STATE AUTO FINANCIAL CORP – 10-Q – Management report and analysis of the financial position and operating results
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The term "State Auto Financial" as used below refers only toState Auto Financial Corporation and the terms "our Company," "we," "us," and "our" as used below refer toState Auto Financial Corporation and its consolidated subsidiaries. The term "third quarter" as used below refers to the three months endedSeptember 30 for the time period then ended. For a glossary of terms forState 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 endedDecember 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 ofSeptember 30, 2021 andDecember 31, 2020 , and for the consolidated statements of income for the three and nine month periods endedSeptember 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 throughoutthe United States through independent insurance agencies, which include retail agents and wholesale brokers. The investment operations segment, managed byStateco , 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 orState Auto Financial orState 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 orState 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 orState Auto Financial due to the Transactions; (7) the effect of the announcement of the Transactions on the relationships of LMHC, State Auto Mutual orState 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 orState Auto Financial following the announcement of the proposed Transactions; and (9) LMHC, State Auto Mutual orState 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. 24
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
PROPOSED TRANSACTION WITH LIBERTY MUTUAL OnJuly 12, 2021 ,State Auto Financial and State Auto Mutual, which owned approximately 58.7% ofState Auto Financial's issued and outstanding common stock as of the date thereof, entered into an Agreement and Plan of Merger and Combination (the "Merger Agreement") withLiberty Mutual Holding Company Inc. ("LMHC"),Pymatuning, Inc. , a wholly-owned indirect subsidiary of LMHC ("Merger Sub I"), andAndover, 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 anOhio 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 acquireState Auto Financial through a merger of Merger Sub I with and intoState Auto Financial , withState Auto Financial surviving such merger (the "Merger"). Subject to the terms and conditions set forth in the Merger Agreement, if the transactions contemplated by the Merger Agreement, including the Merger (collectively, the "Transactions") are consummated, at the effective time of the Transactions: (i) the members of State Auto Mutual will become members of LMHC; and (ii) each share ofState Auto Financial's common stock issued and outstanding immediately prior to the effective time (other than (1) treasury shares owned byState Auto Financial and shares owned by LMHC and its subsidiaries, (2) shares owned by State Auto Mutual or any ofState Auto Financial's subsidiaries, and (3) shares for which appraisal rights have been properly exercised underOhio law) will be converted into the right to receive$52.00 in cash, without interest and less any applicable withholding taxes. The Transactions are expected to close in 2022. As discussed below, the Merger Agreement has been adopted by the shareholders ofState Auto Financial . The Transactions remain subject to approval by the members of State Auto Mutual, and a membership meeting is scheduled forNovember 22, 2021 for the members of State Auto Mutual to vote on whether to approve the Transactions. The Transactions are also subject to receipt of required regulatory approvals and satisfaction of other customary closing conditions. See Part II, Item 1A of this Form 10-Q, for a discussion of certain risks related to the proposed Transactions. A special meeting of shareholders (the "Special Meeting") ofState Auto Financial was held onSeptember 29, 2021 to vote on the proposals identified inState Auto Financial's definitive proxy statement for the Special Meeting, which proxy statement was filed byState Auto Financial with theSecurities and Exchange Commission ("SEC") onAugust 27, 2021 . At the Special Meeting, theState Auto Financial shareholders voted to adopt the Merger Agreement, with 99.5% of the common shares ofState Auto Financial voting (including abstentions) in favor of such adoption. For a detailed description of the Merger Agreement and the Transactions, please see Item 1.01 of the Current Report on Form 8-K that we filed with theSEC onJuly 12, 2021 , and a copy of the Merger Agreement filed as Exhibit 2.1 therewith. For a detailed description of the results of the Special Meeting, please see Item 5.07 of the Current Report on Form 8-K that we filed with theSEC onSeptember 30, 2021 , and a copy of the press release filed as Exhibit 99.1 therewith. 25
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
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
(majority-owned subsidiary of
RESULTS OF OPERATIONS
The following table sets forth certain key performance indicators we use to monitor our operations for the three and nine months endedSeptember 30, 2021 and 2020:
($ millions, except by
share amounts) Three months ended September 30 Nine months ended September 30
2021 2020 2021 2020
GAAP Basis:
Total revenues $ 391.1 $ 391.6 $ 1,218.0 $ 1,041.2
(Loss) income before
federal income taxes $ (25.7) $ 14.8 $ (15.9) $ (87.6)
Net (loss) income $ (14.3) $ 11.6 $ (10.1) $ (68.7)
Basic (loss) earnings per
share $ (0.32) $ 0.26 $ (0.23) $ (1.57)
Diluted (loss) earnings
per share $ (0.32) $ 0.26 $ (0.23) $ (1.57)
Stockholders' equity $ 954.9 $ 944.1
Return on average equity
(LTM) 7.5 % (3.8) %
Book value per share $ 21.49 $ 21.57
Debt to capital ratio 11.3 % 11.4 %
Cat loss and ALAE ratio 10.3 % 16.6 % 17.2 % 18.6 %
Non-cat loss and LAE ratio 64.9 % 54.6 % 61.2 % 55.8 %
Loss and LAE ratio 75.2 % 71.2 % 78.4 % 74.4 %
Expense ratio 30.1 % 34.8 % 31.0 % 34.9 %
Combined ratio 105.3 % 106.0 % 109.4 % 109.3 %
Premium written growth 10.2 % 9.3 % 7.4 % 11.3 %
Investment yield 2.7 % 2.8 % 2.7 % 2.9 %
SAP Basis:
Cat loss and ALAE ratio 10.3 % 16.6 % 17.2 % 18.6 %
Non-cat loss and ALAE
ratio 59.2 % 49.5 % 55.2 % 49.9 %
ULAE ratio 5.6 % 5.2 % 5.8 % 6.0 %
Loss and LAE ratio 75.1 % 71.3 % 78.2 % 74.5 %
Expense ratio 28.4 % 33.8 % 29.6 % 34.1 %
Combined ratio 103.5 % 105.1 % 107.8 % 108.6 %
Twelve months ended September 30
2021 2020
Net premiums written to surplus 1.7 1.7
Third Quarter and Year to Date 2021 Overview:
•For the three and nine months ended September 30, 2021 , net investment loss was
$8.1 million and net investment gain was $56.8 million , respectively, which
included $6.7 million of losses recognized on equity securities and $49.7
million of gains recognized on equity securities, respectively.
•The SAP catastrophe loss and ALAE ratios for the three and nine months ended
September 30, 2021 were 10.3% and 17.2%, respectively, or $39.4 million and
$191.0 million , respectively. The 2021 third quarter was impacted by severe
weather events in the Midwest and Texas . The 2021 year to date was also impacted
by winter storms Uri and Viola in Texas , which added 5.6 points to the year to
date loss and ALAE ratio. Approximately 60% and 70% of the catastrophe losses
for the 2021 third quarter and year to date periods, respectively, occurred
within the homeowners line of business.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
•The SAP non-cat loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 were 59.2% and 55.2%, respectively, or$226.1 million and$611.3 million , respectively. •The 2021 third quarter and year to date current accident year non-cat loss and ALAE ratios were impacted by elevated claim frequency and severity in personal auto and commercial auto. The 2021 year to date was also impacted by elevated frequency and severity of property losses in homeowners. •The 2021 third quarter and year to date non-catastrophe losses and ALAE included 1.3 and 4.1 points, respectively, of favorable development relating to prior years, or$5.0 million and$45.5 million , respectively. For the 2021 third quarter and year to date, the commercial insurance segment contributed$9.2 million and$47.7 million , respectively, of favorable development. •For the three and nine months endedSeptember 30, 2021 , we incurred the following expenses, included in "other expenses", as a result of the pending Merger: •$9.3 million due to an increase in the valuation of the Director RSU awards as a result of the increase in our stock price, and •$2.9 million of legal and investment banking fees and expenses. Third Quarter and Year to Date 2020 Overview: COVID-19 Beginning inMarch 2020 , the global COVID-19 pandemic impacted our results of operations. For the 2020 third quarter and year to date, our results were impacted as follows: •For the three and nine months endedSeptember 30, 2020 , net investment gain was$20.0 million and net investment loss was$39.3 million , respectively, including$42.3 million and$50.9 million , respectively, of realized losses on equity securities. During the third quarter, we completed the exit of our investments in the Master Limited Partnership Exchange Traded Funds ("MLP ETF's") equity security asset class and realized losses of$45.9 million and$56.5 million , respectively, for the three and nine months endedSeptember 30, 2020 . The decline in the fair value of the investments in the MLP ETFs during 2020 was due to the market volatility caused by the COVID-19 pandemic. Net investment gain (loss) for the 2020 third quarter and year to date included$62.5 million and$8.2 million , respectively, of unrealized gains from equity securities and other invested assets. The fair values of our equity securities and other invested assets still held in our investment portfolio have mostly recovered from the disruption in global financial markets caused by the COVID-19 pandemic. •The impact on the current accident year non-cat loss and ALAE included: •A decline in claim frequency in personal auto and commercial auto due to a reduction in miles driven as a result of people working remotely and staying at home more because of COVID-19 concerns, •A decline in claim frequency in small commercial package, middle market commercial and workers' compensation due to reduced business and employment activity, •Increased workers' compensation claims for businesses in the medical field such as nursing homes and hospitals, due to employees being exposed to COVID-19 in the course of their employment, and •Increased legal defense costs in small commercial package and middle market commercial due to litigation involving business interruption insurance claims. Other Results •The SAP catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2020 were 16.6% and 18.6%, respectively, or$58.7 million and$191.0 million , respectively. The 2020 third quarter and year to date were impacted by the Midwest derecho in August, with approximately 75% of the losses occurring inIowa , as well as widespread wind and hail events. Approximately 50% of the catastrophe losses for the quarter were in our homeowners line of business. The 2020 third quarter and year to date were also impacted by adverse development of prior accident year losses of$12.4 million in E&S property related to hurricane Irma. The 2020 year to date was also impacted by (i) a first quarter wind and hail storm, including tornadoes, inTennessee that primarily impacted the middle market line of business, and (ii) widespread second quarter wind and hail events in the South and Midwest that primarily impacted the homeowners line of business. 28
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
•The SAP non-cat loss and ALAE ratios for the three and nine months endedSeptember 30, 2020 were 49.5% and 49.9%, or$175.0 million and$510.6 million , respectively. •The 2020 third quarter and year to date current accident year non-cat loss and ALAE ratios were impacted by (i) the COVID-19 pandemic discussed above, and (ii) non-cat weather losses, primarily wind and hail. The 2020 year to date current accident year non-cat loss and ALAE ratio was also impacted by an elevated level of large losses, including fires. •The 2020 third quarter and year to date non-catastrophe losses and ALAE included 5.5 points and 3.1 points, respectively, of favorable development relating to prior years, or$19.3 million and$31.8 million , respectively. For the 2020 third quarter and year to date, the commercial insurance segment contributed$26.5 million and$57.2 million , respectively, of favorable development, which was partially offset by$8.1 million and$20.2 million , respectively, of adverse development from the personal insurance segment. The 2020 year to date was also impacted by$5.2 million of adverse development from specialty run-off primarily due to an adverse court decision relating to an E&S casualty claim from 2016. 29
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
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. 30
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
The following tables set forth certain key performance indicators based on SAP for our insurance segments for the three and nine months endedSeptember 30, 2021 and 2020: ($ in millions) 2021 2020 2021 2020 Three months ended Personal & Personal & September 30 Commercial Commercial Total(1) Total(1) Net written premiums $ 417.6 $ 379.0$ 417.7 $ 379.1 Net earned premiums 381.6 353.2 381.8 353.2 Losses and LAE incurred: Cat loss and ALAE 39.5 46.4 39.4 58.7 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE (4.9) (18.4) (5.0) (19.3) Current accident year non-cat loss and ALAE 230.9 194.1 231.1 194.3 Total non-cat loss and ALAE 226.0 175.7 226.1 175.0 Total Loss and ALAE 265.5 222.1 265.5 233.7 ULAE 21.3 19.6 21.4 18.3 Total Loss and LAE 286.8 241.7 286.9 252.0 Underwriting expenses 118.5 127.8 118.6 127.9 Net underwriting loss $ (23.7) $ (16.3)$ (23.7) $ (26.7) Cat loss and ALAE ratio 10.3 % 13.1 % 10.3 % 16.6 % Non-cat loss and ALAE ratio Prior accident years non-cat loss and ALAE ratio (1.3) % (5.2) % (1.3) % (5.5) % Current accident year non-cat loss and ALAE ratio 60.5 % 55.1 % 60.5 % 55.0 % Total non-cat loss and ALAE ratio 59.2 % 49.9 % 59.2 % 49.5 % Total Loss and ALAE ratio 69.5 % 63.0 % 69.5 % 66.1 % ULAE ratio 5.6 % 5.5 % 5.6 % 5.2 % Total Loss and LAE ratio 75.1 % 68.5 % 75.1 % 71.3 % Expense ratio 28.4 % 33.7 % 28.4 % 33.8 % Combined ratio 103.5 % 102.2 % 103.5 % 105.1 % (1)Includes specialty run-off 31
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES (a majority-owned subsidiary ofState Automobile Mutual Insurance Company ) ($ in millions) 2021 2020 2021 2020 Personal & Personal & Nine Months Ended September 30 Commercial Commercial Total(1) Total(1) Net written premiums$ 1,190.0 $ 1,107.3 $ 1,188.7 $ 1,107.2 Net earned premiums 1,108.8 1,024.4 1,107.6 1,024.4 Losses and LAE incurred: Cat loss and ALAE 192.8 178.6 191.0 191.0 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE (45.3) (37.0) (45.5) (31.8) Current accident year non-cat loss and ALAE 656.6 542.1 656.8 542.4 Total non-cat loss and ALAE 611.3 505.1 611.3 510.6 Total Loss and ALAE 804.1 683.7 802.3 701.6 ULAE 64.2 62.9 64.2 61.6 Total Loss and LAE 868.3 746.6 866.5 763.2 Underwriting expenses 352.0 376.6 352.4 377.1 Net underwriting loss$ (111.5) $
(98.8)
Cat loss and ALAE ratio 17.4 % 17.4 % 17.2 % 18.6 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss and
ALAE ratio (4.1) % (3.6) % (4.1) % (3.1) %
Current accident year non-cat loss and
ALAE ratio 59.2 % 53.0 % 59.3 % 53.0 %
Total non-cat loss and ALAE ratio 55.1 % 49.4 % 55.2 % 49.9 %
Total Loss and ALAE ratio 72.5 % 66.8 % 72.4 % 68.5 %
ULAE ratio 5.8 % 6.1 % 5.8 % 6.0 %
Total Loss and LAE ratio 78.3 % 72.9 % 78.2 % 74.5 %
Expense ratio 29.6 % 34.0 % 29.6 % 34.1 %
Combined ratio 107.9 % 106.9 % 107.8 % 108.6 %
(1)Includes specialty run-off
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Personal Insurance Segment The following tables set forth certain key performance indicators based on SAP by major product line for our personal insurance segment for the three and nine months endedSeptember 30, 2021 and 2020: Table 1 ($ in millions) Three months ended September 30, 2021 Personal Auto Homeowners Other Personal Total Net written premiums$ 92.4 $ 127.2 $ 23.7 $ 243.3 Net earned premiums 91.8 106.5 18.9 217.2 Losses and LAE incurred: Cat loss and ALAE 1.3 22.2 0.7 24.2 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE 6.8 (2.5) - 4.3 Current accident year non-cat loss and ALAE 67.2 55.8 9.4 132.4 Total non-cat loss and ALAE 74.0 53.3 9.4 136.7 Total Loss and ALAE 75.3 75.5 10.1 160.9 ULAE 7.9 5.3 1.0 14.2 Total Loss and LAE 83.2 80.8 11.1 175.1 Underwriting expenses 25.0 32.2 5.9 63.1 Net underwriting (loss) gain$ (16.4) $ (6.5)
Cat loss and ALAE ratio 1.4 % 20.8 % 3.9 % 11.1 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss
and ALAE ratio 7.4 % (2.4) % (0.1) % 2.0 %
Current accident year non-cat loss
and ALAE ratio 73.2 % 52.4 % 49.5 % 60.9 %
Total non-cat loss and ALAE ratio 80.6 % 50.0 % 49.4 % 62.9 %
Total Loss and ALAE ratio 82.0 % 70.8 % 53.3 % 74.0 %
ULAE ratio 8.6 % 5.0 % 6.0 % 6.6 %
Total Loss and LAE ratio 90.6 % 75.8 % 59.3 % 80.6 %
Expense ratio 27.1 % 25.4 % 24.7 % 26.0 %
Combined ratio 117.7 % 101.2 % 84.0 % 106.6 %
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Table 2 ($ in millions) Three months ended September 30, 2020 Personal Auto Homeowners Other Personal Total Net written premiums$ 101.4 $ 111.4 $ 17.4 $ 230.2 Net earned premiums 103.0 92.5 13.3 208.8 Losses and LAE incurred: Cat loss and ALAE 1.9 28.1 2.9 32.9 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE 8.0 0.7 (0.6) 8.1 Current accident year non-cat loss and ALAE 58.2 50.7 4.8 113.7 Total non-cat loss and ALAE 66.2 51.4 4.2 121.8 Total Loss and ALAE 68.1 79.5 7.1 154.7 ULAE 7.4 6.8 0.2 14.4 Total Loss and LAE 75.5 86.3 7.3 169.1 Underwriting expenses 32.0 33.2 5.2 70.4 Net underwriting (loss) gain$ (4.5) $ (27.0)
Cat loss and ALAE ratio 1.9 % 30.4 % 21.5 % 15.8 %
Non-cat loss and ALAE ratio
Prior accident years non-cat loss
and ALAE ratio 7.8 % 0.7 % (4.1) % 3.9 %
Current accident year non-cat loss
and ALAE ratio 56.4 % 54.9 % 36.2 % 54.4 %
Total non-cat loss and ALAE ratio 64.2 % 55.6 % 32.1 % 58.3 %
Total Loss and ALAE ratio 66.1 % 86.0 % 53.6 % 74.1 %
ULAE ratio 7.2 % 7.3 % 1.6 % 6.9 %
Total Loss and LAE ratio 73.3 % 93.3 % 55.2 % 81.0 %
Expense ratio 31.4 % 29.8 % 29.4 % 30.5 %
Combined ratio 104.7 % 123.1 % 84.6 % 111.5 %
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Table 3
($ in millions)
Nine months ended
2021 Personal Auto Homeowners
Other Personal Total
Net written premiums$ 273.5 $ 329.6 $
61.9
Net earned premiums 281.1 304.9
52.1 638.1
Losses and LAE suffered:
Cat loss and ALAE 6.3 129.8
19.8 155.9
Non-feline loss and ALAE
Previous accident years without loss of cat
and ALAE 4.7 (2.1) (0.2) 2.4
Current occurrence year without a cat
loss and ALAE 186.7 156.9
26.9 370.5
Total non-cat loss and ALAE 191.4 154.8
26.7 372.9
Total Loss and ALAE 197.7 284.6
46.5 528.8
ULAE 22.6 19.2 2.9 44.7 Total Loss and LAE 220.3 303.8
49.4 573.5
Underwriting expenses 76.3 87.0
15.9 179.2
Net underwriting loss$ (15.5) $ (85.9) $
(13.2)
Cat loss and ALAE ratio 2.3 % 42.6 %
38.0% 24.4%
Non-cat loss and ALAE ratio
Previous accident years without loss of cat
and ALAE ratio 1.7 % (0.7) %
(0.4)% 0.4%
Current occurrence year without a cat
loss and ALAE ratio 66.4 % 51.4 %
51.6% 58.1%
Total non-cat loss and ALAE ratio 68.1 % 50.7 % 51.2 % 58.5 %
Total Loss and ALAE ratio 70.4 % 93.3 % 89.2 % 82.9 %
ULAE ratio 8.0 % 6.3 % 5.8 % 7.0 %
Total Loss and LAE ratio 78.4 % 99.6 % 95.0 % 89.9 %
Expense ratio 27.9 % 26.4 % 25.6 % 26.9 %
Combined ratio 106.3 % 126.0 % 120.6 % 116.8 %
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Table 4 ($ in millions) Nine months ended September 30, 2020 Personal Auto Homeowners Other Personal Total Net written premiums$ 310.3 $ 299.1 $ 45.7 $ 655.1 Net earned premiums 311.0 262.9 35.8 609.7 Losses and LAE incurred: Cat loss and ALAE 6.5 93.4 12.0 111.9 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE 19.1 2.8 (1.7) 20.2 Current accident year non-cat loss and ALAE 165.7 125.0 13.0 303.7 Total non-cat loss and ALAE 184.8 127.8 11.3 323.9 Total Loss and ALAE 191.3 221.2 23.3 435.8 ULAE 23.0 18.6 1.2 42.8 Total Loss and LAE 214.3 239.8 24.5 478.6 Underwriting expenses 98.5 89.7 13.7 201.9 Net underwriting loss$ (1.8) $ (66.6)
Cat loss and ALAE ratio 2.1 % 35.5 % 33.4 % 18.4 % Non-cat loss and ALAE ratio Prior accident years non-cat loss and ALAE ratio 6.2 % 1.0 % (4.5) % 3.3 % Current accident year non-cat loss and ALAE ratio 53.2 % 47.6 % 36.2 % 49.8 % Total non-cat loss and ALAE ratio 59.4 % 48.6 % 31.7 % 53.1 % Total Loss and ALAE ratio 61.5 % 84.1 % 65.1 % 71.5 % ULAE ratio 7.4 % 7.1 % 3.4 % 7.0 % Total Loss and LAE ratio 68.9 % 91.2 % 68.5 % 78.5 % Expense ratio 31.7 % 30.0 % 30.0 % 30.8 % Combined ratio 100.6 % 121.2 % 98.5 % 109.3 % The personal insurance segment's net written premiums for the three and nine months endedSeptember 30, 2021 increased 5.7% and 1.5%, respectively, when compared to the same 2020 periods (Tables 1 - 4). The 2021 third quarter and year to date were impacted by (i) increased rates in homeowners, (ii) increased rates and new business growth in other personal, and (iii) a decline in new business in personal auto, primarily attributable to cumulative rate and underwriting actions taken throughout 2020 and 2021 to address personal auto profitability. The personal insurance segment's SAP catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 improved 4.7 points and increased 6.0 points, respectively, when compared to the same 2020 periods (Tables 1 - 4). The 2021 third quarter was impacted by higher frequency but lower severity of CAT events when compared to the same 2020 period. However, on a year to date basis, 2021 CAT events were both more frequent and more severe when compared to the same 2020 period. The 2021 third quarter and year to date were impacted by wind and hail events, primarily in the homeowners line of business. The 2021 year to date was also impacted by winter storms Uri and Viola in the first quarter, which contributed 8.2 points to the cat loss and ALAE ratio. For the 2021 third quarter and year to date, approximately 50% and 80%, respectively, of the reported catastrophe losses occurred inTexas . The 2020 third quarter and year to date were impacted by (i) a Midwest derecho that contributed 4.7 points and 1.6 points, respectively, to the loss ratios, and (ii) other wind and hail events in the South and Midwest, withTexas contributing approximately 40% of the reported year to date catastrophe losses. 36
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
The personal insurance segment's SAP non-catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 increased 4.6 points and 5.4 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 nine months endedSeptember 30, 2021 increased 16.4 points and 8.7 points, respectively, when compared to the same 2020 periods. The 2021 increase is attributable to the current accident year ratio, which was elevated due to an increase in claims frequency and severity when compared to the same 2020 periods. Frequency was suppressed in 2020 due to fewer miles driven as a result of shelter-in-place orders in response to the COVID-19 pandemic. Severity is higher in the 2021 current accident year, driven by bodily injury coverage as well as personal injury protection coverage inMichigan . Partially offsetting the year to date increase in the 2021 non-catastrophe loss and ALAE ratios was less adverse development of prior accident year losses. The 2021 third quarter and year to date prior accident year development was attributable to (i) bodily injury claims from multiple accident years and (ii) PIP claims inMichigan , primarily from the 2020 and 2019 accident years. The 2020 third quarter and year to date prior accident year adverse development was driven by higher than expected severity for bodily injury claims from multiple accident years. The homeowners SAP non-catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 improved 5.6 points and increased 2.1 points, respectively, when compared to the same 2020 periods. The improvement in the 2021 third quarter ratio was due to favorable development of prior accident year losses, primarily from the 2020 accident year, compared to adverse development in the 2020 third quarter. The increase in the 2021 year to date ratio was due to higher frequency and severity of both property and liability claims in the current accident year. Partially offsetting the increase in the 2021 non-catastrophe loss and ALAE ratio was favorable development of prior accident year losses, primarily from the 2020 accident year, compared to adverse development in the same 2020 period. The 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 nine months endedSeptember 30, 2021 increased 17.3 points and 19.5 points, respectively, when compared to the same 2020 periods, primarily driven by higher severity of fire losses in the current accident year. 37
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Commercial Insurance Segment The following tables set forth certain key performance indicators based on SAP by major product line for our commercial insurance segment for the three and nine months endedSeptember 30, 2021 and 2020: Table 5 ($ in millions) Three months ended September 30, Small Commercial Middle Market 2021 Commercial Auto Package Commercial
Workers' Comp Farm & Ranch Other Commercial Total Net written premiums $ 51.9$ 33.6 $ 44.0 $ 20.8 $ 18.6 $ 5.4$ 174.3 Net earned premiums 48.7 33.8 41.7 15.9 19.0 5.3 164.4 Losses and LAE incurred: Cat loss and ALAE (0.2) 3.6 9.2 - 2.7 - 15.3 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE 3.7 (2.4) (1.2) (6.4) (0.5) (2.4) (9.2) Current accident year non-cat loss and ALAE 42.2 16.3 17.8 11.7 6.6 3.9 98.5 Total non-cat loss and ALAE 45.9 13.9 16.6 5.3 6.1 1.5 89.3 Total Loss and ALAE 45.7 17.5 25.8 5.3 8.8 1.5 104.6 ULAE 2.9 1.2 1.3 1.0 0.6 0.1 7.1 Total Loss and LAE 48.6 18.7 27.1 6.3 9.4 1.6 111.7 Underwriting expenses 15.1 10.7 14.7 7.1 6.1 1.7 55.4 Net underwriting (loss) gain$ (15.0) $ 4.4 $ (0.1) $ 2.5 $ 3.5 $ 2.0$ (2.7) Cat loss and ALAE ratio (0.4) % 10.7 % 22.0 % - % 14.1 % (0.4) % 9.3 % Non-cat loss and ALAE ratio Prior accident years non-cat loss and ALAE ratio 7.6 % (7.0) % (2.9) % (40.3) % (2.4) % (46.1) % (5.6) % Current accident year non-cat loss and ALAE ratio 86.6 % 48.0 % 42.9 % 73.9 % 35.5 % 72.8 % 60.0 % Total non-cat loss and ALAE ratio 94.2 % 41.0 % 40.0 % 33.6 % 33.1 % 26.7 % 54.4 % Total Loss and ALAE ratio 93.8 % 51.7 % 62.0 % 33.6 % 47.2 % 26.3 % 63.7 % ULAE ratio 6.0 % 3.5 % 3.1 % 6.0 % 2.7 % 1.6 % 4.2 % Total Loss and LAE ratio 99.8 % 55.2 % 65.1 % 39.6 % 49.9 % 27.9 % 67.9 % Expense ratio 29.2 % 31.7 % 33.4 % 34.3 % 32.2 % 32.2 % 31.8 % Combined ratio 129.0 % 86.9 % 98.5 % 73.9 % 82.1 % 60.1 % 99.7 % 38
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES (a majority-owned subsidiary ofState Automobile Mutual Insurance Company ) Table 6 ($ in millions) Three months ended September 30, Small Commercial Middle Market 2020 Commercial Auto Package Commercial
Workers' Comp Farm & Ranch Other Commercial Total Net written premiums $ 40.0$ 31.4 $ 40.0 $ 17.4 $ 15.0 $ 5.0$ 148.8 Net earned premiums 35.6 31.4 40.3 17.5 14.5 5.1 144.4 Losses and LAE incurred: Cat loss and ALAE 0.1 5.5 4.7 - 3.2 - 13.5 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE (1.2) (7.5) (6.3) (7.3) (0.6) (3.6) (26.5) Current accident year non-cat loss and ALAE 20.8 17.0 20.1 14.4 5.1 3.0 80.4 Total non-cat loss and ALAE 19.6 9.5 13.8 7.1 4.5 (0.6) 53.9 Total Loss and ALAE 19.7 15.0 18.5 7.1 7.7 (0.6) 67.4 ULAE 1.7 0.5 1.3 1.1 0.5 0.1 5.2 Total Loss and LAE 21.4 15.5 19.8 8.2 8.2 (0.5) 72.6 Underwriting expenses 13.7 10.9 16.4 7.8 6.7 1.9 57.4 Net underwriting gain (loss) $ 0.5$ 5.0 $ 4.1 $ 1.5 $ (0.4) $ 3.7$ 14.4 Cat loss and ALAE ratio 0.4 % 17.3 % 11.6 % - % 22.1 % - % 9.3 % Non-cat loss and ALAE ratio Prior accident years non-cat loss and ALAE ratio (3.4) % (23.8) % (15.5) % (41.6) % (4.2) % (72.6) % (18.3) % Current accident year non-cat loss and ALAE ratio 58.3 % 54.3 % 49.7 % 82.2 % 35.0 % 60.4 % 55.7 % Total non-cat loss and ALAE ratio 54.9 % 30.5 % 34.2 % 40.6 % 30.8 % (12.2) % 37.4 % Total Loss and ALAE ratio 55.3 % 47.8 % 45.8 % 40.6 % 52.9 % (12.2) % 46.7 % ULAE ratio 4.8 % 1.5 % 3.3 % 6.4 % 3.4 % 1.9 % 3.6 % Total Loss and LAE ratio 60.1 % 49.3 % 49.1 % 47.0 % 56.3 % (10.3) % 50.3 % Expense ratio 34.2 % 34.7 % 41.0 % 45.1 % 45.1 % 38.6 % 38.6 % Combined ratio 94.3 % 84.0 % 90.1 % 92.1 % 101.4 % 28.3 % 88.9 % 39
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES (a majority-owned subsidiary ofState Automobile Mutual Insurance Company ) Table 7 ($ in millions) Nine months ended September 30, Small Commercial Middle Market 2021 Commercial Auto Package Commercial
Workers' Comp Farm & Ranch Other Commercial Total Net written premiums$ 160.6 $ 103.5 $ 133.7 $ 48.6 $ 61.0 $ 17.6$ 525.0 Net earned premiums 134.6 98.6 122.6 45.6 53.3 16.0 470.7 Losses and LAE incurred: Cat loss and ALAE 1.9 12.0 14.2 - 8.8 - 36.9 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE 2.8 (6.9) (14.7) (21.8) (2.0) (5.1) (47.7) Current accident year non-cat loss and ALAE 97.5 59.4 66.3 33.6 21.9 7.4 286.1 Total non-cat loss and ALAE 100.3 52.5 51.6 11.8 19.9 2.3 238.4 Total Loss and ALAE 102.2 64.5 65.8 11.8 28.7 2.3 275.3 ULAE 7.6 4.7 2.8 2.4 1.7 0.3 19.5 Total Loss and LAE 109.8 69.2 68.6 14.2 30.4 2.6 294.8 Underwriting expenses 47.0 32.2 46.5 20.1 21.1 5.9 172.8 Net underwriting (loss) gain$ (22.2) $ (2.8) $ 7.5 $ 11.3 $ 1.8 $ 7.5$ 3.1 Cat loss and ALAE ratio 1.4 % 12.2 % 11.6 % - % 16.5 % 0.1 % 7.8 % Non-cat loss and ALAE ratio Prior accident years non-cat loss and ALAE ratio 2.1 % (7.0) % (12.0) % (47.8) % (3.7) % (32.1) % (10.1) % Current accident year non-cat loss and ALAE ratio 72.4 % 60.2 % 54.1 % 73.8 % 41.1 % 46.1 % 60.8 % Total non-cat loss and ALAE ratio 74.5 % 53.2 % 42.1 % 26.0 % 37.4 % 14.0 % 50.7 % Total Loss and ALAE ratio 75.9 % 65.4 % 53.7 % 26.0 % 53.9 % 14.1 % 58.5 % ULAE ratio 5.6 % 4.7 % 2.3 % 5.2 % 3.1 % 1.7 % 4.1 % Total Loss and LAE ratio 81.5 % 70.1 % 56.0 % 31.2 % 57.0 % 15.8 % 62.6 % Expense ratio 29.3 % 31.1 % 34.7 % 41.4 % 34.7 % 33.5 % 32.9 % Combined ratio 110.8 % 101.2 % 90.7 % 72.6 % 91.7 % 49.3 % 95.5 % 40
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES (a majority-owned subsidiary ofState Automobile Mutual Insurance Company ) Table 8 ($ in millions) Nine months ended September 30, Small Commercial Middle Market 2020 Commercial Auto Package Commercial
Workers' Comp Farm & Ranch Other Commercial Total Net written premiums$ 117.8 $ 95.8 $ 126.8 $ 49.2 $ 47.3 $ 15.3$ 452.2 Net earned premiums 96.2 92.8 116.0 54.4 40.8 14.5 414.7 Losses and LAE incurred: Cat loss and ALAE 1.1 21.0 35.7 - 8.7 0.2 66.7 Non-cat loss and ALAE Prior accident years non-cat loss and ALAE (1.5) (16.5) (14.3) (16.1) (1.7) (7.1) (57.2) Current accident year non-cat loss and ALAE 52.4 53.3 69.6 40.6 15.2 7.3 238.4 Total non-cat loss and ALAE 50.9 36.8 55.3 24.5 13.5 0.2 181.2 Total Loss and ALAE 52.0 57.8 91.0 24.5 22.2 0.4 247.9 ULAE 4.9 4.2 4.5 4.5 1.6 0.4 20.1 Total Loss and LAE 56.9 62.0 95.5 29.0 23.8 0.8 268.0 Underwriting expenses 40.1 34.0 50.8 22.7 21.1 6.0 174.7 Net underwriting (loss) gain $ (0.8)$ (3.2) $ (30.3) $ 2.7 $ (4.1) $ 7.7$ (28.0) Cat loss and ALAE ratio 1.2 % 22.6 % 30.7 % - % 21.3 % 1.2 % 16.1 % Non-cat loss and ALAE ratio Prior accident years non-cat loss and ALAE ratio (1.5) % (17.8) % (12.3) % (29.6) % (4.1) % (49.3) % (13.8) % Current accident year non-cat loss and ALAE ratio 54.3 % 57.5 % 60.1 % 74.6 % 37.3 % 50.7 % 57.4 % Total non-cat loss and ALAE ratio 52.8 % 39.7 % 47.8 % 45.0 % 33.2 % 1.4 % 43.6 % Total Loss and ALAE ratio 54.0 % 62.3 % 78.5 % 45.0 % 54.5 % 2.6 % 59.7 % ULAE ratio 5.1 % 4.5 % 3.9 % 8.4 % 3.9 % 2.6 % 4.9 % Total Loss and LAE ratio 59.1 % 66.8 % 82.4 % 53.4 % 58.4 % 5.2 % 64.6 % Expense ratio 34.1 % 35.5 % 40.0 % 46.2 % 44.6 % 39.3 % 38.6 % Combined ratio 93.2 % 102.3 % 122.4 % 99.6 % 103.0 % 44.5 % 103.2 % Commercial auto and small commercial package new business has been written on State Auto Connect since 2018. Our farm and ranch product launched on State Auto Connect during the second quarter of 2020 and is now live in 29 states. Nine of the 29 states are states in which we had not previously written policies for farm & ranch products. Our middle market commercial product launched on State Auto Connect inMarch 2020 and is currently live in 30 states, with the last state having been launched inApril 2021 . Finally, our workers' compensation product launched on State Auto Connect in the fourth quarter of 2020 and is currently live in 36 states andWashington D.C. after completing the launch in the 2021 third quarter. The commercial insurance segment's net written premiums for the three and nine months endedSeptember 30, 2021 , increased 17.1 points and 16.1 points, respectively, when compared to the same 2020 periods (Tables 5 - 8). The third quarter and year to date was impacted by new business growth and rate increases in commercial auto and farm & ranch. The third quarter increase was also impacted by rate increases in middle market commercial and new business growth in workers' compensation attributable to its launch on State Auto Connect. The commercial insurance segment's SAP catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 was flat and improved 8.3 points, respectively, when compared to the same 2020 periods (Tables 5 - 8). For the 2021 year to date, the number of catastrophe events increased compared to 2020, but the 2021 catastrophe events were less severe. The 2021 year to date was primarily impacted by winter storms Uri and Viola in the first quarter, which contributed 2.1 points to the loss and ALAE ratio. Approximately 80% of the 2021 losses occurred inTexas and the Midwest. The 2020 year to date was impacted by (i) a severe wind and hail storm, including tornadoes, inTennessee , which contributed 5.1 points to the year to date cat loss and ALAE ratio, of which 3.7 points were from three large losses inNashville , (ii) property losses 41
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
resulting from the civil unrest which added 1.5 points to the cat loss and LAE ratios, (iii) and the Midwest derecho mentioned above, which added 1.5 points to the cat loss and ALAE ratios. The commercial auto SAP non-catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 increased 39.3 points and 21.7 points, respectively, when compared to the same 2020 periods, due to an increase in the current accident year ratios. The 2021 increase in the current accident year ratios was primarily due to an increase in the frequency and severity of bodily injury claims. Also, 2020 experienced lower frequency attributable to fewer miles driven as a result of shelter-in-place orders in response to the COVID-19 pandemic. The 2021 third quarter and year to date were also impacted by adverse development of prior accident year losses, primarily due to higher than anticipated severity from bodily injury claims from multiple accident years, compared to favorable development of prior accident year losses in the same 2020 periods. The small commercial package SAP non-catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 increased 10.5 points and 13.5 points, respectively, when compared to the same 2020 periods, primarily due to less favorable development of prior accident year losses. The 2021 favorable development was primarily attributable to lower than anticipated bodily injury severity from accident years 2019 and prior. The 2020 favorable development of prior accident year losses was driven by lower than expected bodily injury severity from multiple prior accident years. The 2021 third quarter current accident year ratio improved when compared to the same 2020 period, due to lower severity of property losses. The 2021 year to date current accident year ratio increased when compared to the same 2020 period, due to higher severity of property losses from the first half of the year, including a large fire loss that added 2.5 points to the year to date non-cat loss ratio. The 2020 third quarter and year to date current accident year ratios were impacted by a decline in claim frequency as a result of reduced business activity in response to COVID-19. The 2020 year to date current accident year was also impacted by increased COVID-19 related legal defense costs, which added 2.1 points to the year to date non-cat loss ratio. The middle market commercial SAP non-catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 increased 5.8 points and improved 5.7 points, respectively, when compared to the same 2020 periods. The third quarter increase was due to less favorable development of prior accident year losses when compared to the same 2020 period. The 2021 year to date favorable development was primarily attributable to (i) bodily injury claims from multiple accident years and on (ii) fire claims from the 2020 accident year. The 2020 third quarter and year to date favorable development of prior accident year losses was primarily attributable to lower than expected bodily injury severity from multiple accident years. The 2021 third quarter and year to date non-cat loss ratios were also impacted by improvement in the current accident year, primarily due to lower claim frequency of both bodily injury and property damage claims. The workers' compensation SAP non-catastrophe loss and ALAE ratios for the three and nine months endedSeptember 30, 2021 improved 7.0 points and 19.0 points, respectively, when compared to the same 2020 periods. The 2021 third quarter improvement was due to an improvement in the current accident year ratio when compared to the same 2020 period, which was impacted by (i) a large loss that added 10.0 points to the non-cat loss ratio, and (ii) increased claims for businesses in the medical field (e.g. nursing homes, hospitals) due to the COVID-19 pandemic, which added 3.9 points to the non-cat loss ratio. Partially offsetting the 2021 improvement in the third quarter current accident year ratio were two large losses that added 15.9 points to the third quarter non-cat loss ratio. The 2021 year to date improvement was primarily due to more favorable development of prior accident year losses when compared to the same 2020 period. The 2021 favorable development was across multiple accident years. The 2021 year to date current accident year ratio was consistent with the same 2020 period, which was impacted by (i) the COVID-19 pandemic mentioned above that added 6.3 points to the non-cat loss ratio and (ii) the 2020 third quarter large loss mentioned above that added 3.2 points to the non-cat loss ratio. Mostly offsetting the 2021 year to date improvement in the current accident year ratio were four large losses that added 11.4 points to the year to date non-cat loss ratio. The farm & ranch SAP non-catastrophe loss and ALAE ratio for the nine months endedSeptember 30, 2021 increased 4.2 points when compared to the same 2020 period, primarily due to higher claim frequency in the current accident year. 42
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Losses andLAE Development Losses and loss expenses represent the combined estimated ultimate liability for claims occurring in a period, along with any change in the estimated ultimate liability for claims occurring in prior periods. The following table sets forth a tabular presentation of the development of the prior accident years' ultimate liability by product for the three and nine months endedSeptember 30, 2021 and 2020: ($ millions) Three months endedSeptember 30
Nine months ended
2021 2020 Change 2021 2020 $ Change
(Favorable)/Adverse (Favorable)/Adverse
Non-cat loss
and ALAE:
Personal
Insurance
Segment:
Personal Auto $ 6.8 $ 8.0 $ (1.2) $ 4.7 $ 19.1 $ (14.4)
Homeowners (2.5) 0.7 (3.2) (2.1) 2.8 (4.9)
Other Personal - (0.6) 0.6 (0.2) (1.7) 1.5
Total Personal
Insurance
Segment 4.3 8.1 (3.8) 2.4 20.2 (17.8)
Commercial
Insurance
Segment:
Commercial
Auto 3.7 (1.2) 4.9 2.8 (1.5) 4.3
Small
Commercial
Package (2.4) (7.5) 5.1 (6.9) (16.5) 9.6
Middle Market
Commercial (1.2) (6.3) 5.1 (14.7) (14.3) (0.4)
Workers'
Compensation (6.4) (7.3) 0.9 (21.8) (16.1) (5.7)
Farm & Ranch (0.5) (0.6) 0.1 (2.0) (1.7) (0.3)
Other
Commercial (2.4) (3.6) 1.2 (5.1) (7.1) 2.0
Total
Commercial
Insurance
Segment (9.2) (26.5) 17.3 (47.7) (57.2) 9.5
Specialty
run-off (0.1) (0.9) 0.8 (0.2) 5.2 (5.4)
Cat Loss and
ALAE 5.3 11.6 (6.3) 6.5 12.8 (6.3)
ULAE 0.8 (2.3) 3.1 (3.4) 1.4 (4.8)
Total $ 1.1 $ (10.0) $ 11.1 $ (42.4) $ (17.6) $ (24.8)
For more information, refer to the sections “Personal Insurance Segment†and “
Discussions on the insurance segment “included in this point 2.
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Losses and loss expenses payable The following table sets forth losses and loss expenses payable by major product atSeptember 30, 2021 andDecember 31, 2020 : September 30, ($ millions) 2021 December 31, 2020 $ Change Personal Insurance Segment: Personal Auto $ 187.3 $ 174.4$ 12.9 Homeowners 117.0 90.4 26.6 Other Personal 23.2 15.8 7.4 Total Personal Insurance Segment 327.5 280.6 46.9 Commercial Insurance Segment: Commercial Auto 132.4 93.8 38.6 Small Commercial Package 97.4 95.9 1.5 Middle Market Commercial 153.5 162.2 (8.7) Workers' Compensation 153.0 176.4 (23.4) Farm & Ranch 21.9 18.3 3.6 Other Commercial 26.0 25.6 0.4 Total Commercial Insurance Segment 584.2 572.2 12.0 Specialty run-off: E&S Property 7.6 24.3 (16.7) E&S Casualty 90.6 112.2 (21.6) Programs 30.2 36.8 (6.6) Total Specialty run-off 128.4 173.3 (44.9) Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable and allowance for credit losses$ 1,040.1 $ 1,026.1 $ 14.0 Losses and loss expenses payable increased$14.0 million sinceDecember 31, 2020 primarily due to (i) growth in the commercial auto line of business, and (ii) a higher level of unpaid catastrophe losses in the homeowners line of business, partially offset by (i) the run-off from our previously exited specialty insurance business and (ii) continued favorable development of prior accident year losses in the workers compensation line of business, as discussed above. We conduct quarterly reviews of loss development and make judgments in determining the reserves for losses and loss expenses. Several factors are considered by us when estimating ultimate liabilities, including consistency in relative case reserve adequacy, consistency in claims settlement practices, recent legal developments, historical data, actuarial projections, exposure changes, anticipated inflation, current business conditions, catastrophe development, late reported claims, and other reasonableness tests. Our quarterly review also included the potential impact of COVID-19 on our reserves for losses and loss expenses. For a discussion of the most significant risks and uncertainties that could impact our results of operations, financial position, liquidity, and cash flows as a result of the COVID-19 pandemic, see "Risk Factors" in "Item 1A" of the 2020 Form 10-K. The risks and uncertainties inherent in our estimates include, but are not limited to, actual settlement experience differing from historical data, trends, changes in business and economic conditions, court decisions creating unanticipated liabilities, ongoing interpretation of policy provisions by the courts, inconsistent decisions in lawsuits regarding coverage and additional information discovered before settlement of claims. Our results of operations and financial condition could be impacted, perhaps significantly, in the future if the ultimate payments required for claims settlement vary from the liability currently recorded. For a discussion of our reserving methodologies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Losses and Loss Expenses Payable" in Item 7 of the 2020 Form 10-K. 44
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Acquisition and Operating Expenses Our GAAP acquisition and operating expenses for the three and nine months endedSeptember 30, 2021 were$115.0 million and$343.2 million , respectively, compared to$123.0 million and$357.4 million for the same 2020 periods. The 2021 third quarter and year to date decreases in acquisition and operating expenses were primarily driven by (i) less estimated variable agent compensation, and (ii) reduced IT development costs. Investment Operations Segment Our investments in fixed maturities, equity securities and certain other invested assets are carried at fair value. The unrealized holding gains or losses of our available-for-sale fixed maturities, net of applicable deferred taxes, are included as a separate component of stockholders' equity as accumulated other comprehensive income and as such are not included in the determination of net income. We have investment policy guidelines with respect to purchasing fixed maturity investments for our insurance subsidiaries which preclude investments in bonds that are rated below investment grade by a recognized rating service at the time of purchase. Our fixed maturity portfolio is composed of high quality, investment grade issues, consisting primarily of debt issues ratedAAA , AA or A. We obtain investment ratings from major rating services. If there is a split rating, we assign the lowest rating obtained. For further discussion regarding the management of our investment portfolio, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Investment Operations Segment" in Item 7 of the 2020 Form 10-K. Composition of Investment Portfolio The following table sets forth the composition of our investment portfolio at carrying value atSeptember 30, 2021 andDecember 31, 2020 : ($ millions) September
30, 2021 % of Total 2020 % of Total Cash and cash equivalents$ 46.1 1.6 %$ 90.7 3.2 % Fixed maturities, at fair value: Fixed maturities 2,113.7 75.4 % 2,121.0 73.9 % Treasury inflation-protected securities 109.8 3.9 % 116.2 4.0 % Total fixed maturities 2,223.5 79.3 % 2,237.2 77.9 % Notes receivable from affiliate 70.0 2.5 % 70.0 2.4 % Equity securities: Large-cap securities 163.5 5.8 % 134.2 4.7 % Mutual and exchange traded funds 212.5 7.6 % 255.5 8.9 % Total equity securities 376.0 13.4 % 389.7 13.6 % Other invested assets: International funds 62.2 2.2 % 55.8 2.0 % Other invested assets 17.1 0.6 % 15.3 0.5 % Total other invested assets 79.3 2.8 % 71.1 2.5 % Other invested assets, at cost 10.4 0.4 % 12.1 0.4 % Total portfolio$ 2,805.3 100.0 %$ 2,870.8 100.0 % 45
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
The following table sets forth the amortized cost and fair value of available-for-sale fixed maturities by contractual maturity atSeptember 30, 2021 : ($ millions) Fair Amortized cost value Due in 1 year or less $ 141.6$ 142.7 Due after 1 year through 5 years 592.3 614.4 Due after 5 years through 10 years 211.7 218.2 Due after 10 years 516.7 548.6 U.S. government agencies mortgage-backed securities 697.3 699.6 Total$ 2,159.6 $ 2,223.5 Expected maturities may differ from contractual maturities as the issuers may have the right to call or prepay the obligations with or without call or prepayment penalties. The duration of the fixed maturity portfolio was approximately 4.11 and 4.72 as ofSeptember 30, 2021 , andDecember 31, 2020 , respectively. Investment Operations Revenue The following table sets forth the components of net investment income for the three and nine months endedSeptember 30, 2021 and 2020: ($ millions) Three months ended September 30 Nine months ended September 30 2021 2020 2021 2020 Gross investment income: Fixed maturities $ 15.2$ 15.0 $ 46.0$ 44.6 Equity securities 1.2 2.1 4.0 7.8 Other 1.0 0.9 3.0 2.7 Total gross investment income 17.4 18.0 53.0 55.1 Less: Investment expenses 0.4 0.1 0.7 0.6 Net investment income $ 17.0$ 17.9 $ 52.3$ 54.5 Average invested assets (at cost)$ 2,552.3 $ 2,512.9 $ 2,551.0 $ 2,537.6 Annualized investment yield 2.7 % 2.8 % 2.7 % 2.9 % Annualized investment yield, after tax 2.2 % 2.3 % 2.3 % 2.4 % Net investment income, after tax $ 14.1$ 14.7 $ 43.2$ 44.8 Effective tax rate 17.5 % 17.7 % 17.5 % 17.9 % When a fixed maturity has been determined to have an impairment, the impairment charge representing the credit loss is recognized in earnings as a realized loss and on the balance sheet as an allowance for credit losses netted with the amortized cost of fixed maturities. Future increases in fair value, if related to credit factors, are recognized through earnings limited to the amount previously recognized as an allowance for credit losses. The amount related to non-credit factors is recognized in accumulated other comprehensive income and future increases or decreases in fair value, if not credit losses, are included in accumulated other comprehensive (loss) income. We reviewed our available-for-sale fixed maturities atSeptember 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. 46
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Gross Unrealized Investment Gains and Losses Based upon our review of our investment portfolio atSeptember 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) atSeptember 30, 2021 : Gross unrealized Cost or Gross unrealized holding ($ millions) amortized cost holding gains losses Fair value
Available for fixed sale
deadlines:
and obligations of
government agencies$ 483.8 $ 25.1 $
(0.9)
State obligations and
political subdivisions 470.7 22.7
(0.5) 492.9
Corporate securities 507.8 16.1
(0.9) 523.0
mortgage-backed securities 697.3 13.4 (11.1) 699.6 Total available-for-sale fixed maturities$ 2,159.6 $ 77.3 $ (13.4)$ 2,223.5 The following table sets forth our unrealized holding gains for our available-for-sale fixed maturities, net of deferred tax that was included as a component of accumulated other comprehensive loss atSeptember 30, 2021 , andDecember 31, 2020 , and the change in unrealized holding gains, net of deferred tax, for the nine months endedSeptember 30, 2021 : ($ millions) September 30, 2021 December 31,
2020 $ Change
Investments available for sale:
Unrealized capital gains:
Fixed maturities $ 63.9 $
120.2
Net deferred federal income tax (13.5) (25.3) 11.8 Unrealized gains, net of tax $ 50.4 $ 94.9$ (44.5) AtSeptember 30, 2021 , State Auto P&C hadU.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 atSeptember 30, 2021 , andDecember 31, 2020 . 47
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
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 atSeptember 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 theState Auto Group's ability to cancel the policy if the policyholder does not pay the premium. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums for the pool is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. This is included in "other expenses" on the condensed consolidated statements of income and reflected in "due to/from affiliates" on our condensed consolidated balance sheets. We generally manage our cash flows through current operational activity and maturing investments, without a need to liquidate any of our other investments; however, should our written premiums decline or paid losses increase significantly, or a combination thereof, we may need to liquidate investments at losses in order to meet our cash obligations. This action was not necessary for the three and nine months endedSeptember 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. AtSeptember 30, 2021 andDecember 31, 2020 , we had$46.1 million and$90.7 million , respectively, in cash and cash equivalents, and$2,678.8 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 atSeptember 30, 2021 andDecember 31, 2020 , respectively. In addition, substantially all of our fixed maturity and equity securities are traded on public markets. For a further discussion regarding investments, see "Investments Operations Segment" included in this Item 2. Cash used in operating activities was$54.6 million and cash provided by operating activities was$21.8 million for the nine months endedSeptember 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. 48
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Cash provided by investing activities was$17.5 million and$42.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The change was primarily driven by an increase in the purchases of fixed maturities partially offset by (i) higher proceeds from maturities of fixed maturities and (ii) a decrease in the purchases of equity securities. Cash used in financing activities was$7.5 million and$11.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The change was primarily driven by an increase in stock option exercises when compared to the same 2020 period. Borrowing Arrangements FHLB Line of Credit 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 ofSeptember 30, 2021 , no advances had been made under the OLC. The OLC matures inApril 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 inSeptember 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 inMay 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 DebenturesState 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 theCapital Trust's issuance of the capital securities and the related purchase byState Auto Financial of all of theCapital Trust's common securities (liquidation amount of$0.5 million ),State Auto Financial has issued to theCapital Trust $15.5 million aggregate principal amount of unsecuredFloating Rate Junior Subordinated Debt Securities due 2033 (the "Subordinated Debentures"). The sole assets of theCapital Trust are the Subordinated Debentures and any interest accrued thereon. Interest on theCapital 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 forSeptember 30, 2021 and 2020 were 4.32% and 4.44%, respectively. Reinsurance Arrangements Members of theState 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 theState 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, theState Auto Group cedes only to third-party reinsurers who are rated A- or better byA.M. Best orStandard & 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. 49
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
Other Reinsurance Arrangements Each member of theState 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 CoverThe 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 ofNovember 30, 2014 for the terminated restaurant program business previously underwritten by a MGU subsidiary of State Auto Mutual. Property Catastrophe Treaty Members of theState 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 ofJuly 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 ofJuly 1, 2021 , theState Auto Group renewed the property per risk excess of loss reinsurance agreement for a 12-month term. Under this reinsurance agreement, theState 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 ofJuly 1, 2021 , theState Auto Group renewed the casualty excess of loss reinsurance agreement. Under this reinsurance agreement, theState 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 theState 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 AtSeptember 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. 50
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
CREDIT AND FINANCIAL STRENGTH RATINGS OnJuly 14, 2021 ,A.M. Best placed theState Auto Group under review with positive implications with a financial strength rating of A- (Excellent) following the announcement of the proposed Transactions with LMHC described elsewhere in this Form 10-Q. The ratings will remain under review until all approvals are finalized, the Transaction close andA.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. 51
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(majority-owned subsidiary of
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