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OFFON

STATE AUTO FINANCIAL CORPORATION

(STFC)
  Report
Delayed Quote. Delayed Nasdaq - 01/19 04:00:00 pm
51.62 USD   -0.08%
2021INSIDER SELL : State Auto Financial
MT
2021STATE AUTO FINANCIAL CORPORATION : Ex-dividend day for
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2021INSIDER SELL : State Auto Financial
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STATE AUTO FINANCIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/06/2021 | 12:07pm EST
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 quarter" as used below refers to the three months
ended June 30 for the time period then ended. For a glossary of terms for State
Auto Financial Corporation and its subsidiaries and affiliates and a glossary of
selected insurance and accounting terms, see the section entitled "Important
Defined Terms Used in this Form 10-K" included in our Annual Report on Form 10-K
for the year ended December 31, 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 30, 2021 and December 31, 2020, and for the consolidated
statements of income for the three and six month periods ended June 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.
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               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
owns approximately 58.7% of State Auto Financial's issued and outstanding common
stock, 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. Subject to the terms
and conditions set forth in the Merger Agreement, if the transactions
contemplated by the Merger Agreement (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,
subject to certain customary closing conditions, including, but not limited to,
approval by our shareholders, approval by members of State Auto Mutual, and
certain specified governmental regulatory approvals.
For a detailed description of the Merger Agreement and the Transactions, please
see Item 1.01 of the Current Report on Form 8-K that we filed with the
Securities and Exchange Commission ("SEC") on July 12, 2021, and a copy of the
Merger Agreement filed as Exhibit 2.1 therewith.
Additional Information and Where to Find It
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.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



 POOLING ARRANGEMENT
The STFC Pooled Companies and the Mutual Pooled Companies participate in a quota
share reinsurance pooling arrangement referred to as the "Pooling Arrangement."
Under the Pooling Arrangement, State Auto Mutual assumes premiums, losses and
expenses from each of the Pooled Companies and in turn cedes to each of the
Pooled Companies a specified portion of premiums, losses and expenses based on
each of the Pooled Companies' respective pooling percentages. State Auto Mutual
then retains the balance of the pooled business.
The following table sets forth the participants and their participation
percentages in the Pooling Arrangement:
                STFC Pooled Companies:
                State Auto P&C                                  51.0  %
                Milbank                                         14.0
                SA Ohio                                            -
                Total STFC Pooled Companies                     65.0  %
                State Auto Mutual Pooled Companies:
                State Auto Mutual                               34.5  %
                SA Wisconsin                                       -
                Meridian Security                                  -
                Patrons Mutual                                   0.5
                RIC                                                -
                Plaza                                              -
                American Compensation                              -
                Bloomington Compensation                           -
                Total State Auto Mutual Pooled Companies        35.0  %


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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

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

($ millions, except per share

 amounts)                          Three months ended June 30            Six months ended June 30
                                      2021                2020            2021               2020
 GAAP Basis:
 Total revenues                 $      414.7           $ 434.8       $     826.9          $  649.6

Income (loss) before federal

 income taxes                   $        4.2           $  41.6       $       9.8          $ (102.4)
 Net income (loss)              $        0.6           $  34.3       $       4.2          $  (80.3)
 Basic earnings (loss) per
 share                          $       0.01           $  0.78       $      0.10          $  (1.83)

Diluted earnings (loss) per

 share                          $       0.01           $  0.74       $      

0.09 $ (1.83)

 Stockholders' equity                                                $     

978.3 $ 930.5

 Return on average equity (LTM)                                             10.2   %          (3.9) %
 Book value per share                                                $     22.18          $  21.26
 Debt to capital ratio                                                      11.1   %          16.4  %
 Cat loss and ALAE ratio                21.6   %          26.5  %           20.9   %          19.7  %
 Non-cat loss and LAE ratio             59.4   %          53.1  %           59.1   %          56.4  %
 Loss and LAE ratio                     81.0   %          79.6  %           80.0   %          76.1  %
 Expense ratio                          29.0   %          35.1  %           31.4   %          34.9  %
 Combined ratio                        110.0   %         114.7  %          111.4   %         111.0  %
 Premium written growth                  8.0   %          11.7  %            5.9   %          12.4  %
 Investment yield                        2.9   %           2.8  %            2.9   %           2.8  %

 SAP Basis:
 Cat loss and ALAE ratio                21.6   %          26.5  %           20.9   %          19.7  %
 Non-cat loss and ALAE ratio            54.7   %          46.5  %           53.1   %          50.1  %
 ULAE ratio                              4.6   %           6.7  %            5.9   %           6.4  %
 Loss and LAE ratio                     80.9   %          79.7  %           79.9   %          76.2  %
 Expense ratio                          27.5   %          33.6  %           30.3   %          34.2  %
 Combined ratio                        108.4   %         113.3  %          110.2   %         110.4  %


                                                 Twelve months ended June 30
                                                2021                    2020
           Net premiums written to surplus      1.6                     1.7


Second Quarter and Year to Date 2021 Overview:
•For the three and six months ended June 30, 2021, net investment gain was $26.7
million and $64.9 million, respectively, which included $24.9 million and $56.4
million, respectively, of gains recognized on equity securities.
•The SAP catastrophe loss and ALAE ratios for the three and six months ended
June 30, 2021 were 21.6% and 20.9%, respectively, or $80.0 million and $151.6
million, respectively. The 2021 second quarter was impacted by severe weather
events in Texas. The 2021 year to date was also impacted by winter storms Uri
and Viola in Texas, which added 8.5 points to the year to date loss and ALAE
ratio. Approximately 70% of the 2021 second quarter and year to date catastrophe
losses occurred within the homeowners line of business.
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               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 months ended June
30, 2021 were 54.7% and 53.1%, respectively, or $202.1 million and $385.2
million, respectively.
•The 2021 second quarter and year to date non-catastrophe losses and ALAE
included 4.3 and 5.6 points, respectively, of favorable development relating to
prior years, or $15.9 million and $40.5 million, respectively. For the 2021
second quarter and year to date, the commercial insurance segment contributed
$16.7 million and $38.5 million, respectively, of favorable development.
•The current accident year non-cat loss and ALAE ratios were impacted by (i)
claim frequency in personal auto and commercial auto returning to near
pre-COVID-19 pandemic levels, and (ii) high frequency and severity of property
losses.
Second 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 quarter and year to date, our results were
impacted as follows:
•For the three and six months ended June 30, 2020, net investment gain was $75.9
million and net investment loss was $59.3 million, respectively, which included
$84.4 million of unrealized gains and $54.3 million of unrealized losses,
respectively, from equity securities and other invested assets. The fair values
of our equity securities and other invested assets improved from the first
quarter of 2020 but were still below their fair values when compared to year-end
2019 primarily due to the disruption in global financial markets.
•The impact on the non-cat loss and ALAE current accident year included:
•A decline in claim frequency in personal auto and commercial auto due to a
reduction in miles driven as a result of the shelter-in-place orders,
•A decline in claim frequency in small commercial package, middle market
commercial and workers' compensation due to business shut downs and reduced
business and employment activity,
•Increased workers' compensation claims for businesses in the medical field such
as nursing homes and hospitals, due to employees being exposed to COVID-19 in
the course of their employment, and
•Increased legal defense costs in small commercial package and middle market
commercial due to litigation involving business interruption insurance claims.
Other Results
•The SAP catastrophe loss and ALAE ratios for the three and six months ended
June 30, 2020 were 26.5% and 19.7%, respectively, or $90.4 million and $132.3
million, respectively. The 2020 second quarter and year to date were impacted by
wind and hail events in the South and Midwest. Approximately 60% of the
catastrophe losses for the quarter were in our homeowners line of business. The
2020 year to date was also impacted by a first quarter 2020 wind and hail storm,
including tornadoes, in Tennessee that primarily impacted the middle market line
of business.
•The SAP non-cat loss and ALAE ratios for the three and six months ended June
30, 2020 were 46.5% and 50.1%, or $158.5 million and $335.6 million,
respectively.
•The 2020 second quarter and year to date current accident year non-cat loss and
ALAE ratios were impacted by (i) the COVID-19 pandemic discussed above, and (ii)
non-cat weather losses, primarily wind and hail. The 2020 year to date current
accident year non-cat loss and ALAE ratio was also impacted by large losses,
including fires, in the first quarter.
•The 2020 second quarter and year to date non-catastrophe losses and ALAE
included 0.6 points and 1.9 points, respectively, of favorable development
relating to prior years, or $2.0 million and $12.5 million, respectively. For
the second quarter and year to date, the commercial insurance segment
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.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Insurance Segments
We measure our top-line growth for our insurance segments based on net written
premiums, which provides us with an indication of how well we are doing in terms
of revenue growth before it is actually earned. Our policies provide a fixed
amount of coverage for a stated period of time, often referred to as the "policy
term." As such, our net written premiums are recognized as earned ratably over
the policy term. The unearned portion of written premiums, called unearned
premiums, is reflected on our balance sheet as a liability and represents our
obligation to provide coverage for the unexpired term of the policies.
Insurance industry regulators require our insurance subsidiaries to report their
financial condition and results of operations using SAP. We use SAP financial
results, along with industry standard financial measures determined on a SAP
basis and certain measures determined on a GAAP basis, to internally monitor the
performance of our insurance segments and reward our employees.
One of the more significant differences between GAAP and SAP is that SAP
requires all underwriting expenses to be expensed immediately and not deferred
over the same period that the premium is earned. In converting SAP underwriting
results to GAAP underwriting results, acquisition costs are deferred and
amortized over the periods the related written premiums are earned. For a
discussion of deferred acquisition costs, see "Critical Accounting Policies -
Deferred Acquisition Costs" section included in Item 7 of 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.




















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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



The following tables set forth certain key performance indicators based on SAP
for our insurance segments for the three and six months ended June 30, 2021 and
2020:
($ in millions)                        2021                    2020               2021          2020
                                    Personal &              Personal &
Three months ended June 30          Commercial              Commercial          Total(1)      Total(1)

Net written premiums           $         413.0         $         381.7         $ 412.3       $ 381.6
Net earned premiums                      370.7                   340.7           369.9         340.7
Losses and LAE incurred:
Cat loss and ALAE                         79.2                    90.4            80.0          90.4
Non-cat loss and ALAE
Prior accident years
non-cat loss and ALAE                    (15.7)                   (8.2)          (15.9)         (2.0)
Current accident year
non-cat loss and ALAE                    218.1                   160.5           218.0         160.5
Total non-cat loss and ALAE              202.4                   152.3           202.1         158.5
Total Loss and ALAE                      281.6                   242.7           282.1         248.9
ULAE                                      17.2                    22.7            17.1          22.7
Total Loss and LAE                       298.8                   265.4           299.2         271.6
Underwriting expenses                    113.3                   128.1           113.5         128.2
Net underwriting loss          $         (41.4)        $         (52.8)        $ (42.8)      $ (59.1)

Cat loss and ALAE ratio                   21.4    %               26.5    %       21.6  %       26.5  %
Non-cat loss and ALAE ratio
Prior accident years
non-cat loss and ALAE ratio               (4.2)   %               (2.4)   %       (4.3) %       (0.6) %
Current accident year
non-cat loss and ALAE ratio               58.8    %               47.1    %       59.0  %       47.1  %
Total non-cat loss and ALAE
ratio                                     54.6    %               44.7    %       54.7  %       46.5  %
Total Loss and ALAE ratio                 76.0    %               71.2    %       76.3  %       73.0  %
ULAE ratio                                 4.6    %                6.7    %        4.6  %        6.7  %
Total Loss and LAE ratio                  80.6    %               77.9    %       80.9  %       79.7  %
Expense ratio                             27.4    %               33.6    %       27.5  %       33.6  %
Combined ratio                           108.0    %              111.5    %      108.4  %      113.3  %

(1)Includes specialty
run-off


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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
   (a majority-owned subsidiary of State Automobile Mutual Insurance Company)


($ in millions)                                     2021                   2020                 2021               2020
                                                 Personal &             Personal &
Six months ended June 30                         Commercial             Commercial            Total(1)           Total(1)

Net written premiums                          $     772.4            $     728.3            $   771.0          $   728.1
Net earned premiums                                 727.2                  671.2                725.8              671.2
Losses and LAE incurred:
Cat loss and ALAE                                   153.3                  132.2                151.6              132.3
Non-cat loss and ALAE
Prior accident years non-cat loss and
ALAE                                                (40.4)                 (18.6)               (40.5)             (12.5)
Current accident year non-cat loss and
ALAE                                                425.7                  348.0                425.7              348.1
Total non-cat loss and ALAE                         385.3                  329.4                385.2              335.6
Total Loss and ALAE                                 538.6                  461.6                536.8              467.9
ULAE                                                 42.9                   43.3                 42.8               43.3
Total Loss and LAE                                  581.5                  504.9                579.6              511.2
Underwriting expenses                               233.5                  248.8                233.8              249.2
Net underwriting loss                         $     (87.8)           $     (82.5)           $   (87.6)         $   (89.2)

Cat loss and ALAE ratio                              21.1    %              19.7    %            20.9  %            19.7  %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and
ALAE ratio                                           (5.6)   %              (2.8)   %            (5.6) %            (1.9) %
Current accident year non-cat loss and
ALAE ratio                                           58.6    %              51.8    %            58.7  %            52.0  %
Total non-cat loss and ALAE ratio                    53.0    %              49.0    %            53.1  %            50.1  %
Total Loss and ALAE ratio                            74.1    %              68.7    %            74.0  %            69.8  %
ULAE ratio                                            5.9    %               6.5    %             5.9  %             6.4  %
Total Loss and LAE ratio                             80.0    %              75.2    %            79.9  %            76.2  %
Expense ratio                                        30.2    %              34.2    %            30.3  %            34.2  %
Combined ratio                                      110.2    %             109.4    %           110.2  %           110.4  %

(1)Includes specialty run-off


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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Personal Insurance Segment
The following tables set forth certain key performance indicators based on SAP
by major product line for our personal insurance segment for the three and six
months ended June 30, 2021 and 2020:
Table 1
($ in millions)
Three months ended June 30, 2021        Personal Auto      Homeowners       Other Personal       Total

Net written premiums                   $       92.0       $    116.2       $       20.3        $ 228.5
Net earned premiums                            93.6            102.1               17.4          213.1
Losses and LAE incurred:
Cat loss and ALAE                               4.5             55.2                9.5           69.2
Non-cat loss and ALAE
Prior accident years non-cat loss
and ALAE                                       (1.3)             2.5               (0.2)           1.0
Current accident year non-cat loss
and ALAE                                       62.6             46.0                9.4          118.0
Total non-cat loss and ALAE                    61.3             48.5                9.2          119.0
Total Loss and ALAE                            65.8            103.7               18.7          188.2
ULAE                                            6.2              5.2                0.7           12.1
Total Loss and LAE                             72.0            108.9               19.4          200.3
Underwriting expenses                          23.8             28.3                4.9           57.0
Net underwriting loss                  $       (2.2)      $    (35.1)      

$ (6.9) $ (44.2)


Cat loss and ALAE ratio                         4.8  %          54.1  %            54.5   %       32.5  %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss
and ALAE ratio                                 (1.4) %           2.5  %            (1.4)  %        0.5  %
Current accident year non-cat loss
and ALAE ratio                                 66.9  %          45.0  %            54.0   %       55.3  %
Total non-cat loss and ALAE ratio              65.5  %          47.5  %            52.6   %       55.8  %
Total Loss and ALAE ratio                      70.3  %         101.6  %           107.1   %       88.3  %
ULAE ratio                                      6.7  %           5.0  %             3.9   %        5.7  %
Total Loss and LAE ratio                       77.0  %         106.6  %           111.0   %       94.0  %
Expense ratio                                  25.8  %          24.4  %            24.1   %       24.9  %
Combined ratio                                102.8  %         131.0  %           135.1   %      118.9  %


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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Table 2
($ in millions)
Three months ended June 30, 2020        Personal Auto      Homeowners       Other Personal       Total

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

$ (4.7) $ (40.4)


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

















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               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

Net written premiums                   $      181.1       $    202.4       $        38.2       $ 421.7
Net earned premiums                           189.3            198.4                33.2         420.9
Losses and LAE incurred:
Cat loss and ALAE                               5.0            107.6                19.1         131.7
Non-cat loss and ALAE
Prior accident years non-cat loss
and ALAE                                       (2.1)             0.4                (0.2)         (1.9)
Current accident year non-cat loss
and ALAE                                      119.5            101.1                17.5         238.1
Total non-cat loss and ALAE                   117.4            101.5                17.3         236.2
Total Loss and ALAE                           122.4            209.1                36.4         367.9
ULAE                                           14.7             13.9                 1.9          30.5
Total Loss and LAE                            137.1            223.0                38.3         398.4
Underwriting expenses                          51.3             54.8                10.0         116.1
Net underwriting gain (loss)           $        0.9       $    (79.4)      

$ (15.1) $ (93.6)


Cat loss and ALAE ratio                         2.6  %          54.2  %             57.4  %       31.3  %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss
and ALAE ratio                                 (1.1) %           0.2  %             (0.6) %       (0.4) %
Current accident year non-cat loss
and ALAE ratio                                 63.1  %          51.0  %             52.8  %       56.6  %
Total non-cat loss and ALAE ratio              62.0  %          51.2  %             52.2  %       56.2  %
Total Loss and ALAE ratio                      64.6  %         105.4  %            109.6  %       87.5  %
ULAE ratio                                      7.8  %           7.0  %              5.6  %        7.2  %
Total Loss and LAE ratio                       72.4  %         112.4  %            115.2  %       94.7  %
Expense ratio                                  28.3  %          27.1  %             26.2  %       27.5  %
Combined ratio                                100.7  %         139.5  %            141.4  %      122.2  %

















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               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

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

$ (3.2) $ (40.1)


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


The personal insurance segment's net written premiums for the three and six
months ended June 30, 2021 increased 1.4% and decreased 0.8%, respectively, when
compared to the same 2020 periods (Tables 1 - 4). The 2021 second quarter and
year to date were impacted by (i) increased rates in homeowners and other
personal, (ii) 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 to address personal auto
profitability.
The personal insurance segment's SAP catastrophe loss and ALAE ratios for the
three and six months ended June 30, 2021 improved 0.2 points and increased 11.6
points, respectively, when compared to the same 2020 periods (Tables 1 - 4). The
2021 second quarter was impacted by lower frequency and severity of CAT events
when compared to the same 2020 period, which was impacted by wind and hail
events in the South and Midwest, with Texas contributing approximately 40% of
the reported catastrophe losses. The 2021 year to date was also impacted by
winter storms Uri and Viola in the first quarter, which contributed 12.4 points
to the cat loss and ALAE ratio. For the 2021 second quarter and year to date,
approximately 80% of the reported catastrophe losses occurred in Texas.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



The personal insurance segment's SAP non-catastrophe loss and ALAE ratios for
the three and six months ended June 30, 2021 increased 10.6 points and 5.8
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
months ended June 30, 2021 increased 15.8 points and 5.0 points, respectively,
when compared to the same 2020 periods, due to an increase in the current
accident year ratios. The 2021 second quarter and year to date increase was due
to an increase in claims frequency when compared to the same 2020 periods, which
experienced a lower claims frequency attributable to fewer miles driven as a
result of shelter-in-place orders in response to the COVID-19 pandemic. The 2021
claims frequency has mostly returned to pre-COVID-19 pandemic levels. Partially
offsetting the second quarter and year to date increases in the non-cat loss
ratios was 1.4 points and 1.1 points, respectively, of favorable 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 quarter and
year to date prior accident year favorable development was driven by favorable
development on physical damage coverages, primarily from the 2020 accident year,
including higher than anticipated levels of salvage recoveries. The 2020 second
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 2019 accident
year.
The homeowners SAP non-catastrophe loss and ALAE ratios for the three and six
months ended June 30, 2021 increased 5.9 points and 6.3 points, respectively,
when compared to the same 2020 periods, primarily driven by higher frequency and
severity of property claims in the current accident year. The 2021 second
quarter and year to date ratios were also impacted by adverse development of
prior accident year losses, primarily in the 2020 accident year, due to higher
than anticipated emergence on large losses from the fourth quarter as well as
higher than anticipated claim frequency from the second and third quarters. 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 months ended June 30, 2021 increased 20.2 points and 20.6 points,
respectively, when compared to the same 2020 periods, primarily driven by higher
severity of fire losses in the current accident year.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Commercial Insurance Segment
The following tables set forth certain key performance indicators based on SAP
by major product line for our commercial insurance segment for the three and six
months ended June 30, 2021 and 2020:
Table 5
($ in
millions)
Three months
ended                                   Small Commercial       Middle Market
June 30, 2021      Commercial Auto          Package              Commercial
        Workers' Comp      Farm & Ranch      Other Commercial        Total

Net written
premiums          $         57.4       $       34.9          $       50.4          $       11.8       $      22.5       $          7.5         $ 184.5
Net earned
premiums                    45.0               33.1                  41.3                  14.5              17.8                  5.9           157.6
Losses and LAE
incurred:
Cat loss and
ALAE                         1.9                3.2                   2.0                     -               2.9                    -            10.0
Non-cat loss
and ALAE
Prior accident
years non-cat
loss and ALAE               (0.3)              (2.3)                 (5.4)                 (6.9)             (0.1)                (1.7)          (16.7)
Current
accident year
non-cat loss
and ALAE                    29.9               23.3                  22.9                  12.6               9.8                  1.6           100.1
Total non-cat
loss and ALAE               29.6               21.0                  17.5                   5.7               9.7                 (0.1)           83.4
Total Loss and
ALAE                        31.5               24.2                  19.5                   5.7              12.6                 (0.1)           93.4
ULAE                         2.1                1.1                   0.7                   0.7               0.4                  0.1             5.1
Total Loss and
LAE                         33.6               25.3                  20.2                   6.4              13.0                    -            98.5
Underwriting
expenses                    15.8               10.0                  15.6                   5.5               7.0                  2.4            56.3
Net
underwriting
(loss) gain       $         (4.4)      $       (2.2)         $        5.5          $        2.6       $      (2.2)      $          3.5         $   2.8

Cat loss and
ALAE ratio                   4.3  %             9.6     %             4.9     %               -  %           16.0  %               0.5    %        6.4  %
Non-cat loss
and ALAE ratio
Prior accident
years non-cat
loss and ALAE
ratio                       (0.6) %            (6.9)    %           (13.2)    %           (47.5) %           (0.9) %             (28.8)   %      (10.6) %
Current
accident year
non-cat loss
and ALAE ratio              66.5  %            70.2     %            55.5     %            87.4  %           54.3  %              28.0    %       63.5  %
Total non-cat
loss and ALAE
ratio                       65.9  %            63.3     %            42.3     %            39.9  %           53.4  %              (0.8)   %       52.9  %
Total Loss and
ALAE ratio                  70.2  %            72.9     %            47.2     %            39.9  %           69.4  %              (0.3)   %       59.3  %
ULAE ratio                   4.7  %             3.5     %             1.7     %             4.7  %            2.6  %               1.0    %        3.3  %
Total Loss and
LAE ratio                   74.9  %            76.4     %            48.9     %            44.6  %           72.0  %               0.7    %       62.6  %
Expense ratio               27.3  %            28.9     %            30.8     %            46.4  %           32.1  %              30.9    %       30.5  %
Combined ratio             102.2  %           105.3     %            79.7     %            91.0  %          104.1  %              31.6    %       93.1  %


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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
   (a majority-owned subsidiary of State Automobile Mutual Insurance Company)


Table 6
($ in
millions)
Three months
ended                                   Small Commercial       Middle Market
June 30, 2020      Commercial Auto          Package              Commercial
        Workers' Comp      Farm & Ranch      Other Commercial        Total

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

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















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               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,                          Small Commercial       Middle Market
2021               Commercial Auto          Package              Commercial
        Workers' Comp      Farm & Ranch      Other Commercial       Total

Net written
premiums          $        108.7       $       69.9          $       89.7          $       27.8       $      42.4       $          12.2       $ 350.7
Net earned
premiums                    85.9               64.8                  80.9                  29.7              34.3                  10.7         306.3
Losses and LAE
incurred:
Cat loss and
ALAE                         2.1                8.4                   5.0                     -               6.1                     -          21.6
Non-cat loss
and ALAE
Prior accident
years non-cat
loss and ALAE               (0.9)              (4.5)                (13.5)                (15.4)             (1.5)                 (2.7)        (38.5)
Current
accident year
non-cat loss
and ALAE                    55.3               43.1                  48.5                  21.9              15.3                   3.5         187.6
Total non-cat
loss and ALAE               54.4               38.6                  35.0                   6.5              13.8                   0.8         149.1
Total Loss and
ALAE                        56.5               47.0                  40.0                   6.5              19.9                   0.8         170.7
ULAE                         4.7                3.5                   1.5                   1.4               1.1                   0.2          12.4
Total Loss and
LAE                         61.2               50.5                  41.5                   7.9              21.0                   1.0         183.1
Underwriting
expenses                    31.9               21.5                  31.8                  13.0              15.0                   4.2         117.4
Net
underwriting
(loss) gain       $         (7.2)      $       (7.2)         $        7.6          $        8.8       $      (1.7)      $           5.5       $   5.8

Cat loss and
ALAE ratio                   2.4  %            12.9     %             6.2     %               -  %           17.8  %                0.3  %        7.1  %
Non-cat loss
and ALAE ratio
Prior accident
years non-cat
loss and ALAE
ratio                       (1.0) %            (7.0)    %           (16.7)    %           (51.8) %           (4.5) %              (25.1) %      (12.6) %
Current
accident year
non-cat loss
and ALAE ratio              64.4  %            66.6     %            60.0     %            73.7  %           44.3  %               32.9  %       61.2  %
Total non-cat
loss and
ALAE ratio                  63.4  %            59.6     %            43.3     %            21.9  %           39.8  %                7.8  %       48.6  %
Total Loss and
ALAE ratio                  65.8  %            72.5     %            49.5     %            21.9  %           57.6  %                8.1  %       55.7  %
ULAE ratio                   5.4  %             5.4     %             1.8     %             4.8  %            3.3  %                1.7  %        4.1  %
Total Loss and
LAE ratio                   71.2  %            77.9     %            51.3     %            26.7  %           60.9  %                9.8  %       59.8  %
Expense ratio               29.3  %            30.8     %            35.4     %            46.7  %           35.7  %               34.0  %       33.5  %
Combined ratio             100.5  %           108.7     %            86.7     %            73.4  %           96.6  %               43.8  %       93.3  %















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               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,                          Small Commercial      Middle Market
2020               Commercial Auto          Package             Commercial 
      Workers' Comp      Farm & Ranch      Other Commercial       Total

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

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


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 we previously were not writing policies for farm &
ranch products. Our middle market commercial product launched on State Auto
Connect in March 2020 and is currently live in 30 states after completing the
launch in the last state in April 2021. Finally, our workers' compensation
product launched on State Auto Connect in the fourth quarter of 2020 and is
currently live in 30 states as of July 2021 with subsequent state rollouts
scheduled throughout 2021.
The commercial insurance segment's net written premiums for the three and six
months ended June 30, 2021, increased 18.0 points and 15.6 points, respectively,
when compared to the same 2020 periods (Tables 5 - 8), primarily driven by new
business growth and rate increases in commercial auto and farm & ranch. The net
written premium growth was partially offset by a decrease in net written
premiums in workers' compensation due to our 2020 decision to not renew and no
longer write nursing home business.
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               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 4.6 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 contributed 3.1 points to the loss and ALAE
ratio. Approximately 60% of the second quarter and year to date catastrophe
losses occurred in Texas. The 2020 year to date was impacted by a severe wind
and hail storm, including tornadoes, in Tennessee, which contributed 9.0 points
to the year to date cat loss and ALAE ratio, of which 5.7 points were from three
large losses in Nashville.
The commercial auto SAP non-catastrophe loss and ALAE ratios for the three and
six months ended June 30, 2021 increased 18.8 points and 11.6 points,
respectively, when compared to the same 2020 periods, due to an increase in the
current accident year ratios. The 2021 second quarter and year to date increases
in the current accident year ratios was due to an increase in the frequency of
claims involving bodily injury when compared 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 claims
frequency has mostly returned to pre-COVID-19 pandemic levels.
The small commercial package SAP non-catastrophe loss and ALAE ratios for the
three and six months ended June 30, 2021 increased 19.7 points and 15.2 points,
respectively, when compared to the same 2020 periods, due to (i) an increase in
the current accident year ratios and (ii) less favorable development of prior
accident year losses. The 2021 second quarter and year to date current accident
year ratios were impacted by higher frequency and severity of property losses,
including a large fire loss that added 8.0 points and 4.1 points to the non-cat
loss and ALAE ratios, respectively. The 2020 second quarter and year to date
current accident year ratios were impacted by COVID-19 as the ultimate loss
selections for the quarter and year reflected the impact of (i) low claim
frequency as a result of business shut downs and reduced business activity, and
(ii) legal defense costs, which added 6.6 points and 3.3 points, respectively to
the quarter and year to date non-cat loss ratios. The 2021 second quarter and
year to date favorable development of prior accident year losses was primarily
attributable to lower than anticipated bodily injury severity from accident
years 2019 and prior. The 2020 favorable development was primarily attributable
to lower than expected bodily injury severity from multiple accident years.
The middle market commercial SAP non-catastrophe loss and ALAE ratios for the
three and six months ended June 30, 2021 improved 5.8 points and 11.5 points,
respectively, when compared to the same 2020 periods, primarily due to greater
favorable development of prior accident year losses, driven by favorable
development on liability claims from accident years 2019 and prior. The 2020
second 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 year to date non-cat loss ratio was also
impacted by improvement in the current accident year ratio, primarily due (i) a
lower level of fire losses, and (ii) reduced business activity in response to
COVID-19.
The workers' compensation SAP non-catastrophe loss and ALAE ratios for the three
and six months ended June 30, 2021 improved 6.4 points and 25.2 points,
respectively, when compared to the same 2020 periods, due to greater favorable
development of prior accident year losses across multiple accident years.
Partially offsetting the improvement in the 2021 quarter and year to date
ratios, when compared to the same 2020 periods, were two large losses that added
17.6 points and 8.5 points to the 2021 second quarter and year to date non-cat
loss ratios, respectively. The 2020 quarter and year to date current accident
year ratios were impacted by claims for businesses in the medical field (e.g.
nursing homes, hospitals) due to the COVID-19 pandemic, which added 16.0 points
and 7.5 points, respectively, to the 2020 second quarter and year to date
non-cat loss ratios, which was mostly offset by a low claim frequency due to
business shut downs and reduced business and employment activity in response to
the COVID-19 pandemic.
The farm & ranch SAP non-catastrophe loss and ALAE ratios for the three and six
months ended June 30, 2021 increased 10.2 points and 5.2 points, respectively,
when compared to the same 2020 periods, primarily due to higher claim frequency
in the current accident quarter.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Losses and LAE Development
Losses and loss expenses represent the combined estimated ultimate liability for
claims occurring in a period, along with any change in the estimated ultimate
liability for claims occurring in prior periods.
The following table sets forth a tabular presentation of the development of the
prior accident years' ultimate liability by product for the three and six months
ended June 30, 2021 and 2020:
  ($ millions)                  Three months ended June 30                  

Six months ended June 30

                              2021              2020       Change             2021              2020       $ Change
                             (Favorable)/Adverse                             (Favorable)/Adverse
  Non-cat loss and
  ALAE:
  Personal
  Insurance
  Segment:
  Personal Auto        $      (1.3)           $  5.9      $  (7.2)     $      (2.1)           $ 11.1      $  (13.2)
  Homeowners                   2.5              (0.1)         2.6              0.4               2.1          (1.7)
  Other Personal              (0.2)             (0.1)        (0.1)            (0.2)             (1.1)          0.9
  Total Personal
  Insurance Segment            1.0               5.7         (4.7)            (1.9)             12.1         (14.0)

  Commercial
  Insurance
  Segment:
  Commercial Auto             (0.3)             (0.2)        (0.1)            (0.9)             (0.3)         (0.6)

Small Commercial

  Package                     (2.3)             (3.6)         1.3             (4.5)             (9.0)          4.5
  Middle Market
  Commercial                  (5.4)             (2.9)        (2.5)           (13.5)             (8.0)         (5.5)
  Workers'
  Compensation                (6.9)             (4.8)        (2.1)           (15.4)             (8.8)         (6.6)
  Farm & Ranch                (0.1)             (0.3)         0.2             (1.5)             (1.1)         (0.4)
  Other Commercial            (1.7)             (2.1)         0.4             (2.7)             (3.5)          0.8

Total Commercial

  Insurance Segment          (16.7)            (13.9)        (2.8)           (38.5)            (30.7)         (7.8)

  Specialty run-off           (0.2)              6.2         (6.4)            (0.1)              6.1          (6.2)
  Cat Loss and ALAE            5.0               0.9          4.1              1.2               1.2             -
  ULAE                        (2.1)              1.0         (3.1)            (4.2)              3.7          (7.9)
  Total                $     (13.0)           $ (0.1)     $ (12.9)     $     (43.5)           $ (7.6)     $  (35.9)

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

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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



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

 ($ millions)                                June 30, 2021      December 

31, 2020 $ Change

Personal Insurance Segment:

 Personal Auto                              $        176.3      $         174.4      $     1.9
 Homeowners                                          127.1                 90.4           36.7
 Other Personal                                       23.9                 15.8            8.1
 Total Personal Insurance Segment                    327.3                280.6           46.7

Commercial Insurance Segment:

 Commercial Auto                                     112.7                 93.8           18.9
 Small Commercial Package                            102.8                 95.9            6.9
 Middle Market Commercial                            154.6                162.2           (7.6)
 Workers' Compensation                               158.0                176.4          (18.4)
 Farm & Ranch                                         22.3                 18.3            4.0
 Other Commercial                                     26.2                 25.6            0.6
 Total Commercial Insurance Segment                  576.6                572.2            4.4
 Specialty run-off:
 E&S Property                                         11.3                 24.3          (13.0)
 E&S Casualty                                         95.3                112.2          (16.9)
 Programs                                             30.7                 36.8           (6.1)
 Total Specialty run-off                             137.3                173.3          (36.0)

Total losses and loss expenses payable,

net of reinsurance

recoverable on losses and loss expenses

payable and allowance for credit losses $ 1,041.2 $ 1,026.1 $ 15.1



Losses and loss expenses payable increased $15.1 million since December 31, 2020
primarily due to (i) a higher level of catastrophe losses in the personal
insurance segment discussed above and (ii) growth in the commercial auto line of
business, partially offset by (i) the run-off from our previously exited
specialty insurance business and (ii) continued decline in the workers
compensation line of business.
We conduct quarterly reviews of loss development and make judgments in
determining the reserves for losses and loss expenses. Several factors are
considered by us when estimating ultimate liabilities, including consistency in
relative case reserve adequacy, consistency in claims settlement practices,
recent legal developments, historical data, actuarial projections, exposure
changes, anticipated inflation, current business conditions, catastrophe
development, late reported claims, and other reasonableness tests. Our quarterly
review also included the potential impact of COVID-19 on our reserves for losses
and loss expenses. For a discussion of the most significant risks and
uncertainties that could impact our results of operations, financial position,
liquidity, and cash flows as a result of the COVID-19 pandemic, see "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.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Acquisition and Operating Expenses
Our GAAP acquisition and operating expenses for the three and six months ended
June 30, 2021 were $107.2 million and $228.2 million, respectively, compared to
$119.5 million and $234.4 million for the same 2020 periods. The 2021 second
quarter and year to date decreases in acquisition and operating expenses were
driven by decreases in 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 to date decreases 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 30, 2021 and December 31, 2020:

($ millions)                                                                

December 31,

                                               June 30, 2021       % of Total         2020         % of Total
Cash and cash equivalents                     $        108.7            3.8  %    $     90.7            3.2  %
Fixed maturities, at fair value:
Fixed maturities                                     2,106.7           73.7  %       2,121.0           73.9  %
Treasury inflation-protected securities                108.2            3.8  %         116.2            4.0  %
Total fixed maturities                               2,214.9           77.5  %       2,237.2           77.9  %
Notes receivable from affiliate                         70.0            2.4  %          70.0            2.4  %
Equity securities:
Large-cap securities                                   158.6            5.5  %         134.2            4.7  %
Mutual and exchange traded funds                       216.9            7.6  %         255.5            8.9  %
Total equity securities                                375.5           13.1  %         389.7           13.6  %
Other invested assets:
International funds                                     63.0            2.2  %          55.8            2.0  %
Other invested assets                                   16.6            0.6  %          15.3            0.5  %
Total other invested assets                             79.6            2.8  %          71.1            2.5  %
Other invested assets, at cost                          11.1            0.4  %          12.1            0.4  %
Total portfolio                               $      2,859.8          100.0  %    $  2,870.8          100.0  %


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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



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

  ($ millions)                                                                   Fair
                                                          Amortized cost         value
  Due in 1 year or less                                  $         135.7      $   136.8
  Due after 1 year through 5 years                                 571.0          596.8
  Due after 5 years through 10 years                               154.8          162.2
  Due after 10 years                                               530.9          566.9
  U.S. government agencies mortgage-backed securities              742.5          752.2
  Total                                                  $       2,134.9      $ 2,214.9


Expected maturities may differ from contractual maturities as the issuers may
have the right to call or prepay the obligations with or without call or
prepayment penalties. The duration of the fixed maturity portfolio was
approximately 4.04 and 4.72 as of June 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 months ended June 30, 2021 and 2020:
  ($ millions)                    Three months ended June 30             Six months ended June 30
                                    2021                 2020              2021              2020
  Gross investment income:
  Fixed maturities            $        15.4          $    14.5       $       30.8        $    29.6
  Equity securities                     1.2                2.6                2.8              5.7
  Other                                 1.1                0.8                2.0              1.8
  Total gross investment
  income                               17.7               17.9               35.6             37.1
  Less: Investment expenses               -                0.2                0.3              0.5
  Net investment income       $        17.7          $    17.7       $       35.3        $    36.6

Average invested assets (at

  cost)                       $     2,395.5          $ 2,552.9       $    

2,452.8 $ 2,579.5

  Annualized investment yield           2.9   %            2.8  %             2.9   %          2.8  %
  Annualized investment
  yield, after tax                      2.4   %            2.3  %             2.4   %          2.3  %
  Net investment income,
  after tax                   $        14.5          $    14.4       $       29.1        $    30.0
  Effective tax rate                   17.6   %           18.9  %            17.5   %         18.0  %


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 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.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Gross Unrealized Investment Gains and Losses
Based upon our review of our investment portfolio at June 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 30, 2021:
                                                                     Gross unrealized
                                Cost or         Gross unrealized          holding
 ($ millions)               amortized cost       holding gains            losses           Fair value

Available-for-sale fixed

maturities:

U.S. treasury securities

and obligations of U.S.

 government agencies        $       461.6      $           26.9      $      

(0.1) $ 488.4

Obligations of states and

 political subdivisions             473.1                  25.6             

(0.1) 498.6

 Corporate securities               457.7                  18.3             

(0.3) 475.7

U.S. government agencies

 mortgage-backed securities         742.5                  16.6                 (6.9)          752.2
 Total available-for-sale
 fixed maturities           $     2,134.9      $           87.4      $          (7.4)     $  2,214.9


The following table sets forth our unrealized holding gains for our
available-for-sale fixed maturities, net of deferred tax that was included as a
component of accumulated other comprehensive loss at June 30, 2021, and
December 31, 2020, and the change in unrealized holding gains, net of deferred
tax, for the six months ended June 30, 2021:
   ($ millions)                         June 30, 2021       December 31, 

2020 $ Change

Available-for-sale investments:

Unrealized holding gains:

   Fixed maturities                    $         80.0      $            

120.2 $ (40.2)

   Net deferred federal income tax              (16.8)                  

(25.3) 8.5

   Unrealized gains, net of tax        $         63.2      $             

94.9 $ (31.7)



At June 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 30, 2021,
and December 31, 2020.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



LIQUIDITY AND CAPITAL RESOURCES
General
Liquidity refers to our ability to generate adequate amounts of cash to meet our
short- and long-term needs. Our primary sources of cash are premiums, investment
income, investment sales and the maturity of fixed income security investments.
The significant outflows of cash are payments of claims, commissions, premium
taxes, operating expenses, income taxes, dividends, interest and principal
payments on debt and investment purchases. The cash outflows may vary due to
uncertainties regarding settlement of large losses or catastrophic events. As a
result, we continually monitor our investment and reinsurance programs to ensure
they are appropriately structured to enable the insurance subsidiaries to meet
anticipated short-term and long-term cash requirements without the need to sell
investments to meet fluctuations in claim payments.
Liquidity
Our insurance subsidiaries must have adequate liquidity to ensure that their
cash obligations are met. However, as discussed below, the STFC Pooled Companies
do not have the day-to-day liquidity concerns normally associated with an
insurance company due to their participation in, and the terms of, the Pooling
Arrangement. In addition, State Auto P&C has a $100.0 million line of credit in
place with the FHLB available for general corporate purposes such as funding
liquidity needs. See "Borrowing Arrangements - FHLB Loans" described below.
Under the terms of the Pooling Arrangement, each period State Auto Mutual
collects all premiums from policyholders and pays all losses and expenses
associated with the insurance business produced by the STFC Pooled Companies and
the other pool participants, and then it settles the intercompany balances
generated by these transactions with the pool participants within 60 days
following each quarter end. We believe this provides State Auto Mutual with
sufficient liquidity to pay losses and expenses of our insurance operations on a
timely basis.
We are exposed to third-party credit risk both directly through its cessions to
reinsurers and indirectly through its participation in the Pooling Arrangement.
In addition to exposure to credit risk on reinsurance recoverables, we are also
exposed to credit risk on amounts due from insureds and agents. When settling
the intercompany balances, State Auto Mutual provides the STFC Pooled Companies
with full credit for the net premiums written and net losses paid during the
quarter.
While the total amount due to State Auto Mutual from policyholders and agents is
significant, the individual amounts due are relatively small at the policyholder
and agency level. The State Auto Group mitigates its exposure to this credit
risk through its in-house collections unit for both personal and commercial
accounts which is supplemented by third party collection service providers. In
addition to reliance upon recent and historical collection trends, determination
of the allowance for uncollectible premiums receivable at June 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 months ended June 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 30, 2021, and December 31, 2020, we had $108.7
million and $90.7 million, respectively, in cash and cash equivalents, and
$2,670.0 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 30,
2021, and December 31, 2020; in addition, substantially all of our fixed
maturity and equity securities are traded on public markets. For a further
discussion regarding investments, see "Investments Operations Segment" included
in this Item 2.
Cash used in operating activities was $25.7 million and $32.2 million for the
six months ended June 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.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Cash provided by investing activities was $50.8 million and $75.4 million for
the six months ended June 30, 2021 and 2020, respectively. The change was
primarily driven by an increase in the purchase of fixed maturities, partially
offset by an increase in the maturities of fixed maturities and the sale of
fixed maturities and equity securities.
Cash used in financing activities was $7.1 million and cash provided by
financing activities was $53.4 million for the six months ended June 30, 2021
and 2020, respectively. The change was primarily driven by proceeds from the
FHLB REPO loan in 2020.
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 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 30, 2021, and 2020 were 4.33% and 4.55%,
respectively.
Reinsurance Arrangements
Members of the State Auto Group follow the customary industry practice of
reinsuring a portion of their exposures and paying to the reinsurers a portion
of the premiums received. Insurance is ceded principally to reduce net liability
on individual risks or for individual loss occurrences, including catastrophic
losses. Although reinsurance does not legally discharge the individual members
of the State Auto Group from primary liability for the full amount of limits
applicable under their policies, it does make the assuming reinsurer liable to
the extent of the reinsurance ceded.
To minimize the risk of reinsurer default, the State Auto Group cedes only to
third-party reinsurers who are rated A- or better by A.M. Best or Standard &
Poor's and also utilizes both domestic and international markets to diversify
its credit risk. We utilize reinsurance to limit our loss exposure and
contribute to our liquidity and capital resources.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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



Other Reinsurance Arrangements
Each member of the State Auto Group is party to working reinsurance treaties for
casualty, workers' compensation and property lines with several reinsurers
arranged through reinsurance intermediaries. These agreements are described in
more detail below. We have also secured other reinsurance to limit the net cost
of large loss events for certain types of coverage. The State Auto Group also
makes use of facultative reinsurance for unique risk situations. The State Auto
Group also participates in state insurance pools and associations. In general,
these pools and associations are state sponsored and/or operated, impose
mandatory participation by insurers doing business in that state, and offer
coverage for hard-to-place risks at rates established by the state sponsor or
operator, thereby transferring risk of loss to the participating insurers in
exchange for premiums which may not be commensurate with the risk assumed.
Adverse Development Cover
The State Auto Group has an adverse development reinsurance agreement
implemented at the end of 2014, providing $40.0 million of coverage for adverse
claims development in excess of carried reserves as of November 30, 2014 for the
terminated restaurant program business previously underwritten by a
MGU-subsidiary of State Auto Mutual.
Property Catastrophe Treaty
Members of the State Auto Group maintain a property catastrophe excess of loss
reinsurance agreement, covering property catastrophe related events affecting at
least two risks. This property catastrophe reinsurance agreement renewed as of
July 1, 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 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.
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               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 the State Auto Group entered into an agreement
and plan of merger and combination with Liberty Mutual Holding Company Inc.
(LMHC) and its subsidiaries. The ratings will remain under review until all
approvals are finalized, the transaction closes 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.
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               STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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