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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2021
or
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 000-19289
STATE AUTO FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Ohio 31-1324304
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
518 East Broad StreetColumbusOhio43215-3976
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (614464-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common shares, without par valueSTFCThe NASDAQ Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
x
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes      No   ý
On April 30, 2021, the Registrant had 44,051,645 Common Shares outstanding.


Table of Contents

Index to Form 10-Q Quarterly Report for the three month periods ended March 31, 2021
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 2.
Item 4.
Item 5.
Item 6.


Table of Contents
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
PART I – FINANCIAL STATEMENTS
Item 1. Condensed Consolidated Balance Sheets
($ and shares in millions, except per share amounts)March 31, 2021December 31, 2020
(unaudited)
Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $2,147.5 and $2,117.0, respectively)$2,209.0 $2,237.2 
Equity securities399.6 389.7 
Other invested assets76.4 71.1 
Other invested assets, at cost11.8 12.1 
Notes receivable from affiliate70.0 70.0 
Total investments2,766.8 2,780.1 
Cash and cash equivalents59.1 90.7 
Accrued investment income and other assets31.0 29.7 
Premiums receivable12.3 14.0 
Deferred policy acquisition costs (affiliated net assumed $32.5 and $30.1, respectively)121.2 122.2 
Reinsurance recoverable on losses and loss expenses payable23.6 24.3 
Prepaid reinsurance premiums8.5 8.3 
Current federal income taxes1.7 1.7 
Net deferred federal income taxes37.1 27.3 
Property and equipment, at cost (net of accumulated depreciation of $3.5 and $3.5, respectively)4.2 4.2 
Total assets$3,065.5 $3,102.5 
Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliated net assumed $454.6 and $438.8, respectively)$1,066.3 $1,050.4 
Unearned premiums (affiliated net assumed $466.2 and $452.4, respectively)726.7 723.4 
Notes payable (affiliates $15.3 and $15.3, respectively)122.1 122.1 
Pension and postretirement benefits59.2 66.2 
Due to affiliate22.1 11.2 
Other liabilities (affiliated net assumed $17.3 and $22.4, respectively)97.1 119.2 
Total liabilities2,093.5 2,092.5 
Stockholders’ equity:
Common stock, without par value. Authorized 100.0 shares; 50.9 and 50.7 shares issued, respectively, at stated value of $2.50 per share127.4 126.8 
Treasury stock, 6.9 and 6.9 shares, respectively, at cost(118.9)(118.4)
Additional paid-in capital220.1 213.3 
Accumulated other comprehensive (loss) income(30.1)13.9 
Retained earnings773.5 774.4 
Total stockholders’ equity972.0 1,010.0 
Total liabilities and stockholders’ equity$3,065.5 $3,102.5 
See accompanying notes to condensed consolidated financial statements.
1

Table of Contents
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Income
($ in millions, except per share amounts)Three months ended March 31
(unaudited)20212020
Earned premiums (affiliated net assumed $78.0 and $58.3, respectively)$355.9 $330.5 
Net investment income (affiliates $0.7 and $0.7, respectively)17.6 18.9 
Net investment gain (loss)38.2 (135.2)
Other income from affiliates0.5 0.6 
Total revenues412.2 214.8 
Losses and loss expenses (affiliated net assumed $113.7 and $10.9, respectively)280.8 239.4 
Acquisition and operating expenses (affiliated net assumed $37.1 and $20.9, respectively)121.0 114.9 
Interest expense (affiliates $0.2 and $0.2, respectively)1.1 1.2 
Other expenses3.7 3.3 
Total expenses406.6 358.8 
Income (loss) before federal income taxes5.6 (144.0)
Federal income tax expense (benefit):
Deferred2.0 (29.4)
Total federal income tax expense (benefit)2.0 (29.4)
Net income (loss)$3.6 $(114.6)
Earnings (loss) per common share:
Basic$0.08 $(2.62)
Diluted$0.08 $(2.62)
See accompanying notes to condensed consolidated financial statements.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Comprehensive Loss
($ in millions, except per share amounts)Three months ended March 31
(unaudited)20212020
Net income (loss)$3.6 $(114.6)
Other comprehensive (loss) income, net of tax:
Net unrealized holding gains on available-for-sale investments:
Unrealized holding (losses) gains(57.2)31.0 
Reclassification adjustments for gains realized in net income(1.5)(2.4)
Income tax benefit (expense)12.4 (6.0)
Total net unrealized holding (losses) gains on available-for-sale investments(46.3)22.6 
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost(1.6)(1.6)
Net actuarial loss4.5 3.7 
Income tax expense(0.6)(0.5)
Total net unrecognized benefit plan obligations2.3 1.6 
Other comprehensive (loss) income(44.0)24.2 
Comprehensive loss$(40.4)$(90.4)

See accompanying notes to condensed consolidated financial statements.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Stockholders’ Equity
(in millions)Three months ended March 31
20212020
Common shares:
Balance at beginning of period50.7 50.4 
Issuance of shares0.2 0.2 
Balance at March 3150.9 50.6 
Treasury shares:
Balance at beginning of period(6.9)(6.9)
Balance at March 31(6.9)(6.9)
Common stock:
Balance at beginning of period$126.8 $125.9 
Issuance of shares0.6 0.6 
Balance at March 31$127.4 $126.5 
Treasury stock:
Balance at beginning of period$(118.4)$(117.5)
Shares acquired on stock award exercises and vested restricted shares(0.5)(0.9)
Balance at March 31$(118.9)$(118.4)
Additional paid-in capital:
Balance at beginning of period$213.3 $206.7 
Issuance of common stock0.6 1.3 
Stock awards granted6.2 1.1 
Balance at March 31$220.1 $209.1 
Accumulated other comprehensive loss:
Balance at beginning of period$13.9 $(37.9)
Change in net unrealized holding (losses) gains on available-for-sale investments(46.3)22.6 
Change in net unrecognized benefit plan obligations2.3 1.6 
Balance at March 31$(30.1)$(13.7)
Retained earnings:
Balance at beginning of period$774.4 $782.7 
Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020 (0.5)
Net income (loss)3.6 (114.6)
Dividends declared, $0.10 and $0.10 per share (affiliates $2.6 and $2.6, respectively)$(4.5)$(4.4)
Balance at March 31773.5 663.2 
Total stockholders’ equity at March 31$972.0 $866.7 
See accompanying notes to condensed consolidated financial statements.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Cash Flows
($ in millions)Three months ended March 31
(unaudited)20212020
Cash flows from operating activities:
Net income (loss)$3.6 $(114.6)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization, net1.8 1.6 
Share-based compensation6.7 0.5 
Net investment (gain) loss(38.2)135.2 
Changes in operating assets and liabilities:
Deferred policy acquisition costs1.0 (2.2)
Accrued investment income and other assets(1.3)(1.5)
Premiums receivables1.7 (1.4)
Postretirement and pension benefits(6.4)(0.9)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums0.5 (26.5)
Other liabilities and due to/from affiliates, net(9.5)(24.8)
Losses and loss expenses payable15.9 19.5 
Unearned premiums3.3 16.5 
Deferred tax on share-based awards(0.4)(0.2)
Federal income taxes2.4 (29.2)
Net cash used in operating activities(18.9)(28.0)
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale(239.7)(122.4)
Purchases of equity securities(9.4)(16.1)
Purchases of other invested assets(0.1)(6.6)
Maturities, calls and pay downs of fixed maturities available-for-sale102.8 67.9 
Sales of fixed maturities available-for-sale106.0 83.5 
Sales of equity securities31.1 13.2 
Sales of other invested assets0.3 0.4 
Disposals of property and equipment 0.2 
Net cash (used in) provided by investing activities(9.0)20.1 
Cash flows from financing activities:
Proceeds from issuance of common stock1.2 1.8 
Payments to acquire treasury stock(0.4)(0.9)
Payment of dividends(4.5)(4.4)
Proceeds from short-term debt 60.0 
Net cash (used in) provided by financing activities(3.7)56.5 
Net (decrease) increase in cash and cash equivalents(31.6)48.6 
Cash and cash equivalents at beginning of period90.7 78.0 
Cash and cash equivalents at end of period$59.1 $126.6 
Supplemental disclosures:
Interest paid (affiliates $0.2 and $0.2, respectively)$1.1 $1.2 
See accompanying notes to condensed consolidated financial statements.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of State Auto Financial Corporation and Subsidiaries (“State Auto Financial” or the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair statement have been included. Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The balance sheet at December 31, 2020, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the 2020 Form 10-K.
Adoption of Recent Accounting Pronouncements
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12 which updated guidance for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The guidance became effective for annual and interim reporting periods after December 15, 2020 and did not have a material impact on the Company's results of operations, consolidated financial position or cash flows.
Pending Adoption of Recent Accounting Pronouncements
For information regarding other accounting pronouncements that the Company has not yet adopted, see the “Pending Adoption of Recent Accounting Pronouncements” section of Note 1 of the Notes to Consolidated Financial Statements in the 2020 Form 10-K.
2. Investments
The following tables set forth the amortized cost and fair value of investments by investment category at March 31, 2021 and December 31, 2020:
($ millions)Amortized cost Gross unrealized holding gainsGross unrealized holding lossesFair value
March 31, 2021
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$448.4 $23.0 $(0.4)$471.0 
Obligations of states and political subdivisions480.4 22.0 (1.9)500.5 
Corporate securities488.4 17.0 (2.2)503.2 
U.S. government agencies mortgage-backed securities730.3 15.4 (11.4)734.3 
Total available-for-sale fixed maturities$2,147.5 $77.4 $(15.9)$2,209.0 
($ millions)Amortized costGross unrealized holding gainsGross unrealized holding lossesFair value
December 31, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$506.5 $45.2 $ $551.7 
Obligations of states and political subdivisions511.3 30.4 (0.2)541.5 
Corporate securities459.9 23.4  483.3 
U.S. government agencies mortgage-backed securities639.3 22.9 (1.5)660.7 
Total available-for-sale fixed maturities$2,117.0 $121.9 $(1.7)$2,237.2 
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following tables set forth the Company’s gross unrealized losses and fair value on its investments by lot, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position for which an allowance for credit losses has not been recorded at March 31, 2021 and December 31, 2020:
($ millions, except # of positions)Less than 12 months12 months or moreTotal
Fair valueUnrealized lossesNumber of positionsFair valueUnrealized lossesNumber of positionsFair valueUnrealized lossesNumber of positions
March 31, 2021
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$51.6 $(0.4)7 $ $  $51.6 $(0.4)7 
Obligations of states and political subdivisions111.7 (1.9)18    111.7 (1.9)18 
Corporate securities110.9 (2.2)21    110.9 (2.2)21 
U.S. government agencies mortgage-backed securities354.8 (11.3)74 10.9 (0.1)5 365.7 (11.4)79 
Total temporarily impaired securities$629.0 $(15.8)120 $10.9 $(0.1)5 $639.9 $(15.9)125 
($ millions, except # of positions)Less than 12 months12 months or moreTotal
Fair valueUnrealized lossesNumber of positionsFair valueUnrealized lossesNumber of positionsFair valueUnrealized lossesNumber of positions
December 31, 2020
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$9.6 $ 4$ $  $9.6 $ 4
Obligations of states and political subdivisions19.5 (0.2)5   19.5 (0.2)5
Corporate securities1.5  2    1.5  2
U.S. government agencies mortgage-backed securities136.1 (1.4)357.0 (0.1)3143.1 (1.5)38
Total temporarily impaired securities$166.7 $(1.6)46$7.0 $(0.1)3$173.7 $(1.7)49
The Company reviewed its available-for-sale fixed maturities at March 31, 2021, and determined that no credit impairment existed in the gross unrealized holding losses, due to the reasons discussed below:
U.S. treasury securities and obligations of U.S. government agencies: These securities were issued by the U.S. Treasury Department or Federal government-sponsored entities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.
Corporate securities: Corporations in various industries issued these securities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company reviewed the issuers of these securities to identify any significant adverse change in financial condition, a change in the quality of credit enhancement (if any), a ratings decrease, or negative outlook assignment from a major credit rating agency, and any failure to make interest or principal payments. After these reviews, the Company determined that the decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.
U.S. government agencies mortgage-backed securities: Federal government-sponsored entities issued these securities. The decline in fair values was attributable to changes in interest rates and not credit quality. The Company does not intend to sell these securities and it is likely that it will not do so before their anticipated recovery. Therefore, the Company does not consider these impaired securities.
The Company regularly monitors its available-for-sale fixed maturities that have fair values less than cost or amortized cost for signs of impairment, an assessment that requires significant management judgment regarding the evidence known. Such
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
judgments could change in the future as more information becomes known, which could negatively impact the amounts reported. Among the factors that management considers for fixed maturity securities are the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. When a fixed maturity has been determined to have an impairment, the impairment charge representing the credit loss is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive income.
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at March 31, 2021:
($ millions)Amortized costFair
value
Due in 1 year or less$158.5 $159.7 
Due after 1 year through 5 years536.7 562.2 
Due after 5 years through 10 years165.9 170.5 
Due after 10 years556.1 582.3 
U.S. government agencies mortgage-backed securities730.3 734.3 
Total$2,147.5 $2,209.0 
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligations with or without call or prepayment penalties.
At March 31, 2021, State Auto P&C had U.S. government agencies mortgage-backed fixed maturity securities, with a carrying value of approximately $106.5 million pledged as collateral for loans from the Federal Home Loan Bank of Cincinnati ("FHLB"). In accordance with the terms of the FHLB Loans, State Auto P&C retains all rights regarding these pledged securities.
At March 31, 2021, State Auto P&C had fixed maturities with fair values of approximately $30.2 million pledged as collateral for the performance obligations under its reinsurance agreement with Home State County Mutual Insurance Company. In accordance with the terms of the trust agreement, State Auto P&C retains all rights regarding these securities, which are included in the “U.S. treasury securities and obligations of U.S. government agencies” classification of the Company’s fixed maturity securities portfolio.
Fixed maturities with fair values of $9.4 million and $9.7 million were on deposit with insurance regulators as required by law at March 31, 2021, and December 31, 2020, respectively. The Company retains all rights regarding these securities.
The following table sets forth the components of net investment income for the three months ended March 31, 2021 and 2020:
 ($ millions)Three months ended March 31
20212020
Fixed maturities$15.4 $15.1 
Equity securities1.6 3.1 
Cash and cash equivalents, and other0.9 1.0 
Investment income17.9 19.2 
Investment expenses0.3 0.3 
Net investment income$17.6 $18.9 
The Company’s current investment strategy does not rely on the use of derivative financial instruments.
Proceeds on sales of investments were $137.4 million and $97.1 million for the three months ended March 31, 2021, and 2020, respectively.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following table sets forth the realized and unrealized holding gains (losses) on the Company’s investment portfolio for the three months ended March 31, 2021 and 2020:
($ millions)Three months ended March 31
20212020
Investment gain (loss), net:
Fixed maturities:
Realized gains on sales of securities$3.0 $3.6 
Realized losses on sales of securities(1.5)(1.2)
Net gain on fixed securities1.5 2.4 
Net gain (loss) on equity securities31.5 (122.4)
Net gain (loss) on other invested assets5.2 (15.4)
Other net realized gain (loss) 0.2 
Net gain (loss) on investments$38.2 $(135.2)
Change in net unrealized holding (losses) gains, net of tax
Fixed maturities$(58.7)$28.6 
Deferred federal income tax benefit (liability)12.4 (6.0)
Change in net unrealized holding (losses) gains, net of tax$(46.3)$22.6 
The unrealized holding gains recognized for the three months ended March 31, 2021 on equity securities still held was $27.8 million while unrealized holding losses recognized for the three months ended March 31, 2020 on equity securities still held was $123.3 million. The unrealized holding gains recognized for the three months ended March 31, 2021 on other invested assets still held was $5.2 million while the unrealized holding losses recognized for the three months ended March 31, 2020 on other invested assets still held was $15.4 million.
3. Fair Value of Financial Instruments
Below is the fair value hierarchy that categorizes into three levels the inputs to valuation techniques that are used to measure fair value:
Level 1 includes observable inputs which reflect quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2 includes observable inputs for assets or liabilities other than quoted prices included in Level 1, and it includes valuation techniques which use prices for similar assets and liabilities.
Level 3 includes unobservable inputs which reflect the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company utilizes a nationally recognized third party pricing service to estimate the majority of its investment portfolio’s fair value. The Company obtains one price per security and the processes and control procedures employed by the Company are designed to ensure the value is accurately recorded on an unadjusted basis. Through discussions with the pricing service, the Company gains an understanding of the methodologies used to price the different types of securities, that the data and the valuation methods utilized are appropriate and consistently applied, and that the assumptions are reasonable and representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service, the Company compares to fair value pricing information gathered from other independent pricing sources. At March 31, 2021, and December 31, 2020, the Company did not adjust any of the prices received from the pricing service.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
Fixed Maturities
The Company utilizes a nationally recognized third party pricing service to estimate fair value measurements for the majority of its fixed maturities. The fair value estimate of the Company’s fixed maturity investments are determined by evaluations that are based on observable market information rather than market quotes. Inputs to the evaluations include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, and other market-observable information. The fixed maturity portfolio pricing obtained from the pricing service is reviewed for reasonableness. The Company regularly selects a sample of security prices which are compared to one or more alternative pricing sources for reasonableness. Any significant discrepancies with the pricing are returned to the pricing service for further explanation and, if necessary, adjustments are made. To date, the Company has not identified any significant discrepancies in the pricing provided by its third party pricing service. Investments valued using these inputs include U.S. treasury securities and obligations of U.S. government agencies, obligations of states and political subdivisions, corporate securities (except for a security discussed below), and U.S. government agencies' mortgage-backed securities. All unadjusted estimates of fair value for fixed maturities priced by the pricing service are included in the amounts disclosed in Level 2 of the hierarchy. If market inputs are unavailable, then no fair value is provided by the pricing service. For these securities, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote; or the Company internally determines the fair values by employing widely accepted pricing valuation models, and depending on the level of observable market inputs, renders the fair value estimate as Level 2 or Level 3.
Equities
The fair value of each equity security is based on an observable market price for an identical asset in an active market and is priced by the same pricing service discussed above. All equity securities are recorded using unadjusted market prices and have been disclosed in Level 1.
 Other Invested Assets
Included in other invested assets is one international fund (“the fund”) that invests in equity securities of foreign issuers and is managed by a third party investment manager. The fund had a fair value of $60.6 million and $55.8 million at March 31, 2021, and December 31, 2020, respectively, which was determined using the fund’s net asset value. The Company employs procedures to assess the reasonableness of the fair value of the fund, including obtaining and reviewing the fund’s audited financial statements. There are no unfunded commitments related to the fund. The Company may not sell its investment in the fund; however, the Company may redeem all or a portion of its investment in the fund at net asset value per share with the appropriate prior written notice. In accordance with ASC 820-10, this investment is measured at fair value using the net asset value per share practical expedient and has not been classified in the fair value hierarchy. Fair values presented here are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.
The remainder of the Company’s other invested assets consist primarily of holdings in publicly-traded mutual funds. The Company believes that its prices for these publicly-traded mutual funds based on an observable market price for an identical asset in an active market reflect their fair values and consequently these securities have been disclosed in Level 1.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
 The following tables set forth the Company’s investments within the fair value hierarchy at March 31, 2021 and December 31, 2020:
($ millions)TotalLevel 1Level 2
March 31, 2021
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$471.0 $ $471.0 
Obligations of states and political subdivisions500.5  500.5 
Corporate securities503.2  503.2 
U.S. government agencies mortgage-backed securities734.3  734.3 
Total available-for-sale fixed maturities2,209.0  2,209.0 
Equity securities:
Large-cap securities149.2 149.2  
Mutual and exchange traded funds250.4 250.4  
Total equity securities399.6 399.6  
Other invested assets15.8 15.8  
Total investments$2,624.4 $415.4 $2,209.0 
($ millions)TotalLevel 1Level 2
December 31, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$551.7 $ $551.7 
Obligations of states and political subdivisions541.5  541.5 
Corporate securities483.3  483.3 
U.S. government agencies mortgage-backed securities660.7  660.7 
Total available-for-sale fixed maturities2,237.2  2,237.2 
Equity securities:
Large-cap securities134.2 134.2  
Mutual and exchange traded funds255.5 255.5  
Total equity securities389.7 389.7  
Other invested assets15.3 15.3  
Total investments$2,642.2 $405.0 $2,237.2 
The following sections describe the valuation methods used by the Company for each type of financial instrument it holds that is not measured at fair value but for which fair value is disclosed:
Financial Instruments Disclosed, But Not Carried, At Fair Value
Other Invested Assets, at Cost
Included in other invested assets, at cost are common stock of the FHLB and the Trust Securities. The Trust Securities and FHLB common stock are carried at cost, which approximates fair value. The fair value of the FHLB common stock at March 31, 2021, was $11.3 million and the fair value of the Trust Securities was $0.5 million. The investments have been placed in Level 3 of the fair value hierarchy.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
Notes Receivable from Affiliate
The Company has two separate credit agreements with State Automobile Mutual Insurance Company (“State Auto Mutual") pursuant to which it loaned State Auto Mutual a total of $70.0 million at an interest rate of 4.05%, with principal payable in May 2029. The Company estimates the fair value of the notes receivable from affiliate using market quotations for U.S. treasury securities with similar maturity dates and applies an appropriate credit spread. Consequently this has been placed in Level 2 of the fair value hierarchy.
($ millions, except interest rates)March 31, 2021December 31, 2020
 Carrying valueFair valueInterest rateCarrying valueFair
value
Interest rate
Notes receivable from affiliate, issued May 2019$70.0 $76.6 4.05 %$70.0 $80.4 4.05 %
Notes Payable
Included in notes payable are the FHLB Loans and Subordinated Debentures. The Company estimates the fair value of the FHLB Loans by discounting cash flows using a borrowing rate currently available to the Company for loans with similar terms. The FHLB Loans have been placed in Level 3 of the fair value hierarchy. The carrying amount of the Subordinated Debentures approximates its fair value as the interest rate adjusts quarterly and has been disclosed in Level 3.
($ millions, except interest rates)March 31, 2021December 31, 2020
 Carrying valueFair ValueInterest rateCarrying valueFair valueInterest rate
FHLB Loan due 2030: issued $21.5, September 2020 with fixed interest21.5 20.2 1.37 %21.5 21.6 1.37 %
FHLB Loan due 2033: issued $85.0, May 2018 with fixed interest85.3 101.2 3.96 %85.3 107.1 3.96 %
Affiliate Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest15.3 15.3 4.39 %15.3 15.3 4.43 %
Total notes payable$122.1 $136.7 $122.1 $144.0 
4. Deferred Acquisition Costs
The following table sets forth net deferred acquisition costs for the three months ended March 31, 2021 and 2020:
($ millions)20212020
Beginning balance at January 1$122.2 $111.1 
Acquisition costs deferred60.6 91.1 
Acquisition costs amortized to expense(61.6)(88.9)
Ending balance at March 31$121.2 $113.3 
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
5. Losses and Loss Expenses Payable
The following table sets forth the activity in the liability for losses and loss expenses for the three months ended March 31, 2021 and 2020:
($ millions)20212020
Losses and loss expenses payable, at beginning of period$1,050.4 $1,066.5 
Less: reinsurance recoverable on losses and loss expenses payable24.3 13.6 
Net balance at beginning of period1,026.1 1,052.9 
Incurred related to:
Current year311.3 246.9 
Prior years(30.5)(7.5)
Total incurred280.8 239.4 
Paid related to:
Current year105.7 74.1 
Prior years158.5 171.3 
Total paid264.2 245.4 
Net balance at end of period1,042.7 1,046.9 
Plus: reinsurance recoverable on losses and loss expenses payable23.6 39.7 
Losses and loss expenses payable, at end of period$1,066.3 $1,086.6 
The Company recorded more favorable development related to prior years’ loss and loss expense reserves for the three months ended March 31, 2021, of $30.5 million compared to $7.5 million for the same 2020 period. Favorable development of prior accident years' non-catastrophe loss and ALAE reserves for the three months ended March 31, 2021 was $24.6 million, due to favorable development of $21.8 million and $2.9 million in the commercial and personal insurance segments, respectively. In the commercial insurance segment, all products developed favorably, with workers' compensation and middle market commercial contributing $8.5 million and $8.1 million, respectively. In the personal insurance segment, the favorable development was primarily driven by homeowners, which contributed $2.1 million of favorable development. For the three months ended March 31, 2021, the prior accident years' catastrophe loss and ALAE reserves contributed $3.8 million of favorable development.
For the three months ended March 31, 2020, favorable development of prior accident year's non-catastrophe loss and ALAE reserves was $10.5 million, due to favorable development in the commercial insurance segment. In the commercial insurance segment, all lines contributed favorable development, with small commercial package, middle market commercial, and workers' compensation contributing $5.4 million, $5.1 million, and $4.0 million respectively. Somewhat offsetting the favorable development was adverse development in the personal insurance segment of $6.4 million, driven by personal auto and homeowners which contributed $5.2 million and $2.2 million of adverse development, respectively
6. Reinsurance
The insurance subsidiaries of State Auto Financial, referred to as the STFC Pooled Companies, participate in a quota share reinsurance pooling arrangement (“the Pooling Arrangement”) with the Mutual Pooled Companies.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following table sets forth a summary of the Company’s external reinsurance transactions, as well as reinsurance transactions with State Auto Mutual under the Pooling Arrangement, for the three months ended March 31, 2021 and 2020:
($ millions)Three months ended March 31
20212020
Premiums earned:
Assumed from external insurers and reinsurers$21.8 $20.6 
Assumed under Pooling Arrangement355.9 330.5 
Ceded to external insurers and reinsurers(9.0)(10.6)
Ceded under Pooling Arrangement(277.9)(272.2)
Net assumed premiums earned$90.8 $68.3 
Losses and loss expenses incurred:
Assumed from external insurers and reinsurers$14.5 $11.7 
Assumed under Pooling Arrangement280.8 239.4 
Ceded to external insurers and reinsurers(3.3)(33.5)
Ceded under Pooling Arrangement(167.1)(228.5)
Net assumed losses and loss expenses incurred$124.9 $(10.9)
7. Income Taxes
The following table sets forth the reconciliation between actual federal income tax expense and the amount computed at the indicated statutory rate for the three months ended March 31, 2021 and 2020:
($ millions)Three months ended March 31
20212020
Amount at statutory rate$1.2 21.0 %$(30.2)21.0 %
Tax-exempt interest and dividends received deduction(0.6)(11.3)(0.7)0.5 
Other, net1.4 26.6 1.5 (1.1)
Federal income tax expense (benefit)2.0 36.3 %(29.4)20.4 %
8. Pension and Postretirement Benefit Plans
The following table sets forth information regarding the Company’s share of pension and postretirement benefit plans’
components of net periodic cost for the three months ended March 31, 2021 and 2020:
($ millions)PensionPostretirement
Three months ended March 31
 2021202020212020