UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

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


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

For the transition period from to

Commission File Number 000-19289

STATE AUTO FINANCIAL CORPORATION

(Exact name of Registrant as specified in its charter)


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

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

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

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


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

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

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

Yes ý No ¨

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


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

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

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

Yes ☐ No ý

On ~~April 30,~~October 29, 2021, the Registrant had ~~44,051,645~~44,512,210 Common Shares outstanding.

Table of Contents

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


	Part I. Financial Information

Item 1.	Financial Statements (Unaudited)
	Condensed consolidated balance sheets – ~~March 31,~~September 30, 2021 and December 31, 2020	1
	Condensed consolidated statements of income – Three months ended ~~March 31,~~September 30, 2021 and 2020	2
	Condensed consolidated statements of income – Nine months ended September 30, 2021 and 2020	3
	Condensed consolidated statements of comprehensive income – Three months ended ~~March 31,~~September 30, 2021 and 2020	34
	Condensed consolidated statements of comprehensive income – Nine months ended September 30, 2021 and 2020	4
	Condensed consolidated statements of stockholders’ equity - Three months ended ~~March 31,~~September 30, 2021 and 2020	45
	Condensed consolidated statements of stockholders’ equity - Nine months ended September 30, 2021 and 2020	6
	Condensed consolidated statements of cash flows – ~~Three~~Nine months ended ~~March 31,~~September 30, 2021 and 2020	57
	Notes to condensed consolidated financial statements	68
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2024
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4152
Item 4.	Controls and Procedures	4253

	Part II. Other Information
Item 1.	Legal Proceedings	4354
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4355
Item 4.	Mine Safety Disclosures	4355
Item 5.	Other Information	4355
Item 6.	Exhibits	4456
	Signatures	4557

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

PART I – FINANCIAL STATEMENTS

Item 1. Condensed Consolidated Balance Sheets


($ and shares in millions, except per share amounts)	($ and shares in millions, except per share amounts)	March 31, 2021		December 31, 2020		($ 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 $2,147.5 and $2,117.0, respectively)		$	2,209.0	$	2,237.2
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	399.6		389.7		Equity securities	376.0		389.7
Other invested assets	Other invested assets	76.4		71.1		Other invested assets	79.3		71.1
Other invested assets, at cost	Other invested assets, at cost	11.8		12.1		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	2,766.8		2,780.1		Total investments	2,759.2		2,780.1
Cash and cash equivalents	Cash and cash equivalents	59.1		90.7		Cash and cash equivalents	46.1		90.7
Accrued investment income and other assets	Accrued investment income and other assets	31.0		29.7		Accrued investment income and other assets	30.7		29.7
Premiums receivable	Premiums receivable	12.3		14.0		Premiums receivable	14.1		14.0
Deferred policy acquisition costs (affiliated net assumed $32.5 and $30.1, respectively)		121.2		122.2
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	23.6		24.3		Reinsurance recoverable on losses and loss expenses payable	19.6		24.3
Prepaid reinsurance premiums	Prepaid reinsurance premiums	8.5		8.3		Prepaid reinsurance premiums	8.7		8.3

Due from affiliate						Due from affiliate	28.7		—
Current federal income taxes	Current federal income taxes	1.7		1.7		Current federal income taxes	1.8		1.7
Net deferred federal income taxes	Net deferred federal income taxes	37.1		27.3		Net deferred federal income taxes	43.1		27.3
Property and equipment, at cost (net of accumulated depreciation of $3.5 and $3.5, respectively)	Property and equipment, at cost (net of accumulated depreciation of $3.5 and $3.5, respectively)	4.2		4.2		Property and equipment, at cost (net of accumulated depreciation of $3.5 and $3.5, respectively)	3.8		4.2
Total assets	Total assets	$	3,065.5	$	3,102.5	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 $454.6 and $438.8, respectively)		$	1,066.3	$	1,050.4
Unearned premiums (affiliated net assumed $466.2 and $452.4, respectively)		726.7		723.4
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		Notes payable (affiliates $15.3 and $15.3, respectively)	122.1		122.1
Pension and postretirement benefits	Pension and postretirement benefits	59.2		66.2		Pension and postretirement benefits	45.0		66.2
Due to affiliate	Due to affiliate	22.1		11.2		Due to affiliate	—		11.2

Other liabilities (affiliated net assumed $17.3 and $22.4, respectively)		97.1		119.2
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	2,093.5		2,092.5		Total liabilities	2,132.4		2,092.5
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:

Common stock, without par value. Authorized 100.0 shares; 50.9 and 50.7 shares issued, respectively, at stated value of $2.50 per share		127.4		126.8
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	(118.9)		(118.4)		Treasury stock, 6.9 and 6.9 shares, respectively, at cost	(118.8)		(118.4)
Additional paid-in capital	Additional paid-in capital	220.1		213.3		Additional paid-in capital	218.1		213.3
Accumulated other comprehensive (loss) income	Accumulated other comprehensive (loss) income	(30.1)		13.9		Accumulated other comprehensive (loss) income	(23.8)		13.9
Retained earnings	Retained earnings	773.5		774.4		Retained earnings	751.0		774.4
Total stockholders’ equity	Total stockholders’ equity	972.0		1,010.0		Total stockholders’ equity	954.9		1,010.0
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	3,065.5	$	3,102.5	Total liabilities and stockholders’ equity	$	3,087.3	$	3,102.5

See accompanying notes to condensed consolidated financial statements.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Condensed Consolidated Statements of Income


($ in millions, except per share amounts)	($ in millions, except per share amounts)	Three months ended March 31				($ in millions, except per share amounts)	Three months ended September 30
(unaudited)	(unaudited)	2021		2020		(unaudited)	2021		2020
Earned premiums (affiliated net assumed $78.0 and $58.3, respectively)		$	355.9	$	330.5
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)	17.6		18.9		Net investment income (affiliates $0.7 and $0.7, respectively)	17.0		17.9
Net investment gain (loss)		38.2		(135.2)
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	412.2		214.8		Total revenues	391.1		391.6

Losses and loss expenses (affiliated net assumed $113.7 and $10.9, respectively)		280.8		239.4
Acquisition and operating expenses (affiliated net assumed $37.1 and $20.9, respectively)		121.0		114.9
Interest expense (affiliates $0.2 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	3.7		3.3		Other expenses	13.5		1.1
Total expenses	Total expenses	406.6		358.8		Total expenses	416.8		376.8
Income (loss) before federal income taxes		5.6		(144.0)
Federal income tax expense (benefit):

(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	2.0		(29.4)		Deferred	(11.3)		3.2
Total federal income tax expense (benefit)		2.0		(29.4)
Net income (loss)		$	3.6	$	(114.6)
Earnings (loss) 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	$	0.08	$	(2.62)	Basic	$	(0.32)	$	0.26
Diluted	Diluted	$	0.08	$	(2.62)	Diluted	$	(0.32)	$	0.26

See accompanying notes to condensed consolidated financial statements.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Condensed Consolidated Statements of ~~Comprehensive Loss~~Income

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


($ 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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

~~Condensed~~ Consolidated Statements of ~~Stockholders’ Equity~~Comprehensive (Loss) Income

(in millions) Three months ended March 31
2021 2020
Common shares:
Balance at beginning of period 50.7 50.4
Issuance of shares 0.2 0.2
Balance at March 31 50.9 50.6
Treasury shares:
Balance at beginning of period (6.9) (6.9)
Balance at March 31 (6.9) (6.9)
Common stock:
Balance at beginning of period $ 126.8 $ 125.9
Issuance of shares 0.6 0.6
Balance at March 31 $ 127.4 $ 126.5
Treasury stock:
Balance at beginning of period $ (118.4) $ (117.5)
Shares acquired on stock award exercises and vested restricted shares (0.5) (0.9)
Balance at March 31 $ (118.9) $ (118.4)
Additional paid-in capital:
Balance at beginning of period $ 213.3 $ 206.7
Issuance of common stock 0.6 1.3
Stock awards granted 6.2 1.1
Balance at March 31 $ 220.1 $ 209.1
Accumulated other comprehensive loss:
Balance at beginning of period $ 13.9 $ (37.9)
Change in net unrealized holding (losses) gains on available-for-sale investments (46.3) 22.6
Change in net unrecognized benefit plan obligations 2.3 1.6
Balance at March 31 $ (30.1) $ (13.7)
Retained earnings:
Balance at beginning of period $ 774.4 $ 782.7
Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020 0 (0.5)
Net income (loss) 3.6 (114.6)
Dividends declared, $0.10 and $0.10 per share (affiliates $2.6 and $2.6, respectively) $ (4.5) $ (4.4)
Balance at March 31 773.5 663.2
Total stockholders’ equity at March 31 $ 972.0 $ 866.7


($ in millions, except per share amounts)	Three months ended September 30
(unaudited)	2021		2020
Net (loss) income	$	(14.3)	$	11.6
Other comprehensive (loss) income, net of tax:
Net unrealized holding gains on available-for-sale investments:
Unrealized holding (losses) gains	(17.1)		4.6
Reclassification adjustments for losses (gains) realized in net income	1.0		0.2
Income tax benefit (expense)	3.3		(1.1)
Total net unrealized holding (losses) gains on available-for-sale investments	(12.8)		3.7
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost	(1.6)		(1.6)
Net actuarial loss	4.5		3.7
Income tax expense	(0.6)		(0.4)
Total net unrecognized benefit plan obligations	2.3		1.7
Other comprehensive (loss) income	(10.5)		5.4
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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Condensed Consolidated Statements of ~~Cash Flows~~Stockholders’ Equity

($ in millions) Three months ended March 31
(unaudited) 2021 2020
Cash flows from operating activities:
Net income (loss) $ 3.6 $ (114.6)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization, net 1.8 1.6
Share-based compensation 6.7 0.5
Net investment (gain) loss (38.2) 135.2
Changes in operating assets and liabilities:
Deferred policy acquisition costs 1.0 (2.2)
Accrued investment income and other assets (1.3) (1.5)
Premiums receivables 1.7 (1.4)
Postretirement and pension benefits (6.4) (0.9)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums 0.5 (26.5)
Other liabilities and due to/from affiliates, net (9.5) (24.8)
Losses and loss expenses payable 15.9 19.5
Unearned premiums 3.3 16.5
Deferred tax on share-based awards (0.4) (0.2)
Federal income taxes 2.4 (29.2)
Net cash used in operating activities (18.9) (28.0)
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale (239.7) (122.4)
Purchases of equity securities (9.4) (16.1)
Purchases of other invested assets (0.1) (6.6)
Maturities, calls and pay downs of fixed maturities available-for-sale 102.8 67.9
Sales of fixed maturities available-for-sale 106.0 83.5
Sales of equity securities 31.1 13.2
Sales of other invested assets 0.3 0.4
Disposals of property and equipment 0 0.2
Net cash (used in) provided by investing activities (9.0) 20.1
Cash flows from financing activities:
Proceeds from issuance of common stock 1.2 1.8
Payments to acquire treasury stock (0.4) (0.9)
Payment of dividends (4.5) (4.4)
Proceeds from short-term debt 0 60.0
Net cash (used in) provided by financing activities (3.7) 56.5
Net (decrease) increase in cash and cash equivalents (31.6) 48.6
Cash and cash equivalents at beginning of period 90.7 78.0
Cash and cash equivalents at end of period $ 59.1 $ 126.6
Supplemental disclosures:
Interest paid (affiliates $0.2 and $0.2, respectively) $ 1.1 $ 1.2


(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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Condensed Consolidated Statements of Stockholders’ Equity


(in millions)	Nine months ended September 30
	2021		2020
Common shares:
Balance at beginning of year	50.7		50.4
Issuance of shares	0.6		0.3
Balance at September 30	51.3		50.7
Treasury shares:
Balance at beginning of year	(6.9)		(6.9)

Balance at September 30	(6.9)		(6.9)
Common stock:
Balance at beginning of year	$	126.8	$	125.9
Issuance of shares	1.6		0.8
Balance at September 30	$	128.4	$	126.7
Treasury stock:
Balance at beginning of year	$	(118.4)	$	(117.5)
Shares acquired on stock award exercises and vested restricted shares	(0.4)		(0.9)
Balance at September 30	$	(118.8)	$	(118.4)
Additional paid-in capital:
Balance at beginning of year	$	213.3	$	206.7
Issuance of common stock	6.9		2.0

Stock awards granted	(2.1)		3.4
Balance at September 30	$	218.1	$	212.1
Accumulated other comprehensive (loss) income:
Balance at beginning of year	$	13.9	$	(37.9)

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	6.8		4.9
Balance at September 30	$	(23.8)	$	23.3
Retained earnings:
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	—		(0.5)
Net (loss) income	(10.1)		(68.7)
Dividends declared, $0.30 and $0.30 per share (affiliates $7.8 and $7.8, respectively)	$	(13.3)	$	(13.1)
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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Condensed Consolidated Statements of Cash Flows


($ in millions)	Nine months ended September 30
(unaudited)	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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

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

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 for annual and interim reporting periods after December 15, ~~2020~~2020. On January 1, 2021, the Company adopted this guidance and it did not have a material impact on the Company's results of operations, consolidated financial position or cash flows.

Pending Adoption of Recent Accounting Pronouncements

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

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

2. Investments

The following tables set forth the amortized cost and fair value of investments by investment category at ~~March 31,~~September 30, 2021 and December 31, 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
March 31, 2021
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	$	448.4	$	23.0	$	(0.4)	$	471.0	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	480.4		22.0		(1.9)		500.5		Obligations of states and political subdivisions	470.7		22.7		(0.5)		492.9
Corporate securities	Corporate securities	488.4		17.0		(2.2)		503.2		Corporate securities	507.8		16.1		(0.9)		523.0
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	730.3		15.4		(11.4)		734.3		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	$	2,147.5	$	77.4	$	(15.9)	$	2,209.0	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, 2020	December 31, 2020									December 31, 2020
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	$	506.5	$	45.2	$	0	$	551.7	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	511.3		30.4		(0.2)		541.5		Obligations of states and political subdivisions	511.3		30.4		(0.2)		541.5
Corporate securities	Corporate securities	459.9		23.4		0		483.3		Corporate securities	459.9		23.4		—		483.3
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	639.3		22.9		(1.5)		660.7		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	$	2,117.0	$	121.9	$	(1.7)	$	2,237.2	Total available-for-sale fixed maturities	$	2,117.0	$	121.9	$	(1.7)	$	2,237.2

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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


($ millions, except # of positions)	($ millions, except # of positions)	Less than 12 months					12 months or more					Total					($ millions, except # of positions)	Less than 12 months					12 months or more					Total
		Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions		Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions
March 31, 2021
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	$	51.6	$	(0.4)	7	$	0	$	0	0	$	51.6	$	(0.4)	7	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	111.7		(1.9)		18	0		0		0	111.7		(1.9)		18	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	110.9		(2.2)		21	0		0		0	110.9		(2.2)		21	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	354.8		(11.3)		74	10.9		(0.1)		5	365.7		(11.4)		79	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	$	629.0	$	(15.8)	120	$	10.9	$	(0.1)	5	$	639.9	$	(15.9)	125	Total temporarily impaired securities	$	637.5	$	(13.2)	126	$	8.9	$	(0.2)	9	$	646.4	$	(13.4)	135


($ 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, 2020	December 31, 2020																December 31, 2020
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	$	9.6	$	0	4	$	0	$	0	0	$	9.6	$	0	4	U.S. treasury securities and obligations of U.S. government agencies	$	9.6	$	—	4	$	—	$	—	—	$	9.6	$	—	4
Obligations of states and political subdivisions	Obligations of states and political subdivisions	19.5		(0.2)		5	0		0		0	19.5		(0.2)		5	Obligations of states and political subdivisions	19.5		(0.2)		5	—		—		—	19.5		(0.2)		5
Corporate securities	Corporate securities	1.5		0		2	0		0		0	1.5		0		2	Corporate securities	1.5		—		2	—		—		—	1.5		—		2
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	136.1		(1.4)		35	7.0		(0.1)		3	143.1		(1.5)		38	U.S. government agencies mortgage-backed securities	136.1		(1.4)		35	7.0		(0.1)		3	143.1		(1.5)		38
Total temporarily impaired securities	Total temporarily impaired securities	$	166.7	$	(1.6)	46	$	7.0	$	(0.1)	3	$	173.7	$	(1.7)	49	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 ~~March 31,~~September 30, 2021, and determined that no credit impairment existed in the gross unrealized holding losses, due to the reasons discussed below:

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

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

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

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

710

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. When a fixed maturity has been determined to have an impairment, the impairment charge representing the credit loss is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive income.

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


($ millions)	($ millions)	Amortized cost		Fair value		($ millions)	Amortized cost		Fair value
Due in 1 year or less	Due in 1 year or less	$	158.5	$	159.7	Due in 1 year or less	$	141.6	$	142.7
Due after 1 year through 5 years	Due after 1 year through 5 years	536.7		562.2		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	165.9		170.5		Due after 5 years through 10 years	211.7		218.2
Due after 10 years	Due after 10 years	556.1		582.3		Due after 10 years	516.7		548.6
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	730.3		734.3		U.S. government agencies mortgage-backed securities	697.3		699.6
Total	Total	$	2,147.5	$	2,209.0	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 ~~March 31,~~September 30, 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"). In accordance with the terms of the FHLB Loans, State Auto P&C retains all rights regarding these pledged securities.

At ~~March 31,~~September 30, 2021, State Auto P&C had fixed maturities with fair values of approximately ~~$30.2~~$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 ~~$9.4~~$9.6 million and $9.7 million were on deposit with insurance regulators as required by law at ~~March 31,~~September 30, 2021, and December 31, 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 ~~March 31,~~September 30, 2021 and 2020:


($ millions)	($ millions)	Three months ended March 31				($ millions)	Three months ended September 30				Nine Months Ended September 30
		2021		2020					2021		2020		2021		2020
Fixed maturities	Fixed maturities	$	15.4	$	15.1			Fixed maturities	$	15.2	$	15.0	$	46.0	$	44.6
Equity securities	Equity securities	1.6		3.1				Equity securities	1.2		2.1		4.0		7.8
Cash and cash equivalents, and other	Cash and cash equivalents, and other	0.9		1.0				Cash and cash equivalents, and other	1.0		0.9		3.0		2.7
Investment income	Investment income	17.9		19.2				Investment income	17.4		18.0		53.0		55.1
Investment expenses	Investment expenses	0.3		0.3				Investment expenses	0.4		0.1		0.7		0.6
Net investment income	Net investment income	$	17.6	$	18.9			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 ~~$137.4~~$285.3 million and ~~$97.1~~$303.2 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, and 2020, respectively.

811

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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


($ millions)	($ millions)	Three months ended March 31				($ millions)	Three months ended September 30				Nine Months Ended September 30
		2021		2020					2021		2020		2021		2020
Investment gain (loss), net:	Investment gain (loss), net:							Investment gain (loss), net:
Fixed maturities:	Fixed maturities:							Fixed maturities:
Realized gains on sales of securities	Realized gains on sales of securities	$	3.0	$	3.6			Realized gains on sales of securities	$	0.4	$	1.3	$	4.3	$	6.8
Realized losses on sales of securities	Realized losses on sales of securities	(1.5)		(1.2)				Realized losses on sales of securities	(1.4)		(1.5)		(4.6)		(3.6)
Net gain on fixed securities		1.5		2.4
Net gain (loss) on equity securities		31.5		(122.4)
Net gain (loss) on other invested assets		5.2		(15.4)
Other net realized gain (loss)		0		0.2
Net gain (loss) on investments		$	38.2	$	(135.2)
Net (loss) gain on fixed securities								Net (loss) gain on fixed securities	(1.0)		(0.2)		(0.3)		3.2
Net (loss) gain on equity securities								Net (loss) gain on equity securities	(6.7)		18.2		49.7		(35.1)
Net (loss) gain on other invested assets								Net (loss) gain on other invested assets	(0.4)		2.0		7.8		(7.6)
Other net realized (loss)/gain								Other net realized (loss)/gain	—		—		(0.4)		0.2
Net (loss) gain on investments								Net (loss) gain on investments	$	(8.1)	$	20.0	$	56.8	$	(39.3)

Change in net unrealized holding (losses) gains, net of tax	Change in net unrealized holding (losses) gains, net of tax							Change in net unrealized holding (losses) gains, net of tax
Fixed maturities	Fixed maturities	$	(58.7)	$	28.6			Fixed maturities	$	(16.1)	$	4.8	$	(56.3)	$	71.3
Deferred federal income tax benefit (liability)	Deferred federal income tax benefit (liability)	12.4		(6.0)				Deferred federal income tax benefit (liability)	3.3		(1.1)		11.8		(15.0)
Change in net unrealized holding (losses) gains, net of tax	Change in net unrealized holding (losses) gains, net of tax	$	(46.3)	$	22.6			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 ~~March 31, 2021 on equity securities still held was $27.8 million while unrealized holding losses recognized for the three months ended March 31,~~September 30, 2020 on equity securities still held ~~was $123.3 million.~~were $60.5 million and $15.8 million, respectively. The unrealized holding (losses)/gains recognized for the three and nine months ended ~~March 31,~~September 30, 2021 on other invested assets still held ~~was $5.2~~were $(0.4) million ~~while the~~and $7.7 million, respectively. The unrealized holding ~~losses~~gains/(losses) recognized for the three and nine months ended ~~March 31,~~September 30, 2020 on other invested assets still held ~~was $15.4 million.~~were $2.0 million and $(7.6) million, respectively.

3. Fair Value of Financial Instruments

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

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

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

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

The Company utilizes a nationally recognized third party pricing service to estimate the majority of its investment portfolio’s fair value. The Company obtains one price per security and the processes and control procedures employed by the Company are designed to ensure the value is accurately recorded on an unadjusted basis. Through discussions with the pricing service, the Company gains an understanding of the methodologies used to price the different types of securities, that the data and the valuation methods utilized are appropriate and consistently applied, and that the assumptions are reasonable and representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service, the Company compares to fair value pricing information gathered from other independent pricing sources. At ~~March 31,~~September 30, 2021, and December 31, 2020, the Company did not adjust any of the prices received from the pricing service.

912

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

Fixed Maturities

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

Equities

The fair value of each equity security is based on an observable market price for an identical asset in an active market and is priced by the same pricing service discussed above. All equity securities are recorded using unadjusted market prices and have been disclosed in Level 1.

Other Invested Assets

Included in other invested assets is 1 international fund (“the fund”) that invests in equity securities of foreign issuers and is managed by a third party investment manager. The fund had a fair value of ~~$60.6~~$62.2 million and $55.8 million at ~~March 31,~~September 30, 2021, and December 31, 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.

1013

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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


($ millions)	($ millions)	Total		Level 1		Level 2		($ millions)	Total		Level 1		Level 2
March 31, 2021
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	$	471.0	$	0	$	471.0	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	500.5		0		500.5		Obligations of states and political subdivisions	492.9		—		492.9
Corporate securities	Corporate securities	503.2		0		503.2		Corporate securities	523.0		—		523.0
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	734.3		0		734.3		U.S. government agencies mortgage-backed securities	699.6		—		699.6
Total available-for-sale fixed maturities	Total available-for-sale fixed maturities	2,209.0		0		2,209.0		Total available-for-sale fixed maturities	2,223.5		—		2,223.5
Equity securities:	Equity securities:							Equity securities:
Large-cap securities	Large-cap securities	149.2		149.2		0		Large-cap securities	163.5		163.5		—

Mutual and exchange traded funds	Mutual and exchange traded funds	250.4		250.4		0		Mutual and exchange traded funds	212.5		212.5		—
Total equity securities	Total equity securities	399.6		399.6		0		Total equity securities	376.0		376.0		—
Other invested assets	Other invested assets	15.8		15.8		0		Other invested assets	17.1		17.1		—
Total investments	Total investments	$	2,624.4	$	415.4	$	2,209.0	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, 2020	December 31, 2020							December 31, 2020
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	$	551.7	$	0	$	551.7	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	541.5		0		541.5		Obligations of states and political subdivisions	541.5		—		541.5
Corporate securities	Corporate securities	483.3		0		483.3		Corporate securities	483.3		—		483.3
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	660.7		0		660.7		U.S. government agencies mortgage-backed securities	660.7		—		660.7
Total available-for-sale fixed maturities	Total available-for-sale fixed maturities	2,237.2		0		2,237.2		Total available-for-sale fixed maturities	2,237.2		—		2,237.2
Equity securities:	Equity securities:							Equity securities:
Large-cap securities	Large-cap securities	134.2		134.2		0		Large-cap securities	134.2		134.2		—

Mutual and exchange traded funds	Mutual and exchange traded funds	255.5		255.5		0		Mutual and exchange traded funds	255.5		255.5		—
Total equity securities	Total equity securities	389.7		389.7		0		Total equity securities	389.7		389.7		—
Other invested assets	Other invested assets	15.3		15.3		0		Other invested assets	15.3		15.3		—
Total investments	Total investments	$	2,642.2	$	405.0	$	2,237.2	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 ~~March 31,~~September 30, 2021, was ~~$11.3~~$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.

1114

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

Notes Receivable from Affiliate

The Company has 2 separate credit agreements with State Automobile Mutual Insurance Company (“State Auto Mutual") pursuant to which it loaned State Auto Mutual a total of $70.0 million at an interest rate of 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)	March 31, 2021						December 31, 2020						($ 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	$	76.6	4.05	%	$	70.0	$	80.4	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)	March 31, 2021						December 31, 2020						($ 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 2030: issued $21.5, September 2020 with fixed interest	FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest	21.5		20.2		1.37	%	21.5		21.6		1.37	%	FHLB Loan due 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		101.2		3.96	%	85.3		107.1		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	15.3		15.3		4.39	%	15.3		15.3		4.43	%	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	$	122.1	$	136.7			$	122.1	$	144.0			Total notes payable	$	122.1	$	138.1			$	122.1	$	144.0

4. Deferred Acquisition Costs

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


($ millions)	($ millions)	2021		2020		($ millions)	2021		2020

Beginning balance at July 1						Beginning balance at July 1	$	127.2	$	120.0
Acquisition costs deferred						Acquisition costs deferred	67.1		98.4
Acquisition costs amortized to expense						Acquisition costs amortized to expense	(62.8)		(94.7)
Ending balance at September 30						Ending balance at September 30	$	131.5	$	123.7

Beginning balance at January 1	Beginning balance at January 1	$	122.2	$	111.1	Beginning balance at January 1	$	122.2	$	111.1
Acquisition costs deferred	Acquisition costs deferred	60.6		91.1		Acquisition costs deferred	196.1		289.8
Acquisition costs amortized to expense	Acquisition costs amortized to expense	(61.6)		(88.9)		Acquisition costs amortized to expense	(186.8)		(277.2)
Ending balance at March 31		$	121.2	$	113.3
Ending balance at September 30						Ending balance at September 30	$	131.5	$	123.7

1215

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

5. Losses and Loss Expenses Payable

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


($ millions)	($ millions)	2021		2020		($ millions)	2021		2020
Losses and loss expenses payable, at beginning of period	Losses and loss expenses payable, at beginning of period	$	1,050.4	$	1,066.5	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	24.3		13.6		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	1,026.1		1,052.9		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	311.3		246.9		Current year	910.2		779.8
Prior years	Prior years	(30.5)		(7.5)		Prior years	(42.4)		(17.6)
Total incurred	Total incurred	280.8		239.4		Total incurred	867.8		762.2
Paid related to:	Paid related to:					Paid related to:
Current year	Current year	105.7		74.1		Current year	510.2		420.8
Prior years	Prior years	158.5		171.3		Prior years	343.6		338.2
Total paid	Total paid	264.2		245.4		Total paid	853.8		759.0
Net balance at end of period	Net balance at end of period	1,042.7		1,046.9		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	23.6		39.7		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	$	1,066.3	$	1,086.6	Losses and loss expenses payable, at end of period	$	1,059.7	$	1,091.3

The Company recorded more favorable development related to prior years’ loss and loss expense reserves for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, of ~~$30.5~~$42.4 million compared to ~~$7.5~~$17.6 million for the same 2020 period. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 was ~~$24.6~~$45.5 million, ~~due to~~driven by favorable development of ~~$21.8 million and $2.9~~$47.7 million in the commercial ~~and personal~~ insurance ~~segments, respectively.~~segment. In the commercial insurance segment, ~~all products developed favorably, with~~ workers' compensation and middle market commercial ~~contributing $8.5~~contributed $21.8 million and ~~$8.1~~$14.7 million, respectively. In the personal insurance segment, the favorable development was primarily driven by homeowners, which contributed $2.1 million of favorable development. For the three months ended March 31, 2021, the prior accident years' catastrophe loss and ALAE reserves contributed $3.8 millionrespectively, of favorable development.

For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, favorable development of prior accident year's non-catastrophe loss and ALAE reserves was ~~$10.5~~$31.8 million, due to favorable development in the commercial insurance segment. In the commercial insurance segment, all lines contributed favorable development, with small commercial package, workers' compensation and middle market commercial ~~and workers' compensation~~ contributing ~~$5.4~~$16.5 million, ~~$5.1~~$16.1 million and ~~$4.0~~$14.3 million, respectively. ~~Somewhat~~Partially offsetting the favorable development was adverse development in the personal insurance segment ~~of $6.4~~and specialty run-off, which contributed $20.2 million and $5.2 million, respectively. The adverse development in the personal insurance segment was primarily driven by personal auto, ~~and homeowners~~ which contributed ~~$5.2~~$19.1 million of adverse development. The personal auto adverse development was driven by higher than expected severity of bodily injury claims and ~~$2.2~~higher than expected frequency of property damage claims, primarily from the 2019 accident year. The specialty run-off adverse development primarily relates to an adverse court decision relating to an E&S casualty claim from 2016. 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 ~~respectively~~in E&S property related to Hurricane Irma.

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.

1316

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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


($ millions)	($ millions)	Three months ended March 31				($ millions)	Three months ended September 30				Nine months ended September 30
		2021		2020					2021		2020		2021		2020
Premiums earned:	Premiums earned:							Premiums earned:
Assumed from external insurers and reinsurers	Assumed from external insurers and reinsurers	$	21.8	$	20.6			Assumed from external insurers and reinsurers	$	19.7	$	21.7	$	61.7	$	63.0
Assumed under Pooling Arrangement	Assumed under Pooling Arrangement	355.9		330.5				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	(9.0)		(10.6)				Ceded to external insurers and reinsurers	(9.7)		(7.7)		(27.2)		(25.4)
Ceded under Pooling Arrangement	Ceded under Pooling Arrangement	(277.9)		(272.2)				Ceded under Pooling Arrangement	(277.1)		(283.9)		(832.7)		(835.2)
Net assumed premiums earned	Net assumed premiums earned	$	90.8	$	68.3			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	$	14.5	$	11.7			Assumed from external insurers and reinsurers	$	17.0	$	14.1	$	53.1	$	41.3
Assumed under Pooling Arrangement	Assumed under Pooling Arrangement	280.8		239.4				Assumed under Pooling Arrangement	287.2		251.6		867.8		762.2
Ceded to external insurers and reinsurers	Ceded to external insurers and reinsurers	(3.3)		(33.5)				Ceded to external insurers and reinsurers	(4.8)		(9.9)		(11.1)		(55.9)
Ceded under Pooling Arrangement	Ceded under Pooling Arrangement	(167.1)		(228.5)				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	$	124.9	$	(10.9)			Net assumed losses and loss expenses incurred	$	81.2	$	52.9	$	332.5	$	118.2

7. Income Taxes

Interim Period Tax Expense

Due to the variability of our operating results, we determined using an estimated full year 2021 effective tax rate to determine interim period tax expense(benefit) produces an income tax benefit and effective rate that would not be meaningful for 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 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 ~~March 31,~~September 30, 2021 and 2020:

($ millions) Three months ended March 31
2021 2020
Amount at statutory rate $ 1.2 21.0 % $ (30.2) 21.0 %
Tax-exempt interest and dividends received deduction (0.6) (11.3) (0.7) 0.5
Other, net 1.4 26.6 1.5 (1.1)
Federal income tax expense (benefit) 2.0 36.3 % (29.4) 20.4 %

~~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 months ended March 31, 2021 and 2020:~~

($ millions) Pension Postretirement
Three months ended March 31
2021 2020 2021 2020
Service cost $ 1.3 $ 1.2 $ 0 $ 0
Interest cost 2.1 2.4 0 0.1
Expected return on plan assets (4.3) (4.4) 0 0
Amortization of:
Negative prior service cost 0 0 (1.4) (1.4)
Net actuarial loss 3.5 2.3 0 0.1
Net periodic cost (benefit) $ 2.6 $ 1.5 $ (1.4) $ (1.2)

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


($ 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	%

1417

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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

The following tables set forth the changes in the Company’s accumulated other comprehensive (loss) income ("AOC(L)I"), net of tax, for the three and nine months ended ~~March 31,~~September 30, 2021 and 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 January 1, 2021			$	97.5	$	(83.6)	$	13.9
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		(45.1)		0		(45.1)		Other comprehensive loss before reclassifications		(13.6)		—		(13.6)
Amounts reclassified from AOCI (a)	Amounts reclassified from AOCI (a)		(1.2)		2.3		1.1		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		(46.3)		2.3		(44.0)		Net current period other comprehensive (loss) income		(12.8)		2.3		(10.5)
Ending balance at March 31, 2021			$	51.2	$	(81.3)	$	(30.1)
Ending balance at September 30, 2021									Ending balance at September 30, 2021		$	53.0	$	(76.8)	$	(23.8)

Beginning balance at January 1, 2020			$	40.4	$	(78.3)	$	(37.9)
Beginning balance at July 1, 2020									Beginning balance at July 1, 2020		$	93.0	$	(75.1)	$	17.9
Other comprehensive income before reclassifications	Other comprehensive income before reclassifications		24.5		0		24.5		Other comprehensive income before reclassifications		3.5		—		3.5
Amounts reclassified from AOCI (a)	Amounts reclassified from AOCI (a)		(1.9)		1.6		(0.3)		Amounts reclassified from AOCI (a)		0.2		1.7		1.9
Net current period other comprehensive income	Net current period other comprehensive income		22.6		1.6		24.2		Net current period other comprehensive income		3.7		1.7		5.4
Ending balance at March 31, 2020			$	63.0	$	(76.7)	$	(13.7)
Ending balance at September 30, 2020									Ending balance at September 30, 2020		$	96.7	$	(73.4)	$	23.3

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

1518

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)


($ 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

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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


($ millions)	($ millions)											($ millions)
Details about Accumulated Other	Details about Accumulated Other		Three months ended March 31							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
					2021			2020									2021			2020
Unrealized gains on available-for-sale fixed maturity investments	Unrealized gains on available-for-sale fixed maturity investments		$	1.5		$	2.4			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
			1.5			2.4				Total before tax					(1.0)			(0.2)			Total before tax
			(0.3)			(0.5)				Tax expense					0.2			—			Tax expense
			1.2			1.9				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		(4.5)			(3.7)				(b)		Net actuarial loss			(4.5)			(3.7)			(b)
			(2.9)			(2.1)				Total before tax					(2.9)			(2.1)			Total before tax
			0.6			0.5				Tax benefit					0.6			0.4			Tax benefit
			(2.3)			(1.6)				Net of tax					(2.3)			(1.7)			Net of tax
Total reclassifications for the period	Total reclassifications for the period		$	(1.1)		$	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)
Details about Accumulated Other												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
																	2021			2020
Unrealized gains on available-for-sale fixed maturity investments												Unrealized gains on available-for-sale fixed maturity investments			$	(0.3)		$	3.2		Realized gains on sale of securities
														(0.3)			3.2			Total before tax
											0.1			(0.7)			Tax expense
									(0.2)				2.5		Net of tax
Amortization of benefit plan items												Amortization of benefit plan items
Negative prior service cost												Negative prior service cost			4.8			4.8			(b)
Net actuarial loss												Net actuarial loss			(13.4)			(11.0)			(b)
														(8.6)			(6.2)			Total before tax
														1.8			1.3			Tax benefit
														(6.8)			(4.9)			Net of tax
Total reclassifications for the period												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).

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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 ~~March 31,~~September 30, 2021 and 2020:

($ and shares in millions, except per share amounts) Three months ended March 31
2021 2020
Numerator:
Net income (loss) for basic earnings (loss) per common share $ 3.6 $ (114.6)
Denominator:
Weighted average shares for basic earnings (loss) per common share 43.9 43.7
Effect of dilutive share-based awards 0.7 0
Adjusted weighted average shares for diluted earnings (loss) per common share 44.6 43.7
Basic net earnings (loss) per common share $ 0.08 $ (2.62)
Diluted net earnings (loss) per common share $ 0.08 $ (2.62)


($ 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 ~~March 31,~~September 30, 2021 and 2020:


(shares in millions)	(shares in millions)	Three months ended March 31		(shares in millions)	Three months ended September 30				Nine months ended September 30
			2021			2020		2021	2020	2021	2020
Total number of antidilutive awards	Total number of antidilutive awards		0			0.5	Total number of antidilutive awards	1.0	—	0.8	0.6

~~Table of Contents~~

~~STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

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.

1721

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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


($ millions)	($ millions)	Three months ended March 31				($ millions)	Three months ended September 30				Nine months ended September 30
		2021		2020					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	$	207.8	$	198.1			Personal insurance	$	217.2	$	208.8	$	638.1	$	609.7
Commercial insurance	Commercial insurance	148.7		132.4				Commercial insurance	164.4		144.4		470.7		414.7
Specialty run-off	Specialty run-off	(0.6)		0				Specialty run-off	0.2		—		(1.2)		—
Total insurance operations	Total insurance operations	355.9		330.5				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	17.6		18.9				Net investment income	17.0		17.9		52.3		54.5
Net investment gain (loss)		38.2		(135.2)
Net investment (loss) gain								Net investment (loss) gain	(8.1)		20.0		56.8		(39.3)
Total investment operations	Total investment operations	55.8		(116.3)				Total investment operations	8.9		37.9		109.1		15.2
All other	All other	0.5		0.6				All other	0.4		0.5		1.3		1.6
Total revenue from external sources	Total revenue from external sources	412.2		214.8				Total revenue from external sources	391.1		391.6		1,218.0		1,041.2
Intersegment revenue	Intersegment revenue	1.6		1.6				Intersegment revenue	1.6		1.5		4.8		4.6
Total revenue	Total revenue	413.8		216.4				Total revenue	392.7		393.1		1,222.8		1,045.8
Reconciling items:	Reconciling items:							Reconciling items:
Eliminate intersegment revenue	Eliminate intersegment revenue	(1.6)		(1.6)				Eliminate intersegment revenue	(1.6)		(1.5)		(4.8)		(4.6)
Total consolidated revenues	Total consolidated revenues	$	412.2	$	214.8			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	$	(49.4)	$	0.3			Personal insurance	$	(21.0)	$	(30.7)	$	(114.6)	$	(70.8)
Commercial insurance	Commercial insurance	3.0		(30.0)				Commercial insurance	(2.7)		14.4		3.1		(28.0)
Specialty run-off	Specialty run-off	1.6		(0.4)				Specialty run-off	—		(10.4)		0.2		(17.1)
Total insurance operations	Total insurance operations	(44.8)		(30.1)				Total insurance operations	(23.7)		(26.7)		(111.3)		(115.9)
Investment operations	Investment operations							Investment operations
Net investment income	Net investment income	17.6		18.9				Net investment income	17.0		17.9		52.3		54.5
Net investment gain (loss)		38.2		(135.2)
Net investment (loss) gain								Net investment (loss) gain	(8.1)		20.0		56.8		(39.3)

Total investment operations	Total investment operations	55.8		(116.3)				Total investment operations	8.9		37.9		109.1		15.2
All other	All other	0		0.1				All other	—		—		—		0.1
Total segment income (loss) before reconciling items		11.0		(146.3)
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	(1.3)		5.9				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)				Interest expense on corporate debt	(1.1)		(1.1)		(3.3)		(3.6)
Corporate expenses	Corporate expenses	(3.0)		(2.4)				Corporate expenses	(12.9)		(0.9)		(17.9)		(3.6)
Total reconciling items	Total reconciling items	(5.4)		2.3				Total reconciling items	(10.9)		3.6		(13.7)		13.0
Total consolidated income (loss) before federal income tax		$	5.6	$	(144.0)
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 ~~$2,825.9~~$2,805.3 million and $2,870.8 million at ~~March 31,~~September 30, 2021, and December 31, 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

1822

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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. These lawsuits 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.

1923

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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

The term “State Auto Financial” as used below refers only to State Auto Financial Corporation and the terms “our Company,” “we,” “us,” and “our” as used below refer to State Auto Financial Corporation and its consolidated subsidiaries. The term ~~“first~~“third quarter” as used below refers to the three months ended ~~March 31~~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, 2020 (the “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 ~~March 31,~~September 30, 2021 and December 31, 2020, and for the consolidated statements of income for the three and nine month periods ended ~~March 31,~~September 30, 2021 and 2020. This discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of the 2020 Form 10-K, and in particular the discussions in those sections thereof entitled “Overview,” “Executive Summary,” and “Critical Accounting Policies.” Readers are encouraged to review the entire 2020 Form 10-K, as it includes information regarding our Company not discussed in this Form 10-Q. This information will assist in your understanding of the discussion of our current period financial results.

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 2020 Form 10-K, updated by Part II, Item 1A of this Form 10-Q. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

~~We have three reportable segments: personal insurance, commercial insurance,~~

Table of Contents

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 because~~State Auto Mutual, which owned approximately 58.7% of State Auto Financial’s issued and outstanding common stock as of the ~~differences~~date 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 ~~type~~extinguishment of ~~customers they serve or products they provide or services they offer. The insurance segments market~~such 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 line~~merger of ~~property~~Merger Sub I with and ~~casualty insurance products throughout~~into State Auto Financial, with State Auto Financial surviving such merger (the “Merger”). Subject to the ~~United States through independent insurance agencies, which include retail agents~~terms 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 isconditions set forth in ~~Note 14~~the 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 included~~the 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.~~10-Q, for a discussion of certain risks related to the proposed 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 Exchange 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 we 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 the Special Meeting, please see Item 5.07 of the Current Report on Form 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.

2025

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

POOLING ARRANGEMENT

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

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


STFC Pooled Companies:
State Auto P&C	51.0	%
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	%

2126

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

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


($ millions, except per share amounts)	($ millions, except per share amounts)	Three months ended March 31						($ millions, except per share amounts)	Three months ended September 30					Nine months ended September 30
		2021			2020						2021			2020			2021			2020
GAAP Basis:	GAAP Basis:									GAAP Basis:
Total revenues	Total revenues	$	412.2		$	214.8				Total revenues	$	391.1		$	391.6		$	1,218.0		$	1,041.2
Income (loss) before federal income taxes		$	5.6		$	(144.0)
Net income (loss)		$	3.6		$	(114.6)
Basic earnings (loss) per share		$	0.08		$	(2.62)
Diluted earnings (loss) per share		$	0.08		$	(2.62)
(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	$	972.0		$	866.7				Stockholders’ equity							$	954.9		$	944.1
Return on average equity (LTM)	Return on average equity (LTM)	14.3		%	(8.7)		%			Return on average equity (LTM)							7.5		%	(3.8)		%
Book value per share	Book value per share	$	22.07		$	19.83				Book value per share							$	21.49		$	21.57
Debt to capital ratio	Debt to capital ratio	11.2		%	17.4		%			Debt to capital ratio							11.3		%	11.4		%
Cat loss and ALAE ratio	Cat loss and ALAE ratio	20.1		%	12.7		%			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	58.8		%	59.7		%			Non-cat loss and LAE ratio	64.9		%	54.6		%	61.2		%	55.8		%
Loss and LAE ratio	Loss and LAE ratio	78.9		%	72.4		%			Loss and LAE ratio	75.2		%	71.2		%	78.4		%	74.4		%
Expense ratio	Expense ratio	34.0		%	34.8		%			Expense ratio	30.1		%	34.8		%	31.0		%	34.9		%
Combined ratio	Combined ratio	112.9		%	107.2		%			Combined ratio	105.3		%	106.0		%	109.4		%	109.3		%
Premium written growth	Premium written growth	3.5		%	13.2		%			Premium written growth	10.2		%	9.3		%	7.4		%	11.3		%
Investment yield	Investment yield	2.8		%	2.9		%			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	20.1		%	12.7		%			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	51.5		%	53.6		%			Non-cat loss and ALAE ratio	59.2		%	49.5		%	55.2		%	49.9		%
ULAE ratio	ULAE ratio	7.2		%	6.2		%			ULAE ratio	5.6		%	5.2		%	5.8		%	6.0		%
Loss and LAE ratio	Loss and LAE ratio	78.8		%	72.5		%			Loss and LAE ratio	75.1		%	71.3		%	78.2		%	74.5		%
Expense ratio	Expense ratio	33.5		%	34.9		%			Expense ratio	28.4		%	33.8		%	29.6		%	34.1		%
Combined ratio	Combined ratio	112.3		%	107.4		%			Combined ratio	103.5		%	105.1		%	107.8		%	108.6		%

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


	Twelve months ended September 30
	2021	2020
Net premiums written to surplus	1.7	1.7

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

•For the three and nine months ended ~~March 31,~~September 30, 2021, net investment loss was $8.1 million and net investment gain was ~~$38.2~~$56.8 million, respectively, which included ~~$31.5~~$6.7 million of losses recognized on equity securities and $49.7 million of gains recognized on equity ~~securities.~~securities, respectively.

•The SAP catastrophe loss and ALAE ~~ratio~~ratios for the three and nine months ended ~~March 31,~~September 30, 2021 ~~was 20.1%~~were 10.3% and 17.2%, respectively, or ~~$71.6 million.~~$39.4 million and $191.0 million, respectively. The 2021 ~~first~~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 ~~17.0~~5.6 points to the ~~first quarter~~year to date loss and ALAE ratio. Approximately ~~75%~~60% and 70% of the ~~first quarter 2021~~ catastrophe losses for the 2021 third quarter and year to date periods, respectively, occurred within ~~homeowners.~~

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

2227

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

~~$21.8~~•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 ~~$2.9~~$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 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, including $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 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 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 Results

•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.

Table of Contents

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 ~~(i) non-cat weather~~an elevated level of large losses, ~~primarily wind and hail, and (ii) fire losses.~~

~~First Quarter 2020 Overview~~:including fires.

•For the three months ended March 31, 2020, net investment losses were $135.2 million which included $137.8 million of net losses recognized on equity securities and other invested assets. The fair value of our equity securities and other invested assets was adversely affected by the disruption in global financial markets as a result of the COVID-19 pandemic.

•◦The ~~SAP catastrophe loss~~2020 third quarter and ~~ALAE ratio was 12.7%, or $41.9 million. First quarter 2020 was impacted by a severe wind and hail storm, including tornadoes in Tennessee, that contributed 8.3 points~~year to ~~the first quarter loss and ALAE ratio. Approximately 70% of the catastrophe losses for the quarter occurred within middle market commercial.~~

•~~The SAP non-cat loss and ALAE ratio was 53.6%, or $177.1 million. Non-catastrophe~~date non-catastrophe losses and ALAE included ~~3.2~~5.5 points and 3.1 points, respectively, of favorable development relating to prior years, or ~~$10.5~~$19.3 million ~~primarily from~~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 ~~contributed $16.8 million,~~was partially offset by ~~$6.4~~$8.1 million and $20.2 million, respectively, of adverse development from the personal insurance segment. The ~~current accident~~2020 year ~~non-cat loss and ALAE ratio~~to date was also impacted by ~~(i) large losses, including fires, and (ii) a lower level~~$5.2 million of ~~claims attributable~~adverse development from specialty run-off primarily due to ~~fewer miles driven later in the quarter as a result of compliance with shelter-in-place orders and other actions taken in response~~an adverse court decision relating to ~~the COVID-19 pandemic.~~an E&S casualty claim from 2016.

2329

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Insurance Segments

We measure our top-line growth for our insurance segments based on net written premiums, which provides us with an indication of how well we are doing in terms of revenue growth before it is actually earned. Our policies provide a fixed amount of coverage for a stated period of time, often referred to as the “policy term.” As such, our 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 the 2020 Form 10-K.

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

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

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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


($ in millions)	($ in millions)	2021			2020			2021			2020			($ in millions)	2021			2020			2021			2020
Three months ended March 31		Personal & Commercial			Personal & Commercial			Total(1)			Total(1)
Three months ended September 30														Three months ended September 30	Personal & Commercial			Personal & Commercial			Total(1)			Total(1)

Net written premiums	Net written premiums	$	359.4		$	346.6		$	358.7		$	346.5		Net written premiums	$	417.6		$	379.0		$	417.7		$	379.1
Net earned premiums	Net earned premiums	356.5			330.5			355.9			330.5			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	74.1			41.8			71.6			41.9			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	(24.7)			(10.4)			(24.6)			(10.5)			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	207.6			187.5			207.7			187.6			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	182.9			177.1			183.1			177.1			Total non-cat loss and ALAE	226.0			175.7			226.1			175.0
Total Loss and ALAE	Total Loss and ALAE	257.0			218.9			254.7			219.0			Total Loss and ALAE	265.5			222.1			265.5			233.7
ULAE	ULAE	25.7			20.6			25.7			20.6			ULAE	21.3			19.6			21.4			18.3
Total Loss and LAE	Total Loss and LAE	282.7			239.5			280.4			239.6			Total Loss and LAE	286.8			241.7			286.9			252.0
Underwriting expenses	Underwriting expenses	120.2			120.7			120.3			121.0			Underwriting expenses	118.5			127.8			118.6			127.9
Net underwriting loss	Net underwriting loss	$	(46.4)		$	(29.7)		$	(44.8)		$	(30.1)		Net underwriting loss	$	(23.7)		$	(16.3)		$	(23.7)		$	(26.7)

Cat loss and ALAE ratio	Cat loss and ALAE ratio	20.8		%	12.7		%	20.1		%	12.7		%	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	(6.9)		%	(3.2)		%	(6.9)		%	(3.2)		%	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	58.2		%	56.8		%	58.4		%	56.8		%	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	51.3		%	53.6		%	51.5		%	53.6		%	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	72.1		%	66.3		%	71.6		%	66.3		%	Total Loss and ALAE ratio	69.5		%	63.0		%	69.5		%	66.1		%
ULAE ratio	ULAE ratio	7.2		%	6.2		%	7.2		%	6.2		%	ULAE ratio	5.6		%	5.5		%	5.6		%	5.2		%
Total Loss and LAE ratio	Total Loss and LAE ratio	79.3		%	72.5		%	78.8		%	72.5		%	Total Loss and LAE ratio	75.1		%	68.5		%	75.1		%	71.3		%
Expense ratio	Expense ratio	33.5		%	34.8		%	33.5		%	34.9		%	Expense ratio	28.4		%	33.7		%	28.4		%	33.8		%
Combined ratio	Combined ratio	112.8		%	107.3		%	112.3		%	107.4		%	Combined ratio	103.5		%	102.2		%	103.5		%	105.1		%

(1)Includes specialty run-off	(1)Includes specialty run-off													(1)Includes specialty run-off

2531

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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


($ in millions)	2021			2020			2021			2020
Nine Months Ended September 30	Personal & Commercial			Personal & Commercial			Total(1)			Total(1)

Net written premiums	$	1,190.0		$	1,107.3		$	1,188.7		$	1,107.2
Net earned premiums	1,108.8			1,024.4			1,107.6			1,024.4
Losses and LAE incurred:
Cat loss and ALAE	192.8			178.6			191.0			191.0
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(45.3)			(37.0)			(45.5)			(31.8)
Current accident year non-cat loss and ALAE	656.6			542.1			656.8			542.4
Total non-cat loss and ALAE	611.3			505.1			611.3			510.6
Total Loss and ALAE	804.1			683.7			802.3			701.6
ULAE	64.2			62.9			64.2			61.6
Total Loss and LAE	868.3			746.6			866.5			763.2
Underwriting expenses	352.0			376.6			352.4			377.1
Net underwriting loss	$	(111.5)		$	(98.8)		$	(111.3)		$	(115.9)

Cat loss and ALAE ratio	17.4		%	17.4		%	17.2		%	18.6		%
Non-cat loss and ALAE ratio
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	59.2		%	53.0		%	59.3		%	53.0		%
Total non-cat loss and ALAE ratio	55.1		%	49.4		%	55.2		%	49.9		%
Total Loss and ALAE ratio	72.5		%	66.8		%	72.4		%	68.5		%
ULAE ratio	5.8		%	6.1		%	5.8		%	6.0		%
Total Loss and LAE ratio	78.3		%	72.9		%	78.2		%	74.5		%
Expense ratio	29.6		%	34.0		%	29.6		%	34.1		%
Combined ratio	107.9		%	106.9		%	107.8		%	108.6		%

(1)Includes specialty run-off

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Personal Insurance Segment

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

Table 1


($ in millions)	($ in millions)													($ in millions)
Three months ended March 31, 2021		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	$	89.1		$	86.2		$	17.9		$	193.2		Net written premiums	$	92.4		$	127.2		$	23.7		$	243.3
Net earned premiums	Net earned premiums	95.7			96.3			15.8			207.8			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	0.5			52.4			9.6			62.5			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	(0.8)			(2.1)			—			(2.9)			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	56.9			55.1			8.1			120.1			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	56.1			53.0			8.1			117.2			Total non-cat loss and ALAE	74.0			53.3			9.4			136.7
Total Loss and ALAE	Total Loss and ALAE	56.6			105.4			17.7			179.7			Total Loss and ALAE	75.3			75.5			10.1			160.9
ULAE	ULAE	8.5			8.7			1.2			18.4			ULAE	7.9			5.3			1.0			14.2
Total Loss and LAE	Total Loss and LAE	65.1			114.1			18.9			198.1			Total Loss and LAE	83.2			80.8			11.1			175.1
Underwriting expenses	Underwriting expenses	27.5			26.5			5.1			59.1			Underwriting expenses	25.0			32.2			5.9			63.1
Net underwriting gain (loss)		$	3.1		$	(44.3)		$	(8.2)		$	(49.4)
Net underwriting (loss) gain														Net underwriting (loss) gain	$	(16.4)		$	(6.5)		$	1.9		$	(21.0)

Cat loss and ALAE ratio	Cat loss and ALAE ratio	0.6		%	54.4		%	60.6		%	30.1		%	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	(0.9)		%	(2.2)		%	0.2		%	(1.4)		%	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	59.5		%	57.3		%	51.6		%	57.7		%	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	58.6		%	55.1		%	51.8		%	56.3		%	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	59.2		%	109.5		%	112.4		%	86.4		%	Total Loss and ALAE ratio	82.0		%	70.8		%	53.3		%	74.0		%
ULAE ratio	ULAE ratio	8.8		%	9.1		%	7.5		%	8.9		%	ULAE ratio	8.6		%	5.0		%	6.0		%	6.6		%
Total Loss and LAE ratio	Total Loss and LAE ratio	68.0		%	118.6		%	119.9		%	95.3		%	Total Loss and LAE ratio	90.6		%	75.8		%	59.3		%	80.6		%
Expense ratio	Expense ratio	30.9		%	30.7		%	28.5		%	30.6		%	Expense ratio	27.1		%	25.4		%	24.7		%	26.0		%
Combined ratio	Combined ratio	98.9		%	149.3		%	148.4		%	125.9		%	Combined ratio	117.7		%	101.2		%	84.0		%	106.6		%

2633

Table of Contents

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 March 31, 2020		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	$	104.6		$	81.6		$	13.3		$	199.5		Net written premiums	$	101.4		$	111.4		$	17.4		$	230.2
Net earned premiums	Net earned premiums	104.7			82.7			10.7			198.1			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	0.5			10.7			1.5			12.7			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	5.2			2.2			(1.0)			6.4			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	62.0			37.6			4.3			103.9			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	67.2			39.8			3.3			110.3			Total non-cat loss and ALAE	66.2			51.4			4.2			121.8
Total Loss and ALAE	Total Loss and ALAE	67.7			50.5			4.8			123.0			Total Loss and ALAE	68.1			79.5			7.1			154.7
ULAE	ULAE	7.3			5.3			0.4			13.0			ULAE	7.4			6.8			0.2			14.4
Total Loss and LAE	Total Loss and LAE	75.0			55.8			5.2			136.0			Total Loss and LAE	75.5			86.3			7.3			169.1
Underwriting expenses	Underwriting expenses	32.8			25.0			4.0			61.8			Underwriting expenses	32.0			33.2			5.2			70.4
Net underwriting (loss) gain	Net underwriting (loss) gain	$	(3.1)		$	1.9		$	1.5		$	0.3		Net underwriting (loss) gain	$	(4.5)		$	(27.0)		$	0.8		$	(30.7)

Cat loss and ALAE ratio	Cat loss and ALAE ratio	0.4		%	13.0		%	14.0		%	6.4		%	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	5.0		%	2.7		%	(9.2)		%	3.2		%	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	59.3		%	45.4		%	40.0		%	52.5		%	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	64.3		%	48.1		%	30.8		%	55.7		%	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	64.7		%	61.1		%	44.8		%	62.1		%	Total Loss and ALAE ratio	66.1		%	86.0		%	53.6		%	74.1		%
ULAE ratio	ULAE ratio	6.9		%	6.4		%	4.0		%	6.5		%	ULAE ratio	7.2		%	7.3		%	1.6		%	6.9		%
Total Loss and LAE ratio	Total Loss and LAE ratio	71.6		%	67.5		%	48.8		%	68.6		%	Total Loss and LAE ratio	73.3		%	93.3		%	55.2		%	81.0		%
Expense ratio	Expense ratio	31.4		%	30.6		%	30.0		%	31.0		%	Expense ratio	31.4		%	29.8		%	29.4		%	30.5		%
Combined ratio	Combined ratio	103.0		%	98.1		%	78.8		%	99.6		%	Combined ratio	104.7		%	123.1		%	84.6		%	111.5		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 3


($ in millions)
Nine months ended September 30, 2021	Personal Auto			Homeowners			Other Personal			Total

Net written premiums	$	273.5		$	329.6		$	61.9		$	665.0
Net earned premiums	281.1			304.9			52.1			638.1
Losses and LAE incurred:
Cat loss and ALAE	6.3			129.8			19.8			155.9
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	4.7			(2.1)			(0.2)			2.4
Current accident year non-cat loss and ALAE	186.7			156.9			26.9			370.5
Total non-cat loss and ALAE	191.4			154.8			26.7			372.9
Total Loss and ALAE	197.7			284.6			46.5			528.8
ULAE	22.6			19.2			2.9			44.7
Total Loss and LAE	220.3			303.8			49.4			573.5
Underwriting expenses	76.3			87.0			15.9			179.2
Net underwriting loss	$	(15.5)		$	(85.9)		$	(13.2)		$	(114.6)

Cat loss and ALAE ratio	2.3		%	42.6		%	38.0		%	24.4		%
Non-cat loss and ALAE ratio
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	66.4		%	51.4		%	51.6		%	58.1		%
Total non-cat loss and ALAE ratio	68.1		%	50.7		%	51.2		%	58.5		%
Total Loss and ALAE ratio	70.4		%	93.3		%	89.2		%	82.9		%
ULAE ratio	8.0		%	6.3		%	5.8		%	7.0		%
Total Loss and LAE ratio	78.4		%	99.6		%	95.0		%	89.9		%
Expense ratio	27.9		%	26.4		%	25.6		%	26.9		%
Combined ratio	106.3		%	126.0		%	120.6		%	116.8		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 4


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

Net written premiums	$	310.3		$	299.1		$	45.7		$	655.1
Net earned premiums	311.0			262.9			35.8			609.7
Losses and LAE incurred:
Cat loss and ALAE	6.5			93.4			12.0			111.9
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	19.1			2.8			(1.7)			20.2
Current accident year non-cat loss and ALAE	165.7			125.0			13.0			303.7
Total non-cat loss and ALAE	184.8			127.8			11.3			323.9
Total Loss and ALAE	191.3			221.2			23.3			435.8
ULAE	23.0			18.6			1.2			42.8
Total Loss and LAE	214.3			239.8			24.5			478.6
Underwriting expenses	98.5			89.7			13.7			201.9
Net underwriting loss	$	(1.8)		$	(66.6)		$	(2.4)		$	(70.8)

Cat loss and ALAE ratio	2.1		%	35.5		%	33.4		%	18.4		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	6.2		%	1.0		%	(4.5)		%	3.3		%
Current accident year non-cat loss and ALAE ratio	53.2		%	47.6		%	36.2		%	49.8		%
Total non-cat loss and ALAE ratio	59.4		%	48.6		%	31.7		%	53.1		%
Total Loss and ALAE ratio	61.5		%	84.1		%	65.1		%	71.5		%
ULAE ratio	7.4		%	7.1		%	3.4		%	7.0		%
Total Loss and LAE ratio	68.9		%	91.2		%	68.5		%	78.5		%
Expense ratio	31.7		%	30.0		%	30.0		%	30.8		%
Combined ratio	100.6		%	121.2		%	98.5		%	109.3		%

The personal insurance segment's net written premiums for the three and nine months ended ~~March 31,~~September 30, 2021 ~~decreased 3.2%~~increased 5.7% and 1.5%, respectively, when compared to the same 2020 ~~period~~periods (Tables 1 - ~~2), driven~~4). The 2021 third quarter and year to date were impacted by ~~a decrease~~(i) increased rates in homeowners, (ii) increased rates and new business growth in other personal, ~~auto net written premiums. The decrease in personal auto net written premiums was driven by~~and (iii) a decline in new business in personal auto, primarily attributable to cumulative rate and underwriting actions taken throughout 2020 and 2021 to address personal auto profitability. ~~Partially offsetting the decrease in the personal insurance segment's net written premiums was net written premium growth in homeowners and other personal, primarily driven by increased rates.~~

The personal insurance segment's SAP catastrophe loss and ALAE ~~ratio~~ratios for the three and nine months ended ~~March 31,~~September 30, 2021 improved 4.7 points and increased ~~23.7~~6.0 points, respectively, when compared to the same 2020 ~~period~~periods (Tables 1 - ~~2), due~~4). The 2021 third quarter was impacted by higher frequency but lower severity of CAT events when compared to the same 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, primarily in 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 ~~24.3~~8.2 points to the ~~personal lines SAP catastrophe~~cat loss and ALAE ratio. ~~Approximately 85%~~For the 2021 third quarter and year to date, approximately 50% and 80%, respectively, of the ~~losses attributable to winter storms Uri and Viola was in our homeowners line of business, and approximately 90% of the personal lines~~reported catastrophe losses occurred in Texas. The 2020 third quarter and year to date were impacted by (i) a Midwest derecho 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.

2736

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

The personal insurance segment’s SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and nine months ended ~~March 31,~~September 30, 2021 increased ~~0.6~~4.6 points and 5.4 points, respectively, when compared to the same 2020 ~~period~~periods (Tables 1 - 2)4).

The personal auto SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and nine months ended ~~March 31,~~September 30, 2021 ~~improved 5.7~~increased 16.4 points and 8.7 points, respectively, when compared to the same 2020 ~~period,~~periods. The 2021 increase is attributable to the current accident year ratio, 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 shelter-in-place orders in response to the COVID-19 pandemic. Severity is higher in the 2021 current accident year, driven by ~~favorable~~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 ALAE ratios was less adverse development of prior accident year ~~losses of 0.9 points compared~~losses. The 2021 third quarter and year to ~~adverse development of 5.0 points in the same 2020 period. The first quarter 2021~~date prior accident year ~~favorable~~ development was ~~driven by favorable development on physical damage coverages,~~attributable to (i) bodily injury claims from multiple accident years and (ii) PIP claims in Michigan, primarily from the 2020 and 2019 accident ~~year~~.years. The ~~first~~2020 third quarter ~~2020~~and year to date prior accident year adverse development was driven by higher than expected severity ~~primarily from the 2019 accident year,~~ for bodily injury ~~property damage, and personal injury protection, particularly in Michigan.~~claims from multiple accident years.

The homeowners SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and nine months ended ~~March 31,~~September 30, 2021 improved 5.6 points and increased ~~7.0~~2.1 points, respectively, when compared to the same 2020 ~~period.~~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 ratio was ~~primarily driven by~~due to higher frequency and severity ~~for~~of both property and liability claims in the current accident year. Partially offsetting the increase in the 2021 non-catastrophe loss and ALAE ratio was favorable development of prior accident year losses, primarily from the 2020 accident year, compared to adverse development in the same 2020 period. The ~~first quarter 2021 favorable development of prior accident~~2020 year ~~losses was due~~ to ~~lower than expected loss emergence, primarily from the 2020 accident year. The first quarter 2020~~date prior accident year adverse development was primarily driven by higher severity on fourth quarter 2019 third-party liability and property ~~claims.~~claims that emerged during the first quarter of 2020.

The other personal SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2021 increased 17.3 points and 19.5 points, respectively, when compared to the same 2020 periods, primarily driven by higher severity of fire losses in the current accident year.

2837

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Commercial Insurance Segment

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

Table 35


($ in millions)	($ in millions)																						($ in millions)
Three months ended March 31, 2021		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	$	51.3		$	35.0		$	39.3		$	16.0		$	19.9		$	4.7		$	166.2		Net written premiums	$	51.9		$	33.6		$	44.0		$	20.8		$	18.6		$	5.4		$	174.3
Net earned premiums	Net earned premiums	40.9			31.7			39.6			15.2			16.5			4.8			148.7			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	0.2			5.2			3.0			—			3.2			—			11.6			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	(0.6)			(2.2)			(8.1)			(8.5)			(1.4)			(1.0)			(21.8)			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	25.4			19.8			25.6			9.3			5.5			1.9			87.5			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	24.8			17.6			17.5			0.8			4.1			0.9			65.7			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	25.0			22.8			20.5			0.8			7.3			0.9			77.3			Total Loss and ALAE	45.7			17.5			25.8			5.3			8.8			1.5			104.6
ULAE	ULAE	2.6			2.4			0.8			0.7			0.7			0.1			7.3			ULAE	2.9			1.2			1.3			1.0			0.6			0.1			7.1
Total Loss and LAE	Total Loss and LAE	27.6			25.2			21.3			1.5			8.0			1.0			84.6			Total Loss and LAE	48.6			18.7			27.1			6.3			9.4			1.6			111.7
Underwriting expenses	Underwriting expenses	16.1			11.5			16.2			7.5			8.0			1.8			61.1			Underwriting expenses	15.1			10.7			14.7			7.1			6.1			1.7			55.4
Net underwriting (loss) gain	Net underwriting (loss) gain	$	(2.8)		$	(5.0)		$	2.1		$	6.2		$	0.5		$	2.0		$	3.0		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	0.3		%	16.5		%	7.6		%	—		%	19.7		%	—		%	7.8		%	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	(1.5)		%	(7.0)		%	(20.3)		%	(55.8)		%	(8.3)		%	(20.8)		%	(14.6)		%	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	62.1		%	62.6		%	64.6		%	60.7		%	33.4		%	38.7		%	58.8		%	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	60.6		%	55.6		%	44.3		%	4.9		%	25.1		%	17.9		%	44.2		%	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	60.9		%	72.1		%	51.9		%	4.9		%	44.8		%	17.9		%	52.0		%	Total Loss and ALAE ratio	93.8		%	51.7		%	62.0		%	33.6		%	47.2		%	26.3		%	63.7		%
ULAE ratio	ULAE ratio	6.3		%	7.4		%	2.0		%	4.9		%	4.1		%	2.8		%	4.9		%	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	67.2		%	79.5		%	53.9		%	9.8		%	48.9		%	20.7		%	56.9		%	Total Loss and LAE ratio	99.8		%	55.2		%	65.1		%	39.6		%	49.9		%	27.9		%	67.9		%
Expense ratio	Expense ratio	31.6		%	32.8		%	41.2		%	46.9		%	39.9		%	39.0		%	36.8		%	Expense ratio	29.2		%	31.7		%	33.4		%	34.3		%	32.2		%	32.2		%	31.8		%
Combined ratio	Combined ratio	98.8		%	112.3		%	95.1		%	56.7		%	88.8		%	59.7		%	93.7		%	Combined ratio	129.0		%	86.9		%	98.5		%	73.9		%	82.1		%	60.1		%	99.7		%

2938

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 46


($ in millions)	($ in millions)																						($ in millions)
Three months ended March 31, 2020		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	$	36.4		$	31.9		$	40.3		$	18.8		$	14.8		$	4.9		$	147.1		Net written premiums	$	40.0		$	31.4		$	40.0		$	17.4		$	15.0		$	5.0		$	148.8
Net earned premiums	Net earned premiums	29.0			30.3			36.1			19.7			12.6			4.7			132.4			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	0.3			3.6			24.1			—			0.9			0.2			29.1			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	(0.1)			(5.4)			(5.1)			(4.0)			(0.8)			(1.4)			(16.8)			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	16.6			19.1			27.5			13.4			4.0			3.0			83.6			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	16.5			13.7			22.4			9.4			3.2			1.6			66.8			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	16.8			17.3			46.5			9.4			4.1			1.8			95.9			Total Loss and ALAE	19.7			15.0			18.5			7.1			7.7			(0.6)			67.4
ULAE	ULAE	1.5			1.6			2.1			1.7			0.5			0.2			7.6			ULAE	1.7			0.5			1.3			1.1			0.5			0.1			5.2
Total Loss and LAE	Total Loss and LAE	18.3			18.9			48.6			11.1			4.6			2.0			103.5			Total Loss and LAE	21.4			15.5			19.8			8.2			8.2			(0.5)			72.6
Underwriting expenses	Underwriting expenses	12.7			11.8			16.7			8.9			6.7			2.1			58.9			Underwriting expenses	13.7			10.9			16.4			7.8			6.7			1.9			57.4
Net underwriting (loss) gain		$	(2.0)		$	(0.4)		$	(29.2)		$	(0.3)		$	1.3		$	0.6		$	(30.0)
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	1.1		%	12.0		%	66.7		%	—		%	7.3		%	3.8		%	22.0		%	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	(0.3)		%	(17.8)		%	(14.2)		%	(20.5)		%	(6.4)		%	(29.9)		%	(12.7)		%	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	57.2		%	62.8		%	76.4		%	68.2		%	31.6		%	63.9		%	63.1		%	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	56.9		%	45.0		%	62.2		%	47.7		%	25.2		%	34.0		%	50.4		%	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	58.0		%	57.0		%	128.9		%	47.7		%	32.5		%	37.8		%	72.4		%	Total Loss and ALAE ratio	55.3		%	47.8		%	45.8		%	40.6		%	52.9		%	(12.2)		%	46.7		%
ULAE ratio	ULAE ratio	5.2		%	5.3		%	5.8		%	8.9		%	3.9		%	4.0		%	5.8		%	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	63.2		%	62.3		%	134.7		%	56.6		%	36.4		%	41.8		%	78.2		%	Total Loss and LAE ratio	60.1		%	49.3		%	49.1		%	47.0		%	56.3		%	(10.3)		%	50.3		%
Expense ratio	Expense ratio	35.0		%	37.0		%	41.4		%	47.7		%	45.5		%	41.7		%	40.1		%	Expense ratio	34.2		%	34.7		%	41.0		%	45.1		%	45.1		%	38.6		%	38.6		%
Combined ratio	Combined ratio	98.2		%	99.3		%	176.1		%	104.3		%	81.9		%	83.5		%	118.3		%	Combined ratio	94.3		%	84.0		%	90.1		%	92.1		%	101.4		%	28.3		%	88.9		%

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 first quarter of 2020 and is now live in 29 states. Nine of the 29 states are states that we previously were not writing 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 after completing the launch in the last state in April 2021. Finally, our workers' compensation product launched on State Auto Connect in the fourth quarter of 2020 and is currently live in 16 states as of April 2021 with subsequent state rollouts scheduled throughout 2021.

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

3039

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 7


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

Net written premiums	$	160.6		$	103.5		$	133.7		$	48.6		$	61.0		$	17.6		$	525.0
Net earned premiums	134.6			98.6			122.6			45.6			53.3			16.0			470.7
Losses and LAE incurred:
Cat loss and ALAE	1.9			12.0			14.2			—			8.8			—			36.9
Non-cat loss and ALAE
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	97.5			59.4			66.3			33.6			21.9			7.4			286.1
Total non-cat loss and ALAE	100.3			52.5			51.6			11.8			19.9			2.3			238.4
Total Loss and ALAE	102.2			64.5			65.8			11.8			28.7			2.3			275.3
ULAE	7.6			4.7			2.8			2.4			1.7			0.3			19.5
Total Loss and LAE	109.8			69.2			68.6			14.2			30.4			2.6			294.8
Underwriting expenses	47.0			32.2			46.5			20.1			21.1			5.9			172.8
Net underwriting (loss) gain	$	(22.2)		$	(2.8)		$	7.5		$	11.3		$	1.8		$	7.5		$	3.1

Cat loss and ALAE ratio	1.4		%	12.2		%	11.6		%	—		%	16.5		%	0.1		%	7.8		%
Non-cat loss and ALAE ratio
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	72.4		%	60.2		%	54.1		%	73.8		%	41.1		%	46.1		%	60.8		%
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	75.9		%	65.4		%	53.7		%	26.0		%	53.9		%	14.1		%	58.5		%
ULAE ratio	5.6		%	4.7		%	2.3		%	5.2		%	3.1		%	1.7		%	4.1		%
Total Loss and LAE ratio	81.5		%	70.1		%	56.0		%	31.2		%	57.0		%	15.8		%	62.6		%
Expense ratio	29.3		%	31.1		%	34.7		%	41.4		%	34.7		%	33.5		%	32.9		%
Combined ratio	110.8		%	101.2		%	90.7		%	72.6		%	91.7		%	49.3		%	95.5		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 8


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

Net written premiums	$	117.8		$	95.8		$	126.8		$	49.2		$	47.3		$	15.3		$	452.2
Net earned premiums	96.2			92.8			116.0			54.4			40.8			14.5			414.7
Losses and LAE incurred:
Cat loss and ALAE	1.1			21.0			35.7			—			8.7			0.2			66.7
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(1.5)			(16.5)			(14.3)			(16.1)			(1.7)			(7.1)			(57.2)
Current accident year non-cat loss and ALAE	52.4			53.3			69.6			40.6			15.2			7.3			238.4
Total non-cat loss and ALAE	50.9			36.8			55.3			24.5			13.5			0.2			181.2
Total Loss and ALAE	52.0			57.8			91.0			24.5			22.2			0.4			247.9
ULAE	4.9			4.2			4.5			4.5			1.6			0.4			20.1
Total Loss and LAE	56.9			62.0			95.5			29.0			23.8			0.8			268.0
Underwriting expenses	40.1			34.0			50.8			22.7			21.1			6.0			174.7
Net underwriting (loss) gain	$	(0.8)		$	(3.2)		$	(30.3)		$	2.7		$	(4.1)		$	7.7		$	(28.0)

Cat loss and ALAE ratio	1.2		%	22.6		%	30.7		%	—		%	21.3		%	1.2		%	16.1		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(1.5)		%	(17.8)		%	(12.3)		%	(29.6)		%	(4.1)		%	(49.3)		%	(13.8)		%
Current accident year non-cat loss and ALAE ratio	54.3		%	57.5		%	60.1		%	74.6		%	37.3		%	50.7		%	57.4		%
Total non-cat loss and ALAE ratio	52.8		%	39.7		%	47.8		%	45.0		%	33.2		%	1.4		%	43.6		%
Total Loss and ALAE ratio	54.0		%	62.3		%	78.5		%	45.0		%	54.5		%	2.6		%	59.7		%
ULAE ratio	5.1		%	4.5		%	3.9		%	8.4		%	3.9		%	2.6		%	4.9		%
Total Loss and LAE ratio	59.1		%	66.8		%	82.4		%	53.4		%	58.4		%	5.2		%	64.6		%
Expense ratio	34.1		%	35.5		%	40.0		%	46.2		%	44.6		%	39.3		%	38.6		%
Combined ratio	93.2		%	102.3		%	122.4		%	99.6		%	103.0		%	44.5		%	103.2		%

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, 2021, increased 17.1 points and 16.1 points, respectively, when compared to the same 2020 periods (Tables 5 - 8). The third quarter and year to date was impacted by new business growth and rate increases in commercial auto and farm & ranch. The third quarter increase was also impacted by rate increases in middle market commercial and new business growth in workers' compensation attributable to its launch on State Auto Connect.

The commercial insurance segment's SAP catastrophe loss and ALAE ~~ratio~~ratios for the three and nine months ended ~~March 31,~~September 30, 2021 was flat and improved ~~14.2~~8.3 points, respectively, when compared to the same 2020 ~~period~~periods (Tables 35 - 4)8). ~~While~~For the 2021 year to date, the number of catastrophe events increased compared to 2020, but the 2021 catastrophe events were less severe. ~~During the first quarter~~The 2021 year to date was primarily impacted by winter storms Uri and Viola in the first quarter, which contributed ~~6.7~~2.1 points to the loss and ALAE ratio. Approximately ~~60%~~80% of the ~~first quarter~~ 2021 ~~catastrophe~~ losses occurred in ~~Texas. During~~Texas and the ~~first quarter~~Midwest. The 2020 year to date was impacted by (i) a severe wind and hail storm, including tornadoes, in Tennessee, which contributed ~~19.0~~5.1 points to the ~~first quarter~~year to date cat loss and ALAE ratio, of which ~~11.4~~3.7 points were from three large losses in ~~Nashville.~~Nashville, (ii) property losses

~~The commercial insurance segment’s SAP non-catastrophe~~

Table of Contents

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, (iii) and the Midwest derecho mentioned above, which added 1.5 points to the cat loss and ALAE ~~ratio for the three months ended March 31, 2021 improved 6.2 points when compared to the same 2020 period (Tables 3 - 4).~~ratios.

The commercial auto SAP non-catastrophe loss and ALAE ~~ratio~~ratios for the three and nine months ended ~~March 31,~~September 30, 2021 increased ~~3.7~~39.3 points and 21.7 points, respectively, when compared to the same 2020 periods, due to an increase in the current accident 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 were also impacted by adverse development of prior accident year losses, primarily due to higher than anticipated severity from bodily injury claims from multiple accident years, compared to favorable development of prior accident year losses in the same 2020 periods.

The small commercial package SAP non-catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2021 increased 10.5 points and 13.5 points, respectively, when compared to the same 2020 periods, primarily due to less 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 years. The 2021 third quarter current accident year ratio improved when compared to the same 2020 period, ~~driven by an increase in the~~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 ~~2021~~2020 third quarter and year to date current accident year ratios were impacted by a decline in claim frequency as a result of reduced business activity in response to COVID-19. The 2020 year to date current accident year was also impacted by ~~higher bodily injury~~increased COVID-19 related legal defense costs, which added 2.1 points to the year to date non-cat loss ratio.

The middle market commercial SAP non-catastrophe loss and ~~uninsured motorist claims frequency~~ALAE ratios for the three and nine months ended September 30, 2021 increased 5.8 points and improved 5.7 points, respectively, when compared to ~~2020. Partially offsetting~~ the same 2020 periods. The third quarter increase was ~~greater~~due to less favorable development of prior accident year losses when compared to the same 2020 period. The 2021 ~~prior accident~~ year ~~favorable development was due~~ to ~~lower than anticipated bodily injury and uninsured motorist claims severity from the 2019 accident year~~

The small commercial package SAP non-catastrophe loss and ALAE ratio for the three months ended March 31, 2021 increased 10.6 points when compared to the same 2020 period, primarily due to less favorable development of prior accident year losses. The 2021 favorable development was attributable to lower than anticipated bodily injury severity from multiple accident years, partially offset by adverse development on several large property claims from the 2020 accident year. The 2020date favorable development was primarily attributable to ~~lower than expected bodily injury severity from multiple accident years.~~

~~The middle market commercial SAP non-catastrophe loss and ALAE ratio for the three months ended March 31, 2021 improved 17.9 points when compared to the same 2020 period, primarily due to~~ (i) improvement in the current accident year ratio due to reduced business activity in response to COVID-19, and (ii) greater favorable development of prior accident year losses, primarily driven by favorable development on bodily injury claims from multiple accident years and on ~~large~~(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~~.years. The 2021 third quarter and year to date non-cat loss ratios were also impacted by improvement in the current accident year, primarily due to lower claim frequency of 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, 2021 improved 7.0 points and 19.0 points, respectively, when compared to the same 2020 periods. The 2021 third quarter improvement was due to an improvement in the current accident year ratio 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) due to the COVID-19 pandemic, which added 3.9 points to 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 to the third quarter non-cat loss ratio. The 2021 year to date improvement was primarily due to more favorable development of prior accident year losses when compared to the same 2020 period. The 2021 favorable development was across multiple accident years. The 2021 year to date current accident year ratio was consistent with the same 2020 period, which was impacted by (i) the COVID-19 pandemic mentioned above that added 6.3 points to the non-cat loss 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 ratio for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 ~~improved 42.8~~increased 4.2 points when compared to the same 2020 period, primarily due to ~~(i) greater favorable development of prior accident year losses across multiple accident years and (ii) lower~~higher claim ~~severity~~frequency in the current accident ~~year when compared 2020.~~year.

3142

Table of Contents

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 ~~March 31,~~September 30, 2021 and 2020:


($ millions)	($ millions)	Three months ended March 31						($ millions)	Three months ended September 30					Nine months ended September 30
		2021		2020		Change						2021		2020		Change		2021		2020		$ Change
		(Favorable)/Adverse								(Favorable)/Adverse						(Favorable)/Adverse
Non-cat loss and ALAE:	Non-cat loss and ALAE:										Non-cat loss and ALAE:
Personal Insurance Segment:	Personal Insurance Segment:										Personal Insurance Segment:
Personal Auto	Personal Auto	$	(0.8)	$	5.2	$	(6.0)				Personal Auto	$	6.8	$	8.0	$	(1.2)	$	4.7	$	19.1	$	(14.4)
Homeowners	Homeowners	(2.1)		2.2		(4.3)					Homeowners	(2.5)		0.7		(3.2)		(2.1)		2.8		(4.9)
Other Personal	Other Personal	—		(1.0)		1.0					Other Personal	—		(0.6)		0.6		(0.2)		(1.7)		1.5
Total Personal Insurance Segment	Total Personal Insurance Segment	(2.9)		6.4		(9.3)					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	(0.6)		(0.1)		(0.5)					Commercial Auto	3.7		(1.2)		4.9		2.8		(1.5)		4.3
Small Commercial Package	Small Commercial Package	(2.2)		(5.4)		3.2					Small Commercial Package	(2.4)		(7.5)		5.1		(6.9)		(16.5)		9.6
Middle Market Commercial	Middle Market Commercial	(8.1)		(5.1)		(3.0)					Middle Market Commercial	(1.2)		(6.3)		5.1		(14.7)		(14.3)		(0.4)
Workers' Compensation	Workers' Compensation	(8.5)		(4.0)		(4.5)					Workers' Compensation	(6.4)		(7.3)		0.9		(21.8)		(16.1)		(5.7)
Farm & Ranch	Farm & Ranch	(1.4)		(0.8)		(0.6)					Farm & Ranch	(0.5)		(0.6)		0.1		(2.0)		(1.7)		(0.3)
Other Commercial	Other Commercial	(1.0)		(1.4)		0.4					Other Commercial	(2.4)		(3.6)		1.2		(5.1)		(7.1)		2.0
Total Commercial Insurance Segment	Total Commercial Insurance Segment	(21.8)		(16.8)		(5.0)					Total Commercial Insurance Segment	(9.2)		(26.5)		17.3		(47.7)		(57.2)		9.5

Specialty run-off	Specialty run-off	0.1		(0.1)		0.2					Specialty run-off	(0.1)		(0.9)		0.8		(0.2)		5.2		(5.4)
Cat Loss and ALAE	Cat Loss and ALAE	(3.8)		0.3		(4.1)					Cat Loss and ALAE	5.3		11.6		(6.3)		6.5		12.8		(6.3)
ULAE	ULAE	(2.1)		2.7		(4.8)					ULAE	0.8		(2.3)		3.1		(3.4)		1.4		(4.8)
Total	Total	$	(30.5)	$	(7.5)	$	(23.0)				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.

3243

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Losses and loss expenses payable

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


($ millions)	($ millions)	March 31, 2021		December 31, 2020		$ Change		($ millions)	September 30, 2021		December 31, 2020		$ Change
Personal Insurance Segment:	Personal Insurance Segment:							Personal Insurance Segment:
Personal Auto	Personal Auto	$	170.5	$	174.4	$	(3.9)	Personal Auto	$	187.3	$	174.4	$	12.9
Homeowners	Homeowners	124.2		90.4		33.8		Homeowners	117.0		90.4		26.6
Other Personal	Other Personal	19.8		15.8		4.0		Other Personal	23.2		15.8		7.4
Total Personal Insurance Segment	Total Personal Insurance Segment	314.5		280.6		33.9		Total Personal Insurance Segment	327.5		280.6		46.9
Commercial Insurance Segment:	Commercial Insurance Segment:							Commercial Insurance Segment:
Commercial Auto	Commercial Auto	101.7		93.8		7.9		Commercial Auto	132.4		93.8		38.6
Small Commercial Package	Small Commercial Package	100.4		95.9		4.5		Small Commercial Package	97.4		95.9		1.5
Middle Market Commercial	Middle Market Commercial	162.5		162.2		0.3		Middle Market Commercial	153.5		162.2		(8.7)
Workers’ Compensation	Workers’ Compensation	163.9		176.4		(12.5)		Workers’ Compensation	153.0		176.4		(23.4)
Farm & Ranch	Farm & Ranch	20.2		18.3		1.9		Farm & Ranch	21.9		18.3		3.6
Other Commercial	Other Commercial	26.3		25.6		0.7		Other Commercial	26.0		25.6		0.4
Total Commercial Insurance Segment	Total Commercial Insurance Segment	575.0		572.2		2.8		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	17.4		24.3		(6.9)		E&S Property	7.6		24.3		(16.7)
E&S Casualty	E&S Casualty	102.2		112.2		(10.0)		E&S Casualty	90.6		112.2		(21.6)
Programs	Programs	33.6		36.8		(3.2)		Programs	30.2		36.8		(6.6)
Total Specialty run-off	Total Specialty run-off	153.2		173.3		(20.1)		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	$	1,042.7	$	1,026.1	$	16.6	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 ~~$16.6~~$14.0 million since December 31, 2020 primarily due to (i) growth in the commercial auto line of business, and (ii) a higher level of unpaid catastrophe losses in the ~~personal insurance segment discussed above,~~homeowners line of business, partially offset by (i) the run-off from our previously exited specialty insurance ~~business.~~business and (ii) continued favorable development of 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 "Risk Factors" in “Item 1A” of the 2020 Form 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 2020 Form 10-K.

3344

Table of Contents

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 ~~March 31,~~September 30, 2021 ~~was $121.0~~were $115.0 million and $343.2 million, respectively, compared to ~~$114.9~~$123.0 million and $357.4 million for the same 2020 ~~period.~~periods. The ~~increase~~2021 third quarter and year to date decreases in acquisition and operating expenses ~~was~~were primarily driven by ~~an increase in~~ (i) less estimated variable ~~associate~~agent compensation, and (ii) ~~amortization of deferred acquisition~~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 2020 Form 10-K.

Composition of Investment Portfolio

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


($ millions)	($ millions)	March 31, 2021		% of Total		December 31, 2020		% of Total		($ millions)	September 30, 2021		% of Total		December 31, 2020		% of Total
Cash and cash equivalents	Cash and cash equivalents	$	59.1	2.1	%	$	90.7	3.2	%	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	2,104.3		74.5	%	2,121.0		73.9	%	Fixed maturities	2,113.7		75.4	%	2,121.0		73.9	%
Treasury inflation-protected securities	Treasury inflation-protected securities	104.7		3.7	%	116.2		4.0	%	Treasury inflation-protected securities	109.8		3.9	%	116.2		4.0	%
Total fixed maturities	Total fixed maturities	2,209.0		78.2	%	2,237.2		77.9	%	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		2.4	%	Notes receivable from affiliate	70.0		2.5	%	70.0		2.4	%
Equity securities:	Equity securities:									Equity securities:
Large-cap securities	Large-cap securities	149.2		5.2	%	134.2		4.7	%	Large-cap securities	163.5		5.8	%	134.2		4.7	%
Mutual and exchange traded funds	Mutual and exchange traded funds	250.4		8.9	%	255.5		8.9	%	Mutual and exchange traded funds	212.5		7.6	%	255.5		8.9	%
Total equity securities	Total equity securities	399.6		14.1	%	389.7		13.6	%	Total equity securities	376.0		13.4	%	389.7		13.6	%
Other invested assets:	Other invested assets:									Other invested assets:
International funds	International funds	60.6		2.1	%	55.8		2.0	%	International funds	62.2		2.2	%	55.8		2.0	%
Other invested assets	Other invested assets	15.8		0.6	%	15.3		0.5	%	Other invested assets	17.1		0.6	%	15.3		0.5	%
Total other invested assets	Total other invested assets	76.4		2.7	%	71.1		2.5	%	Total other invested assets	79.3		2.8	%	71.1		2.5	%
Other invested assets, at cost	Other invested assets, at cost	11.8		0.4	%	12.1		0.4	%	Other invested assets, at cost	10.4		0.4	%	12.1		0.4	%
Total portfolio	Total portfolio	$	2,825.9	100.0	%	$	2,870.8	100.0	%	Total portfolio	$	2,805.3	100.0	%	$	2,870.8	100.0	%

3445

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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


($ millions)	($ millions)	Amortized cost		Fair value		($ millions)	Amortized cost		Fair value
Due in 1 year or less	Due in 1 year or less	$	158.5	$	159.7	Due in 1 year or less	$	141.6	$	142.7
Due after 1 year through 5 years	Due after 1 year through 5 years	536.7		562.2		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	165.9		170.5		Due after 5 years through 10 years	211.7		218.2
Due after 10 years	Due after 10 years	556.1		582.3		Due after 10 years	516.7		548.6
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	730.3		734.3		U.S. government agencies mortgage-backed securities	697.3		699.6
Total	Total	$	2,147.5	$	2,209.0	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 ~~4.60~~4.11 and 4.72 as of ~~March 31,~~September 30, 2021, and December 31, 2020, respectively.

Investment Operations Revenue

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


($ millions)	($ millions)	Three months ended March 31						($ millions)	Three months ended September 30					Nine months ended September 30
		2021			2020						2021			2020			2021			2020
Gross investment income:	Gross investment income:									Gross investment income:
Fixed maturities	Fixed maturities	$	15.4		$	15.1				Fixed maturities	$	15.2		$	15.0		$	46.0		$	44.6
Equity securities	Equity securities	1.6			3.1					Equity securities	1.2			2.1			4.0			7.8
Other	Other	0.9			1.0					Other	1.0			0.9			3.0			2.7
Total gross investment income	Total gross investment income	17.9			19.2					Total gross investment income	17.4			18.0			53.0			55.1
Less: Investment expenses	Less: Investment expenses	0.3			0.3					Less: Investment expenses	0.4			0.1			0.7			0.6
Net investment income	Net investment income	$	17.6		$	18.9				Net investment income	$	17.0		$	17.9		$	52.3		$	54.5

Average invested assets (at cost)	Average invested assets (at cost)	$	2,531.3		$	2,623.9				Average invested assets (at cost)	$	2,552.3		$	2,512.9		$	2,551.0		$	2,537.6
Annualized investment yield	Annualized investment yield	2.8		%	2.9		%			Annualized investment yield	2.7		%	2.8		%	2.7		%	2.9		%
Annualized investment yield, after tax	Annualized investment yield, after tax	2.3		%	2.4		%			Annualized investment yield, after tax	2.2		%	2.3		%	2.3		%	2.4		%
Net investment income, after tax	Net investment income, after tax	$	14.6		$	15.6				Net investment income, after tax	$	14.1		$	14.7		$	43.2		$	44.8
Effective tax rate	Effective tax rate	17.4		%	17.2		%			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 ~~March 31,~~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.

3546

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Gross Unrealized Investment Gains and Losses

Based upon our review of our investment portfolio at ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2021:


($ millions)	($ millions)	Cost or amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value		($ 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	$	448.4	$	23.0	$	(0.4)	$	471.0	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	480.4		22.0		(1.9)		500.5		Obligations of states and political subdivisions	470.7		22.7		(0.5)		492.9
Corporate securities	Corporate securities	488.4		17.0		(2.2)		503.2		Corporate securities	507.8		16.1		(0.9)		523.0
U.S. government agencies mortgage-backed securities	U.S. government agencies mortgage-backed securities	730.3		15.4		(11.4)		734.3		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	$	2,147.5	$	77.4	$	(15.9)	$	2,209.0	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 ~~March 31,~~September 30, 2021, and December 31, 2020, and the change in unrealized holding gains, net of deferred tax, for the ~~three~~nine months ended ~~March 31,~~September 30, 2021:


($ millions)	($ millions)	March 31, 2021		December 31, 2020		$ 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	$	61.5	$	120.2	$	(58.7)	Fixed maturities	$	63.9	$	120.2	$	(56.3)
Net deferred federal income tax	Net deferred federal income tax	(12.9)		(25.3)		12.4		Net deferred federal income tax	(13.5)		(25.3)		11.8
Unrealized gains, net of tax	Unrealized gains, net of tax	$	48.6	$	94.9	$	(46.3)	Unrealized gains, net of tax	$	50.4	$	94.9	$	(44.5)

At ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2021, and December 31, 2020.

3647

Table of Contents

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 ~~March 31,~~September 30, 2021 included consideration of other factors, including macro-economic conditions and trends, in particular the estimated impact of COVID-19. Credit risk is partially mitigated by the State Auto Group's ability to cancel the policy if the policyholder does not pay the premium. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums for the pool is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. This is included in "other expenses" on the condensed consolidated statements of income and reflected in “due to/from affiliates” on our condensed consolidated balance sheets.

We generally manage our cash flows through current operational activity and maturing investments, without a need to liquidate any of our other investments; however, should our written premiums decline or paid losses increase significantly, or a combination thereof, we may need to liquidate investments at losses in order to meet our cash obligations. This action was not necessary for the three and nine months ended ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2021 and December 31, 2020, we had ~~$59.1~~$46.1 million and $90.7 million, respectively, in cash and cash equivalents, and ~~$2,685.0~~$2,678.8 million and $2,698.0 million, respectively, of total investments. Our available-for-sale fixed maturities included ~~$9.4~~$9.6 million and $9.7 million of securities on deposit with insurance regulators as required by law at ~~March 31,~~September 30, 2021 and December 31, ~~2020; in~~2020, 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.

Cash used in operating activities was ~~$18.9~~$54.6 million and ~~$28.0~~cash provided by operating activities was $21.8 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 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.

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

3748

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

~~fixed maturities, partially offset~~Cash provided by ~~an increase in the maturities of fixed maturities and the sale of fixed maturities and equity securities.~~

~~Cash used in financing~~investing activities was ~~$3.7~~$17.5 million and ~~cash provided by financing activities was $56.5~~$42.8 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively. The change was primarily driven by an increase in the purchases of fixed maturities partially offset by (i) higher proceeds from maturities of fixed maturities and (ii) a decrease in the ~~FHLB REPO loan~~purchases of equity securities.

Cash used in ~~2020.~~financing activities was $7.5 million and $11.2 million for the nine months ended September 30, 2021 and 2020, respectively. The change was primarily driven by an increase in stock option exercises when compared to the same 2020 period.

Borrowing Arrangements

FHLB Line of Credit

~~As of March 31, 2021,~~ State Auto P&C ~~had~~has an Open Line of Credit Commitment (the ~~"Prior OLC"~~"OLC") with the FHLB that ~~provided~~provides it with a $100.0 million open line of credit available for general corporate purposes. As of ~~March 31,~~September 30, 2021, no advances had been made under the ~~Prior~~ OLC. The ~~Prior~~ OLC ~~matured on~~matures in April 2, 2021, and on that date, State Auto P&C entered into a new Open Line of Credit Commitment (the “New OLC”) with the FHLB that provides it with a $100.0 million one-year open line of credit available for general corporate purposes.2022. Draws under the ~~New~~ OLC are to be funded with a daily variable rate advance with a term of no more than 180 days with interest payable monthly. All advances under the ~~New~~ OLC are fully secured by a pledge of specific investment securities of State Auto P&C.

FHLB Loans

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

State Auto P&C 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 ~~March 31,~~September 30, 2021 and 2020 were ~~4.39%~~4.32% and ~~5.78%~~4.44%, 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.

3849

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Other Reinsurance Arrangements

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

Adverse Development Cover

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

Property Catastrophe Treaty

Members of the State Auto Group maintain a property catastrophe excess of loss reinsurance agreement covering property catastrophe related events affecting at least two risks. This property catastrophe reinsurance agreement renewed as of July 1, ~~2020.~~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 ~~two~~three 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 ~~restatement~~reinstatement of the limit for 100% of the deposit premium.

Property Per Risk Treaty

As of ~~April~~July 1, ~~2020,~~2021, the State Auto Group renewed the property per risk excess of loss reinsurance agreement for a ~~15-month~~12-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 ~~March 31,~~September 30, 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.

Table of Contents

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 ~~affirmed~~placed the State Auto ~~Group’s~~Group 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 2020 Form 10-K. There have been no material changes from the information reported regarding Market Risk in the 2020 Form 10-K.

4051

Table of Contents

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.

4152

Table of Contents

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.

4253

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The proposed Transactions may not be completed on the terms or timeline currently contemplated, or at all, and the failure to complete the Transactions may adversely affect our share price and future business and financial results.

The 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 the proposed articles of incorporation and code of regulations for the reorganized State Auto Mutual (the “State Auto Mutual Member Approval”); and (ii) the parties obtaining certain specified governmental and regulatory approvals.

The Merger Agreement contains certain provisions giving LMHC, State Auto Mutual and State Auto Financial the right to terminate the 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 additional 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 termination 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 management 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 and their future role with us following the Transactions; and

•reputational harm due to the adverse perception of any failure to successfully 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 have an adverse effect on the trading price of our common shares.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

The pendency of the Transactions could adversely affect our business and operations

In connection with the pending 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 revenues, earnings, funds from operations, cash flows and expenses, regardless of whether the Transactions 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 retain and motivate 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 potential competing acquirer or could 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 things, a transaction that would result in any person (other than LMHC) becoming the beneficial owner of 15% or more of the voting power of our common shares or of our consolidated net revenues, net income or total assets. In addition, pursuant to the 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 potential 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 potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances under the 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.

4355

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Item 6. Exhibits


Exhibit No.						Description of Exhibits

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

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

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

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

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

101.SCH						Inline XBRL Taxonomy Extension Schema Document

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						Inline XBRL Taxonomy Definition Linkbase Document

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

4456

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

SIGNATURE

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


			State Auto Financial Corporation

Date: ~~May 7,~~November 4, 2021			/s/ Steven E. English
			Steven E. English
			Chief Financial Officer
			(Duly Authorized Officer and
			Principal Financial Officer)

4557


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