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 ~~June~~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 ~~July~~October 3029, 2021, the Registrant had 44,~~223~~512,~~498~~210 Common Shares outstanding.

Table of Contents

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

	Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed consolidated balance sheets – June 30, 2021 and December 31, 2020	1
	Condensed consolidated balance sheets – September 30, 2021 and December 31, 2020	1
	Condensed consolidated statements of income – Three months ended June 30, 2021 and 2020	2
	Condensed consolidated statements of income – Three months ended September 30, 2021 and 2020	2
	Condensed consolidated statements of income – Six months ended June 30, 2021 and 2020	3
	Condensed consolidated statements of income – Nine months ended September 30, 2021 and 2020	3
	Condensed consolidated statements of comprehensive income – Three months ended June 30, 2021 and 2020	4
	Condensed consolidated statements of comprehensive income – Three months ended September 30, 2021 and 2020	4
	Condensed consolidated statements of comprehensive income – Six months ended June 30, 2021 and 2020	4
	Condensed consolidated statements of comprehensive income – Nine months ended September 30, 2021 and 2020	4
	Condensed consolidated statements of stockholders’ equity - Three months ended June 30, 2021 and 2020	5
	Condensed consolidated statements of stockholders’ equity - Three months ended September 30, 2021 and 2020	5
	Condensed consolidated statements of stockholders’ equity - Six months ended June 30, 2021 and 2020	6
	Condensed consolidated statements of stockholders’ equity - Nine months ended September 30, 2021 and 2020	6
	Condensed consolidated statements of cash flows – Three months ended June 30, 2021 and 2020	7
	Condensed consolidated statements of cash flows – Nine months ended September 30, 2021 and 2020	7
	Notes to condensed consolidated financial statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2524
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	53
	Part II. Other Information
Item 1.	Legal Proceedings	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56
	Signatures	57

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

PART I – FINANCIAL STATEMENTS

Item 1. Condensed Consolidated Balance Sheets

($ and shares in millions, except per share amounts)	~~June~~September 30, 2021		December 31, 2020
(unaudited)
Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $2,134.9 and $2,117.0, respectively)	$	2,214.9	$	2,237.2
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	~~375~~376.50		389.7
Other invested assets	79.63		71.1
Other invested assets, at cost	1110.14		12.1
Notes receivable from affiliate	70.0		70.0
Total investments	2,~~751~~759.12		2,780.1
Cash and cash equivalents	~~108~~46.71		90.7
Accrued investment income and other assets	2630.47		29.7
Premiums receivable	1714.61		14.0
Deferred policy acquisition costs (affiliated net assumed $37.0 and $30.1, respectively)	127.2		122.2
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	19.76		24.3
Prepaid reinsurance premiums	8.87		8.3
Current federal income taxes	1.7		1.7
Due from affiliate	28.7		—
Net deferred federal income taxes	29.0		27.3
Current federal income taxes	1.8		1.7
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)	3.8		4.2
Total assets	$	3,~~094~~087.03	$	3,102.5
Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliated net assumed $441.9 and $438.8, respectively)	$	1,060.9	$	1,050.4
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 $494.7 and $452.4, respectively)	769.1		723.4
Unearned premiums (affiliated net assumed $516.1 and $452.4, respectively)	805.0		723.4
Notes payable (affiliates $15.3 and $15.3, respectively)	122.1		122.1
Pension and postretirement benefits	5245.20		66.2
Due to affiliate	~~16.2~~—		11.2
Other liabilities (affiliated net assumed $19.4 and $22.4, respectively)	95.2		119.2
Other liabilities (affiliated net assumed $18.8 and $22.4, respectively)	100.6		119.2
Total liabilities	2,~~115~~132.74		2,092.5
Stockholders’ equity:
Common stock, without par value. Authorized 100.0 shares; 51.0 and 50.7 shares issued, respectively, at stated value of $2.50 per share	127.5		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	128.4		126.8
Treasury stock, 6.9 and 6.9 shares, respectively, at cost	(118.8)		(118.4)
Additional paid-in capital	~~213~~218.1		213.3
Accumulated other comprehensive (loss) income	(1323.38)		13.9
Retained earnings	~~769~~751.80		774.4
Total stockholders’ equity	~~978~~954.39		1,010.0
Total liabilities and stockholders’ equity	$	3,~~094~~087.03	$	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)	Three months ended ~~June~~September 30
(unaudited)	2021		2020
Earned premiums (affiliated net assumed $92.2 and $61.6, respectively)	$	369.9	$	340.7
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)	17.70		17.79
Net investment gain	26.7		75.9
Net investment (loss) gain	(8.1)		20.0
Other income from affiliates	0.4		0.5
Total revenues	~~414~~391.71		~~434~~391.86
Losses and loss expenses (affiliated net assumed $107.8 and $73.2, respectively)	299.8		271.2
Losses and loss expenses (affiliated net assumed $69.0 and $48.7, respectively)	287.2		251.6
Acquisition and operating expenses (affiliated net assumed $27.0 and $21.0, respectively)	107.2		119.5
Acquisition and operating expenses (affiliated net assumed $29.4 and $24.2, respectively)	115.0		123.0
Interest expense (affiliates $0.1 and $0.3, respectively)	1.1		1.3
Interest expense (affiliates $0.2 and $0.1, respectively)	1.1		1.1
Other expenses	213.45		1.21
Total expenses	~~410~~416.58		~~393~~376.28
Income before federal income taxes	4.2		41.6
(Loss) income before federal income taxes	(25.7)		14.8
Federal income tax (benefit) expense:
Current	—(0.1)		~~(0.4)~~—
Deferred	3(11.63)		73.72
Total federal income tax expense	3.6		7.3
Total federal income tax (benefit) expense	(11.4)		3.2
Net income	$	0.6	$	34.3
Net (loss) income	$	(14.3)	$	11.6
Earnings per common share:
(Loss) earnings per common share:
Basic	$	(0.0132)	$	0.7826
Diluted	$	(0.0132)	$	0.7426

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)	~~Six~~Nine months ended ~~June~~September 30
(unaudited)	2021		2020
Earned premiums (affiliated net assumed $170.2 and $119.9, respectively)	$	725.8	$	671.2
Earned premiums (affiliated net assumed $274.9 and $189.2, respectively)	$	1,107.6	$	1,024.4
Net investment income (affiliates $1.4 and $1.4, respectively)	35.3		36.6
Net investment income (affiliates $2.1 and $2.1, respectively)	52.3		54.5
Net investment gain (loss)	6456.98		(5939.3)
Other income from affiliates	01.93		1.16
Total revenues	~~826~~1,218.90		~~649~~1,041.62
Losses and loss expenses (affiliated net assumed $221.5 and $84.1, respectively)	580.6		510.6
Losses and loss expenses (affiliated net assumed $290.5 and $132.8, respectively)	867.8		762.2
Acquisition and operating expenses (affiliated net assumed $64.1 and $41.9, respectively)	228.2		234.4
Acquisition and operating expenses (affiliated net assumed $93.5 and $65.9, respectively)	343.2		357.4
Interest expense (affiliates $0.3 and $0.5, respectively)	2.2		2.5
Interest expense (affiliates $0.5 and $0.6, respectively)	3.3		3.6
Other expenses	619.16		4.5.6
Total expenses	~~817.~~1,233.9		~~752~~1,128.08
Income (loss) before federal income taxes	9.8		(102.4)
Loss before federal income taxes	(15.9)		(87.6)
Federal income tax (benefit) expense:
Federal income tax benefit:
Current	—(0.1)		(0.4)
Deferred	(5.67)		(2118.75)
Total federal income tax expense (benefit)	5.6		(22.1)
Total federal income tax benefit	(5.8)		(18.9)
Net income (loss)	$	4.2	$	(80.3)
Net loss	$	(10.1)	$	(68.7)
Earnings (loss) per common share:
Loss per common share:
Basic	$	(0.1023)	$	(1.8357)
Diluted	$	(0.0923)	$	(1.8357)

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)

Consolidated Statements of Comprehensive (Loss) Income

($ in millions, except per share amounts)	Three months ended ~~June~~September 30
(unaudited)	2021		2020
Net income	$	0.6	$	34.3
Net (loss) income	$	(14.3)	$	11.6
Other comprehensive income, net of tax:
Other comprehensive (loss) income, net of tax:
Net unrealized holding gains on available-for-sale investments:
Unrealized holding gains	17.7		38.9
Unrealized holding (losses) gains	(17.1)		4.6
Reclassification adjustments for losses (gains) realized in net income	01.80		~~(1.~~0).2
Income tax expense	(3.9)		(7.9)
Income tax benefit (expense)	3.3		(1.1)
Total net unrealized holding gains on available-for-sale investments	14.6		30.0
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	4.45		3.67
Income tax expense	(0.6)		(0.4)
Total net unrecognized benefit plan obligations	2.23		1.67
Other comprehensive income	16.8		31.6
Other comprehensive (loss) income	(10.5)		5.4
Comprehensive income	$	17.4	$	65.9
Comprehensive (loss) income	$	(24.8)	$	17.0

Consolidated Statements of Comprehensive Loss

($ in millions, except per share amounts)	~~Six~~Nine months ended ~~June~~September 30
(unaudited)	2021		2020
Net income (loss)	$	4.2	$	(80.3)
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	(3956.56)		6974.95
Reclassification adjustments for gains realized in net income	(0.7)3		(3.42)
Income tax benefit (expense)	811.58		(1315.90)
Total net unrealized holding (loss) gains on available-for-sale investments	(3144.75)		5256.63
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost	(34.28)		(34.28)
Net actuarial loss	813.94		711.30
Income tax expense	(1.28)		(01.93)
Total net unrecognized benefit plan obligations	46.58		34.29
Other comprehensive (loss) income	(2737.27)		5561.82
Comprehensive loss	$	(2347.08)	$	(247.5)

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 Stockholders’ Equity

(in millions)	Three months ended ~~June~~September 30
	2021		2020
Common shares:
Balance at beginning of period	5051.90		50.67
Issuance of shares	0.13		~~0.1~~—
Balance at June 30	51.0		50.7
Balance at September 30	51.3		50.7
Treasury shares:
Balance at beginning of period	(6.9)		(6.9)
Balance at June 30	(6.9)		(6.9)
Balance at September 30	(6.9)		(6.9)
Common stock:
Balance at beginning of period	$	127.45	$	126.57
Issuance of shares	0.19		~~0.2~~—
Balance at June 30	$	127.5	$	126.7
Balance at September 30	$	128.4	$	126.7
Treasury stock:
Balance at beginning of period	$	(118.98)	$	(118.4)
Shares acquired on stock award exercises and vested restricted shares	0.1		—
Balance at September 30	$	(118.8)	$	(118.4)
Balance at June 30	$	(118.8)	$	(118.4)
Additional paid-in capital:
Balance at beginning of period	$	~~220~~213.1	$	~~209~~211.1
Issuance of common stock	05.85		(0.92)
Stock awards granted	(70.85)		1.12
Balance at June 30	$	213.1	$	211.1
Balance at September 30	$	218.1	$	212.1
Accumulated other comprehensive (loss) income:
Balance at beginning of period	$	(3013.13)	$	~~(13~~17.7)9
Change in net unrealized holding gains on available-for-sale investments	14(12.68)		303.07
Change in net unrecognized benefit plan obligations	2.23		1.67
Balance at June 30	$	(13.3)	$	17.9
Balance at September 30	$	(23.8)	$	23.3
Retained earnings:
Balance at beginning of period	$	~~773~~769.58	$	~~663~~693.2
Net income	0.6		34.3
Net (loss) income	(14.3)		11.6
Dividends declared, $0.10 and $0.10 per share (affiliates $2.6 and $2.6, respectively)	$	(4.35)	$	(4.34)
Balance at June 30	769.8		693.2
Balance at September 30	751.0		700.4
Total stockholders’ equity at June 30	$	978.3	$	930.5
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)	~~Six~~Nine months ended ~~June~~September 30
	2021		2020
Common shares:
Balance at beginning of year	50.7		50.4
Issuance of shares	0.36		0.3
Balance at June 30	51.0		50.7
Balance at September 30	51.3		50.7
Treasury shares:
Balance at beginning of year	(6.9)		(6.9)
Balance at June 30	(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	01.76		0.8
Balance at June 30	$	127.5	$	126.7
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 June 30	$	(118.8)	$	(118.4)
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	16.49		2.20
Stock awards granted	(12.61)		23.24
Balance at June 30	$	213.1	$	211.1
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	(3144.75)		5256.63
Change in unrecognized benefit plan obligations, net of tax	46.58		34.29
Balance at June 30	$	(13.3)	$	17.9
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 income	4.2		(80.3)
Net (loss) income	(10.1)		(68.7)
Dividends declared, $0.20 and $0.20 per share (affiliates $5.2 and $5.2, respectively)	$	(8.8)	$	(8.7)
Dividends declared, $0.30 and $0.30 per share (affiliates $7.8 and $7.8, respectively)	$	(13.3)	$	(13.1)
Balance at June 30	769.8		693.2
Balance at September 30	751.0		700.4
Total stockholders’ equity at June 30	$	978.3	$	930.5
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)	~~Six~~Nine months ended ~~June~~September 30
(unaudited)	2021		2020
Cash flows from operating activities:
Net income (loss)	$	4.2	$	(80.3)
Net loss	$	(10.1)	$	(68.7)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Depreciation and amortization, net	34.87		5.7.6
Share-based compensation	(19.5)		~~(0.5)~~—
Net investment (gain) loss	(6557.32)		5939.3
Changes in operating assets and liabilities:
Deferred policy acquisition costs	(59.03)		(812.96)
Accrued investment income and other assets	3(1.30)		0.6
Premiums receivables	(30.61)		(40.5)
Postretirement and pension benefits	(1117.75)		(1017.50)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums	4.13		(2322.85)
Other liabilities and due to/from affiliates, net	(1563.80)		~~(42~~8.0)5
Losses and loss expenses payable	109.53		3824.2
Unearned premiums	4581.76		5681.68
Deferred tax on share-based awards	(01.4)		(0.21)
Federal income taxes	6(7.02)		(2118.98)
Net cash used in operating activities	(25.7)		(32.2)
Net cash (used in) provided by operating activities	(54.6)		21.8
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale	(~~359~~570.4)		(~~280~~462.86)
Purchases of equity securities	(1224.90)		(4265.76)
Purchases of other invested assets	(0.59)		(67.93)
Maturities, calls and pay downs of fixed maturities available-for-sale	~~203~~327.35		~~186~~274.79
Sales of fixed maturities available-for-sale	~~135~~195.56		~~188~~216.31
Sales of equity securities	8387.54		3086.02
Sales of other invested assets	12.3		0.69
Disposals of property and equipment	—		0.2
Net cash provided by investing activities	5017.85		7542.48
Cash flows from financing activities:
Proceeds from issuance of common stock	26.12		32.08
Payments to acquire treasury stock	(0.4)		(0.9)
Payment of dividends	(813.83)		(813.71)
Proceeds from short-term debt	—		60.0
Net cash (used in) provided by financing activities	(7.1)		53.4
Repayment of short-term debt	—		(60.0)
Net increase in cash and cash equivalents	18.0		96.6
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	$	~~108~~46.71	$	~~174~~131.64
Supplemental disclosures:
Interest paid (affiliates $0.3 and $0.5, respectively)	$	2.2	$	2.3
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 ~~six~~nine months ended ~~June~~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. 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 ~~June~~September 30, 2021 and December 31, 2020:

($ millions)	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
June 30, 2021
September 30, 2021
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	~~461~~483.68	$	2625.91	$	(0.19)	$	~~488~~508.40
Obligations of states and political subdivisions	~~473~~470.17		2522.67		(0.15)		~~498~~492.69
Corporate securities	~~457~~507.78		1816.31		(0.39)		~~475~~523.70
U.S. government agencies mortgage-backed securities	~~742~~697.53		1613.64		(611.91)		~~752~~699.26
Total available-for-sale fixed maturities	$	2,~~134~~159.96	$	8777.43	$	(713.4)	$	2,~~214~~223.95
($ millions)	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
December 31, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	506.5	$	45.2	$	—	$	551.7
Obligations of states and political subdivisions	511.3		30.4		(0.2)		541.5
Corporate securities	459.9		23.4		—		483.3
U.S. government agencies mortgage-backed securities	639.3		22.9		(1.5)		660.7
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 ~~June~~September 30, 2021 and December 31, 2020:

($ millions, except # of positions)	Less than 12 months					12 months or more					Total
	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions
June 30, 2021
September 30, 2021
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	71115.10	$	(0.1.0)	1217	$	—	$	—	—	$	71115.10	$	(0.1.0)	1217
Obligations of states and political subdivisions	321.80		(0.13)		14	—3.7		—(0.1)		—1	324.87		(0.14)		15
Corporate securities	42142.56		(0.38)		924	—		—		—	42142.56		(0.38)		924
U.S. government agencies mortgage-backed securities	~~320~~358.59		(611.91)		7281	85.42		—(0.1)		58	~~328~~364.91		(611.92)		7789
Total temporarily impaired securities	$	~~437~~637.95	$	(713.42)	94126	$	8.49	$	—(0.2)	59	$	~~446~~646.34	$	(713.4)	99135


($ millions, except # of positions)	Less than 12 months					12 months or more					Total
	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions	Fair value		Unrealized losses		Number of positions
December 31, 2020
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	9.6	$	—	4	$	—	$	—	—	$	9.6	$	—	4
Obligations of states and political subdivisions	19.5		(0.2)		5	—		—		—	19.5		(0.2)		5
Corporate securities	1.5		—		2	—		—		—	1.5		—		2
U.S. government agencies mortgage-backed securities	136.1		(1.4)		35	7.0		(0.1)		3	143.1		(1.5)		38
Total temporarily impaired securities	$	166.7	$	(1.6)	46	$	7.0	$	(0.1)	3	$	173.7	$	(1.7)	49

The Company reviewed its available-for-sale fixed maturities at ~~June~~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

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 ~~June~~September 30, 2021:

($ millions)	Amortized cost		Fairvalue
Due in 1 year or less	$	~~135~~141.76	$	~~136~~142.87
Due after 1 year through 5 years	~~571~~592.03		~~596~~614.84
Due after 5 years through 10 years	~~154~~211.87		~~162~~218.2
Due after 10 years	~~530~~516.97		~~566~~548.96
U.S. government agencies mortgage-backed securities	~~742~~697.53		~~752~~699.26
Total	$	2,~~134~~159.96	$	2,~~214~~223.95

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 ~~June~~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 ~~June~~September 30, 2021, State Auto P&C had fixed maturities with fair values of approximately $3233.97 million pledged as collateral for the performance obligations under its reinsurance agreement with Home State County Mutual Insurance Company. In accordance with the terms of the trust agreement, State Auto P&C retains all rights regarding these securities, which are included in the “U.S. treasury securities and obligations of U.S. government agencies” classification of the Company’s fixed maturity securities portfolio.

Fixed maturities with fair values of $9.6 million and $9.7 million were on deposit with insurance regulators as required by law at ~~June~~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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ millions)	Three months ended ~~June~~September 30				~~Six~~Nine ~~months~~Months ~~ended~~Ended ~~June~~September 30
	2021		2020		2021		2020
Fixed maturities	$	15.42	$	1415.50	$	3046.80	$	2944.6
Equity securities	1.2		2.61		24.80		5.7.8
Cash and cash equivalents, and other	1.10		0.89		23.0		12.87
Investment income	17.74		1718.90		3553.60		3755.1
Investment expenses	—0.4		0.21		0.37		0.56
Net investment income	$	17.70	$	17.79	$	3552.3	$	3654.65

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

Proceeds on sales of investments were $~~220~~285.3 million and $~~218~~303.92 million for the ~~six~~nine months ended ~~June~~September 30, 2021, and 2020, respectively.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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

($ millions)	Three months ended ~~June~~September 30				~~Six~~Nine ~~months~~Months ~~ended~~Ended ~~June~~September 30
	2021		2020		2021		2020
Investment gain (loss), net:
Fixed maturities:
Realized gains on sales of securities	$	0.94	$	1.93	$	34.93	$	56.58
Realized losses on sales of securities	(1.74)		(01.95)		(34.26)		(23.16)
Net (loss) gain on fixed securities	(01.80)		1.(0.2)		(0.73)		3.42
Net gain (loss) on equity securities	24.9		69.1		56.4		(53.3)
Net (loss) gain on equity securities	(6.7)		18.2		49.7		(35.1)
Net gain (loss) on other invested assets	3.0		5.8		8.2		(9.6)
Net (loss) gain on other invested assets	(0.4)		2.0		7.8		(7.6)
Other net realized (loss)/gain	~~(0.4)~~—		—		(0.4)		0.2
Net gain (loss) on investments	$	26.7	$	75.9	$	64.9	$	(59.3)
Net (loss) gain on investments	$	(8.1)	$	20.0	$	56.8	$	(39.3)
Change in net unrealized holding gains (losses), net of tax
Change in net unrealized holding (losses) gains, net of tax
Fixed maturities	$	18(16.51)	$	374.98	$	(4056.23)	$	6671.53
Deferred federal income tax (liability) benefit	(3.9)		(7.9)		8.5		(13.9)
Deferred federal income tax benefit (liability)	3.3		(1.1)		11.8		(15.0)
Change in net unrealized holding gains (losses), net of tax	$	14.6	$	30.0	$	(31.7)	$	52.6
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 ~~six~~nine months ended ~~June~~September 30, 2021 on equity securities still held were $~~19.~~(8.4) million and $4637.16 million, respectively. The unrealized holding gains~~/(losses)~~ recognized for the three and ~~six~~nine months ended ~~June~~September 30, 2020 on equity securities still held were $7860.65 million and $~~(44~~15.7)8 million, respectively. The unrealized holding (losses)/gains recognized for the three and ~~six~~nine months ended ~~June~~September 30, 2021 on other invested assets still held were $3.(0.4) million and $87.27 million, respectively. The unrealized holding gains/(losses) recognized for the three and ~~six~~nine months ended ~~June~~September 30, 2020 on other invested assets still held were $52.80 million and $(97.6) 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 ~~June~~September 30, 2021, and December 31, 2020, the Company did not adjust any of the prices received from the pricing service.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

Fixed Maturities

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

Equities

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

Other Invested Assets

Included in other invested assets is one 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 $6362.02 million and $55.8 million at ~~June~~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.

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 ~~June~~September 30, 2021 and December 31, 2020:

($ millions)	Total		Level 1		Level 2
June 30, 2021
September 30, 2021
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	~~488~~508.40	$	—	$	~~488~~508.40
Obligations of states and political subdivisions	~~498~~492.69		—		~~498~~492.69
Corporate securities	~~475~~523.70		—		~~475~~523.70
U.S. government agencies mortgage-backed securities	~~752~~699.26		—		~~752~~699.26
Total available-for-sale fixed maturities	2,~~214~~223.95		—		2,~~214~~223.95
Equity securities:
Large-cap securities	~~158~~163.65		~~158~~163.65		—
Mutual and exchange traded funds	~~216~~212.95		~~216~~212.95		—
Total equity securities	~~375~~376.50		~~375~~376.50		—
Other invested assets	1617.61		1617.61		—
Total investments	$	2,~~607~~616.06	$	~~392~~393.1	$	2,~~214~~223.95
($ millions)	Total		Level 1		Level 2
December 31, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	551.7	$	—	$	551.7
Obligations of states and political subdivisions	541.5		—		541.5
Corporate securities	483.3		—		483.3
U.S. government agencies mortgage-backed securities	660.7		—		660.7
Total available-for-sale fixed maturities	2,237.2		—		2,237.2
Equity securities:
Large-cap securities	134.2		134.2		—
Mutual and exchange traded funds	255.5		255.5		—
Total equity securities	389.7		389.7		—
Other invested assets	15.3		15.3		—
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 ~~June~~September 30, 2021, was $109.69 million and the fair value of the Trust Securities was $0.5 million. The investments have been placed in Level 3 of the fair value hierarchy.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

Notes Receivable from Affiliate

The Company has two 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)	~~June~~September 30, 2021						December 31, 2020
	Carrying value		Fair value		Interest rate		Carrying value		Fairvalue		Interest rate
Notes receivable from affiliate, issued May 2019	$	70.0	$	7677.94	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)	~~June~~September 30, 2021						December 31, 2020
	Carrying value		Fair Value		Interest rate		Carrying value		Fair value		Interest rate
FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest	$	21.5	$	20.86	1.37	%	$	21.5	$	21.6	1.37	%
FHLB Loan due 2033: issued $85.0, May 2018 with fixed interest	85.3		103.7		3.96	%	85.3		107.1		3.96	%
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	15.3		15.3		4.3332	%	15.3		15.3		4.43	%
Total notes payable	$	122.1	$	~~139~~138.81			$	122.1	$	144.0

4. Deferred Acquisition Costs

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

($ millions)	2021		2020
Beginning balance at April 1	$	121.2	$	113.3
Beginning balance at July 1	$	127.2	$	120.0
Acquisition costs deferred	6867.41		~~100~~98.34
Acquisition costs amortized to expense	(62.48)		(9394.67)
Ending balance at June 30	$	127.2	$	120.0
Ending balance at September 30	$	131.5	$	123.7
Beginning balance at January 1	$	122.2	$	111.1
Acquisition costs deferred	~~129~~196.01		~~191~~289.48
Acquisition costs amortized to expense	(~~124~~186.08)		(~~182~~277.52)
Ending balance at June 30	$	127.2	$	120.0
Ending balance at September 30	$	131.5	$	123.7

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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ millions)	2021		2020
Losses and loss expenses payable, at beginning of period	$	1,050.4	$	1,066.5
Less: reinsurance recoverable on losses and loss expenses payable	24.3		13.6
Net balance at beginning of period	1,026.1		1,052.9
Incurred related to:
Current year	~~624~~910.12		~~518~~779.28
Prior years	(4342.54)		(717.6)
Total incurred	~~580~~867.68		~~510~~762.62
Paid related to:
Current year	~~303~~510.12		~~228~~420.98
Prior years	~~262~~343.46		~~265~~338.72
Total paid	~~565~~853.58		~~494~~759.60
Net balance at end of period	1,~~041~~040.21		1,~~068~~056.91
Plus: reinsurance recoverable on losses and loss expenses payable	19.76		3635.42
Losses and loss expenses payable, at end of period	$	1,~~060~~059.97	$	1,~~105~~091.3

The Company recorded more favorable development related to prior years’ loss and loss expense reserves for the ~~six~~nine months ended ~~June~~September 30, 2021, of $4342.54 million compared to $717.6 million for the same 2020 period. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves for the ~~six~~nine months ended ~~June~~September 30, 2021 was $4045.5 million, driven by favorable development of $3847.57 million in the commercial insurance segment. In the commercial insurance segment, ~~all products developed favorably, with~~ workers' compensation and middle market commercial ~~contributing~~contributed $1521.48 million and $1314.57 million, respectively, of favorable development.

For the ~~six~~nine months ended ~~June~~September 30, 2020, favorable development of prior accident year's non-catastrophe loss and ALAE reserves was $1231.58 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 contributing $916.05 million, $816.81 million and $814.03 million, respectively. Partially offsetting the favorable development was adverse development in the personal insurance segment and specialty run-off, which contributed $1220.12 million and $65.12 million, respectively. The adverse development in the personal insurance segment was primarily driven by personal auto, which contributed $1119.1 million of adverse development. The personal auto adverse development was driven by higher than expected severity of bodily injury claims and higher than expected frequency of property damage claims, primarily from 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 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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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

($ millions)	Three months ended ~~June~~September 30				~~Six~~Nine months ended ~~June~~September 30
	2021		2020		2021		2020
Premiums earned:
Assumed from external insurers and reinsurers	$	2019.27	$	2021.7	$	4261.07	$	4163.30
Assumed under Pooling Arrangement	~~369~~381.98		~~340~~353.72		~~725~~1,107.86		~~671~~1,024.24
Ceded to external insurers and reinsurers	(89.57)		(7.17)		(1727.52)		(1725.74)
Ceded under Pooling Arrangement	(277.71)		(~~279~~283.19)		(~~555~~832.67)		(~~551~~835.32)
Net assumed premiums earned	$	~~103~~114.97	$	7583.23	$	~~194~~309.74	$	~~143~~226.58
Losses and loss expenses incurred:
Assumed from external insurers and reinsurers	$	2117.60	$	1514.51	$	3653.1	$	2741.23
Assumed under Pooling Arrangement	~~299~~287.82		~~271~~251.26		~~580~~867.68		~~510~~762.62
Ceded to external insurers and reinsurers	(34.08)		(129.59)		(611.31)		(4655.09)
Ceded under Pooling Arrangement	(~~192~~218.02)		(~~198~~202.09)		(~~359~~577.13)		(~~426~~629.54)
Net assumed losses and loss expenses incurred	$	~~126~~81.42	$	7652.29	$	~~251~~332.35	$	65118.32

7. Income ~~Notes Payable and Open Line of Credit~~Taxes

~~FHLB~~Interim ~~Loans~~Period Tax Expense

~~State~~Due ~~Auto~~to ~~P&C~~the ~~has~~variability ~~an Open Line~~ of ~~Credit~~our ~~Commitment~~operating ~~(the~~results, ~~"OLC")~~we ~~with~~determined ~~the~~using ~~FHLB~~an ~~that~~estimated ~~provides~~full ~~State~~year ~~Auto~~2021 ~~P&C~~effective ~~with~~tax arate ~~$100.0 million~~to ~~one-year~~determine ~~open~~interim ~~line~~period oftax ~~credit~~expense(benefit) ~~available~~produces ~~for~~an ~~general~~income ~~corporate~~tax ~~purposes.~~benefit ~~The~~and ~~OLC~~effective ~~was~~rate ~~renewed~~that ~~for~~would ~~one~~not ~~year~~be onmeaningful ~~April~~for ~~2, 2021~~investors. ~~Draws~~Accordingly, ~~under~~ the ~~OLC~~Company ~~are~~calculated ~~to be funded with~~ a ~~daily~~year ~~variable~~to ~~rate~~date ~~advance~~tax ~~with~~benefit abased ~~term~~on ofthe noyear ~~more~~to ~~than~~date ~~180~~loss ~~days~~before ~~with~~federal ~~interest~~income ~~payable~~taxes ~~monthly.~~using ~~All advances under~~ the ~~OLC~~U.S. ~~are~~Federal ~~fully~~statutory ~~secured~~tax byrate aand ~~pledge~~adjusted offor ~~specific~~the ~~investment~~estimated ~~securities~~impact of ~~State~~permanent ~~Auto~~differences ~~P&C.~~and Asdiscrete ~~of June 30, 2021, no advances had been made under the OLC~~items.

~~State~~The ~~Auto~~following ~~P&C~~table ~~also~~sets ~~has~~forth athe ~~fifteen-year~~reconciliation ~~term~~between ~~loan~~actual ~~and~~federal aincome ~~ten-year~~tax ~~term~~(benefit) ~~loan~~expense ~~with~~and the ~~FHLB~~amount ~~that~~computed ~~are~~at ~~more fully disclosed in Note 10 of~~ the ~~Notes~~indicated tostatutory ~~Condensed~~rate ~~Consolidated~~for ~~Financial Statements in~~ the ~~2020~~three ~~Form 10-K. The foregoing OLC~~ and ~~term~~nine ~~loans~~months ~~from~~ended ~~the~~September ~~FHLB~~30, ~~are~~2021 ~~collectively~~and ~~referred to as the "FHLB Loans".~~2020:

8. Income Taxes


($ 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	%

The following table sets forth the reconciliation between actual federal income tax expense and the amount computed at the indicated statutory rate for the three and six months ended June 30, 2021 and 2020:

($ millions)	Three months ended June 30								Six months ended June 30
	2021				2020				2021				2020
Amount at statutory rate	$	0.9	21.0	%	$	8.7	21.0	%	$	2.1	21.0	%	$	(21.5)	21.0	%
Tax-exempt interest and dividends received deduction	(0.6)		(14.2)		(0.4)		(0.9)		(1.2)		(12.6)		(1.1)		1.1
Other, net	3.3		78.0		(1.0)		(2.5)		4.7		48.6		0.5		(0.5)
Federal income tax expense (benefit)	$	3.6	84.8	%	$	7.3	17.6	%	$	5.6	57.0	%	$	(22.1)	21.6	%

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)

98. Pension and Postretirement Benefit Plans

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

components of net periodic cost for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ millions)	Pension				Postretirement				Pension				Postretirement
	Three months ended June 30								Six months ended June 30
	Three months ended September 30								Nine months ended September 30
	2021		2020		2021		2020		2021		2020		2021		2020
Service cost	$	1.23	$	1.2	$	—	$	—	$	23.58	$	23.46	$	—	$	—
Interest cost	2.1		2.4		~~0.1~~—		0.12		46.23		47.82		0.1		0.24
Expected return on plan assets	(4.23)		(4.34)		—		—		(812.58)		(813.71)		—		—
Amortization of:
Negative prior service cost	—		—		(1.43)		(1.34)		—		—		(24.81)		(24.71)
Net actuarial loss/(gain)	3.54		2.3		(0.1)		—0.1		710.04		4.6.9		(0.12)		0.12
Net periodic cost (benefit)	$	2.65	$	1.65	$	(1.4)	$	(1.21)	$	57.27	$	34.16	$	(24.82)	$	(23.45)

The Company contributed $1015.0 million to its pension plan for the ~~six~~nine months ended ~~June~~September 30, 2021 ~~and expects to contribute an additional $5~~.~~0 million to its pension plan during 2021.~~

109. Other Comprehensive Income (Loss) 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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ millions)		Unrealized Gains and Losses on Available-for-Sale Securities		Benefit Plan Items		Total
Beginning balance at April 1, 2021		$	51.2	$	(81.3)	$	(30.1)
Beginning balance at July 1, 2021		$	65.8	$	(79.1)	$	(13.3)
Other comprehensive loss before reclassifications		14(13.06)		—		14(13.06)
Amounts reclassified from AOCI (a)		0.68		2.23		23.81
Net current period other comprehensive (loss) income		14(12.68)		2.23		16(10.85)
Ending balance at June 30, 2021		$	65.8	$	(79.1)	$	(13.3)
Ending balance at September 30, 2021		$	53.0	$	(76.8)	$	(23.8)
Beginning balance at April 1, 2020		$	63.0	$	(76.7)	$	(13.7)
Beginning balance at July 1, 2020		$	93.0	$	(75.1)	$	17.9
Other comprehensive income before reclassifications		303.85		—		303.85
Amounts reclassified from AOCI (a)		(0.8)2		1.67		01.89
Net current period other comprehensive income		303.07		1.67		315.64
Ending balance at June 30, 2020		$	93.0	$	(75.1)	$	17.9
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)

($ 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		(3144.17)		—		(3144.17)
Amounts reclassified from AOCI (a)		(0.6)2		46.58		37.90
Net current period other comprehensive income		(3144.75)		46.58		(2737.27)
Ending balance at June 30, 2021		$	65.8	$	(79.1)	$	(13.3)
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		5558.38		—		5558.38
Amounts reclassified from AOCI (a)		(2.75)		34.29		02.54
Net current period other comprehensive income		5256.63		34.29		5561.82
Ending balance at June 30, 2020		$	93.0	$	(75.1)	$	17.9
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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ millions)
Details about Accumulated Other		Three months ended ~~June~~September 30				Affected line item in the Condensed
Comprehensive Income Components						Consolidated Statements of Income
		2021		2020
Unrealized gains on available-for-sale fixed maturity investments		$	(01.80)	$	1.(0.2)	Realized gain on sale of securities
		(0.8)		1.0		Total before tax
		(1.0)		(0.2)		Total before tax
		0.2		~~(0.2)~~—		Tax expense
		(0.6)		0.8		Net of tax
		(0.8)		(0.2)		Net of tax
Amortization of benefit plan items
Negative prior service cost		1.6		1.6		(b)
Net actuarial loss		(4.45)		(3.67)		(b)
		(2.8)		(2.0)		Total before tax
		(2.9)		(2.1)		Total before tax
		0.6		0.4		Tax benefit
		(2.2)		(1.6)		Net of tax
		(2.3)		(1.7)		Net of tax
Total reclassifications for the period		$	(23.81)	$	(01.89)
(b)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see pension and postretirement benefit plans footnote for additional details).
($ millions)
Details about Accumulated Other		~~Six~~Nine months ended ~~June~~September 30				Affected line item in the Condensed
Comprehensive Income Components						Consolidated Statements of Income
		2021		2020
Unrealized gains on available-for-sale fixed maturity investments		$	(0.73)	$	3.42	Realized gains on sale of securities
		0.7		3.4		Total before tax
		(0.3)		3.2		Total before tax
		(0.1)		(0.7)		Tax expense
		0.1		(0.7)		Tax expense
		0.6		2.7		Net of tax
		(0.2)		2.5		Net of tax
Amortization of benefit plan items
Negative prior service cost		34.28		34.28		(b)
Net actuarial loss		(813.94)		(711.30)		(b)
		(5.7)		(4.1)		Total before tax
		(8.6)		(6.2)		Total before tax
		1.2		0.9		Tax benefit
		1.8		1.3		Tax benefit
		(4.5)		(3.2)		Net of tax
		(6.8)		(4.9)		Net of tax
Total reclassifications for the period		$	(37.90)	$	(02.54)
(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)

1110. Net ~~Earnings~~ (Loss) Earnings per Common Share

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

($ and shares in millions, except per share amounts)	Three months ended ~~June~~September 30				~~Six~~Nine months ended ~~June~~September 30
	2021		2020		2021		2020
Numerator:
Net income (loss) for basic earnings (loss) per common share	$	0.6	$	34.3	$	4.2	$	(80.3)
Net (loss) income for basic (loss) earnings per common share	$	(14.3)	$	11.6	$	(10.1)	$	(68.7)
Effect of dilutive share-based awards	—		(1.6)		—		—
Adjusted net (loss) income for diluted (loss) earnings per common share	$	(14.3)	$	11.6	$	(10.1)	$	(68.7)
Adjusted net income (loss) for diluted earnings (loss) per common share	$	0.6	$	32.7	$	4.2	$	(80.3)
Denominator:
Weighted average shares for basic earnings (loss) per common share	44.0		43.8		44.0		43.7
Weighted average shares for basic (loss) earnings per common share	44.3		43.8		44.1		43.7
Effect of dilutive share-based awards	~~0.8~~—		0.35		~~0.6~~—		—
Adjusted weighted average shares for diluted earnings (loss) per common share	44.8		44.1		44.6		43.7
Adjusted weighted average shares for diluted (loss) earnings per common share	44.3		44.3		44.1		43.7
Basic net earnings (loss) per common share	$	0.01	$	0.78	$	0.10	$	(1.83)
Basic net (loss) earnings per common share	$	(0.32)	$	0.26	$	(0.23)	$	(1.57)
Diluted net earnings (loss) per common share	$	0.01	$	0.74	$	0.09	$	(1.83)
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 ~~six~~three and nine months ended ~~June~~September 30, 2021 and 2020:

(shares in millions)	Three months ended September 30	~~Six months ended June 30~~	Nine months ended September 30
	2021	2020	2021	2020
Total number of antidilutive awards	1.0	—	—0.8	0.46

1211. 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.

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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ millions)	Three months ended ~~June~~September 30				~~Six~~Nine months ended ~~June~~September 30
	2021		2020		2021		2020
Revenue from external sources:
Insurance operations
Personal insurance	$	~~213~~217.12	$	~~202~~208.8	$	~~420~~638.91	$	~~400~~609.97
Commercial insurance	~~157~~164.64		~~137~~144.94		~~306~~470.37		~~270~~414.37
Specialty run-off	(0.8)2		—		(1.42)		—
Total insurance operations	~~369~~381.98		~~340~~353.72		~~725~~1,107.86		~~671~~1,024.24
Investment operations
Net investment income	17.70		17.79		3552.3		3654.65
Net investment gain (loss)	26.7		75.9		64.9		(59.3)
Net investment (loss) gain	(8.1)		20.0		56.8		(39.3)
Total investment operations	448.49		9337.69		~~100~~109.21		~~(22~~15.7)2
All other	0.4		0.5		01.93		1.16
Total revenue from external sources	~~414~~391.71		~~434~~391.86		~~826~~1,218.90		~~649~~1,041.62
Intersegment revenue	1.6		1.5		34.28		34.16
Total revenue	~~416~~392.37		~~436~~393.31		~~830.~~1,222.8		~~652~~1,045.78
Reconciling items:
Eliminate intersegment revenue	(1.6)		(1.5)		(34.28)		(34.16)
Total consolidated revenues	$	~~414~~391.71	$	~~434~~391.86	$	~~826~~1,218.90	$	~~649~~1,041.62
Segment income (loss) before federal income tax:
Segment (loss) income before federal income tax:
Insurance operations SAP underwriting (loss) gain
Personal insurance	$	(4421.20)	$	(4030.47)	$	(93114.6)	$	(4070.18)
Commercial insurance	(2.87)		~~(12~~14.4)		53.81		(4228.40)
Specialty run-off	~~(1.4)~~—		(610.34)		0.2		(617.71)
Total insurance operations	(4223.87)		(5926.17)		(87111.63)		(89115.29)
Investment operations
Net investment income	17.70		17.79		3552.3		3654.65
Net investment gain (loss)	26.7		75.9		64.9		(59.3)
Net investment (loss) gain	(8.1)		20.0		56.8		(39.3)
Total investment operations	448.49		9337.69		~~100~~109.21		~~(22~~15.7)2
All other	—		—		—		0.1
Total segment income (loss) before reconciling items	1.6		34.5		12.6		(111.8)
Total segment (loss) income before reconciling items	(14.8)		11.2		(2.2)		(100.6)
Reconciling items:
GAAP expense adjustments	53.71		85.76		47.45		1420.62
Interest expense on corporate debt	(1.1)		(1.31)		(23.23)		(23.56)
Corporate expenses	(212.09)		(0.39)		(517.09)		(23.76)
Total reconciling items	2(10.69)		73.16		(213.87)		913.40
Total consolidated income (loss) before federal income tax	$	4.2	$	41.6	$	9.8	$	(102.4)
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,~~859~~805.83 million and $2,870.8 million at ~~June~~September 30, 2021, and December 31, 2020, respectively.

1312. Contingencies and Litigation

In accordance with the Contingencies Topic of the FASB's Accounting Standards Codification, the Company accrues for a litigation-related liability when it is probable that such a liability has been incurred and the amount can be reasonably ~~estimated. The Company reviews all litigation on an ongoing basis when making accrual and disclosure decisions. For certain~~

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.

14. Subsequent Events

The Company has evaluated all events occurring after June 30, 2021 through August 6, 2021, the date the interim unaudited financial statements for the period ending June 30, 2021 were available to be issued, to determine whether any event required either recognition or disclosure in the financial statements.

Merger Agreement

On July 12, 2021, the Company and State Automobile Mutual Insurance Company, an Ohio mutual insurance company and the owner of approximately 58.8% of the Company’s issued and outstanding common stock as of the date thereof (“SAM” or “State Auto Mutual”), entered into an Agreement and Plan of Merger and Combination (the “Merger Agreement”) with Liberty Mutual Holding Company Inc., a Massachusetts mutual holding company (“LMHC”), Pymatuning, Inc., an Ohio corporation and wholly-owned indirect subsidiary of LMHC (“Merger Sub I”), and Andover, Inc., an Ohio corporation and wholly-owned direct subsidiary of LMHC (“Merger Sub II”).

The Merger Agreement provides for SAM to reorganize (in accordance with all applicable provisions of Sections 3913.25 to 3913.38 of the Ohio Revised Code) pursuant to a Plan of Reorganization (the “Plan of Reorganization”) adopted by the board of directors of SAM (the “SAM Board”), which reorganization shall be effectuated through a merger (pursuant to Section 3913.32(A) and Section 1702.411 of the Ohio Revised Code and Section 19T(b)(ii) of Chapter 175 of the Massachusetts General Laws) of Merger Sub II with and into SAM, with SAM surviving such merger as an Ohio domiciled reorganized stock insurance subsidiary of LMHC (SAM, as so reorganized, “Reorganized SAM”) and LMHC granting equity rights in LMHC to each SAM member upon the extinguishment of such SAM member’s equity rights in SAM at the effective time of such merger (the foregoing components of one simultaneous transaction, collectively, the “SAM Transaction”). Simultaneously with the SAM Transaction, the Merger Agreement provides for LMHC to effect the acquisition of the Company through the merger of Merger Sub I with and into the Company (the “Merger”) with the Company surviving the Merger as the surviving corporation (the Merger, together with the SAM Transaction, the “Transactions”).

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 completion of the Transactions is subject to the satisfaction or waiver of certain customary conditions, including, among others: (i) the adoption of the Merger Agreement by the Company’s shareholders (the “Company Shareholder Approval”); (ii) approval by the members of SAM of the Plan of Reorganization and the proposed articles of incorporation and code of regulations for Reorganized SAM (the “SAM Member Approval”); and (iii) the parties obtaining certain specified governmental and regulatory approvals. The Transactions are expected to close in 2022.

Subject to the terms and conditions set forth in the Merger Agreement, if the Transactions are consummated, at the effective time of the Merger (the “Effective Time”): (i) the members of SAM will become members of LMHC; and (ii) each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time (other than (1) shares owned by the Company as treasury shares and shares owned by LMHC and its subsidiaries, (2) shares owned by SAM or any of the Company’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 “Merger Consideration”).

The Merger Agreement contains certain provisions giving LMHC, SAM and the Company the right to terminate the Merger Agreement under certain circumstances. Subject to certain limitations, pursuant to the Merger Agreement:

•LMHC, SAM and the Company may terminate the Merger Agreement by mutual written consent, which consent shall have been approved by the action of their respective boards of directors;

•LMHC, SAM or the Company 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 non-appealable, (b) the SAM Member Approval shall not have been obtained following a vote thereon having been taken at a meeting of the members of SAM (the “SAM Member Meeting”), (c) the Company Shareholder Approval shall not have been obtained following a vote thereon having been taken at a meeting of the shareholders of the Company (the “Company Shareholder Meeting”) or (d) 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);

•The Company may terminate the Merger Agreement, prior to the receipt of the Company Shareholder Approval, to enter into a definitive agreement to implement a Superior Proposal (as such term is defined in the Merger Agreement);

•The Company or SAM 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) prior to the receipt of the Company Shareholder Approval, the special committee of the board of directors of the Company makes an Adverse Recommendation Change (as such term is defined in the Merger Agreement), (ii) the Company or SAM willfully and materially breach certain covenants in the Merger Agreement relating to the SAM Member Meeting, the Company Shareholder Meeting or the no-solicitation provisions set forth in the Merger Agreement or (iii) the Company or SAM 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).

Upon termination of the Merger Agreement, under specified circumstances, the Company (or, as applicable, SAM) may be required to pay a termination fee to LMHC in an aggregate amount of $70,793,307.

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 “~~second~~third quarter” as used below refers to the three months ended ~~June~~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 ~~June~~September 30, 2021 and December 31, 2020, and for the consolidated statements of income for the three and ~~six~~nine month periods ended ~~June~~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.

2524

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 State Auto Mutual, which ~~currently~~owned ~~owns~~ approximately 58.7% of State Auto Financial’s issued and outstanding common stock as of the 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 extinguishment of 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 merger of Merger Sub I with and into State Auto Financial, with State Auto Financial surviving such merger (the “Merger”). Subject to the terms and conditions set forth in the Merger Agreement, if the transactions contemplated by the Merger Agreement, including the Merger (collectively, the “Transactions”) are consummated, at the effective time of 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, ~~subject~~the toMerger ~~certain~~Agreement ~~customary~~has ~~closing~~been ~~conditions,~~adopted ~~including,~~by ~~but~~the ~~not~~shareholders ~~limited~~of ~~to,~~State ~~approval~~Auto byFinancial. The ~~our~~Transactions ~~shareholders,~~remain subject to approval by the members of State Auto Mutual, and ~~certain~~a ~~specified~~membership ~~governmental~~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 1A of this Form 10-Q, for a discussion of certain risks related to the proposed Transactions.

~~For~~A aspecial ~~detailed~~meeting ~~description~~ of shareholders (the ~~Merger~~“Special ~~Agreement~~Meeting”) ~~and~~of ~~the~~State ~~Transactions,~~Auto ~~please~~Financial ~~see~~was ~~Item~~held ~~1.01~~on ofSeptember ~~the~~29, ~~Current~~2021 ~~Report~~to vote on ~~Form~~the ~~8-K~~proposals ~~that~~identified wein 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 ~~July~~August 1227, 2021. At the Special Meeting, ~~and~~the aState ~~copy~~Auto ofFinancial shareholders voted to adopt the Merger Agreement, ~~filed~~with as99.5% ~~Exhibit~~of ~~2.1~~the ~~therewith~~common shares of State Auto Financial voting (including abstentions) in favor of such adoption.

~~Additional~~For ~~Information~~a detailed description of the Merger Agreement and ~~Where~~the toTransactions, ~~Find~~please Itsee 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.

In connection with the proposed Transactions, State Auto Financial will file with the SEC a proxy statement and may file or furnish other documents with the SEC regarding the proposed Transactions. This communication is not a substitute for the proxy statement or any other document that State Auto Financial may file with the SEC. The definitive proxy statement of State Auto Financial will be mailed to the shareholders of State Auto Financial. INVESTORS IN AND SECURITY HOLDERS OF STATE AUTO FINANCIAL ARE URGED TO READ THE PROXY STATEMENT AND ANY OTHER RELEVANT DOCUMENTS THAT ARE FILED WITH OR FURNISHED TO OR WILL BE FILED WITH OR WILL BE FURNISHED TO THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THESE DOCUMENTS, CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTIONS AND RELATED MATTERS. Investors and security holders may obtain free copies of the proxy statement (when available) and other documents filed with or furnished to the SEC by State Auto Financial through the web site maintained by the SEC at www.sec.gov or by contacting State Auto Financial’s investor relations department.25

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	%

2726

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

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

($ millions, except per share amounts)	Three months ended ~~June~~September 30						~~Six~~Nine months ended ~~June~~September 30
	2021			2020			2021			2020
GAAP Basis:
Total revenues	$	~~414~~391.71		$	~~434~~391.86		$	~~826~~1,218.90		$	~~649~~1,041.62
Income (loss) before federal income taxes	$	4.2		$	41.6		$	9.8		$	(102.4)
(Loss) income before federal income taxes	$	(25.7)		$	14.8		$	(15.9)		$	(87.6)
Net income (loss)	$	0.6		$	34.3		$	4.2		$	(80.3)
Net (loss) income	$	(14.3)		$	11.6		$	(10.1)		$	(68.7)
Basic earnings (loss) per share	$	0.01		$	0.78		$	0.10		$	(1.83)
Basic (loss) earnings per share	$	(0.32)		$	0.26		$	(0.23)		$	(1.57)
Diluted earnings (loss) per share	$	0.01		$	0.74		$	0.09		$	(1.83)
Diluted (loss) earnings per share	$	(0.32)		$	0.26		$	(0.23)		$	(1.57)
Stockholders’ equity							$	~~978~~954.39		$	~~930~~944.51
Return on average equity (LTM)							107.25		%	(3.98)		%
Book value per share							$	2221.1849		$	21.2657
Debt to capital ratio							11.13		%	1611.4		%
Cat loss and ALAE ratio	2110.63		%	2616.56		%	2017.92		%	1918.76		%
Non-cat loss and LAE ratio	5964.49		%	5354.16		%	5961.12		%	5655.48		%
Loss and LAE ratio	8175.02		%	7971.62		%	8078.04		%	7674.14		%
Expense ratio	2930.01		%	3534.18		%	31.40		%	34.9		%
Combined ratio	~~110~~105.03		%	~~114~~106.70		%	~~111~~109.4		%	~~111~~109.03		%
Premium written growth	810.02		%	119.73		%	57.94		%	1211.43		%
Investment yield	2.97		%	2.8		%	2.97		%	2.89		%
SAP Basis:
Cat loss and ALAE ratio	2110.63		%	2616.56		%	2017.92		%	1918.76		%
Non-cat loss and ALAE ratio	5459.72		%	4649.5		%	5355.12		%	5049.19		%
ULAE ratio	45.6		%	65.72		%	5.98		%	6.40		%
Loss and LAE ratio	8075.91		%	7971.73		%	7978.92		%	7674.25		%
Expense ratio	2728.54		%	33.68		%	3029.36		%	34.21		%
Combined ratio	~~108~~103.45		%	~~113~~105.31		%	~~110~~107.28		%	~~110~~108.46		%

	Twelve months ended June 30
	Twelve months ended September 30
	2021	2020
Net premiums written to surplus	1.67	1.7

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

•For the three and ~~six~~nine months ended ~~June~~September 30, 2021, net investment ~~gain~~loss was $268.71 million and net investment gain was $6456.98 million, respectively, which included $246.97 million of losses recognized on equity securities and $5649.47 million, ~~respectively,~~ of gains recognized on equity securities, respectively.

•The SAP catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 were 2110.63% and 2017.92%, respectively, or $8039.04 million and $~~151~~191.60 million, respectively. The 2021 ~~second~~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 8.5.6 points to the year to date loss and ALAE ratio. Approximately 60% and 70% of the catastrophe losses for the 2021 ~~second~~third quarter and year to date ~~catastrophe~~periods, ~~losses~~respectively, occurred within the homeowners line of business.

2827

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 ~~six~~nine months ended ~~June~~September 30, 2021 were 5459.72% and 5355.12%, respectively, or $~~202~~226.1 million and $~~385~~611.23 million, respectively.

◦The 2021 ~~second~~third quarter and year to date current accident year non-~~catastrophe~~cat ~~losses~~loss and ALAE ~~included~~ratios ~~4.3~~were ~~and~~impacted ~~5.6~~by ~~points,~~elevated ~~respectively,~~claim offrequency ~~favorable~~and ~~development~~severity ~~relating~~in topersonal ~~prior~~auto ~~years, or $15.9 million~~ and ~~$40.5~~commercial ~~million, respectively~~auto. ~~For~~The ~~the~~ 2021 ~~second quarter and~~ year to date, ~~the~~was ~~commercial~~also ~~insurance~~impacted ~~segment~~by ~~contributed~~elevated ~~$16.7~~frequency ~~million~~ and ~~$38.5~~severity ~~million,~~of ~~respectively,~~property oflosses ~~favorable~~in ~~development~~homeowners.

◦The ~~current~~2021 ~~accident~~third quarter and year to date non-~~cat~~catastrophe ~~loss~~losses and ALAE ~~ratios~~included ~~were~~1.3 ~~impacted~~and by4.1 ~~(i)~~points, ~~claim~~respectively, ~~frequency~~of infavorable ~~personal~~development ~~auto~~relating ~~and~~to ~~commercial~~prior ~~auto~~years, ~~returning~~or to$5.0 ~~near~~million ~~pre-COVID-19~~and ~~pandemic~~$45.5 ~~levels~~million, respectively. For the 2021 third quarter and ~~(ii)~~year ~~high~~to ~~frequency~~date, the commercial insurance segment contributed $9.2 million and ~~severity~~$47.7 million, respectively, of ~~property~~favorable ~~losses~~development.

~~Second~~•For ~~Quarter~~the three and ~~Year~~nine tomonths ~~Date~~ended ~~2020~~September ~~Overview~~30, 2021, we incurred the following expenses, included in "other expenses", as a result of the pending Merger:

◦$9.3 million due to an increase in the valuation of the Director RSU awards as a result of the increase in our stock price, and

◦$2.9 million of legal and investment banking fees and expenses.

Third Quarter and Year to Date 2020 Overview:

COVID-19

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

•For the three and ~~six~~nine months ended ~~June~~September 30, 2020, net investment gain was $7520.90 million and net investment loss was $5939.3 million, respectively, ~~which~~including ~~included~~$42.3 million and $8450.49 million, respectively, of ~~unrealized~~realized ~~gains~~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 $5445.39 million ofand ~~unrealized~~$56.5 ~~losses~~million, respectively, ~~from~~for ~~equity~~the ~~securities~~three and ~~other~~nine ~~invested~~months ~~assets~~ended September 30, 2020. The decline in the fair ~~values~~value of ~~our~~the ~~equity~~investments ~~securities~~in ~~and~~the ~~other~~MLP ~~invested~~ETFs ~~assets~~during ~~improved~~2020 ~~from~~was due to the ~~first~~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 ~~2020~~unrealized ~~but~~gains ~~were~~from ~~still~~equity ~~below~~securities ~~their~~and other invested assets. The fair values ~~when~~of ~~compared~~our toequity ~~year-end~~securities ~~2019~~and ~~primarily~~other ~~due~~invested toassets still held in our investment portfolio have mostly recovered from the disruption in global financial markets caused by the COVID-19 pandemic.

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

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

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

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

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

Other Results

•The SAP catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2020 were 2616.56% and 1918.76%, respectively, or $9058.47 million and $~~132~~191.30 million, respectively. The 2020 ~~second~~third quarter and year to date were impacted by ~~wind~~the ~~and~~Midwest ~~hail~~derecho ~~events~~ in August, with approximately 75% of the ~~South~~losses occurring in Iowa, as well as widespread wind and ~~Midwest~~hail events. Approximately 6050% 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 ~~2020~~ 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.

~~•The SAP non-cat loss and ALAE ratios for the three and six months ended June 30, 2020 were 46.5% and 50.1%, or $158.5 million and $335.6 million, respectively.~~ 28

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

~~◦The~~STATE ~~2020~~AUTO ~~second~~FINANCIAL ~~quarter~~CORPORATION ~~and~~AND year to date non-catastrophe losses and ALAE included 0.6 points and 1.9 points, respectively, of favorable development relating to prior years, or $2.0 million and $12.5 million, respectively. For the second quarter and year to date, the commercial insurance segment contributed $13.9 million and $30.7 million, respectively, of favorable development partially offset by (i) $5.7 million and $12.1 million, respectively, of adverse development from the personal insurance segment, and (ii) $6.2 million and $6.1 million, respectively, of adverse development from specialty run-off primarily due to an adverse court decision relating to an E&S casualty claim from 2016.SUBSIDIARIES

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

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

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

◦The 2020 third quarter and year to date non-catastrophe losses and ALAE included 5.5 points and 3.1 points, respectively, of favorable development relating to prior years, or $19.3 million and $31.8 million, respectively. For the 2020 third quarter and year to date, the commercial insurance segment contributed $26.5 million and $57.2 million, respectively, of favorable development, which was partially offset by $8.1 million and $20.2 million, respectively, of adverse development from the personal insurance segment. The 2020 year to date was also impacted by $5.2 million of adverse development from specialty run-off primarily due to an adverse court decision relating to an E&S casualty claim from 2016.

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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ in millions)	2021			2020			2021			2020
Three months ended June 30	Personal & Commercial			Personal & Commercial			Total(1)			Total(1)
Three months ended September 30	Personal & Commercial			Personal & Commercial			Total(1)			Total(1)
Net written premiums	$	~~413~~417.06		$	~~381~~379.70		$	~~412~~417.37		$	~~381~~379.61
Net earned premiums	~~370~~381.76			~~340~~353.72			~~369~~381.98			~~340~~353.72
Losses and LAE incurred:
Cat loss and ALAE	7939.25			9046.4			8039.04			9058.47
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(154.79)			(818.24)			(155.90)			(219.03)
Current accident year non-cat loss and ALAE	~~218~~230.19			~~160~~194.51			~~218~~231.01			~~160~~194.53
Total non-cat loss and ALAE	~~202~~226.40			~~152~~175.37			~~202~~226.1			~~158~~175.50
Total Loss and ALAE	~~281~~265.65			~~242~~222.71			~~282~~265.15			~~248~~233.97
ULAE	1721.23			2219.76			1721.14			2218.73
Total Loss and LAE	~~298~~286.8			~~265~~241.47			~~299~~286.29			~~271~~252.60
Underwriting expenses	~~113~~118.35			~~128~~127.18			~~113~~118.56			~~128~~127.29
Net underwriting loss	$	(4123.47)		$	(5216.83)		$	(4223.87)		$	(5926.17)
Cat loss and ALAE ratio	2110.43		%	2613.51		%	2110.63		%	2616.56		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(41.23)		%	(25.42)		%	(41.3)		%	(05.65)		%
Current accident year non-cat loss and ALAE ratio	5860.85		%	4755.1		%	5960.05		%	4755.10		%
Total non-cat loss and ALAE ratio	5459.62		%	4449.79		%	5459.72		%	4649.5		%
Total Loss and ALAE ratio	7669.05		%	7163.20		%	7669.35		%	7366.01		%
ULAE ratio	45.6		%	65.75		%	45.6		%	65.72		%
Total Loss and LAE ratio	8075.61		%	7768.95		%	8075.91		%	7971.73		%
Expense ratio	2728.4		%	33.67		%	2728.54		%	33.68		%
Combined ratio	~~108~~103.05		%	~~111~~102.52		%	~~108~~103.45		%	~~113~~105.31		%
(1)Includes specialty run-off

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

($ in millions)	2021			2020			2021			2020
Six months ended June 30	Personal & Commercial			Personal & Commercial			Total(1)			Total(1)
Nine Months Ended September 30	Personal & Commercial			Personal & Commercial			Total(1)			Total(1)
Net written premiums	$	~~772~~1,190.40		$	~~728~~1,107.3		$	~~771~~1,188.07		$	~~728.~~1,107.2
Net earned premiums	~~727~~1,108.28			~~671~~1,024.24			~~725~~1,107.86			~~671~~1,024.24
Losses and LAE incurred:
Cat loss and ALAE	~~153~~192.38			~~132~~178.26			~~151~~191.60			~~132~~191.30
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(4045.43)			(1837.60)			(4045.5)			(1231.58)
Current accident year non-cat loss and ALAE	~~425~~656.76			~~348~~542.01			~~425~~656.78			~~348~~542.14
Total non-cat loss and ALAE	~~385~~611.3			~~329~~505.41			~~385~~611.23			~~335~~510.6
Total Loss and ALAE	~~538~~804.61			~~461~~683.67			~~536~~802.83			~~467~~701.96
ULAE	4264.92			4362.39			4264.82			4361.36
Total Loss and LAE	~~581~~868.53			~~504~~746.96			~~579~~866.65			~~511~~763.2
Underwriting expenses	~~233~~352.50			~~248~~376.86			~~233~~352.84			~~249~~377.21
Net underwriting loss	$	(87111.85)		$	(8298.58)		$	(87111.63)		$	(89115.29)
Cat loss and ALAE ratio	2117.14		%	1917.74		%	2017.92		%	1918.76		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(54.61)		%	(23.86)		%	(54.61)		%	(13.91)		%
Current accident year non-cat loss and ALAE ratio	5859.62		%	5153.80		%	5859.73		%	5253.0		%
Total non-cat loss and ALAE ratio	5355.01		%	49.04		%	5355.12		%	5049.19		%
Total Loss and ALAE ratio	7472.15		%	6866.78		%	7472.04		%	6968.85		%
ULAE ratio	5.98		%	6.51		%	5.98		%	6.40		%
Total Loss and LAE ratio	8078.03		%	7572.29		%	7978.92		%	7674.25		%
Expense ratio	3029.26		%	34.20		%	3029.36		%	34.21		%
Combined ratio	~~110~~107.29		%	~~109~~106.49		%	~~110~~107.28		%	~~110~~108.46		%
(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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

Table 1

($ in millions)
Three months ended June 30, 2021	Personal Auto			Homeowners			Other Personal			Total
Three months ended September 30, 2021	Personal Auto			Homeowners			Other Personal			Total
Net written premiums	$	92.04		$	~~116~~127.2		$	2023.37		$	~~228~~243.53
Net earned premiums	9391.68			~~102~~106.15			1718.49			~~213~~217.12
Losses and LAE incurred:
Cat loss and ALAE	41.53			5522.2			90.57			6924.2
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(16.3)8			(2.5)			~~(0.2)~~—			14.03
Current accident year non-cat loss and ALAE	6267.62			4655.08			9.4			~~118~~132.04
Total non-cat loss and ALAE	6174.30			4853.53			9.24			~~119~~136.07
Total Loss and ALAE	6575.83			~~103~~75.75			1810.71			~~188~~160.29
ULAE	67.29			5.23			01.70			1214.12
Total Loss and LAE	7283.02			~~108~~80.98			1911.41			~~200~~175.31
Underwriting expenses	2325.80			2832.32			45.9			5763.01
Net underwriting loss	$	(2.2)		$	(35.1)		$	(6.9)		$	(44.2)
Net underwriting (loss) gain	$	(16.4)		$	(6.5)		$	1.9		$	(21.0)
Cat loss and ALAE ratio	41.84		%	5420.18		%	543.59		%	3211.51		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(17.4)		%	(2.54)		%	(10.41)		%	02.50		%
Current accident year non-cat loss and ALAE ratio	6673.92		%	4552.04		%	5449.05		%	5560.39		%
Total non-cat loss and ALAE ratio	6580.56		%	4750.50		%	5249.64		%	5562.89		%
Total Loss and ALAE ratio	7082.30		%	~~101~~70.68		%	~~107~~53.13		%	8874.30		%
ULAE ratio	68.76		%	5.0		%	36.90		%	56.76		%
Total Loss and LAE ratio	7790.06		%	~~106~~75.68		%	~~111~~59.03		%	9480.06		%
Expense ratio	2527.81		%	2425.4		%	24.17		%	2426.90		%
Combined ratio	~~102~~117.87		%	~~131~~101.02		%	~~135~~84.10		%	~~118~~106.96		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 2

($ in millions)
Three months ended June 30, 2020	Personal Auto			Homeowners			Other Personal			Total
Three months ended September 30, 2020	Personal Auto			Homeowners			Other Personal			Total
Net written premiums	$	~~104~~101.34		$	~~106~~111.14		$	1517.04		$	~~225~~230.42
Net earned premiums	103.30			8792.75			1113.83			~~202~~208.8
Losses and LAE incurred:
Cat loss and ALAE	4.1.9			5428.61			72.69			6632.39
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	58.90			(0.1)7			(0.16)			58.71
Current accident year non-cat loss and ALAE	4558.52			3650.7			34.98			86113.17
Total non-cat loss and ALAE	5166.42			3651.64			34.82			91121.8
Total Loss and ALAE	5568.51			9179.25			117.41			~~158~~154.17
ULAE	87.34			6.58			0.62			1514.4
Total Loss and LAE	6375.85			9786.73			127.03			~~173~~169.51
Underwriting expenses	3332.70			3133.52			4.5.2			6970.74
Net underwriting gain (loss)	$	5.8		$	(41.5)		$	(4.7)		$	(40.4)
Net underwriting (loss) gain	$	(4.5)		$	(27.0)		$	0.8		$	(30.7)
Cat loss and ALAE ratio	41.09		%	6230.34		%	6421.35		%	3215.78		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	5.7.8		%	(0.2)7		%	(04.81)		%	23.89		%
Current accident year non-cat loss and ALAE ratio	4456.04		%	4154.89		%	3336.2		%	4254.4		%
Total non-cat loss and ALAE ratio	4964.72		%	4155.6		%	32.41		%	4558.23		%
Total Loss and ALAE ratio	5366.71		%	~~103~~86.90		%	9653.76		%	7774.91		%
ULAE ratio	87.12		%	7.53		%	41.86		%	7.6.9		%
Total Loss and LAE ratio	6173.83		%	~~111~~93.43		%	~~101~~55.52		%	8581.50		%
Expense ratio	3231.34		%	29.78		%	3029.64		%	3130.05		%
Combined ratio	94104.17		%	~~141~~123.1		%	~~132~~84.16		%	~~116~~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)
Six months ended June 30, 2021	Personal Auto			Homeowners			Other Personal			Total
Nine months ended September 30, 2021	Personal Auto			Homeowners			Other Personal			Total
Net written premiums	$	~~181~~273.15		$	~~202~~329.46		$	3861.29		$	~~421~~665.70
Net earned premiums	~~189~~281.31			~~198~~304.49			3352.21			~~420~~638.91
Losses and LAE incurred:
Cat loss and ALAE	56.03			~~107~~129.68			19.18			~~131~~155.79
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(24.1)7			0(2.41)			(0.2)			(12.9)4
Current accident year non-cat loss and ALAE	~~119~~186.57			~~101~~156.19			1726.59			~~238~~370.15
Total non-cat loss and ALAE	~~117~~191.4			~~101~~154.58			1726.37			~~236~~372.29
Total Loss and ALAE	~~122~~197.47			~~209~~284.16			3646.45			~~367~~528.98
ULAE	1422.76			1319.92			12.9			3044.57
Total Loss and LAE	~~137~~220.13			~~223~~303.08			3849.34			~~398~~573.45
Underwriting expenses	5176.3			5487.80			1015.09			~~116~~179.12
Net underwriting gain (loss)	$	0.9		$	(79.4)		$	(15.1)		$	(93.6)
Net underwriting loss	$	(15.5)		$	(85.9)		$	(13.2)		$	(114.6)
Cat loss and ALAE ratio	2.63		%	5442.26		%	5738.40		%	3124.34		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(1.1)7		%	(0.27)		%	(0.64)		%	(0.4)		%
Current accident year non-cat loss and ALAE ratio	6366.14		%	51.04		%	5251.86		%	5658.61		%
Total non-cat loss and ALAE ratio	6268.01		%	5150.27		%	5251.2		%	5658.25		%
Total Loss and ALAE ratio	6470.64		%	~~105~~93.43		%	~~109~~89.62		%	8782.59		%
ULAE ratio	7.8.0		%	76.03		%	5.68		%	7.20		%
Total Loss and LAE ratio	7278.4		%	~~112~~99.46		%	~~115~~95.20		%	9489.79		%
Expense ratio	2827.39		%	2726.14		%	2625.26		%	2726.59		%
Combined ratio	~~100~~106.73		%	~~139~~126.50		%	~~141~~120.46		%	~~122~~116.28		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 4

($ in millions)
Six months ended June 30, 2020	Personal Auto			Homeowners			Other Personal			Total
Nine months ended September 30, 2020	Personal Auto			Homeowners			Other Personal			Total
Net written premiums	$	~~208~~310.93		$	~~187~~299.71		$	2845.37		$	~~424~~655.91
Net earned premiums	~~208~~311.0			~~170~~262.49			2235.58			~~400~~609.97
Losses and LAE incurred:
Cat loss and ALAE	4.6.5			6593.34			912.10			79111.09
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	1119.1			2.18			(1.17)			1220.12
Current accident year non-cat loss and ALAE	~~107~~165.57			74125.30			813.20			~~190~~303.07
Total non-cat loss and ALAE	~~118~~184.68			76127.48			711.13			~~202~~323.19
Total Loss and ALAE	~~123~~191.23			~~141~~221.72			1623.23			~~281~~435.18
ULAE	1523.60			1118.86			1.02			2842.48
Total Loss and LAE	~~138~~214.83			~~153~~239.58			1724.25			~~309~~478.56
Underwriting expenses	6698.5			5689.57			813.57			~~131~~201.59
Net underwriting gain (loss)	$	2.7		$	(39.6)		$	(3.2)		$	(40.1)
Net underwriting loss	$	(1.8)		$	(66.6)		$	(2.4)		$	(70.8)
Cat loss and ALAE ratio	2.21		%	3835.35		%	4033.4		%	1918.74		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	56.42		%	1.20		%	(4.85)		%	3.03		%
Current accident year non-cat loss and ALAE ratio	5153.62		%	4347.76		%	36.42		%	4749.48		%
Total non-cat loss and ALAE ratio	5759.04		%	4448.96		%	31.67		%	5053.41		%
Total Loss and ALAE ratio	5961.25		%	8384.21		%	7265.01		%	7071.15		%
ULAE ratio	7.54		%	67.91		%	43.4		%	7.10		%
Total Loss and LAE ratio	6668.79		%	9091.12		%	7668.45		%	7778.25		%
Expense ratio	31.97		%	30.10		%	30.30		%	3130.08		%
Combined ratio	98100.6		%	~~120~~121.2		%	~~106~~98.75		%	~~108~~109.23		%

The personal insurance segment's net written premiums for the three and ~~six~~nine months ended ~~June~~September 30, 2021 increased 15.47% and ~~decreased 0~~1.85%, respectively, when compared to the same 2020 periods (Tables 1 - 4). The 2021 ~~second~~third quarter and year to date were impacted by (i) increased rates in homeowners ~~and other personal~~, (ii) increased rates and new business growth in other personal, 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.

The personal insurance segment's SAP catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 improved 04.27 points and increased ~~11.~~6.0 points, respectively, when compared to the same 2020 periods (Tables 1 - 4). The 2021 ~~second~~third quarter was impacted by ~~lower~~higher frequency ~~and~~but lower severity of CAT events when compared to the same 2020 period. However, ~~which~~on ~~was~~a ~~impacted~~year byto ~~wind~~date ~~and~~basis, ~~hail~~2021 CAT events inwere both more frequent and more severe when compared to the ~~South~~same 2020 period. The 2021 third quarter and ~~Midwest,~~year ~~with~~to ~~Texas~~date ~~contributing~~were ~~approximately~~impacted ~~40%~~by ofwind and hail events, primarily in the ~~reported~~homeowners ~~catastrophe~~line ~~losses~~of business. The 2021 year to date was also impacted by winter storms Uri and Viola in the first quarter, which contributed 128.42 points to the cat loss and ALAE ratio. For the 2021 ~~second~~third quarter and year to date, approximately 50% and 80%, respectively, of the reported catastrophe losses occurred in Texas. The 2020 third quarter and year to date 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.

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 ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 increased 104.6 points and 5.84 points, respectively, when compared to the same 2020 periods (Tables 1 - 4).

The personal auto SAP non-catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 increased 1516.84 points and 58.07 points, respectively, when compared to the same 2020 periods,. ~~due~~The to2021 an increase inis attributable to the current accident year ~~ratios.~~ratio, ~~The~~which ~~2021 second quarter and year to date increase~~ was elevated due to an increase in claims frequency and severity when compared to the same 2020 periods,. ~~which~~Frequency ~~experienced~~was asuppressed ~~lower~~in ~~claims~~2020 ~~frequency~~due ~~attributable~~ to fewer miles driven as a result of shelter-in-place orders in response to the COVID-19 pandemic. ~~The~~Severity is higher in the 2021 ~~claims~~current ~~frequency~~accident ~~has~~year, ~~mostly~~driven ~~returned~~by tobodily ~~pre-COVID-19~~injury ~~pandemic~~coverage ~~levels~~as well as personal injury protection coverage in Michigan. Partially offsetting the ~~second quarter and~~ year to date ~~increases~~increase in the 2021 non-~~cat~~catastrophe loss ~~ratios was 1.4 points~~ and ~~1.1~~ALAE ~~points,~~ratios ~~respectively,~~was ofless ~~favorable~~adverse development of prior accident year losses ~~compared to 5~~.7 ~~points and 5.4 points, respectively, of adverse development in the same 2020 periods.~~ The 2021 ~~second~~third quarter and year to date prior accident year ~~favorable~~ development was ~~driven~~attributable byto ~~favorable~~(i) ~~development~~bodily oninjury ~~physical~~claims ~~damage~~from ~~coverages,~~multiple ~~primarily~~accident ~~from~~years ~~the~~and ~~2020~~(ii) ~~accident~~PIP ~~year~~claims in Michigan, ~~including~~primarily ~~higher~~from ~~than~~the ~~anticipated~~2020 ~~levels~~and of2019 ~~salvage~~accident ~~recoveries~~years. The 2020 ~~second~~third quarter and year to date prior accident year adverse development was driven by ~~(i)~~ higher than expected severity for bodily injury claims, ~~and (ii) higher than expected frequency for property damage claims, primarily~~ from ~~the~~multiple ~~2019~~ accident ~~year~~years.

The homeowners SAP non-catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 ~~increased~~improved 5.96 points and 6increased 2.31 points, respectively, when compared to the same 2020 periods,. ~~primarily~~The ~~driven~~improvement byin ~~higher~~the ~~frequency~~2021 ~~and~~third ~~severity~~quarter ratio was due to favorable development of ~~property~~prior ~~claims~~accident inyear losses, primarily from the ~~current~~2020 accident year, compared to adverse development in the 2020 third quarter. The ~~2021~~increase ~~second~~in ~~quarter~~the ~~and~~2021 year to date ~~ratios~~ratio ~~were~~was ~~also~~due ~~impacted~~to byhigher ~~adverse~~frequency ~~development~~and severity of ~~prior~~both ~~accident~~property ~~year~~and ~~losses,~~liability ~~primarily~~claims in the ~~2020~~current accident year,. ~~due~~Partially tooffsetting ~~higher~~the ~~than~~increase ~~anticipated~~in ~~emergence~~the on2021 ~~large~~non-catastrophe ~~losses~~loss ~~from~~and ~~the~~ALAE ~~fourth~~ratio ~~quarter~~was asfavorable ~~well~~development asof ~~higher~~prior ~~than~~accident ~~anticipated~~year ~~claim~~losses, ~~frequency~~primarily from the ~~second~~2020 ~~and~~accident ~~third~~year, ~~quarters~~compared to adverse development in the same 2020 period. The 2020 year to date prior accident year adverse development was primarily driven by higher severity on fourth quarter 2019 third-party liability and property claims that emerged during the first quarter of 2020.

The other personal SAP non-catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 increased 2017.23 points and 2019.65 points, respectively, when compared to the same 2020 periods, primarily driven by higher severity of fire losses in the current accident year.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Commercial Insurance Segment

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

Table 5

($ in millions)
Three months endedJune 30, 2021	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Three months endedSeptember 30, 2021	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Net written premiums	$	5751.49		$	3433.96		$	5044.40		$	1120.8		$	2218.56		$	7.5.4		$	~~184~~174.53
Net earned premiums	4548.07			33.18			41.37			1415.59			1719.80			5.93			~~157~~164.64
Losses and LAE incurred:
Cat loss and ALAE	1(0.92)			3.26			29.02			—			2.97			—			1015.03
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	~~(0.~~3).7			(2.34)			(51.42)			(6.94)			(0.15)			(12.74)			(169.72)
Current accident year non-cat loss and ALAE	2942.92			2316.3			2217.98			1211.67			96.86			13.69			~~100~~98.15
Total non-cat loss and ALAE	2945.69			2113.09			1716.56			5.73			96.71			~~(0.~~1).5			8389.43
Total Loss and ALAE	3145.57			2417.25			1925.58			5.73			128.68			~~(0.~~1).5			93104.46
ULAE	2.19			1.12			01.73			01.70			0.46			0.1			57.1
Total Loss and LAE	3348.6			2518.37			2027.21			6.43			139.04			—1.6			98111.57
Underwriting expenses	15.81			10.07			1514.67			57.51			76.01			21.47			5655.34
Net underwriting (loss) gain	$	(415.40)		$	(24.2)4		$	5(0.51)		$	2.65		$	(23.2)5		$	32.50		$	(2.87)
Cat loss and ALAE ratio	4(0.34)		%	910.67		%	422.90		%	—		%	1614.01		%	(0.54)		%	69.43		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(07.6)		%	(67.90)		%	(~~13.~~2.9)		%	(4740.53)		%	(02.94)		%	(2846.81)		%	(105.6)		%
Current accident year non-cat loss and ALAE ratio	6686.56		%	7048.20		%	5542.59		%	8773.49		%	5435.35		%	2872.08		%	6360.50		%
Total non-cat loss and ALAE ratio	6594.92		%	6341.30		%	4240.30		%	3933.96		%	5333.41		%	(026.8)7		%	5254.94		%
Total Loss and ALAE ratio	7093.28		%	7251.97		%	4762.20		%	3933.96		%	6947.42		%	(026.3)		%	5963.37		%
ULAE ratio	46.70		%	3.5		%	13.71		%	46.70		%	2.67		%	1.06		%	34.32		%
Total Loss and LAE ratio	7499.98		%	7655.42		%	4865.91		%	4439.6		%	7249.09		%	027.79		%	6267.69		%
Expense ratio	2729.32		%	2831.97		%	3033.84		%	4634.43		%	32.12		%	3032.92		%	3031.58		%
Combined ratio	~~102~~129.20		%	~~105~~86.39		%	7998.75		%	9173.09		%	~~104~~82.1		%	3160.61		%	9399.17		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 6

($ in millions)
Three months endedJune 30, 2020	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Three months endedSeptember 30, 2020	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Net written premiums	$	4140.40		$	3231.54		$	4640.50		$	1317.04		$	1715.50		$	5.40		$	~~156~~148.38
Net earned premiums	3135.6			31.14			3940.63			17.25			1314.75			45.71			~~137~~144.94
Losses and LAE incurred:
Cat loss and ALAE	0.71			115.95			64.97			—			43.62			—			2413.15
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(01.2)			(37.65)			(26.93)			(47.83)			(0.36)			(23.16)			(1326.95)
Current accident year non-cat loss and ALAE	1520.08			17.20			2220.01			1214.84			65.1			1.3.0			7480.4
Total non-cat loss and ALAE	1419.86			139.65			1913.18			87.01			54.85			(0.86)			6053.59
Total Loss and ALAE	1519.57			2515.50			2618.05			87.01			107.47			(0.86)			8467.64
ULAE	1.7			20.15			1.13			1.71			0.65			0.1			75.32
Total Loss and LAE	1721.24			2715.65			2719.18			98.72			118.02			(0.75)			9172.96
Underwriting expenses	13.7			1110.39			1716.74			67.08			76.7			21.09			5857.4
Net underwriting gain (loss)	$	0.75		$	(75.8)0		$	(54.2)1		$	1.5		$	(5.0.4)		$	3.47		$	~~(12~~14.4)
Cat loss and ALAE ratio	2.0.4		%	3817.43		%	1711.6		%	—		%	3322.41		%	~~(0.1)~~—		%	179.53		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(03.64)		%	(1123.78)		%	(715.35)		%	(2841.06)		%	(24.02)		%	(4372.96)		%	(1018.13)		%
Current accident year non-cat loss and ALAE ratio	4758.73		%	5554.3		%	5549.47		%	7482.32		%	4535.20		%	2760.54		%	5455.07		%
Total non-cat loss and ALAE ratio	4754.19		%	4330.65		%	4834.12		%	4640.36		%	4330.28		%	(1612.42)		%	4337.94		%
Total Loss and ALAE ratio	4955.13		%	8247.08		%	6545.78		%	4640.36		%	7652.69		%	(1612.52)		%	6146.47		%
ULAE ratio	54.38		%	61.75		%	23.83		%	96.94		%	43.54		%	1.89		%	5.3.6		%
Total Loss and LAE ratio	5460.41		%	8849.73		%	6849.51		%	5647.20		%	8156.13		%	(1410.73)		%	6650.73		%
Expense ratio	3334.12		%	34.87		%	3841.10		%	45.51		%	4345.41		%	3738.6		%	3738.36		%
Combined ratio	8794.53		%	~~123~~84.50		%	~~106~~90.61		%	~~101~~92.71		%	~~124~~101.54		%	2228.93		%	~~104~~88.09		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 7

($ in millions)
Six months ended June 30, 2021	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Nine months ended September 30, 2021	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Net written premiums	$	~~108~~160.76		$	69103.95		$	89133.7		$	2748.86		$	4261.40		$	1217.26		$	~~350~~525.70
Net earned premiums	85134.96			6498.86			80122.96			2945.76			3453.3			1016.70			~~306~~470.37
Losses and LAE incurred:
Cat loss and ALAE	2.1.9			812.40			514.02			—			68.18			—			2136.69
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(02.9)8			(46.59)			(1314.57)			(1521.48)			(12.50)			(25.71)			(3847.57)
Current accident year non-cat loss and ALAE	5597.35			4359.14			4866.53			2133.96			1521.39			37.54			~~187~~286.61
Total non-cat loss and ALAE	54100.43			3852.65			3551.06			611.58			1319.89			02.83			~~149~~238.14
Total Loss and ALAE	56102.52			4764.05			4065.08			611.58			1928.97			02.83			~~170~~275.73
ULAE	4.7.6			34.57			12.58			12.4			1.17			0.23			1219.45
Total Loss and LAE	61109.28			5069.52			4168.56			714.92			2130.04			12.06			~~183~~294.18
Underwriting expenses	3147.90			2132.52			3146.85			1320.01			1521.01			45.29			~~117~~172.48
Net underwriting (loss) gain	$	(722.2)		$	(7.2.8)		$	7.65		$	811.83		$	(1.7)8		$	57.5		$	53.81
Cat loss and ALAE ratio	21.4		%	12.92		%	611.26		%	—		%	1716.85		%	0.31		%	7.18		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(12.0)1		%	(7.0)		%	(1612.70)		%	(5147.8)		%	(43.57)		%	(2532.1)		%	(1210.61)		%
Current accident year non-cat loss and ALAE ratio	6472.4		%	6660.62		%	6054.01		%	73.78		%	4441.31		%	3246.91		%	6160.28		%
Total non-cat loss andALAE ratio	6374.45		%	5953.62		%	4342.31		%	2126.90		%	3937.84		%	714.80		%	4850.67		%
Total Loss and ALAE ratio	6575.89		%	7265.54		%	4953.57		%	2126.90		%	5753.69		%	814.1		%	5558.75		%
ULAE ratio	5.46		%	5.4.7		%	12.83		%	45.82		%	3.31		%	1.7		%	4.1		%
Total Loss and LAE ratio	7181.25		%	7770.91		%	5156.30		%	2631.72		%	6057.90		%	915.8		%	5962.86		%
Expense ratio	29.3		%	3031.81		%	3534.47		%	4641.74		%	3534.7		%	3433.05		%	3332.59		%
Combined ratio	~~100~~110.58		%	~~108~~101.72		%	8690.7		%	7372.46		%	9691.67		%	4349.83		%	9395.35		%

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Table 8

($ in millions)
Six months ended June 30, 2020	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Nine months ended September 30, 2020	Commercial Auto			Small Commercial Package			Middle Market Commercial			Workers' Comp			Farm & Ranch			Other Commercial			Total
Net written premiums	$	77117.8		$	6495.48		$	86126.8		$	3149.82		$	3247.3		$	1015.3		$	~~303~~452.42
Net earned premiums	6096.62			6192.48			75116.70			3654.94			2640.38			914.45			~~270~~414.37
Losses and LAE incurred:
Cat loss and ALAE	1.01			1521.50			3135.07			—			58.57			0.2			5366.27
Non-cat loss and ALAE
Prior accident years non-cat loss and ALAE	(01.35)			(916.05)			(814.03)			(816.81)			(1.17)			(37.51)			(3057.72)
Current accident year non-cat loss and ALAE	3152.64			3653.3			4969.56			2640.26			1015.12			47.3			~~158~~238.04
Total non-cat loss and ALAE	3150.39			2736.38			4155.53			1724.45			913.05			0.82			~~127~~181.32
Total Loss and ALAE	3252.30			4257.8			7291.50			1724.45			1422.52			1.0.4			~~180~~247.59
ULAE	34.29			34.72			34.25			3.4.5			1.16			0.34			1420.91
Total Loss and LAE	3556.59			4662.50			7595.75			2029.80			1523.68			10.38			~~195~~268.40
Underwriting expenses	2640.41			2334.10			3450.48			1422.97			1421.41			46.10			~~117~~174.37
Net underwriting (loss) gain	$	(10.38)		$	(83.2)		$	(3430.43)		$	1.2.7		$	(34.71)		$	47.07		$	(4228.40)
Cat loss and ALAE ratio	1.62		%	2522.36		%	4130.07		%	—		%	2021.83		%	1.92		%	1916.71		%
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and ALAE ratio	(01.45)		%	(1417.78)		%	(1012.63)		%	(2429.06)		%	(4.1)		%	(3649.93)		%	(1113.48)		%
Current accident year non-cat loss and ALAE ratio	5254.23		%	5957.15		%	6560.41		%	7174.16		%	3837.73		%	4550.57		%	5857.54		%
Total non-cat loss andALAE ratio	5152.8		%	4439.47		%	5447.8		%	4745.10		%	3433.62		%	81.64		%	4743.16		%
Total Loss and ALAE ratio	5354.40		%	6962.73		%	9578.85		%	4745.10		%	5554.45		%	102.56		%	6659.87		%
ULAE ratio	5.21		%	64.05		%	43.29		%	98.34		%	43.29		%	2.96		%	54.59		%
Total Loss and LAE ratio	5859.61		%	7566.78		%	~~100~~82.04		%	5653.4		%	5958.64		%	135.42		%	7264.36		%
Expense ratio	34.01		%	35.95		%	3940.60		%	46.82		%	44.46		%	39.63		%	38.6		%
Combined ratio	9293.62		%	~~111~~102.63		%	~~139~~122.64		%	~~103~~99.26		%	~~104~~103.0		%	5344.05		%	~~110~~103.92		%

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 ~~that~~in which we ~~previously~~had ~~were~~ not ~~writing~~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, ~~after~~with ~~completing~~ the ~~launch~~last instate ~~the~~having ~~last~~been ~~state~~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 3036 states asand ofWashington ~~July~~D.C. ~~2021~~after ~~with~~completing ~~subsequent~~the ~~state~~launch ~~rollouts~~in ~~scheduled~~the ~~throughout~~ 2021 third quarter.

The commercial insurance segment's net written premiums for the three and ~~six~~nine months ended ~~June~~September 30, 2021, increased 1817.01 points and 1516.61 points, respectively, when compared to the same 2020 periods (Tables 5 - 8),. ~~primarily~~The ~~driven~~third quarter and year to date was impacted by new business growth and rate increases in commercial auto and farm & ranch. The ~~net~~third ~~written~~quarter ~~premium~~increase ~~growth~~ was ~~partially~~also ~~offset~~impacted by arate ~~decrease~~increases in ~~net~~middle ~~written~~market ~~premiums~~commercial inand ~~workers’~~new ~~compensation~~business ~~due~~growth toin ~~our~~workers' ~~2020~~compensation ~~decision~~attributable to ~~not~~its ~~renew~~launch ~~and~~on noState ~~longer~~Auto ~~write nursing home business~~Connect.

The commercial insurance segment's SAP catastrophe loss and ALAE ratios for the three and nine months ended September 30, 2021 was flat and improved 8.3 points, respectively, when compared to the same 2020 periods (Tables 5 - 8). For the 2021 year to date, the number of catastrophe events increased compared to 2020, but the 2021 catastrophe events were less severe. The 2021 year to date was primarily impacted by winter storms Uri and Viola in the first quarter, which contributed 2.1 points to the loss and ALAE ratio. Approximately 80% of the 2021 losses occurred in Texas and the Midwest. The 2020 year to date was impacted by (i) a severe wind and hail storm, including tornadoes, in Tennessee, which contributed 5.1 points to the year to date cat loss and ALAE ratio, of which 3.7 points were from three large losses in Nashville, (ii) property losses

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

The commercial insurance segment's SAP catastrophe loss and ALAE ratios for the three and six months ended June 30, 2021 improved 11.1 points and 12.6 points when compared to the same 2020 periods (Tables 5 - 8). While the number of catastrophe events increased compared to 2020, the 2021 catastrophe events were less severe. The 2021 second quarter was primarily impacted by wind and hail events, while the 2020 second quarter and year to date were impacted by (i) severe weather events and (ii) property losses resulting from the civil unrest which added 41.65 points ~~and 2.4 points, respectively,~~ to the cat loss and LAE ratios~~. The 2021 year to date was primarily impacted by winter storms Uri and Viola in the first quarter~~, ~~which~~(iii) ~~contributed 3.1 points to the loss~~ and ~~ALAE ratio. Approximately 60% of~~ the ~~second~~Midwest ~~quarter~~derecho ~~and~~mentioned ~~year to date catastrophe losses occurred in Texas. The 2020 year to date was impacted by a severe wind and hail storm~~above, ~~including tornadoes, in Tennessee,~~ which ~~contributed~~added 91.05 points to the ~~year to date~~ cat loss and ALAE ~~ratio, of which 5~~ratios.~~7 points were from three large losses in Nashville.~~

The commercial auto SAP non-catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 increased 1839.83 points and 1121.67 points, respectively, when compared to the same 2020 periods, due to an increase in the current accident year ratios. The 2021 ~~second~~increase ~~quarter and year to date increases~~ in the current accident year ratios was primarily due to an increase in the frequency ofand ~~claims~~severity ~~involving~~of bodily injury ~~when~~claims. ~~compared~~Also, ~~to the same~~ 2020 ~~periods, which~~ 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 ~~frequency~~from ~~has~~multiple ~~mostly~~accident ~~returned~~years, compared to ~~pre-COVID-19~~favorable ~~pandemic~~development ~~levels.~~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 ~~six~~nine months ended ~~June~~September 30, 2021 increased 1910.75 points and 1513.25 points, respectively, when compared to the same 2020 periods, primarily due to ~~(i) an increase in the current accident year ratios and (ii)~~ less favorable development of prior accident year losses. The 2021 ~~second~~favorable ~~quarter~~development ~~and~~was ~~year~~primarily attributable to ~~date~~lower ~~current~~than ~~accident~~anticipated ~~year~~bodily ~~ratios~~injury ~~were~~severity ~~impacted~~from byaccident ~~higher~~years ~~frequency~~2019 and ~~severity~~prior. ofThe ~~property~~2020 ~~losses,~~favorable ~~including~~development aof ~~large~~prior ~~fire~~accident ~~loss~~year ~~that~~losses ~~added~~was ~~8.0~~driven ~~points~~by ~~and~~lower ~~4.1~~than ~~points~~expected tobodily ~~the~~injury ~~non-cat~~severity ~~loss~~from ~~and~~multiple ~~ALAE~~prior ~~ratios,~~accident ~~respectively~~years. The ~~2020~~2021 ~~second~~third quarter ~~and~~current accident year ratio improved when compared to ~~date~~the ~~current~~same ~~accident~~2020 ~~year~~period, ~~ratios~~due ~~were~~to ~~impacted~~lower byseverity ~~COVID-19~~of asproperty ~~the~~losses. ~~ultimate~~The ~~loss~~2021 ~~selections~~year ~~for~~to ~~the~~date ~~quarter~~current ~~and~~accident year ~~reflected~~ratio ~~the~~increased ~~impact~~when ofcompared ~~(i)~~to ~~low~~the ~~claim~~same ~~frequency~~2020 asperiod, adue ~~result~~to higher severity of ~~business~~property ~~shut~~losses ~~downs~~from ~~and~~the ~~reduced~~first ~~business~~half ~~activity~~of the year, ~~and~~including ~~(ii)~~a ~~legal~~large ~~defense~~fire ~~costs,~~loss ~~which~~that added 62.65 points ~~and 3.3 points, respectively~~ to the ~~quarter and~~ year to date non-cat loss ~~ratios~~ratio. The ~~2021~~2020 ~~second~~third quarter and year to date ~~favorable~~current ~~development~~accident ofyear ~~prior~~ratios ~~accident~~were ~~year~~impacted ~~losses~~by ~~was~~a ~~primarily~~decline ~~attributable~~in toclaim ~~lower~~frequency ~~than~~as ~~anticipated~~a ~~bodily~~result ~~injury~~of ~~severity~~reduced ~~from~~business ~~accident~~activity ~~years~~in ~~2019~~response ~~and~~to ~~prior~~COVID-19. The 2020 ~~favorable~~year ~~development~~to date current accident year was ~~primarily~~also ~~attributable~~impacted toby ~~lower~~increased ~~than~~COVID-19 ~~expected~~related ~~bodily~~legal ~~injury~~defense ~~severity~~costs, ~~from~~which ~~multiple~~added ~~accident~~2.1 ~~years~~points to the year to date non-cat loss ratio.

The middle market commercial SAP non-catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 ~~improved~~increased 5.8 points and ~~11.~~improved 5.7 points, respectively, when compared to the same 2020 periods,. ~~primarily~~The third quarter increase was due to ~~greater~~less favorable development of prior accident year losses, ~~driven~~when bycompared to the same 2020 period. The 2021 year to date favorable development onwas ~~liability~~primarily attributable to (i) bodily injury claims from multiple accident years ~~2019~~ and ~~prior~~on (ii) fire claims from the 2020 accident year. The 2020 ~~second~~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. The 2021 third quarter and year to date non-cat loss ~~ratio~~ratios ~~was~~were also impacted by improvement in the current accident year ~~ratio~~, primarily due ~~(i)~~to a lower ~~level~~claim frequency of ~~fire~~both ~~losses,~~bodily injury and ~~(ii)~~property ~~reduced~~damage ~~business activity in response to COVID-19~~claims.

The workers' compensation SAP non-catastrophe loss and ALAE ratios for the three and ~~six~~nine months ended ~~June~~September 30, 2021 improved 67.40 points and 2519.20 points, respectively, when compared to the same 2020 periods,. The 2021 third quarter improvement was due to ~~greater~~an ~~favorable~~improvement ~~development~~in ofthe ~~prior~~current accident year ~~losses~~ratio ~~across~~when ~~multiple~~compared ~~accident~~to ~~years~~the same 2020 period, which was impacted by (i) a large loss that added 10.0 ~~Partially~~points ~~offsetting~~to the ~~improvement~~non-cat loss ratio, and (ii) increased claims for businesses in the ~~2021~~medical ~~quarter~~field ~~and~~(e.g. ~~year~~nursing homes, hospitals) due to ~~date~~the ~~ratios~~COVID-19 pandemic, ~~when~~which ~~compared~~added 3.9 points to the ~~same~~non-cat ~~2020~~loss ~~periods,~~ratio. Partially offsetting the 2021 improvement in the third quarter current accident year ratio were two large losses that added 1715.69 points ~~and~~to ~~8.5~~the ~~points~~third toquarter ~~the~~non-cat ~~2021~~loss ~~second~~ratio. ~~quarter~~The ~~and~~2021 year to date ~~non-cat~~improvement ~~loss~~was ~~ratios,~~primarily ~~respectively~~due to more favorable development of prior accident year losses when compared to the same 2020 period. The ~~2020~~2021 ~~quarter~~favorable ~~and~~development was across multiple accident years. The 2021 year to date current accident year ~~ratios~~ratio ~~were~~was ~~impacted~~consistent bywith ~~claims~~the ~~for~~same ~~businesses~~2020 inperiod, ~~the~~which ~~medical~~was ~~field~~impacted ~~(e.g.~~by ~~nursing homes, hospitals~~(i) ~~due to~~ the COVID-19 pandemic, ~~which~~mentioned above that added 166.03 points ~~and~~to ~~7.5~~the ~~points,~~non-cat ~~respectively,~~loss toratio and (ii) the 2020 ~~second~~third quarter ~~and~~large ~~year~~loss mentioned above that added 3.2 points to ~~date~~the non-cat loss ~~ratios,~~ratio. ~~which~~Mostly ~~was~~offsetting ~~mostly~~the ~~offset~~2021 byyear ato ~~low~~date ~~claim~~improvement ~~frequency~~in ~~due~~the tocurrent ~~business~~accident ~~shut~~year ~~downs~~ratio ~~and~~were ~~reduced~~four ~~business~~large ~~and~~losses ~~employment~~that ~~activity~~added in11.4 ~~response~~points to the ~~COVID~~year to date non-19cat ~~pandemic~~loss ratio.

The farm & ranch SAP non-catastrophe loss and ALAE ~~ratios~~ratio for the ~~three~~nine ~~and six~~ months ended ~~June~~September 30, 2021 increased 104.2 points ~~and 5.2 points, respectively,~~ when compared to the same 2020 ~~periods~~period, primarily due to higher claim frequency in the current accident ~~quarter~~year.

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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ millions)	Three months ended ~~June~~September 30						~~Six~~Nine months ended ~~June~~September 30
	2021		2020		Change		2021		2020		$ Change
	(Favorable)/Adverse						(Favorable)/Adverse
Non-cat loss and ALAE:
Personal Insurance Segment:
Personal Auto	$	(16.3)8	$	58.90	$	(71.2)	$	(24.1)7	$	1119.1	$	(1314.24)
Homeowners	(2.5)		(0.1)7		2(3.62)		0(2.41)		2.18		(14.79)
Other Personal	~~(0.2)~~—		(0.16)		(0.1)6		(0.2)		(1.17)		01.95
Total Personal Insurance Segment	14.03		58.71		(43.78)		(12.9)4		1220.12		(1417.08)
Commercial Insurance Segment:
Commercial Auto	~~(0.~~3).7		(01.2)		(04.1)9		(02.9)8		(01.35)		(04.6)3
Small Commercial Package	(2.34)		(37.65)		15.31		(46.59)		(916.05)		49.56
Middle Market Commercial	(51.42)		(26.93)		~~(2.~~5).1		(1314.57)		(814.03)		(50.54)
Workers' Compensation	(6.94)		(47.83)		(20.1)9		(1521.48)		(816.81)		(65.67)
Farm & Ranch	(0.15)		(0.36)		0.21		(12.50)		(1.17)		(0.43)
Other Commercial	(12.74)		(23.16)		01.42		(25.71)		(37.51)		02.80
Total Commercial Insurance Segment	(169.72)		(1326.95)		(217.8)3		(3847.57)		(3057.72)		(79.8)5
Specialty run-off	(0.21)		6(0.29)		(60.4)8		(0.12)		65.12		(65.24)
Cat Loss and ALAE	5.03		011.96		4(6.13)		16.25		112.28		—(6.3)
ULAE	(20.1)8		1(2.03)		(3.1)		(43.24)		31.74		(74.98)
Total	$	~~(13~~1.0)1	$	(010.10)	$	~~(12~~11.9)1	$	(4342.54)	$	(717.6)	$	(3524.98)

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

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 ~~June~~September 30, 2021 and December 31, 2020:

($ millions)	~~June~~September 30, 2021		December 31, 2020		$ Change
Personal Insurance Segment:
Personal Auto	$	~~176~~187.3	$	174.4	$	112.9
Homeowners	~~127~~117.10		90.4		3626.76
Other Personal	23.92		15.8		87.14
Total Personal Insurance Segment	327.35		280.6		46.79
Commercial Insurance Segment:
Commercial Auto	~~112~~132.74		93.8		1838.96
Small Commercial Package	~~102~~97.84		95.9		61.95
Middle Market Commercial	~~154~~153.65		162.2		(78.67)
Workers’ Compensation	~~158~~153.0		176.4		(1823.4)
Farm & Ranch	2221.39		18.3		43.06
Other Commercial	26.20		25.6		0.64
Total Commercial Insurance Segment	~~576~~584.62		572.2		412.40
Specialty run-off:
E&S Property	117.36		24.3		(1316.07)
E&S Casualty	9590.36		112.2		(1621.96)
Programs	30.72		36.8		(6.16)
Total Specialty run-off	~~137~~128.34		173.3		(3644.09)
Total losses and loss expenses payable, net of reinsurancerecoverable on losses and loss expenses payable and allowance for credit losses	$	1,~~041~~040.21	$	1,026.1	$	1514.10

Losses and loss expenses payable increased $1514.10 million since December 31, 2020 primarily due to (i) agrowth ~~higher level of catastrophe losses~~ in the ~~personal~~commercial ~~insurance~~auto ~~segment~~line ~~discussed~~of ~~above~~business, and (ii) ~~growth~~a higher level of unpaid catastrophe losses in the ~~commercial~~homeowners ~~auto~~ line of business, partially offset by (i) the run-off from our previously exited specialty insurance business and (ii) continued ~~decline~~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.

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 ~~six~~nine months ended ~~June~~September 30, 2021 were $~~107~~115.20 million and $~~228~~343.2 million, respectively, compared to $~~119~~123.50 million and $~~234~~357.4 million for the same 2020 periods. The 2021 ~~second~~third quarter and year to date decreases in acquisition and operating expenses were primarily driven by ~~decreases~~(i) inless ~~IT development costs and~~ estimated variable agent compensation., ~~The 2021 second quarter was also impacted by a decrease in estimated variable associate compensation. Partially offsetting the 2021 quarter~~ and ~~year~~(ii) toreduced ~~date~~IT ~~decreases~~development ~~in our GAAP acquisition and operating expenses was an increase in the amortization of deferred acquisition~~ costs.

Investment Operations Segment

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

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

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

Composition of Investment Portfolio

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

($ millions)	~~June~~September 30, 2021		% of Total		December 31, 2020		% of Total
Cash and cash equivalents	$	~~108~~46.71	31.86	%	$	90.7	3.2	%
Fixed maturities, at fair value:
Fixed maturities	2,~~106~~113.7		7375.74	%	2,121.0		73.9	%
Treasury inflation-protected securities	~~108~~109.28		3.89	%	116.2		4.0	%
Total fixed maturities	2,~~214~~223.95		7779.53	%	2,237.2		77.9	%
Notes receivable from affiliate	70.0		2.45	%	70.0		2.4	%
Equity securities:
Large-cap securities	~~158~~163.65		5.58	%	134.2		4.7	%
Mutual and exchange traded funds	~~216~~212.95		7.6	%	255.5		8.9	%
Total equity securities	~~375~~376.50		13.14	%	389.7		13.6	%
Other invested assets:
International funds	6362.02		2.2	%	55.8		2.0	%
Other invested assets	1617.61		0.6	%	15.3		0.5	%
Total other invested assets	79.63		2.8	%	71.1		2.5	%
Other invested assets, at cost	1110.14		0.4	%	12.1		0.4	%
Total portfolio	$	2,~~859~~805.83	100.0	%	$	2,870.8	100.0	%

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 ~~June~~September 30, 2021:

($ millions)	Amortized cost		Fairvalue
Due in 1 year or less	$	~~135~~141.76	$	~~136~~142.87
Due after 1 year through 5 years	~~571~~592.03		~~596~~614.84
Due after 5 years through 10 years	~~154~~211.87		~~162~~218.2
Due after 10 years	~~530~~516.97		~~566~~548.96
U.S. government agencies mortgage-backed securities	~~742~~697.53		~~752~~699.26
Total	$	2,~~134~~159.96	$	2,~~214~~223.95

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 4.0411 and 4.72 as of ~~June~~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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

($ millions)	Three months ended ~~June~~September 30						~~Six~~Nine months ended ~~June~~September 30
	2021			2020			2021			2020
Gross investment income:
Fixed maturities	$	15.42		$	1415.50		$	3046.80		$	2944.6
Equity securities	1.2			2.61			24.80			5.7.8
Other	1.10			0.89			23.0			12.87
Total gross investment income	17.74			1718.90			3553.60			3755.1
Less: Investment expenses	—0.4			0.21			0.37			0.56
Net investment income	$	17.70		$	17.79		$	3552.3		$	3654.65
Average invested assets (at cost)	$	2,~~395~~552.53		$	2,~~552~~512.9		$	2,~~452~~551.80		$	2,~~579~~537.56
Annualized investment yield	2.97		%	2.8		%	2.97		%	2.89		%
Annualized investment yield, after tax	2.42		%	2.3		%	2.43		%	2.34		%
Net investment income, after tax	$	14.51		$	14.47		$	2943.12		$	3044.08
Effective tax rate	17.65		%	1817.97		%	17.5		%	1817.09		%

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 ~~June~~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.

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 ~~June~~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 ~~June~~September 30, 2021:

($ millions)	Cost or amortized cost		Gross unrealized holding gains		Gross unrealized holdinglosses		Fair value
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies	$	~~461~~483.68	$	2625.91	$	(0.19)	$	~~488~~508.40
Obligations of states and political subdivisions	~~473~~470.17		2522.67		(0.15)		~~498~~492.69
Corporate securities	~~457~~507.78		1816.31		(0.39)		~~475~~523.70
U.S. government agencies mortgage-backed securities	~~742~~697.53		1613.64		(611.91)		~~752~~699.26
Total available-for-sale fixed maturities	$	2,~~134~~159.96	$	8777.43	$	(713.4)	$	2,~~214~~223.95

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 ~~June~~September 30, 2021, and December 31, 2020, and the change in unrealized holding gains, net of deferred tax, for the ~~six~~nine months ended ~~June~~September 30, 2021:

($ millions)	~~June~~September 30, 2021		December 31, 2020		$ Change
Available-for-sale investments:
Unrealized holding gains:
Fixed maturities	$	8063.09	$	120.2	$	(4056.23)
Net deferred federal income tax	(1613.85)		(25.3)		811.58
Unrealized gains, net of tax	$	6350.24	$	94.9	$	(3144.75)

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

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 ~~June~~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 ~~six~~nine months ended ~~June~~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 ~~June~~September 30, 2021, and December 31, 2020, we had $~~108~~46.71 million and $90.7 million, respectively, in cash and cash equivalents, and $2,~~670~~678.08 million and $2,698.0 million, respectively, of total investments. Our available-for-sale fixed maturities included $9.6 million and $9.7 million of securities on deposit with insurance regulators as required by law at ~~June~~September 30, 2021, and December 31, 2020;, inrespectively. 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 $2554.76 million and cash provided by operating activities was $3221.28 million for the ~~six~~nine months ended ~~June~~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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Cash provided by investing activities was $5017.85 million and $7542.48 million for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively. The change was primarily driven by an increase in the ~~purchase~~purchases of fixed maturities, partially offset by an(i) ~~increase~~higher inproceeds ~~the~~from maturities of fixed maturities and ~~the~~(ii) ~~sale~~a ofdecrease ~~fixed~~in ~~maturities~~the ~~and~~purchases of equity securities.

Cash used in financing activities was $7.15 million and ~~cash provided by financing activities was~~ $5311.42 million for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively. The change was primarily driven by ~~proceeds~~an ~~from~~increase ~~the~~in ~~FHLB~~stock ~~REPO~~option ~~loan~~exercises inwhen compared to the same 2020 period.

Borrowing Arrangements

FHLB Line of Credit

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

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 in September 2030 and provides for interest-only payments during its term, with principal due in full at maturity, and may be prepaid without penalty after five years and each of the succeeding six months thereafter. The interest rate is fixed over the term of the loan 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 ~~June~~September 30, 2021, and 2020 were 4.3332% and 4.5544%, 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.

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 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, 2021. Under this reinsurance agreement, we retain the first $100.0 million of catastrophe loss, each occurrence, with a 5.0% co-participation on the next $340.0 million of covered loss, each occurrence which is broken down into three layers of $60.0 million, $110.0 million, and $170.0 million. The reinsurers are responsible for 95.0% of the catastrophe losses excess of $100.0 million up to $440.0 million, each occurrence. The State Auto Group is responsible for catastrophe losses above $440.0 million. There is also an automatic reinstatement of the limit, for 100% of the deposit premium.

Property Per Risk Treaty

As of July 1, 2021, the State Auto Group renewed the property per risk excess of loss reinsurance agreement for a 12-month term. Under this reinsurance agreement, the State Auto Group retains the first $10.0 million of covered loss, with reinsurers responsible for 100% of the loss excess of the $10.0 million retention up to $20.0 million.

Casualty and Workers' Compensation Treaties

As of July 1, 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 ~~June~~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)

CREDIT AND FINANCIAL STRENGTH RATINGS

On July 14, 2021, A.M. Best placed the State Auto Group under review with positive implications with a financial strength rating of A- (Excellent) following the announcement ~~that~~of the ~~State~~proposed ~~Auto~~Transactions ~~Group entered into an agreement and plan of merger and combination~~ with ~~Liberty~~LMHC ~~Mutual~~described ~~Holding~~elsewhere ~~Company~~in ~~Inc.~~this ~~(LMHC)~~Form ~~and its subsidiaries~~10-Q. The ratings will remain under review until all approvals are finalized, the ~~transaction~~Transaction ~~closes~~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.

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.

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.

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 ~~with LMHC~~ 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) ~~adoption of the Merger Agreement by the shareholders of State Auto Financial (the “State Auto Financial Shareholder Approval”); (ii)~~ 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 (~~iii~~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”), (c) the State Auto Financial Shareholder Approval shall not have been obtained following a vote thereon having been taken at a meeting of the shareholders of State Auto Financial (the “Company Shareholder Meeting”) or (dc) 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 may terminate the Merger Agreement, prior to the receipt of the State Auto Financial Shareholder Approval, to enter into a definitive agreement to implement a Superior Proposal (as such term is defined in the Merger Agreement);

•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) ~~prior to the receipt of the~~ State Auto Financial Shareholder Approval, the special committee of the board of directors of State Auto Financial (the “Special Committee”) makes an Adverse Recommendation Change (as such term is defined in the Merger Agreement), (ii) 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, ~~State~~the ~~Auto~~Special ~~Financial Shareholder~~ Meeting or the no-solicitation provisions set forth in the Merger Agreement or (~~iii~~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)

•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.

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, ~~LMHC~~pursuant ~~generally has an opportunity~~ to ~~offer to modify~~ the ~~terms of the~~ Merger Agreement, inunder ~~response~~specified tocircumstances, ~~any competing “superior proposal” (as defined in the Merger Agreement) that may be made to us before the board of directors of~~ State Auto Financial (or ~~the Special Committee~~, as applicable, ~~may~~State ~~withdraw~~Auto orMutual) ~~modify~~may ~~its~~be ~~recommendation~~required ~~in response~~ to ~~such~~pay ~~superior proposal or terminate~~ the ~~Merger~~Termination ~~Agreement~~Fee to ~~enter into such superior proposal~~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.

Table of Contents

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Item 6. Exhibits

ExhibitNo.						Description of Exhibits
10.01						First Amendment to the Outside Directors Restricted Share Unit Plan of State Auto Financial Corporation
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)

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: August 6, 2021			/s/ Steven E. English
Date: November 4, 2021			/s/ Steven E. English
			Steven E. English
			Chief Financial Officer
			(Duly Authorized Officer and
			Principal Financial Officer)

Filing Compare · State Auto Financial CORP