | 33.2 | % | | 1.4 | % | | 43.6 | % | Total non-cat loss and
ALAE ratio | | 74.5 | % | | 53.2 | % | | 42.1 | % | | 26.0 | % | | 37.4 | % | | 14.0 | % | | 50.7 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 54.0 | % | | 62.3 | % | | 78.5 | % | | 45.0 | % | | 54.5 | % | | 2.6 | % | | 59.7 | % | Total Loss and ALAE ratio | | 75.9 | % | | 65.4 | % | | 53.7 | % | | 26.0 | % | | 53.9 | % | | 14.1 | % | | 58.5 | % |
| ULAE ratio | ULAE ratio | | 5.1 | % | | 4.5 | % | | 3.9 | % | | 8.4 | % | | 3.9 | % | | 2.6 | % | | 4.9 | % | ULAE ratio | | 5.6 | % | | 4.7 | % | | 2.3 | % | | 5.2 | % | | 3.1 | % | | 1.7 | % | | 4.1 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 59.1 | % | | 66.8 | % | | 82.4 | % | | 53.4 | % | | 58.4 | % | | 5.2 | % | | 64.6 | % | Total Loss and LAE ratio | | 81.5 | % | | 70.1 | % | | 56.0 | % | | 31.2 | % | | 57.0 | % | | 15.8 | % | | 62.6 | % |
| Expense ratio | Expense ratio | | 34.1 | % | | 35.5 | % | | 40.0 | % | | 46.2 | % | | 44.6 | % | | 39.3 | % | | 38.6 | % | Expense ratio | | 29.3 | % | | 31.1 | % | | 34.7 | % | | 41.4 | % | | 34.7 | % | | 33.5 | % | | 32.9 | % |
| Combined ratio | Combined ratio | | 93.2 | % | | 102.3 | % | | 122.4 | % | | 99.6 | % | | 103.0 | % | | 44.5 | % | | 103.2 | % | Combined ratio | | 110.8 | % | | 101.2 | % | | 90.7 | % | | 72.6 | % | | 91.7 | % | | 49.3 | % | | 95.5 | % |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table 8
| | ($ in millions) | ($ in millions) | | ($ in millions) | |
| Nine months ended September 30, 2019 | | Commercial Auto | | Small Commercial Package | | Middle Market Commercial | | Workers' Comp | | Farm & Ranch | | Other Commercial | | Total | |
| Nine months ended September 30, 2020 | | Nine months ended September 30, 2020 | | Commercial Auto | | Small Commercial Package | | Middle Market Commercial | | Workers' Comp | | Farm & Ranch | | Other Commercial | | Total |
| | Net written premiums | Net written premiums | | $ | 81.4 | | | $ | 92.0 | | | $ | 115.1 | | | $ | 58.8 | | | $ | 37.4 | | | $ | 14.1 | | | $ | 398.8 | | Net written premiums | | $ | 117.8 | | | $ | 95.8 | | | $ | 126.8 | | | $ | 49.2 | | | $ | 47.3 | | | $ | 15.3 | | | $ | 452.2 | |
| Net earned premiums | Net earned premiums | | 65.3 | | | 88.9 | | | 98.1 | | | 60.3 | | | 36.2 | | | 12.6 | | | 361.4 | | Net earned premiums | | 96.2 | | | 92.8 | | | 116.0 | | | 54.4 | | | 40.8 | | | 14.5 | | | 414.7 | |
| Losses and LAE incurred: | Losses and LAE incurred: | | Losses and LAE incurred: | |
| Cat loss and ALAE | Cat loss and ALAE | | 0.2 | | | 6.1 | | | 5.7 | | | — | | | 2.5 | | | — | | | 14.5 | | Cat loss and ALAE | | 1.1 | | | 21.0 | | | 35.7 | | | — | | | 8.7 | | | 0.2 | | | 66.7 | |
| Non-cat loss and ALAE | Non-cat loss and ALAE | | Non-cat loss and ALAE | |
| Prior accident years non-cat loss and ALAE | Prior accident years non-cat loss and ALAE | | (3.6) | | | (11.8) | | | (7.2) | | | (13.4) | | | (1.9) | | | (1.4) | | | (39.3) | | Prior accident years non-cat loss and ALAE | | (1.5) | | | (16.5) | | | (14.3) | | | (16.1) | | | (1.7) | | | (7.1) | | | (57.2) | |
| Current accident year non-cat loss and ALAE | Current accident year non-cat loss and ALAE | | 41.2 | | | 51.3 | | | 62.2 | | | 42.3 | | | 18.0 | | | 7.7 | | | 222.7 | | Current accident year non-cat loss and ALAE | | 52.4 | | | 53.3 | | | 69.6 | | | 40.6 | | | 15.2 | | | 7.3 | | | 238.4 | |
| Total non-cat loss and ALAE | Total non-cat loss and ALAE | | 37.6 | | | 39.5 | | | 55.0 | | | 28.9 | | | 16.1 | | | 6.3 | | | 183.4 | | Total non-cat loss and ALAE | | 50.9 | | | 36.8 | | | 55.3 | | | 24.5 | | | 13.5 | | | 0.2 | | | 181.2 | |
| Total Loss and ALAE | Total Loss and ALAE | | 37.8 | | | 45.6 | | | 60.7 | | | 28.9 | | | 18.6 | | | 6.3 | | | 197.9 | | Total Loss and ALAE | | 52.0 | | | 57.8 | | | 91.0 | | | 24.5 | | | 22.2 | | | 0.4 | | | 247.9 | |
| ULAE | ULAE | | 4.2 | | | 4.8 | | | 5.0 | | | 5.4 | | | 1.5 | | | 0.5 | | | 21.4 | | ULAE | | 4.9 | | | 4.2 | | | 4.5 | | | 4.5 | | | 1.6 | | | 0.4 | | | 20.1 | |
| Total Loss and LAE | Total Loss and LAE | | 42.0 | | | 50.4 | | | 65.7 | | | 34.3 | | | 20.1 | | | 6.8 | | | 219.3 | | Total Loss and LAE | | 56.9 | | | 62.0 | | | 95.5 | | | 29.0 | | | 23.8 | | | 0.8 | | | 268.0 | |
| Underwriting expenses | Underwriting expenses | | 33.6 | | | 36.0 | | | 46.0 | | | 20.2 | | | 17.4 | | | 6.0 | | | 159.2 | | Underwriting expenses | | 40.1 | | | 34.0 | | | 50.8 | | | 22.7 | | | 21.1 | | | 6.0 | | | 174.7 | |
| Net underwriting (loss) gain | Net underwriting (loss) gain | | $ | (10.3) | | | $ | 2.5 | | | $ | (13.6) | | | $ | 5.8 | | | $ | (1.3) | | | $ | (0.2) | | | $ | (17.1) | | Net underwriting (loss) gain | | $ | (0.8) | | | $ | (3.2) | | | $ | (30.3) | | | $ | 2.7 | | | $ | (4.1) | | | $ | 7.7 | | | $ | (28.0) | |
| | Cat loss and ALAE ratio | Cat loss and ALAE ratio | | 0.4 | % | | 6.9 | % | | 5.8 | % | | — | % | | 6.8 | % | | — | % | | 4.0 | % | Cat loss and ALAE ratio | | 1.2 | % | | 22.6 | % | | 30.7 | % | | — | % | | 21.3 | % | | 1.2 | % | | 16.1 | % |
| Non-cat loss and ALAE ratio | Non-cat loss and ALAE ratio | | Non-cat loss and ALAE ratio | |
| Prior accident years non-cat loss and ALAE ratio | Prior accident years non-cat loss and ALAE ratio | | (5.5) | % | | (13.3) | % | | (7.4) | % | | (22.1) | % | | (5.2) | % | | (11.2) | % | | (10.9) | % | Prior accident years non-cat loss and ALAE ratio | | (1.5) | % | | (17.8) | % | | (12.3) | % | | (29.6) | % | | (4.1) | % | | (49.3) | % | | (13.8) | % |
| Current accident year non-cat loss and ALAE ratio | Current accident year non-cat loss and ALAE ratio | | 62.9 | % | | 57.7 | % | | 63.4 | % | | 70.2 | % | | 49.7 | % | | 61.7 | % | | 61.7 | % | Current accident year non-cat loss and ALAE ratio | | 54.3 | % | | 57.5 | % | | 60.1 | % | | 74.6 | % | | 37.3 | % | | 50.7 | % | | 57.4 | % |
Total non-cat loss and
ALAE ratio | Total non-cat loss and
ALAE ratio | | 57.4 | % | | 44.4 | % | | 56.0 | % | | 48.1 | % | | 44.5 | % | | 50.5 | % | | 50.8 | % | Total non-cat loss and
ALAE ratio | | 52.8 | % | | 39.7 | % | | 47.8 | % | | 45.0 | % | | 33.2 | % | | 1.4 | % | | 43.6 | % |
| Total Loss and ALAE ratio | Total Loss and ALAE ratio | | 57.8 | % | | 51.3 | % | | 61.8 | % | | 48.1 | % | | 51.3 | % | | 50.5 | % | | 54.8 | % | Total Loss and ALAE ratio | | 54.0 | % | | 62.3 | % | | 78.5 | % | | 45.0 | % | | 54.5 | % | | 2.6 | % | | 59.7 | % |
| ULAE ratio | ULAE ratio | | 6.5 | % | | 5.4 | % | | 5.1 | % | | 8.9 | % | | 4.2 | % | | 4.3 | % | | 5.9 | % | ULAE ratio | | 5.1 | % | | 4.5 | % | | 3.9 | % | | 8.4 | % | | 3.9 | % | | 2.6 | % | | 4.9 | % |
| Total Loss and LAE ratio | Total Loss and LAE ratio | | 64.3 | % | | 56.7 | % | | 66.9 | % | | 57.0 | % | | 55.5 | % | | 54.8 | % | | 60.7 | % | Total Loss and LAE ratio | | 59.1 | % | | 66.8 | % | | 82.4 | % | | 53.4 | % | | 58.4 | % | | 5.2 | % | | 64.6 | % |
| Expense ratio | Expense ratio | | 41.3 | % | | 39.1 | % | | 40.0 | % | | 34.4 | % | | 46.6 | % | | 41.7 | % | | 39.9 | % | Expense ratio | | 34.1 | % | | 35.5 | % | | 40.0 | % | | 46.2 | % | | 44.6 | % | | 39.3 | % | | 38.6 | % |
| Combined ratio | Combined ratio | | 105.6 | % | | 95.8 | % | | 106.9 | % | | 91.4 | % | | 102.1 | % | | 96.5 | % | | 100.6 | % | Combined ratio | | 93.2 | % | | 102.3 | % | | 122.4 | % | | 99.6 | % | | 103.0 | % | | 44.5 | % | | 103.2 | % |
|
Commercial auto and small commercial package new business has been written on State Auto Connect since 2018. Our farm and ranch product launched on State Auto Connect during the second quarter of 2020 and is now live in 29 states. Nine of the 29 states are states in which we had not previously written policies for farm & ranch products. Our middle market commercial product launched on State Auto Connect in March 2020 and is currently live in 30 states, with the last state having been launched in April 2021. Finally, our workers' compensation product launched on State Auto Connect in the fourth quarter of 2020 and is currently live in 36 states and Washington D.C. after completing the launch in the 2021 third quarter.
The commercial insurance segment's net written premiums for the three and nine months ended September 30, 2020,2021, increased 8.3%17.1 points and 13.4%,16.1 points, respectively, when compared to the same 20192020 periods (Tables 5 - 8), primarily driven. The third quarter and year to date was impacted by (i) new business growth and rate increases in commercial auto (ii) new business growth inand farm & ranch, and (iii)ranch. The third quarter increase was also impacted by rate increases in middle market commercial. Thecommercial and new business growth in farm & ranch was driven by the continued state rollout of theworkers' compensation attributable to its launch on State Auto Connect platform during the third quarter, which is now live in 27 states. Eight of the 27 states are states that we previously were not writing policies for farm & ranch products. The rollout of the State Auto Connect platform in farm & ranch's remaining states will continue throughout 2020. Additionally, the State Auto Connect platform was launched for middle market commercial in March 2020 and is currently live in 16 states, with subsequent state rollouts scheduled for the remainder of 2020 and the first half of 2021. The net written premium growth was partially offset by a decrease in net written premiums in workers’ compensation due to (i) a decline in new business as a result of COVID-19, and (ii) continued intense competition in this market.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Connect.The commercial insurance segment's SAP catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2020 increased 7.6 points2021 was flat and 12.1improved 8.3 points, respectively, when compared to the same 20192020 periods (Tables 5 - 8), with most of. For the third quarter and2021 year to date, the number of catastrophe losses impacting small commercial package, middle market commercial, and farm & ranch.events increased compared to 2020, but the 2021 catastrophe events were less severe. The 2020 third quarter and2021 year to date catwas primarily impacted by winter storms Uri and Viola in the first quarter, which contributed 2.1 points to the loss and ALAE ratios were impacted by (i) an increaseratio. Approximately 80% of the 2021 losses occurred in Texas and the severity of weather events when compared to the same 2019 periods and (ii) the Midwest derecho in August which contributed 4.4 points and 1.5 points, respectively, to the cat loss and ALAE ratios.Midwest. The 2020 year to date was also impacted by (i) a severe wind and hail storm, including tornadoes, in Tennessee, which contributed 5.1 points to the year to date cat loss and ALAE ratio, of which 3.7 points were from three large losses in Nashville, and (ii) property losses
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
resulting from the civil unrest which added 1.5 points to the cat loss and LAE ratios.
The commercial insurance segment’s SAP non-catastropheratios, (iii) and the Midwest derecho mentioned above, which added 1.5 points to the cat loss and ALAE ratios for the three and nine months ended September 30, 2020 improved 12.2 points and 7.2 points, respectively, when compared to the same 2019 periods (Tables 5 - 8).ratios.
The commercial auto SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2020 improved 4.32021 increased 39.3 points and 4.621.7 points, respectively, when compared to the same 20192020 periods, driven by improvementdue to an increase in the current accident year.year ratios. The 2021 increase in the current accident year ratios was primarily due to an increase in the frequency and severity of bodily injury claims. Also, 2020 experienced lower frequency attributable to fewer miles driven as a result of shelter-in-place orders in response to the COVID-19 pandemic. The 2021 third quarter and year to date currentwere also impacted by adverse development of prior accident year was impacted by lower claims frequency, attributable to fewer miles drivenlosses, primarily due to people working remotely and staying at home more because of COVID-19 concerns. Partially offsetting the 2020 third quarter and yearhigher than anticipated severity from bodily injury claims from multiple accident years, compared to date improvement was less favorable development of prior accident year losses when compared toin the same 20192020 periods. The 2019 prior accident year favorable development was primarily attributable to lower than anticipated severity from the 2017 accident year.
The small commercial package SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2020 improved 15.92021 increased 10.5 points and 4.713.5 points, respectively, when compared to the same 20192020 periods, primarily due to greaterless favorable development of prior accident year losses. The 2021 favorable development was primarily attributable to lower than anticipated bodily injury severity from accident years 2019 and prior. The 2020 favorable development of prior accident year losses was driven by lower than expected bodily injury severity from multiple prior accident yearsyears. The 2021 third quarter current accident year ratio improved when compared to the same 2019 periods.2020 period, due to lower severity of property losses. The 2021 year to date current accident year ratio increased when compared to the same 2020 period, due to higher severity of property losses from the first half of the year, including a large fire loss that added 2.5 points to the year to date non-cat loss ratio. The 2020 third quarter and year to date current accident year ratios were impacted by (i) a decline in claim frequency as a result of reduced business activity caused by COVID-19, and (ii) increased severity of property losses, primarily relatedin response to fire.COVID-19. The 2020 year to date current accident year was also impacted by increased COVID-19 related legal defense costs, from claims related to COVID-19, which added 2.1 points to the year to date non-cat loss ratio.
The middle market commercial SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2020 improved 18.52021 increased 5.8 points and 8.2improved 5.7 points, respectively, when compared to the same 2019 periods, primarily2020 periods. The third quarter increase was due to greaterless favorable development of prior accident year losses driven bywhen compared to the same 2020 period. The 2021 year to date favorable development was primarily attributable to (i) bodily injury claims from multiple accident years and on (ii) fire claims from the 2020 accident year. The 2020 third quarter and year to date favorable development of prior accident year losses was primarily attributable to lower than expected bodily injury severity from multiple accident years when compared to the same 2019 periods.years. The 20202021 third quarter and year to date non-cat loss ratios were also impacted by improvement in the current accident year, ratios were impacted by a decline inprimarily due to lower claim frequency as a result of reduced business activity caused by the COVID-19 pandemic. The 2020 year to date current accident year was also impacted by increased legal defense costs from claims related to COVID-19, which added 0.7 points to the year to date non-cat loss ratio.both bodily injury and property damage claims.
The workers' compensation SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 20202021 improved 3.57.0 points and 3.119.0 points, respectively, when compared to the same 2019 periods, primarily2020 periods. The 2021 third quarter improvement was due to greater favorable development of prior accident year losses across multiple accident years. The 2020 quarter and year to datean improvement in the current accident year ratios wereratio when compared to the same 2020 period, which was impacted by (i) a large loss that added 10.0 points to the non-cat loss ratio, and (ii) increased claims for businesses in the medical field (e.g. nursing homes, hospitals) caused bydue to the COVID-19 pandemic, which added 3.9 points and 6.3to the non-cat loss ratio. Partially offsetting the 2021 improvement in the third quarter current accident year ratio were two large losses that added 15.9 points respectively, whichto the third quarter non-cat loss ratio. The 2021 year to date improvement was partially offset by a decline in claim frequencyprimarily due to reduced business and employment activity caused bymore favorable development of prior accident year losses when compared to the COVID-19 pandemic.same 2020 period. The 2020 third quarter and2021 favorable development was across multiple accident years. The 2021 year to date current accident year ratios were alsoratio was consistent with the same 2020 period, which was impacted by a large loss(i) the COVID-19 pandemic mentioned above that added 10.06.3 points and 3.2 points, respectively, to the non-cat loss ratios.ratio and (ii) the 2020 third quarter large loss mentioned above that added 3.2 points to the non-cat loss ratio. Mostly offsetting the 2021 year to date improvement in the current accident year ratio were four large losses that added 11.4 points to the year to date non-cat loss ratio.
The farm & ranch SAP non-catastrophe loss and ALAE ratiosratio for the three and nine months ended September 30, 2020 improved 13.52021 increased 4.2 points and 11.3 points, respectively, when compared to the same 2019 periods,2020 period, primarily due to lowerhigher claim frequency in the current accident year.
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 nine months ended September 30, 20202021 and 2019:2020:
| | ($ millions) | ($ millions) | | Three months ended September 30 | | Nine months ended September 30 | ($ millions) | | Three months ended September 30 | | Nine months ended September 30 |
| | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | $ Change |
| | (Favorable)/Adverse | | | | (Favorable)/Adverse | | | | (Favorable)/Adverse | | | | (Favorable)/Adverse | | |
| Non-cat loss and ALAE: | Non-cat loss and ALAE: | | Non-cat loss and ALAE: | |
| Personal Insurance Segment: | Personal Insurance Segment: | | Personal Insurance Segment: | |
| Personal Auto | Personal Auto | | $ | 8.0 | | | $ | (1.2) | | | $ | 9.2 | | | $ | 19.1 | | | $ | (11.0) | | | $ | 30.1 | | Personal Auto | | $ | 6.8 | | | $ | 8.0 | | | $ | (1.2) | | | $ | 4.7 | | | $ | 19.1 | | | $ | (14.4) | |
| Homeowners | Homeowners | | 0.7 | | | — | | | 0.7 | | | 2.8 | | | 0.5 | | | 2.3 | | Homeowners | | (2.5) | | | 0.7 | | | (3.2) | | | (2.1) | | | 2.8 | | | (4.9) | |
| Other Personal | Other Personal | | (0.6) | | | (0.9) | | | 0.3 | | | (1.7) | | | (1.9) | | | 0.2 | | Other Personal | | — | | | (0.6) | | | 0.6 | | | (0.2) | | | (1.7) | | | 1.5 | |
| Total Personal Insurance Segment | Total Personal Insurance Segment | | 8.1 | | | (2.1) | | | 10.2 | | | 20.2 | | | (12.4) | | | 32.6 | | Total Personal Insurance Segment | | 4.3 | | | 8.1 | | | (3.8) | | | 2.4 | | | 20.2 | | | (17.8) | |
| | Commercial Insurance Segment: | Commercial Insurance Segment: | | Commercial Insurance Segment: | |
| Commercial Auto | Commercial Auto | | (1.2) | | | (1.1) | | | (0.1) | | | (1.5) | | | (3.6) | | | 2.1 | | Commercial Auto | | 3.7 | | | (1.2) | | | 4.9 | | | 2.8 | | | (1.5) | | | 4.3 | |
| Small Commercial Package | Small Commercial Package | | (7.5) | | | (4.1) | | | (3.4) | | | (16.5) | | | (11.8) | | | (4.7) | | Small Commercial Package | | (2.4) | | | (7.5) | | | 5.1 | | | (6.9) | | | (16.5) | | | 9.6 | |
| Middle Market Commercial | Middle Market Commercial | | (6.3) | | | (1.2) | | | (5.1) | | | (14.3) | | | (7.2) | | | (7.1) | | Middle Market Commercial | | (1.2) | | | (6.3) | | | 5.1 | | | (14.7) | | | (14.3) | | | (0.4) | |
| Workers' Compensation | Workers' Compensation | | (7.3) | | | (4.4) | | | (2.9) | | | (16.1) | | | (13.4) | | | (2.7) | | Workers' Compensation | | (6.4) | | | (7.3) | | | 0.9 | | | (21.8) | | | (16.1) | | | (5.7) | |
| Farm & Ranch | Farm & Ranch | | (0.6) | | | (0.7) | | | 0.1 | | | (1.7) | | | (1.9) | | | 0.2 | | Farm & Ranch | | (0.5) | | | (0.6) | | | 0.1 | | | (2.0) | | | (1.7) | | | (0.3) | |
| Other Commercial | Other Commercial | | (3.6) | | | (1.6) | | | (2.0) | | | (7.1) | | | (1.4) | | | (5.7) | | Other Commercial | | (2.4) | | | (3.6) | | | 1.2 | | | (5.1) | | | (7.1) | | | 2.0 | |
| Total Commercial Insurance Segment | Total Commercial Insurance Segment | | (26.5) | | | (13.1) | | | (13.4) | | | (57.2) | | | (39.3) | | | (17.9) | | Total Commercial Insurance Segment | | (9.2) | | | (26.5) | | | 17.3 | | | (47.7) | | | (57.2) | | | 9.5 | |
| | | Specialty run-off | Specialty run-off | | (0.9) | | | (0.9) | | | — | | | 5.2 | | | (2.4) | | | 7.6 | | Specialty run-off | | (0.1) | | | (0.9) | | | 0.8 | | | (0.2) | | | 5.2 | | | (5.4) | |
| Cat Loss and ALAE | Cat Loss and ALAE | | 11.6 | | | (1.0) | | | 12.6 | | | 12.8 | | | (0.2) | | | 13.0 | | Cat Loss and ALAE | | 5.3 | | | 11.6 | | | (6.3) | | | 6.5 | | | 12.8 | | | (6.3) | |
| ULAE | ULAE | | (2.3) | | | (0.4) | | | (1.9) | | | 1.4 | | | (0.8) | | | 2.2 | | ULAE | | 0.8 | | | (2.3) | | | 3.1 | | | (3.4) | | | 1.4 | | | (4.8) | |
| Total | Total | | $ | (10.0) | | | $ | (17.5) | | | $ | 7.5 | | | $ | (17.6) | | | $ | (55.1) | | | $ | 37.5 | | Total | | $ | 1.1 | | | $ | (10.0) | | | $ | 11.1 | | | $ | (42.4) | | | $ | (17.6) | | | $ | (24.8) | |
|
For further information, see the "Personal Insurance Segment" and "Commercial Insurance Segment" discussions included in this Item 2.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Losses and loss expenses payable
The following table sets forth losses and loss expenses payable by major product at September 30, 20202021 and December 31, 2019:2020:
| | ($ millions) | ($ millions) | September 30, 2020 | | December 31, 2019 | | $ Change | ($ millions) | September 30, 2021 | | December 31, 2020 | | $ Change |
| Personal Insurance Segment: | Personal Insurance Segment: | | | | | | Personal Insurance Segment: | | | | | |
| Personal Auto | Personal Auto | $ | 162.4 | | | $ | 162.9 | | | $ | (0.5) | | Personal Auto | $ | 187.3 | | | $ | 174.4 | | | $ | 12.9 | |
| Homeowners | Homeowners | 103.7 | | | 69.2 | | | 34.5 | | Homeowners | 117.0 | | | 90.4 | | | 26.6 | |
| Other Personal | Other Personal | 16.5 | | | 15.1 | | | 1.4 | | Other Personal | 23.2 | | | 15.8 | | | 7.4 | |
| Total Personal Insurance Segment | Total Personal Insurance Segment | 282.6 | | | 247.2 | | | 35.4 | | Total Personal Insurance Segment | 327.5 | | | 280.6 | | | 46.9 | |
| Commercial Insurance Segment: | Commercial Insurance Segment: | | | | | | Commercial Insurance Segment: | | | | | |
| Commercial Auto | Commercial Auto | 87.4 | | | 76.7 | | | 10.7 | | Commercial Auto | 132.4 | | | 93.8 | | | 38.6 | |
| Small Commercial Package | Small Commercial Package | 108.6 | | | 110.5 | | | (1.9) | | Small Commercial Package | 97.4 | | | 95.9 | | | 1.5 | |
| Middle Market Commercial | Middle Market Commercial | 160.2 | | | 152.8 | | | 7.4 | | Middle Market Commercial | 153.5 | | | 162.2 | | | (8.7) | |
| Workers’ Compensation | Workers’ Compensation | 183.9 | | | 187.8 | | | (3.9) | | Workers’ Compensation | 153.0 | | | 176.4 | | | (23.4) | |
| Farm & Ranch | Farm & Ranch | 16.3 | | | 13.3 | | | 3.0 | | Farm & Ranch | 21.9 | | | 18.3 | | | 3.6 | |
| Other Commercial | Other Commercial | 30.2 | | | 30.9 | | | (0.7) | | Other Commercial | 26.0 | | | 25.6 | | | 0.4 | |
| Total Commercial Insurance Segment | Total Commercial Insurance Segment | 586.6 | | | 572.0 | | | 14.6 | | Total Commercial Insurance Segment | 584.2 | | | 572.2 | | | 12.0 | |
| Specialty run-off: | Specialty run-off: | | | | | | Specialty run-off: | | | | | |
| E&S Property | E&S Property | 29.7 | | | 27.8 | | | 1.9 | | E&S Property | 7.6 | | | 24.3 | | | (16.7) | |
| E&S Casualty | E&S Casualty | 117.9 | | | 145.9 | | | (28.0) | | E&S Casualty | 90.6 | | | 112.2 | | | (21.6) | |
| Programs | Programs | 39.3 | | | 60.0 | | | (20.7) | | Programs | 30.2 | | | 36.8 | | | (6.6) | |
| Total Specialty run-off | Total Specialty run-off | 186.9 | | | 233.7 | | | (46.8) | | Total Specialty run-off | 128.4 | | | 173.3 | | | (44.9) | |
Total losses and loss expenses payable, net of reinsurance
recoverable on losses and loss expenses payable and allowance for credit losses | Total losses and loss expenses payable, net of reinsurance
recoverable on losses and loss expenses payable and allowance for credit losses | $ | 1,056.1 | | | $ | 1,052.9 | | | $ | 3.2 | | Total losses and loss expenses payable, net of reinsurance
recoverable on losses and loss expenses payable and allowance for credit losses | $ | 1,040.1 | | | $ | 1,026.1 | | | $ | 14.0 | |
|
Losses and loss expenses payable increased $3.2$14.0 million since December 31, 20192020 primarily due to a higher level of catastrophe losses in the commercial and personal insurance segments discussed above and(i) growth in the commercial auto line of business, and (ii) a higher level of unpaid catastrophe losses in the homeowners line of business, partially offset by (i) the run-off from our previously exited specialty insurance business and (ii) continued favorable development of specialty business.prior accident year losses in the workers compensation line of business, as discussed above.
We conduct quarterly reviews of loss development and make judgments in determining the reserves for losses and loss expenses. Several factors are considered by us when estimating ultimate liabilities, including consistency in relative case reserve adequacy, consistency in claims settlement practices, recent legal developments, historical data, actuarial projections, exposure changes, anticipated inflation, current business conditions, catastrophe development, late reported claims, and other reasonableness tests. Our quarterly review also included the potential impact of COVID-19 on our reserves for losses and loss expenses. For a discussion of the most significant risks and uncertainties that could impact our results of operations, financial position, liquidity, and cash flows as a result of the COVID-19 pandemic, see “Part II—Item 1A—Risk Factors” included"Risk Factors" in this“Item 1A” of the 2020 Form 10-Q.10-K.
The risks and uncertainties inherent in our estimates include, but are not limited to, actual settlement experience differing from historical data, trends, changes in business and economic conditions, court decisions creating unanticipated liabilities, ongoing interpretation of policy provisions by the courts, inconsistent decisions in lawsuits regarding coverage and additional information discovered before settlement of claims. Our results of operations and financial condition could be impacted, perhaps significantly, in the future if the ultimate payments required for claims settlement vary from the liability currently recorded. For a discussion of our reserving methodologies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Losses and Loss Expenses Payable” in Item 7 of the 20192020 Form 10-K.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Acquisition and Operating Expenses
Our GAAP acquisition and operating expenses for the three and nine months ended September 30, 20202021 were $115.0 million and $343.2 million, respectively, compared to $123.0 million and $357.4 million respectively, compared to $109.7 million and $325.2 million, respectively, for the same 20192020 periods. The 20202021 third quarter and year to date increases were driven by (i) amortization of deferred acquisition costs due to growth, (ii) IT expenses, including electronic data processing equipment and software cost amortization and IT consulting, and (iii) variable agent compensation. The shift to State Auto Connect and our digital journey over the last five years continue to drive the increases in IT expenses. Partially offsetting the third quarter and year to date increasesdecreases in acquisition and operating expenses were decreases inprimarily driven by (i) less estimated variable associateagent compensation, when compared to the same 2019 periods.and (ii) reduced IT development costs.
Investment Operations Segment
Our investments in fixed maturities, equity securities and certain other invested assets are carried at fair value. The unrealized holding gains or losses of our available-for-sale fixed maturities, net of applicable deferred taxes, are included as a separate component of stockholders’ equity as accumulated other comprehensive income and as such are not included in the determination of net income.
We have investment policy guidelines with respect to purchasing fixed maturity investments for our insurance subsidiaries which preclude investments in bonds that are rated below investment grade by a recognized rating service at the time of purchase. Our fixed maturity portfolio is composed of high quality, investment grade issues, consisting primarily of debt issues rated AAA, AA or A. We obtain investment ratings from major rating services. If there is a split rating, we assign the lowest rating obtained.
For further discussion regarding the management of our investment portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Investment Operations Segment” in Item 7 of the 20192020 Form 10-K.
Composition of Investment Portfolio
The following table sets forth the composition of our investment portfolio at carrying value at September 30, 20202021 and December 31, 2019:2020:
| | ($ millions) | ($ millions) | September 30, 2020 | | % of Total | | December 31, 2019 | | % of Total | ($ millions) | September 30, 2021 | | % of Total | | December 31, 2020 | | % of Total |
| Cash and cash equivalents | Cash and cash equivalents | $ | 131.4 | | | 4.7 | % | | $ | 78.0 | | | 2.8 | % | Cash and cash equivalents | $ | 46.1 | | | 1.6 | % | | $ | 90.7 | | | 3.2 | % |
| Fixed maturities, at fair value: | Fixed maturities, at fair value: | | Fixed maturities, at fair value: | |
| Fixed maturities | Fixed maturities | 2,049.3 | | | 73.7 | % | | 1,992.3 | | | 72.5 | % | Fixed maturities | 2,113.7 | | | 75.4 | % | | 2,121.0 | | | 73.9 | % |
| Treasury inflation-protected securities | Treasury inflation-protected securities | 117.0 | | | 4.2 | % | | 135.6 | | | 5.0 | % | Treasury inflation-protected securities | 109.8 | | | 3.9 | % | | 116.2 | | | 4.0 | % |
| Total fixed maturities | Total fixed maturities | 2,166.3 | | | 77.9 | % | | 2,127.9 | | | 77.5 | % | Total fixed maturities | 2,223.5 | | | 79.3 | % | | 2,237.2 | | | 77.9 | % |
| Notes receivable from affiliate | Notes receivable from affiliate | 70.0 | | | 2.5 | % | | 70.0 | | | 2.5 | % | Notes receivable from affiliate | 70.0 | | | 2.5 | % | | 70.0 | | | 2.4 | % |
| Equity securities: | Equity securities: | | Equity securities: | |
| Large-cap securities | Large-cap securities | 120.0 | | | 4.3 | % | | 104.4 | | | 3.8 | % | Large-cap securities | 163.5 | | | 5.8 | % | | 134.2 | | | 4.7 | % |
| Mutual and exchange traded funds | Mutual and exchange traded funds | 219.5 | | | 7.9 | % | | 290.8 | | | 10.6 | % | Mutual and exchange traded funds | 212.5 | | | 7.6 | % | | 255.5 | | | 8.9 | % |
| Total equity securities | Total equity securities | 339.5 | | | 12.2 | % | | 395.2 | | | 14.4 | % | Total equity securities | 376.0 | | | 13.4 | % | | 389.7 | | | 13.6 | % |
| Other invested assets: | Other invested assets: | | Other invested assets: | |
| International funds | International funds | 48.5 | | | 1.7 | % | | 56.4 | | | 2.1 | % | International funds | 62.2 | | | 2.2 | % | | 55.8 | | | 2.0 | % |
| Other invested assets | Other invested assets | 14.0 | | | 0.5 | % | | 13.3 | | | 0.5 | % | Other invested assets | 17.1 | | | 0.6 | % | | 15.3 | | | 0.5 | % |
| Total other invested assets | Total other invested assets | 62.5 | | | 2.2 | % | | 69.7 | | | 2.6 | % | Total other invested assets | 79.3 | | | 2.8 | % | | 71.1 | | | 2.5 | % |
| Other invested assets, at cost | Other invested assets, at cost | 12.5 | | | 0.5 | % | | 6.5 | | | 0.2 | % | Other invested assets, at cost | 10.4 | | | 0.4 | % | | 12.1 | | | 0.4 | % |
| Total portfolio | Total portfolio | $ | 2,782.2 | | | 100.0 | % | | $ | 2,747.3 | | | 100.0 | % | Total portfolio | $ | 2,805.3 | | | 100.0 | % | | $ | 2,870.8 | | | 100.0 | % |
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at September 30, 2020:2021:
| | ($ millions) | ($ millions) | Amortized cost | | Fair
value | ($ millions) | Amortized cost | | Fair
value |
| Due in 1 year or less | Due in 1 year or less | $ | 119.8 | | | $ | 120.9 | | Due in 1 year or less | $ | 141.6 | | | $ | 142.7 | |
| Due after 1 year through 5 years | Due after 1 year through 5 years | 519.9 | | | 548.0 | | Due after 1 year through 5 years | 592.3 | | | 614.4 | |
| Due after 5 years through 10 years | Due after 5 years through 10 years | 168.0 | | | 178.9 | | Due after 5 years through 10 years | 211.7 | | | 218.2 | |
| Due after 10 years | Due after 10 years | 682.4 | | | 737.5 | | Due after 10 years | 516.7 | | | 548.6 | |
| U.S. government agencies mortgage-backed securities | U.S. government agencies mortgage-backed securities | 557.0 | | | 581.0 | | U.S. government agencies mortgage-backed securities | 697.3 | | | 699.6 | |
| Total | Total | $ | 2,047.1 | | | $ | 2,166.3 | | Total | $ | 2,159.6 | | | $ | 2,223.5 | |
|
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 4.804.11 and 4.174.72 as of September 30, 2020,2021, and December 31, 2019,2020, respectively.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Investment Operations Revenue
The following table sets forth the components of net investment income for the three and nine months ended September 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | Three months ended September 30 | | Nine months ended September 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
| Gross investment income: | | | | | | | |
| Fixed maturities | $ | 15.0 | | | $ | 15.3 | | | $ | 44.6 | | | $ | 47.7 | |
| Equity securities | 2.1 | | | 3.0 | | | 7.8 | | | 8.9 | |
| Other | 0.9 | | | 1.1 | | | 2.7 | | | 4.2 | |
| Total gross investment income | 18.0 | | | 19.4 | | | 55.1 | | | 60.8 | |
| Less: Investment expenses | 0.1 | | | 0.1 | | | 0.6 | | | 0.4 | |
| Net investment income | $ | 17.9 | | | $ | 19.3 | | | $ | 54.5 | | | $ | 60.4 | |
| | | | | | | |
| Average invested assets (at cost) | $ | 2,512.9 | | | $ | 2,638.0 | | | $ | 2,537.6 | | | $ | 2,648.4 | |
| Annualized investment yield | 2.8 | % | | 2.9 | % | | 2.9 | % | | 3.0 | % |
| Annualized investment yield, after tax | 2.3 | % | | 2.4 | % | | 2.4 | % | | 2.5 | % |
| Net investment income, after tax | $ | 14.7 | | | $ | 16.0 | | | $ | 44.8 | | | $ | 49.8 | |
| Effective tax rate | 17.7 | % | | 9.4 | % | | 17.9 | % | | 17.9 | % |
| | | | | | | |
The following table sets forth realized gains (losses) and the proceeds received from the sale of our investment portfolio for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Three months ended September 30 | | Nine months ended September 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
| Realized gains (losses) | | Proceeds received on sale | | Realized gains (losses) | | Proceeds received on sale | | Realized gains (losses) | | Proceeds received on sale | | Realized gains (losses) | | Proceeds received on sale |
| Realized gains: | | | | | | | | | | | | | | | |
| Fixed maturities | $ | 1.3 | | | $ | 27.8 | | | $ | 1.2 | | | $ | 50.0 | | | $ | 6.8 | | | $ | 192.2 | | | $ | 2.8 | | | $ | 248.7 | |
| Equity securities | 4.0 | | | 18.9 | | | 0.2 | | | 4.1 | | | 6.3 | | | 31.1 | | | 1.7 | | | 14.3 | |
| | | | | | | | | | | | | | | |
| Total realized gains | 5.3 | | | 46.7 | | | 1.4 | | | 54.1 | | | 13.1 | | | 223.3 | | | 4.5 | | | 263.0 | |
| Realized losses: | | | | | | | | | | | | | | | |
| Fixed maturities | (1.5) | | | — | | | — | | | — | | | (3.6) | | | 23.9 | | | — | | | — | |
| Equity securities | (46.3) | | | 37.3 | | | (2.0) | | | 10.0 | | | (57.2) | | | 55.1 | | | (4.2) | | | 20.1 | |
| Other invested assets | — | | | 0.3 | | | — | | | 0.4 | | | — | | | 0.9 | | | — | | | 1.0 | |
| Total realized losses | (47.8) | | | 37.6 | | | (2.0) | | | 10.4 | | | (60.8) | | | 79.9 | | | (4.2) | | | 21.1 | |
| Net realized (losses) gains on investments | $ | (42.5) | | | $ | 84.3 | | | $ | (0.6) | | | $ | 64.5 | | | $ | (47.7) | | | $ | 303.2 | | | $ | 0.3 | | | $ | 284.1 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | Three months ended September 30 | | Nine months ended September 30 |
| 2021 | | 2020 | | 2021 | | 2020 |
| Gross investment income: | | | | | | | |
| Fixed maturities | $ | 15.2 | | | $ | 15.0 | | | $ | 46.0 | | | $ | 44.6 | |
| Equity securities | 1.2 | | | 2.1 | | | 4.0 | | | 7.8 | |
| Other | 1.0 | | | 0.9 | | | 3.0 | | | 2.7 | |
| Total gross investment income | 17.4 | | | 18.0 | | | 53.0 | | | 55.1 | |
| Less: Investment expenses | 0.4 | | | 0.1 | | | 0.7 | | | 0.6 | |
| Net investment income | $ | 17.0 | | | $ | 17.9 | | | $ | 52.3 | | | $ | 54.5 | |
| | | | | | | |
| Average invested assets (at cost) | $ | 2,552.3 | | | $ | 2,512.9 | | | $ | 2,551.0 | | | $ | 2,537.6 | |
| Annualized investment yield | 2.7 | % | | 2.8 | % | | 2.7 | % | | 2.9 | % |
| Annualized investment yield, after tax | 2.2 | % | | 2.3 | % | | 2.3 | % | | 2.4 | % |
| Net investment income, after tax | $ | 14.1 | | | $ | 14.7 | | | $ | 43.2 | | | $ | 44.8 | |
| Effective tax rate | 17.5 | % | | 17.7 | % | | 17.5 | % | | 17.9 | % |
| | | | | | | |
When a fixed maturity has been determined to have an impairment, the impairment charge representing the credit loss is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive (loss) income. We reviewed our available-for-sale fixed maturities at September 30, 2021 and 2020 and determined that no credit impairment existed in the gross unrealized holding losses. See Note 3, “Investments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional information.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Gross Unrealized Investment Gains and Losses
Based upon our review of our investment portfolio at September 30, 2020,2021, we determined that there were no individual investments with an unrealized holding loss that had a fair value significantly below cost continually for more than one year. The following table sets forth detailed information on our investment portfolio by investment category at fair value for our gross unrealized holding gains (losses) at September 30, 2020:2021:
| | ($ millions, except # of positions) | Cost or amortized cost | | Gross unrealized holding gains | | Gross unrealized holding
losses | | Fair value | |
| ($ millions) | | ($ millions) | Cost or amortized cost | | Gross unrealized holding gains | | Gross unrealized holding
losses | | Fair value |
| Available-for-sale fixed maturities: | Available-for-sale fixed maturities: | | | | Available-for-sale fixed maturities: | | | |
| U.S. treasury securities and obligations of U.S. government agencies | U.S. treasury securities and obligations of U.S. government agencies | $ | 510.9 | | | $ | 48.1 | | | $ | — | | | $ | 559.0 | | U.S. treasury securities and obligations of U.S. government agencies | $ | 483.8 | | | $ | 25.1 | | | $ | (0.9) | | | $ | 508.0 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 527.5 | | | 26.7 | | | (1.5) | | | 552.7 | | Obligations of states and political subdivisions | 470.7 | | | 22.7 | | | (0.5) | | | 492.9 | |
| Corporate securities | Corporate securities | 451.7 | | | 21.9 | | | — | | | 473.6 | | Corporate securities | 507.8 | | | 16.1 | | | (0.9) | | | 523.0 | |
| U.S. government agencies mortgage-backed securities | U.S. government agencies mortgage-backed securities | 557.0 | | | 25.3 | | | (1.3) | | | 581.0 | | U.S. government agencies mortgage-backed securities | 697.3 | | | 13.4 | | | (11.1) | | | 699.6 | |
| Total available-for-sale fixed maturities | Total available-for-sale fixed maturities | $ | 2,047.1 | | | $ | 122.0 | | | $ | (2.8) | | | $ | 2,166.3 | | Total available-for-sale fixed maturities | $ | 2,159.6 | | | $ | 77.3 | | | $ | (13.4) | | | $ | 2,223.5 | |
|
The following table sets forth our unrealized holding gains for our available-for-sale fixed maturities, net of deferred tax that was included as a component of accumulated other comprehensive loss at September 30, 2020,2021, and December 31, 2019,2020, and the change in unrealized holding gains, net of deferred tax, for the nine months ended September 30, 2020:2021:
| | ($ millions) | ($ millions) | September 30, 2020 | | December 31, 2019 | | $ Change | ($ millions) | September 30, 2021 | | December 31, 2020 | | $ Change |
| Available-for-sale investments: | Available-for-sale investments: | | | | | | Available-for-sale investments: | | | | | |
| Unrealized holding gains: | Unrealized holding gains: | | Unrealized holding gains: | |
| Fixed maturities | Fixed maturities | $ | 119.2 | | | $ | 47.9 | | | $ | 71.3 | | Fixed maturities | $ | 63.9 | | | $ | 120.2 | | | $ | (56.3) | |
| Net deferred federal income tax | Net deferred federal income tax | (25.0) | | | (10.0) | | | (15.0) | | Net deferred federal income tax | (13.5) | | | (25.3) | | | 11.8 | |
| Unrealized gains, net of tax | Unrealized gains, net of tax | $ | 94.2 | | | $ | 37.9 | | | $ | 56.3 | | Unrealized gains, net of tax | $ | 50.4 | | | $ | 94.9 | | | $ | (44.5) | |
|
At September 30, 2020,2021, State Auto P&C had U.S. government agencies mortgage-backed fixed maturity securities with a carrying value of approximately $106.5 million pledged as collateral for loans from the FHLB. See “Liquidity and Capital Resources - Borrowing Arrangements - FHLB Loans” in this Item 2 for a further description of these loans. In accordance with the terms of the FHLB loans, State Auto P&C retains all rights regarding these pledged securities.
Fair Value Measurements
We primarily use one independent nationally recognized third party pricing service in developing fair value estimates. We obtain one price per security, and our processes and control procedures are designed to ensure the value is accurately recorded on an unadjusted basis. Through discussions with the pricing service, we gain an understanding of the methodologies used to price the different types of securities, that the data and the valuation methods utilized are appropriate and consistently applied, and that the assumptions are reasonable and representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service, we compare to other fair value pricing information gathered from other independent pricing sources. See Note 4, “Fair Value of Financial Instruments” to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for a presentation of our available-for-sale investments within the fair value hierarchy at September 30, 2020,2021, and December 31, 2019.2020.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Other Items
Income Taxes
The following table sets forth the components of our federal income tax (benefit) expense for the three and nine months ended September 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ millions) | | Three months ended September 30 | | Nine months ended September 30 |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Income (loss) before federal income taxes | | $ | 14.8 | | | $ | 12.7 | | | $ | (87.6) | | | $ | 66.7 | |
| Federal income tax expense (benefit) | | | | | | | | |
| Current | | — | | | — | | | (0.4) | | | (0.4) | |
| Deferred | | 3.2 | | | 1.2 | | | (18.5) | | | 12.4 | |
| Total federal income tax expense (benefit) | | 3.2 | | | 1.2 | | | (18.9) | | | 12.0 | |
| Net income (loss) | | $ | 11.6 | | | $ | 11.5 | | | $ | (68.7) | | | $ | 54.7 | |
| | | | | | | | |
The effective tax rate for the three and nine months ended September 30, 2020 was 21.4% and 21.5%, respectively, compared to 9.4% and 17.9%, respectively, for the same 2019 periods.
We have foreign tax credit carryforwards of $0.5 million which will expire in 2021 and 2022. We believe it is more likely than not that the benefit from these foreign tax credit carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $0.5 million on the deferred tax assets related to these foreign tax credit carryforwards.
For additional information, see Note 10 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
LIQUIDITY AND CAPITAL RESOURCES
General
Liquidity refers to our ability to generate adequate amounts of cash to meet our short- and long-term needs. Our primary sources of cash are premiums, investment income, investment sales and the maturity of fixed income security investments. The significant outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends, interest and principal payments on debt and investment purchases. The cash outflows may vary due to uncertainties regarding settlement of large losses or catastrophic events. As a result, we continually monitor our investment and reinsurance programs to ensure they are appropriately structured to enable the insurance subsidiaries to meet anticipated short-term and long-term cash requirements without the need to sell investments to meet fluctuations in claim payments.
Liquidity
Our insurance subsidiaries must have adequate liquidity to ensure that their cash obligations are met. However, as discussed below, the STFC Pooled Companies do not have the day-to-day liquidity concerns normally associated with an insurance company due to their participation in, and the terms of, the Pooling Arrangement. In addition, State Auto P&C has a $100.0 million line of credit in place with the FHLB available for general corporate purposes such as funding liquidity needs. See “Borrowing Arrangements - FHLB Loans” described below.
Under the terms of the Pooling Arrangement, each period State Auto Mutual collects all premiums from policyholders and pays all losses and expenses associated with the insurance business produced by the STFC Pooled Companies and the other pool participants, and then it settles the intercompany balances generated by these transactions with the pool participants within 60 days following each quarter end. We believe this provides State Auto Mutual with sufficient liquidity to pay losses and expenses of our insurance operations on a timely basis.
We are exposed to third-party credit risk both directly through its cessions to reinsurers and indirectly through its participation in the Pooling Arrangement. In addition to exposure to credit risk on reinsurance recoverables, we are also exposed to credit risk on amounts due from insureds and agents. When settling the intercompany balances, State Auto Mutual provides the STFC Pooled Companies with full credit for the net premiums written and net losses paid during the quarter.
While the total amount due to State Auto Mutual from policyholders and agents is significant, the individual amounts due are relatively small at the policyholder and agency level. The State Auto Group mitigates its exposure to this credit risk through its in-house collections unit for both personal and commercial accounts which is supplemented by third party collection service providers. In addition to reliance upon recent and historical collection trends, determination of the allowance for uncollectible premiums receivable at September 30, 20202021 included consideration of other factors, including macro-economic conditions and trends, in particular the estimated impact of COVID-19. Credit risk is partially mitigated by the State Auto Group's ability to cancel the policy if the policyholder does not pay the premium. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums for the pool is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. This is included in "other expenses" on the condensed consolidated statements of income and reflected in “due to/from affiliates” on our condensed consolidated balance sheets.
We generally manage our cash flows through current operational activity and maturing investments, without a need to liquidate any of our other investments; however, should our written premiums decline or paid losses increase significantly, or a combination thereof, we may need to liquidate investments at losses in order to meet our cash obligations. This action was not necessary for the three and nine months ended September 30, 2020.2021.
We maintain a portion of our investment portfolio in relatively short-term and highly liquid investments to ensure the immediate availability of funds to pay claims and expenses. At September 30, 2020,2021 and December 31, 2019,2020, we had $131.4$46.1 million and $78.0$90.7 million, respectively, in cash and cash equivalents, and $2,568.3$2,678.8 million and $2,592.8$2,698.0 million, respectively, of total investments. Our available-for-sale fixed maturities included $9.6 million and $9.3$9.7 million of securities on deposit with insurance regulators as required by law at September 30, 2020,2021 and December 31, 2019; in2020, respectively. 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 rateCash used in operating activities was 7.00%), with interest payable semi-annually$54.6 million and principal payable in May 2029.
Cashcash provided by operating activities was $21.8 million and cash used in operating activities was $43.9 million for the nine months ended September 30, 20202021 and 2019,2020, 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.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
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 $42.8$17.5 million compared to $31.1and $42.8 million for the nine months ended September 30, 20202021 and 2019,2020, respectively. The change was primarily driven by an increase in the salepurchases of our MLP ETFs duringfixed maturities partially offset by (i) higher proceeds from maturities of fixed maturities and (ii) a decrease in the 2020 third quarter.purchases of equity securities.
Cash used in financing activities was $11.2$7.5 million compared to $8.7and $11.2 million for the nine months ended September 30, 20202021 and 2019,2020, respectively. The change was primarily driven by a decreasean increase in stock option exercises when compared to the same 20192020 period.
Borrowing Arrangements
FHLB Loans
On September 2, 2020, State Auto P&C retired its five-year term loan with the FHLB in the amountLine of $21.5 million and maturing on September 2, 2021 and replaced it with a new ten-year term loan with the FHLB in the amount of $21.5 million (the “2020 FHLB Loan”). The 2020 FHLB Loan is at a fixed rate of interest of 1.37%, provides for interest-only payments during its term, with principal due in full at maturity, and may be prepaid without penalty after five years and each of the succeeding six months thereafter. The 2020 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C.Credit
State Auto P&C has an Open Line of Credit Commitment (the "OLC") with the FHLB that provides State Auto P&Cit with a $100.0 million one-year open line of credit available for general corporate purposes. As of September 30, 2021, no advances had been made under the OLC. The OLC matures in April 2021.2022. Draws under the OLC are to be funded with a daily variable rate advance with a term of no more than 180 days with interest payable monthly. All advances under the OLC are fully secured by a pledge of specific investment securities of State Auto P&C. As of September 30, 2020, no advances had been made under the OLC.
On March 19, 2020, FHLB Loans
State Auto P&C entered intohas a short-termterm loan arrangement with the FHLB in the principal amount of $60.0 million. This$21.5 million (the “2020 FHLB Loan”). The 2020 FHLB Loan matures in September 2030 and provides for interest-only payments during its term, with principal due in full at maturity, and may be prepaid without penalty after five years and each of the succeeding six months thereafter. The interest rate is fixed over the term of the loan arrangement, known as REPO based advances, was for general corporate purposes and was intended to provide additional liquidity toat 1.37%. The 2020 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C. The REPO based advances were repaid in full on September 22, 2020, and this loan arrangement was terminated.
State Auto P&C also has an outstanding term loan with the FHLB in the principal amount of $85.0 million (the "2018 FHLB Loan"). The 2018 FHLB Loan matures in May 2033 and provides for interest-only payments during its term, with principal due in full at maturity. The interest rate is fixed over the term of the loan at 3.96%. Prepayment of the 2018 FHLB Loan would require a prepayment fee. The 2018 FHLB Loan is fully secured by a pledge of specific investment securities of State Auto P&C.
Subordinated Debentures
State Auto Financial’s Delaware business trust subsidiary (the “Capital Trust”) has outstanding $15.0 million liquidation amount of capital securities, due 2033. In connection with the Capital Trust’s issuance of the capital securities and the related purchase by State Auto Financial of all of the Capital Trust’s common securities (liquidation amount of $0.5 million), State Auto Financial has issued to the Capital Trust $15.5 million aggregate principal amount of unsecured Floating Rate Junior Subordinated Debt Securities due 2033 (the “Subordinated Debentures”). The sole assets of the Capital Trust are the Subordinated Debentures and any interest accrued thereon. Interest on the Capital Trust’s capital and common securities is payable quarterly at a rate equal to the three-month LIBOR rate plus 4.20%, adjusted quarterly. The applicable interest rates for September 30, 2021 and 2020 were 4.32% and 2019 were 4.44% and 6.33%, respectively.
Reinsurance Arrangements
Members of the State Auto Group follow the customary industry practice of reinsuring a portion of their exposures and paying to the reinsurers a portion of the premiums received. Insurance is ceded principally to reduce net liability on individual risks or for individual loss occurrences, including catastrophic losses. Although reinsurance does not legally discharge the individual members of the State Auto Group from primary liability for the full amount of limits applicable under their policies, it does make the assuming reinsurer liable to the extent of the reinsurance ceded.
To minimize the risk of reinsurer default, the State Auto Group cedes only to third-party reinsurers who are rated A- or better by A.M. Best or Standard & Poor’s and also utilizes both domestic and international markets to diversify its credit risk. We utilize reinsurance to limit our loss exposure and contribute to our liquidity and capital resources.
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-subsidiaryMGU subsidiary of State Auto Mutual.
Property Catastrophe Treaty
Members of the State Auto Group maintain a property catastrophe excess of loss reinsurance agreement covering property catastrophe related events affecting at least two risks. This property catastrophe reinsurance agreement renewed as of July 1, 2020.2021. Under this reinsurance agreement, we retain the first $90.0$100.0 million of catastrophe loss, each occurrence, with a 5.0% co-participation on the next $180.0$340.0 million of covered loss, each occurrence which is broken down into twothree layers of $70.0$60.0 million, $110.0 million, and $110.0$170.0 million. The reinsurers are responsible for 95.0% of the catastrophe losses excess of $90.0$100.0 million up to $270.0$440.0 million, each occurrence. The State Auto Group is responsible for catastrophe losses above $270.0$440.0 million. There is also an automatic restatementreinstatement of the limit for 100% of the deposit premium.
Property Per Risk Treaty
As of AprilJuly 1, 2020,2021, the State Auto Group renewed the property per risk excess of loss reinsurance agreement for a 15-month12-month term. Under this reinsurance agreement, the State Auto Group retains the first $4.0$10.0 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%100% of the loss excess of the $4.0$10.0 million retention up to $10.0 million and 86.0% of the loss excess of $10 million up to $20.0 million.
Casualty and Workers' Compensation Treaties
As of July 1, 2020,2021, the State Auto Group renewed the casualty excess of loss reinsurance agreement. Under this reinsurance agreement, the State Auto Group is responsible for the first $3.0 million of losses that involve workers' compensation, auto liability, other liability and umbrella liability policies. This reinsurance agreement provides coverage up to $10.0 million, except for commercial umbrella policies which are covered for limits up to $15.0 million.
Also, certain unusual claim situations involving extra contractual obligations, excess of policy limits, LAE coverage and multiple policy or coverage loss occurrences arising from bodily injury liability, property damage, uninsured motorist and personal injury protection are covered by a Clash reinsurance agreement that provides for $20.0 million of coverage in excess of $10.0 million retention for each loss occurrence. This Clash reinsurance coverage sits above the $7.0 million excess of $3.0 million arrangement.
In addition, each company in the State Auto Group is party to a workers’ compensation catastrophe insurance agreement that provides additional reinsurance coverage for workers’ compensation losses involving multiple workers. Subject to $10.0 million of retention, reinsurers are responsible for 100.0% of the excess over $10.0 million up to $30.0 million of covered loss. For loss amounts over $30.0 million, the casualty excess of loss reinsurance agreement provides $20.0 million coverage in excess of $30.0 million. Workers’ compensation catastrophe coverage is subject to a “Maximum Any One Life” limitation of $10.0 million. This limitation means that losses associated with each worker may contribute no more than $10.0 million to covered loss under these agreements.
Regulatory Considerations
At September 30, 2020,2021, 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.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
For information on this topic, see Note 1 of our condensed consolidated financial statements included in Item 1 of this Form 10-Q.
CREDIT AND FINANCIAL STRENGTH RATINGS
On July 16, 2020,14, 2021, A.M. Best affirmedplaced the State Auto Group’sGroup under review with positive implications with a financial strength rating of A- (Excellent) following the announcement of the proposed Transactions with a stable outlook.LMHC described elsewhere in this Form 10-Q. The ratings will remain under review until all approvals are finalized, the Transaction close and A.M. Best evaluates the overall impact.
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 20192020 Form 10-K. There have been no material changes from the information reported regarding Market Risk in the 20192020 Form 10-K.
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.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Item 4. Controls and Procedures
Disclosure Controls and Procedures
With the participation of our principal executive officer and principal financial officer, our management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report:
1.Information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission;
2.Information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; and
3.Our disclosure controls and procedures are effective in timely making known to them material information required to be included in our periodic filings with the Securities and Exchange Commission.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, nor is it likely to materially affect, our internal control over financial reporting.
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 RelatedThe proposed Transactions may not be completed on the terms or timeline currently contemplated, or at all, and the failure to COVID-19complete the Transactions may adversely affect our share price and future business and financial results.
The COVID-19 pandemic has had,completion of the Transactions is subject to certain conditions, including, among others: (i) approval by the members of State Auto Mutual of the Plan of Reorganization and has the potential to continue to haveproposed articles of incorporation and code of regulations for the foreseeable future, a significant adverse impact onreorganized State Auto Mutual (the “State Auto Mutual Member Approval”); and (ii) the global economy. Due to the sizeparties obtaining certain specified governmental and breadth of this pandemic, all of the directregulatory approvals.
The Merger Agreement contains certain provisions giving LMHC, State Auto Mutual 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 intendedthe right 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 atterminate the state and federal levels to implement legislation that would expand the scope of business interruption insurance to include business closures related to COVID-19, although we are not aware of any such legislation being enacted at this time. In addition, putative class action litigation has been initiated against us and many other insurers regarding the denial of business interruption coverage claims for business closures related to COVID-19. We intend to vigorously challenge any claims that our business interruption insurance covers business closures related to COVID-19. If legislation would be enacted in states where we do business to expand the scope of business interruption insurance to include COVID-19 business closures, or judicial decisions of courts in such states found that business interruption coverage included COVID-19 business closures, such legislation or judicial decisions would have a material adverse effect on our results of operations, liquidity, financial condition, and cash flows, and, potentially, our solvency.
As a result of COVID-19, many states have either mandated insurers provide grace periods for the payment of premiums or requested insurers provide such grace periods in the event an insured requests a payment deferral. To date, we have complied with these payment extension periods in those states where we do business.
Furthermore, some states have issued regulatory guidance encouraging premium relief or a return of premium to insureds. While we are voluntarily,Merger Agreement under certain circumstances, including the following:
•LMHC, State Auto Mutual or State Auto Financial may terminate the Merger Agreement if (a) any governmental authority shall have enacted any laws permanently preventing or otherwise permanently prohibiting the Transactions and such law shall have become final and nonappealable, (b) the State Auto Mutual Member Approval shall not have been obtained following a vote thereon having been taken at a meeting of the members of State Auto Mutual (the “State Auto Mutual Member Meeting”), or (c) the Transactions shall not have been consummated prior to May 12, 2022 (as such date may be extended by a period of three months up to two times under certain circumstances);
•State Auto Financial or State Auto Mutual may terminate the Merger Agreement if there has been a breach by LMHC, Merger Sub I or Merger Sub II of any representation, warranty, covenant or agreement contained in the Merger Agreement to the extent such breach would result in the failure of a closing condition (subject to cure periods); and
•LMHC may terminate the Merger Agreement if (i) State Auto Financial or State Auto Mutual willfully and materially breach certain covenants in the Merger Agreement relating to the State Auto Mutual Member Meeting, the Special Meeting or the no-solicitation provisions set forth in the Merger Agreement or (ii) State Auto Financial or State Auto Mutual breaches any representation, warranty, covenant or agreement in the Merger Agreement to the extent such breach would result in the failure of a closing condition (subject to cure periods).
There can be no assurance that the conditions to closing will be satisfied or waived or that other events will not intervene to delay or result in the termination of the proposed Transactions.
If the Transactions are not completed for any reason, the trading price of our common shares may decline to the extent that the market price of the common shares reflects positive market assumptions that the Transactions will be completed and the related benefits will be realized. We may also be subject to regulatory approval, providingadditional risks if the Transactions are not completed, including:
•the requirement in the Merger Agreement that, under specified circumstances, State Auto Financial (or, as applicable, State Auto Mutual) may be required to pay a 5% discounttermination fee to LMHC in an aggregate amount of $70,793,307 (the “Termination Fee”);
•incurring substantial costs related to the Transactions, such as legal, accounting, financial advisory and integration costs that have already been incurred or will continue to be incurred until the closing;
•our personal auto insureds uponmanagement focusing on the Transactions instead of on pursuing other opportunities that could be beneficial to us, without realizing any of the benefits of having the Transactions completed;
•we may face challenges retaining current employees and key personnel due to their uncertainty about our future renewaland their future role with us following the Transactions; and
•reputational harm due to the adverse perception of their existing policies, if states where we do business wereany failure to mandate such type of premium action beyond what we have implemented, such actionsuccessfully complete the Transactions.
If the Transactions are not completed, these risks could have a material adverse effect on our business, financial conditions and 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 dependan adverse effect on the length of this pandemic and is highly uncertain.
Our investment portfolio is invested mostly in fixed income securities the majority of which consists of securities issued by the U.S. Treasury, federal agencies, and state and local governments. Our portfolio also contains a number of securities issued by corporations. Concerns about COVID-19 have caused a sharp increase in volatility in financial markets, which has had a significant negative impact on our investment portfolio. A prolonged economic recession caused by COVID-19 could negatively impact the financial condition of corporate issuers in our portfolio, resulting in rating downgrades or an inability to make timely principal and or interest payments. It is possible we could suffer a partial or complete loss of principal from an issuer who fails to meet its obligations. Our portfolio could suffer large decreases in market value if the economic crisis deepens and the financial solvency of issuers are called into question. Likewise, our exposure to state and local governments carries risk of loss in an economic downturn. A reduction in tax collections for local governments can cause them to default on interest or principal payments resulting in permanent loss of principal from our portfolio. The valuetrading price 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.common shares.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Changes in economic conditionsThe pendency of the Transactions could lead to inflation.
Reactions to COVID-19 by federal and state governmental agencies, including the Federal Reserve, and consumers could lead to higher inflation, which can in turn result in an increase in our loss costs, ultimately resulting in the need to strengthen loss and loss adjustment expense reserves. The impact of inflation could be greater on our longer tail casualty claim liabilities. In addition, inflation may cause changes in interest rates which can affect the market value of our fixed income investments.
With most of our associates working remotely during this pandemic, we have a greater risk to cybersecurity threats.
As a result of COVID-19, we have approximately 90% of our associates working remotely. While we have implemented enhanced procedures and protocols to protect the security of our data and systems, having a remote workforce increases our risk to successful cybersecurity attacks. Furthermore, there has been an increase in phishing and other social engineering attacks focused on COVID-19. These attacks typically come in the form of malicious links or emails, but they could involve phone calls or text messages as well. These cyberattacks, if successful, could interrupt, damage or otherwise adversely affect our business and operations
In connection with the operationpending Transactions, some independent agents may reduce the number of insurance policies placed with the State Auto Group or stop placing any insurance policies with the State Auto Group, which could adversely affect our critical systems.
A significant interruption or major failurerevenues, earnings, funds from operations, cash flows and expenses, regardless of whether the Internet would have an adverse effect onTransactions are completed. Similarly, current employees may experience uncertainty about their future roles with State Auto following the Transactions, which may materially adversely affect our ability to writeretain and process new and renewal business, provide customer service, receive premium payments, pay claimsmotivate key personnel during the pendency of the Transactions. In addition, due to interim operating covenants in the Merger Agreement, we may be unable (without LMHC’s prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned)), during the pendency of the Transactions, to pursue various actions, even if such actions would prove beneficial.
The Merger Agreement contains provisions that could discourage a timely mannerpotential competing acquirer or performcould result in any competing proposal being at a lower price than it might otherwise be.
The Merger Agreement contains provisions that, subject to limited exceptions, restrict our ability to initiate, solicit, propose or knowingly encourage proposals to effect, among other necessary corporate functions, whichthings, a transaction that 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 uponany person (other than LMHC) becoming the Internet and related technology. Because many businesses are deploying a remote workforce as a resultbeneficial owner of COVID-19, Internet usage has increased significantly. A significant interruption15% or major failuremore of the Internet would substantially impairvoting power of our abilitycommon shares or of our consolidated net revenues, net income or total assets. In addition, pursuant to perform daily functions onthe Merger Agreement, under specified circumstances, State Auto Financial (or, as applicable, State Auto Mutual) may be required to pay the Termination Fee to LMHC.
These provisions could discourage a timely basis and couldpotential competing acquirer that might have an interest in acquiring all or a significant part of us from considering or proposing such an acquisition, even if it were prepared to pay consideration with a higher per share cash than that proposed to be received or realized in the Transactions, or might result in a material adverse impact on our operations.
COVID-19 has had and willpotential competing acquirer proposing to pay a lower price than it might otherwise have an impact on our revenues.
Dueproposed to COVID-19’s impact on economic activity, we began to experience reduced quote and policy issuance volumespay because of the added expense of the termination fee that may become payable in certain lines of business beginning in mid-March 2020. Givencircumstances under the unprecedented nature of COVID-19, at this time it is not possible to accurately project the degree or duration of the continued impact.
We may experience changes to frequency and severity of claims in certain lines of business.
As a result of COVID-19, we may experience higher claim and claim adjustment expenses in certain lines of business, such as workers’ compensation, if the injury or illness arose both out of and in the course of employment.
We may also see an impact on our auto and property coverages due to changes in both business practices and individual behaviors. For example, there has been an increase in delivery services due to concerns with in-person contact. We may see an increase in commercial property claims due to unoccupied businesses. Since the outset of the pandemic, there has been a decrease in frequency of personal auto claims attributed to a reduction in miles driven by insureds as a result of people working remotely and staying at home more because of COVID-19 concerns. The duration of this decrease and its impact to severity is unknown at this time.
Further, because the risks associated with COVID-19 are so unknown at this time we may experience uncertainty in estimating claims. We may also experience an increase in fraudulent claims, and there may be an impact in the timing of claims settlements as a result of court delays.Merger Agreement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Item 6. Exhibits
| | | | | | | | | | | |
Exhibit
No. | | Description of Exhibits | |
| | | |
| 31.01 | | | | |
| | | |
| 31.02 | | | | |
| | | |
| 32.01 | | | | |
| | | |
| 32.02 | | | | |
| | | |
| 101.INS | | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document | |
| | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | |
| | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| | | |
| 101.DEF | | Inline XBRL Taxonomy Definition Linkbase Document | |
| | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | | | | |
| State Auto Financial Corporation |
| |
Date: November 6, 20204, 2021 | /s/ Steven E. English |
| Steven E. English |
| Chief Financial Officer |
| (Duly Authorized Officer and |
| Principal Financial Officer) |