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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 September 30, 2020
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 October 30, 2020, the Registrant had 43,837,768 Common Shares outstanding.


Index to Form 10-Q Quarterly Report for the three and nine month periods ended September 30, 2020
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 4.
Item 5.
Item 6.


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)September 30, 2020December 31, 2019
(unaudited)
Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $2,047.1 and $2,080.0, respectively)$2,166.3 $2,127.9 
Equity securities339.5 395.2 
Other invested assets62.5 69.7 
Other invested assets, at cost12.5 6.5 
Notes receivable from affiliate70.0 70.0 
Total investments2,650.8 2,669.3 
Cash and cash equivalents131.4 78.0 
Accrued investment income and other assets31.1 31.7 
Premiums receivable14.1 13.6 
Deferred policy acquisition costs (affiliated net assumed $27.6 and $20.2, respectively)123.7 111.1 
Reinsurance recoverable on losses and loss expenses payable35.2 13.6 
Prepaid reinsurance premiums8.4 7.5 
Due from affiliate18.3 7.9 
Current federal income taxes6.7 6.3 
Net deferred federal income taxes44.6 42.2 
Property and equipment, held for sale4.2 4.2 
Total assets$3,068.5 $2,985.4 
Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliated net assumed $450.9 and $500.8, respectively)$1,091.3 $1,066.5 
Unearned premiums (affiliated net assumed $450.8 and $415.8, respectively)731.0 649.2 
Notes payable (affiliates $15.2 and $15.2, respectively)122.0 122.0 
Pension and postretirement benefits54.0 72.9 
Other liabilities (affiliated net assumed $18.5 and $19.5, respectively)126.1 114.9 
Total liabilities2,124.4 2,025.5 
Stockholders’ equity:
Class A Preferred stock (nonvoting), without par value. Authorized 2.5 shares; none issued  
Class B Preferred stock, without par value. Authorized 2.5 shares; none issued  
Common stock, without par value. Authorized 100.0 shares; 50.7 and 50.4 shares issued, respectively, at stated value of $2.50 per share126.7 125.9 
Treasury stock, 6.9 and 6.9 shares, respectively, at cost(118.4)(117.5)
Additional paid-in capital212.1 206.7 
Accumulated other comprehensive income (loss)23.3 (37.9)
Retained earnings700.4 782.7 
Total stockholders’ equity944.1 959.9 
Total liabilities and stockholders’ equity$3,068.5 $2,985.4 
See accompanying notes to condensed consolidated financial statements.
1

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 September 30
(unaudited)20202019
Earned premiums (affiliated net assumed $69.3 and $55.7, respectively)$353.2 $319.6 
Net investment income (affiliates $0.7 and $0.7, respectively)17.9 19.3 
Net investment gain (loss)20.0 (5.0)
Other income from affiliates0.5 0.6 
Total revenues391.6 334.5 
Losses and loss expenses (affiliated net assumed $48.7 and $24.2, respectively)251.6 208.4 
Acquisition and operating expenses (affiliated net assumed $24.2 and $17.6, respectively)123.0 109.7 
Interest expense (affiliates $0.1 and $0.2, respectively)1.1 1.2 
Other expenses1.1 2.5 
Total expenses376.8 321.8 
Income before federal income taxes14.8 12.7 
Federal income tax expense:
Deferred3.2 1.2 
Total federal income tax expense3.2 1.2 
Net income$11.6 $11.5 
Earnings per common share:
Basic$0.26 $0.26 
Diluted$0.26 $0.25 
See accompanying notes to condensed consolidated financial statements.
2

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)Nine months ended September 30
(unaudited)20202019
Earned premiums (affiliated net assumed $189.2 and $168.5, respectively)$1,024.4 $930.0 
Net investment income (affiliates $2.1 and $2.3, respectively)54.5 60.4 
Net investment (loss) gain(39.3)50.2 
Other income from affiliates1.6 1.6 
Total revenues1,041.2 1,042.2 
Losses and loss expenses (affiliated net assumed $132.8 and $125.1, respectively)762.2 637.6 
Acquisition and operating expenses (affiliated net assumed $65.9 and $54.5, respectively)357.4 325.2 
Interest expense (affiliates $0.6 and $0.7, respectively)3.6 3.7 
Other expenses5.6 9.0 
Total expenses1,128.8 975.5 
(Loss) income before federal income taxes(87.6)66.7 
Federal income tax (benefit) expense:
Current(0.4)(0.4)
Deferred(18.5)12.4 
Total federal income tax (benefit) expense(18.9)12.0 
Net (loss) income$(68.7)$54.7 
(Loss) earnings per common share:
Basic$(1.57)$1.26 
Diluted$(1.57)$1.25 


See accompanying notes to condensed consolidated financial statements.
3

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Comprehensive Income
($ in millions, except per share amounts)Three months ended September 30
(unaudited)20202019
Net income$11.6 $11.5 
Other comprehensive income, net of tax:
Net unrealized holding gains on available-for-sale investments:
Unrealized holding gains4.6 22.6 
Reclassification adjustments for losses (gains) realized in net income0.2 (1.2)
Income tax expense(1.1)(4.5)
Total net unrealized holding gains on available-for-sale investments3.7 16.9 
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost(1.6)(1.6)
Net actuarial loss3.7 2.4 
Income tax expense(0.4)(0.2)
Total net unrecognized benefit plan obligations1.7 0.6 
Other comprehensive income5.4 17.5 
Comprehensive income$17.0 $29.0 

See accompanying notes to condensed consolidated financial statements.
4

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Consolidated Statements of Comprehensive (Loss) Income
($ in millions, except per share amounts)Nine months ended September 30
(unaudited)20202019
Net (loss) income$(68.7)$54.7 
Other comprehensive income, net of tax:
Net unrealized holding gains on fixed available-for-sale investments:
Unrealized holding gains74.5 91.8 
Reclassification adjustments for gains realized in net income(3.2)(2.8)
Income tax expense(15.0)(18.7)
Total net unrealized holding gains on available-for-sale investments56.3 70.3 
Net unrecognized benefit plan obligations:
Reclassification adjustments for amortization to statements of income:
Negative prior service cost(4.8)(4.8)
Net actuarial loss11.0 7.2 
Income tax expense
(1.3)(0.5)
Total net unrecognized benefit plan obligations4.9 1.9 
Other comprehensive income61.2 72.2 
Comprehensive (loss) income$(7.5)$126.9 
See accompanying notes to condensed consolidated financial statements.
5

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 September 30
20202019
Common shares:
Balance at beginning of period50.7 50.3 
Balance at September 3050.7 50.3 
Treasury shares:
Balance at beginning of period(6.9)(6.8)
Balance at September 30(6.9)(6.8)
Common stock:
Balance at beginning of period$126.7 $125.7 
Issuance of shares 0.1 
Balance at September 30$126.7 $125.8 
Treasury stock:
Balance at beginning of period$(118.4)$(117.5)
Balance at September 30$(118.4)$(117.5)
Additional paid-in capital:
Balance at beginning of period$211.1 $202.5 
Issuance of common stock(0.2)0.7 
Stock awards granted1.2 2.0 
Balance at September 30$212.1 $205.2 
Accumulated other comprehensive income (loss):
Balance at beginning of period$17.9 $(41.7)
Change in net unrealized holding gains on available-for-sale investments3.7 16.9 
Total net unrecognized benefit plan obligations1.7 0.6 
Balance at September 30$23.3 $(24.2)
Retained earnings:
Balance at beginning of period$693.2 $747.2 
Net income11.6 11.5 
Dividends declared, $0.10 and $0.10 per share (affiliates $2.6 and $2.6, respectively)$(4.4)$(4.3)
Balance at September 30700.4 754.4 
Total stockholders’ equity at September 30$944.1 $943.7 
See accompanying notes to condensed consolidated financial statements.
6

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Stockholders’ Equity
(in millions)Nine months ended September 30
20202019
Common shares:
Balance at beginning of year50.4 50.0 
Issuance of shares0.3 0.3 
Balance at September 3050.7 50.3 
Treasury shares:
Balance at beginning of year(6.9)(6.8)
Balance at September 30(6.9)(6.8)
Common stock:
Balance at beginning of year$125.9 $125.0 
Issuance of shares0.8 0.8 
Balance at September 30$126.7 $125.8 
Treasury stock:
Balance at beginning of year$(117.5)$(117.0)
Shares acquired on stock award exercises and vested restricted shares(0.9)(0.5)
Balance at September 30$(118.4)$(117.5)
Additional paid-in capital:
Balance at beginning of year$206.7 $194.2 
Issuance of common stock2.0 4.0 
Stock awards granted3.4 7.0 
Balance at September 30$212.1 $205.2 
Accumulated other comprehensive income (loss):
Balance at beginning of year$(37.9)$(96.4)
Change in net unrealized holding gains on available-for-sale investments56.3 70.3 
Change in unrecognized benefit plan obligations, net of tax4.9 1.9 
Balance at September 30$23.3 $(24.2)
Retained earnings:
Balance at beginning of year$782.7 $712.7 
Cumulative effect of change in accounting to establish an allowance for expected credit losses at January 1, 2020(0.5) 
Net (loss) income(68.7)54.7 
Dividends declared, $0.30 and $0.30 per share (affiliates $7.8 and $7.8, respectively)$(13.1)$(13.0)
Balance at September 30700.4 754.4 
Total stockholders’ equity at September 30$944.1 $943.7 
See accompanying notes to condensed consolidated financial statements.
7

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Condensed Consolidated Statements of Cash Flows
($ in millions)Nine months ended September 30
(unaudited)20202019
Cash flows from operating activities:
Net (loss) income$(68.7)$54.7 
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
Depreciation and amortization, net7.6 6.2 
Share-based compensation 7.0 
Net investment loss (gain)39.3 (50.2)
Changes in operating assets and liabilities:
Deferred policy acquisition costs(12.6)(12.4)
Accrued investment income and other assets0.6 (2.3)
Premiums receivables(0.5)(3.2)
Postretirement and pension benefits(17.0)(12.2)
Other liabilities and due to/from affiliates, net8.5 (51.8)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums(22.5)(2.6)
Losses and loss expenses payable24.2 (54.1)
Unearned premiums81.8 65.0 
Deferred tax on share-based awards(0.1)(0.7)
Federal income taxes(18.8)12.7 
Net cash provided by (used in) operating activities21.8 (43.9)
Cash flows from investing activities:
Purchases of fixed maturities available-for-sale(462.6)(459.9)
Purchases of equity securities(65.6)(48.9)
Purchases of other invested assets(7.3)(12.9)
Maturities, calls and pay downs of fixed maturities available-for-sale274.9 267.1 
Sales of fixed maturities available-for-sale216.1 248.7 
Sales of equity securities86.2 34.4 
Sales of other invested assets0.9 1.0 
Disposals of property and equipment0.2 1.6 
Net cash provided by investing activities42.8 31.1 
Cash flows from financing activities:
Proceeds from issuance of common stock2.8 4.8 
Payments to acquire treasury stock(0.9)(0.5)
Payment of dividends(13.1)(13.0)
Proceeds from short-term debt60.0  
Repayment of short-term debt(60.0) 
Proceeds from long-term debt21.5  
Repayment of long-term debt(21.5) 
Net cash used in financing activities(11.2)(8.7)
Net increase (decrease) in cash and cash equivalents53.4 (21.5)
Cash and cash equivalents at beginning of period78.0 59.8 
Cash and cash equivalents at end of period$131.4 $38.3 
Supplemental disclosures:
Interest paid (affiliates $0.6 and $0.7, respectively)$3.5 $3.5 
See accompanying notes to condensed consolidated financial statements.
8

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of State Auto Financial Corporation and Subsidiaries (“State Auto Financial” or the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet at December 31, 2019, 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, 2019 (the “2019 Form 10-K”). Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the 2019 Form 10-K.
The COVID-19 pandemic has caused an economic downturn on a global scale, as well as significant market disruption and volatility. The scope, duration and magnitude of the effects of COVID-19 continue to evolve rapidly and in ways that are difficult or impossible to anticipate. The Company cannot, at this time, predict the impact the pandemic will have on its future consolidated financial position, cash flows or results of operations, however, the impact could be material. The Company's future financial results and operations depend in part on the duration and severity of the pandemic and what actions are taken to mitigate the outbreak.
Adoption of Recent Accounting Pronouncements
Measurement of Credit Losses on Financial Instruments
On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. This includes the Company's direct third party reinsurance recoverables, and the Company's share of the State Auto Group's third party reinsurance recoverables assumed via the Pooling Arrangement (as defined in Note 7). In addition, ASC 326 made changes to the accounting for available-for-sale fixed maturities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale fixed maturities management does not intend to sell or believes that it is more likely than not they will not be required to sell.
The adoption of this guidance reduced retained earnings by $0.5 million, net of tax, and established an allowance for estimated uncollectible reinsurance as of January 1, 2020. Adoption of ASC 326 for available-for-sale fixed maturities was prospective, and therefore there was no adjustment to retained earnings as of January 1, 2020. Changes to the Company's accounting policy resulting from the adoption of the guidance are discussed below.
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13 which changes the fair value measurement disclosure requirements of ASC 820 by adding, eliminating and modifying disclosures. The new guidance eliminates (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the entity's policy for the timing of transfers between levels, and (iii) the entity's valuation process for Level 3 fair value measurements. Additionally, the guidance now requires the disclosure of (i) the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements, and (ii) the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated for Level 3 fair value measurements. Finally, the guidance requires entities to provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future. The guidance became effective for annual reporting periods after December 15, 2019 and it did not have a material impact on the Company's results of operations, consolidated financial position or cash flows.
9


STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
Pending 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 effective date of ASU 2019-12 is for interim and annual periods beginning after December 15, 2020. Early adoption is permitted. The ASU has not yet been adopted; however, it is not expected to have a material impact on the Company’s results of operations, consolidated financial position or cash flows.
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 2019 Form 10-K.
Significant Accounting Policy Updates
The following accounting policies have been updated to reflect the Company's adoption of ASU 2016-13 Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments as described above.
Investments
Investments in fixed maturities are classified as available-for-sale and are carried at fair value. For fixed maturities in an unrealized loss position, management considers 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. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded in the "net investment gain (loss)" line item on the condensed consolidated statement of income. Losses are charged against the allowance when management believes the uncollectibility of a fixed maturity is confirmed or when either of the criteria regarding intent or requirement to sell is met. Description and disclosure of credit losses on fixed maturities are disclosed in Note 3 of the Notes to Condensed Consolidated Financial Statements.
The Company excludes accrued interest receivable from both the estimated fair value and the amortized cost basis of available-for-sale fixed maturities and includes such amounts within "accrued investment income and other assets" on the Company's condensed consolidated balance sheets. Any uncollectible accrued interest receivable is written off in the period it is deemed uncollectible.
Reinsurance Recoverables
Management assesses expected credit losses on third party reinsurance recoverables for the entire State Auto Pool and, pursuant to the Pooling Arrangement (as defined in Note 7), the Company is responsible for its share of the estimated uncollectible reinsurance for the entire pool. Management uses A.M. Best’s Financial Strength ratings or equivalent such as S&P, Moody’s, or Fitch when an A.M. Best Financial Strength rating is not available to assess the credit risk of the reinsurance recoverables. The estimate of expected credit losses considers historical credit loss information as well as current conditions and reasonable and supportable forecasts. Description and disclosure of credit losses on reinsurance recoverables are disclosed in Note 8 of the Notes to Condensed Consolidated Financial Statements.
Premiums
Premiums are recognized as earned pro rata over the policy period. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage.
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. When settling the intercompany balances, State Auto Mutual provides the pool participants with full credit for their share of the Pooled Companies net premiums written during the quarter.
10


STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
Management utilizes an aging schedule to estimate an allowance for uncollectible amounts relating to the State Auto Group’s premiums receivable balance. Current and historical collection experience along with reasonable and supportable forecasts are used to estimate the percentage of the premiums receivable balance that will be uncollectible. Credit risk is partially mitigated by the State Auto Group's ability to cancel the policy if the policyholder does not pay the premium. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums receivable 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 the Company's condensed consolidated balance sheets. The Company’s share of the premium balances due to State Auto Mutual from agents and insureds at September 30, 2020 and December 31, 2019 is approximately $404.8 million and $371.0 million, respectively, net of the allowance for uncollectible premiums receivable of $7.0 million and $4.3 million, respectively.
2. Correction of Misstatement in Prior Period Financial Statements
The Company has corrected the presentation of premiums receivable on its condensed consolidated balance sheet for the period ended December 31, 2019 to appropriately reflect outstanding balances for premiums billed and due on premiums written directly by the STFC Pooled Companies. Based on the Pooling Arrangement (as defined in Note 7), this has no impact on the underwriting operations of the STFC Pooled Companies given the role of State Auto Mutual as agent for the State Auto Group.
The Company's balance sheet has been revised to include "premiums receivable", which represents the billed and due premium from its policyholders, with an offsetting adjustment to "due to/from affiliates". This adjustment was not material to the Company’s previously issued financial statements.
The effect of the revisions on the Company's previously issued financial statements are provided in the tables below. Amounts throughout the consolidated financial statements and notes thereto have been adjusted to incorporate the revised amounts, where applicable. The following tables reconcile selected lines from the Company’s year-end 2019 consolidated balance sheet and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 from the previously reported amounts to the revised amounts. There were no changes to the condensed consolidated statements of income, condensed consolidated statements of comprehensive income, and condensed consolidated statements of stockholders' equity.
Revised Consolidated Balance Sheets
($ in millions)Year Ended December 31, 2019
As ReportedAdjustmentAs Revised
Assets
Premiums receivable$ $13.6 $13.6 
Due from affiliate21.5 (13.6)7.9 
Total Assets$2,985.4 $ $2,985.4 
Revised Consolidated Statement of Cash Flows
($ in millions)Nine months ended September 30, 2019
As ReportedAdjustmentAs Revised
Cash flows from operating activities:
Changes in operating assets and liabilities:
Premiums receivable$ $(3.2)$(3.2)
Other liabilities and due to/from affiliates, net(55.0)3.2 (51.8)
Net cash used in operating activities$(43.9)$ $(43.9)
11


STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
3. Investments
The following tables set forth the amortized cost and fair value of investments by investment category at September 30, 2020 and December 31, 2019:
($ millions)Amortized cost Gross unrealized holding gainsGross unrealized holding lossesFair value
September 30, 2020
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$510.9 $48.1 $ $559.0 
Obligations of states and political subdivisions527.5 26.7 (1.5)552.7 
Corporate securities451.7 21.9  473.6 
U.S. government agencies mortgage-backed securities557.0 25.3 (1.3)581.0 
Total available-for-sale fixed maturities$2,047.1 $122.0 $(2.8)$2,166.3 
($ millions)Amortized costGross unrealized holding gainsGross unrealized holding lossesFair value
December 31, 2019
Available-for-sale fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$569.2 $12.3 $(3.3)$578.2 
Obligations of states and political subdivisions404.3 21.1  425.4 
Corporate securities460.5 11.7 (0.4)471.8 
U.S. government agencies mortgage-backed securities646.0 11.1 (4.6)652.5 
Total available-for-sale fixed maturities$2,080.0 $56.2 $(8.3)$2,127.9 
12


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 September 30, 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
September 30, 2020
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$0.7 $ 1 $ $  $0.7 $ 1 
Obligations of states and political subdivisions94.3 (1.5)18    94.3 (1.5)18 
Corporate securities15.1  4    15.1  4 
U.S. government agencies mortgage-backed securities76.1 (1.1)22 9.4 (0.2)4 85.5 (1.3)26 
Total temporarily impaired securities$186.2 $(2.6)45 $9.4 $(0.2)4 $195.6 $(2.8)49 
The following tables set forth the Company’s gross unrealized losses and fair value on its investments by lot, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position at December 31, 2019:
($ 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, 2019
Fixed maturities:
U.S. treasury securities and obligations of U.S. government agencies$136.0 $(2.5)17$157.6 $(0.8)11 $293.6 $(3.3)28
Corporate securities   40.8 (0.4)7 40.8 (0.4)7
U.S. government agencies mortgage-backed securities126.6 (1.5)15137.9 (3.1)32264.5 (4.6)47
Total temporarily impaired securities$262.6 $(4.0)32$336.3 $(4.3)50$598.9 $(8.3)82
The Company reviewed its available-for-sale fixed maturities at September 30, 2020, and determined that no credit impairment existed in the gross unrealized holding losses, due to the reasons discussed below:
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.
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 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
13


STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
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 September 30, 2020:
($ millions)Amortized costFair
value
Due in 1 year or less$119.8 $120.9 
Due after 1 year through 5 years519.9 548.0 
Due after 5 years through 10 years168.0 178.9 
Due after 10 years682.4 737.5 
U.S. government agencies mortgage-backed securities557.0 581.0 
Total$2,047.1 $2,166.3 
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 September 30, 2020, 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"), which loans are further described in Note 9. In accordance with the terms of the FHLB Loans, State Auto P&C retains all rights regarding these pledged securities.
At September 30, 2020, State Auto P&C had fixed maturities with fair values of approximately $31.7 million pledged as collateral for the performance obligations under its reinsurance agreement with Home State County Mutual Insurance Company. In accordance with the terms of the trust agreement, State Auto P&C retains all rights regarding these securities, which are included in the “U.S. treasury securities and obligations of U.S. government agencies” classification of the Company’s fixed maturity securities portfolio.
Fixed maturities with fair values of $9.6 million and $9.3 million were on deposit with insurance regulators as required by law at September 30, 2020, and December 31, 2019, respectively. The Company retains all rights regarding these securities.
The following table sets forth the components of net investment income for the three and nine months ended September 30, 2020 and 2019:
 ($ millions)Three months ended September 30Nine Months Ended September 30
2020201920202019
Fixed maturities$15.0 $15.3 $44.6 $47.7 
Equity securities2.1 3.0 7.8 8.9 
Cash and cash equivalents, and other0.9 1.1 2.7 4.2 
Investment income18.0 19.4 55.1 60.8 
Investment expenses0.1 0.1 0.6 0.4 
Net investment income$17.9 $19.3 $54.5 $60.4 
The Company’s current investment strategy does not rely on the use of derivative financial instruments.
Proceeds on sales of investments were $303.2 million and $284.1 million for the nine months ended September 30, 2020, and 2019, respectively.
14


STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)
The following table sets forth the realized and unrealized holding gains (losses) on the Company’s investment portfolio for the three and nine months ended September 30, 2020 and 2019:
($ millions)Three months ended September 30Nine Months Ended September 30
2020201920202019
Investment gain (loss), net:
Fixed maturities:
Realized gains on sales of securities$1.3 $1.2 $6.8 $2.8 
Realized losses on sales of securities(1.5) (3.6) 
Net (loss) gain on fixed securities(0.2)1.2 3.2 2.8 
Equity securities:
Realized losses on sales of securities, net(42.3)(1.8)(50.9)(2.5)
Unrealized gain (loss) on securities still held, net60.5 (4.1)15.8 46.4 
Net gain (loss) on equity securities18.2 (5.9)(35.1)43.9 
Other invested assets:
Unrealized gain (loss) on securities still held, net2.0 (0.3)